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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2001

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.)3033 Science Park Road
San Diego, California

92121-1199(Address of principal executive offices)

(Zip code)


(858) 552-9500(Registrant's telephone number, including area code)

NoneSecurities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of exchange on which registeredNone

None


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

Class A
Common Stock, $.001 par value

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

Indicate
by check mark 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. ý

Aggregate
market value of the voting stock held by non-affiliates of the registrant as of March 22, 2002: $65,402,671.

Number
of Registrant's shares of Class A Common Stock, $.001 par value outstanding as of March 22, 2002 was: 16,823,867 and the number of Registrant's shares of
Class B Common Stock, $.001 par value outstanding as of March 22, 2002 was: 50,000,000.

Documents Incorporated By Reference:

Portions of the Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders on May 23, 2002. (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 2002 Annual Meeting of Stockholders is not deemed to be filed as part of this Report.

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SureBeam Corporation

Form 10-K
For the Fiscal Year Ended December 31, 2001

INDEX

|PART I   |          | 3                                                                                      
|-------- | -------- | ---------------------------------------------------------------------------------------
|         | ITEM 1.  | BUSINESS                                                                               
|         | ITEM 2.  | PROPERTIES                                                                             
|         | ITEM 3.  | LEGAL PROCEEDINGS                                                                      
|         | ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                    
|PART II  |          | 31                                                                                     
|         | 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 FROM OPERATIONS
|         | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                             
|         | ITEM 8.  | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                               
|PART III |          | 74                                                                                     
|         | ITEM 9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.  
|         | 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  |          | 75                                                                                     
|         | ITEM 14. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                       
|         |          |                                                                                        

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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 forward-looking statements see our note regarding forward-looking statements on
page32. 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 "Risk Factors,"Part II, Item 7 entitled "Management's Discussion and Analysis of Results of Operations
and Financial Condition" 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
risk factors.

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 in the most tax-efficient manner. At that time, Titan contributed to us the assets, liabilities and operations related to its electronic food irradiation business. We in turn
contributed the same assets, liabilities and operations 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 Dr. Gene Ray, President and Chief Executive Officer of Titan. Concurrently, we substituted the outstanding options and assumed the outstanding
warrants to acquire common stock of SB Operating Co. that had been granted by SB Operating Co. As a result, the holders of the substituted options and assumed warrants had the right to receive shares
of our Class A common stock instead of shares of SB Operating Co. common stock. In addition, we assumed Titan's investment in all of SureBeam's operations as evidenced by a subordinated
promissory note payable to Titan. Also at the time of the contribution, we licensed to Titan the patent rights for the SureBeam technology to be used solely for its medical equipment sterilization
business. SB Operating Co. and we had limited assets prior to the contribution.

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, without compromising food taste, texture or nutritional value. 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 responsible 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 combines our patented conveyor and shielding systems and proprietary software with publicly available electron beam, x-ray and linear
accelerator technology. Under our business model, we intend to generate revenue using our electronic food irradiation system in primarily three types of installations:



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We
built, own and operate in Sioux City, Iowa the first commercial electronic food irradiation service center in the United States. In addition, we built, own and operate a second
commercial electronic food irradiation service center, which opened in Chicago, Illinois in October 2001. We use these service centers for both commercial processing of ground beef and spices
for customers and for testing the processing of products for other customers. We are in the process of building additional company-owned service centers in Los Angeles, California and Rio de Janeiro,
Brazil. We expect the Los Angeles service center to be operational by the second quarter of 2002 and the Rio de Janeiro service center to be operational by the third quarter of 2002. Also, we are
currently reviewing the need for a company-owned service center on the east coast of the United States.

In
addition to the company-owned service centers, we generally plan to retain ownership of and operate or support the customer's operation of any systems that we install within a
customer's production line. We have entered into an agreement with Cargill Incorporated's Excel subsidiary to engineer, manufacture and install in-line electronic food irradiation systems
for two of Excel's processing facilities.

We
may also sell systems to third parties who would own and operate service centers in the United States or internationally. In addition to charging for the price of the system, we
anticipate we will typically charge these third parties a royalty fee for the use of our technology on an ongoing basis.

To
date, we have sold a SureBeam system to Hawaii Pride LLC, or Hawaii Pride, for operation of a center in Hilo, Hawaii for the disinfestation of fruits and vegetables, which opened in
July 2000. We also are pursuing global opportunities to sell systems through strategic alliances with local entities in international markets. In 2001, we entered into an order with RESAL Saudi
Corporation, or RESAL, to build electronic food irradiation systems for the operation of four service centers in the Saudi Arabia region for irradiating poultry and disinfesting and prolonging the
shelf life of dates and we have begun construction on six of these systems.

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 technology. 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 in 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 contract accounting under the
percentage-of-completion method. For example, we have commenced construction of the systems for RESAL under our $50.0 million order for ten systems and have recognized
total revenues of $12.2 million through December 31, 2001 under the percentage-of-completion method 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 and Spice Tek. 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 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 frozen and, recently, fresh ground beef for commercial sale by Cargill, Huisken Meats, IBP,

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Omaha Steaks, Schwan's and WW Johnson. Our other customers are currently testing products processed by the SureBeam system.

During
2001 we made significant advances in implementing our strategy. The volume of food products processed in 2001 increased by 88% from 2000 increasing from 5.9 million pounds
to 11.1 million pounds. In addition, we have experienced a significant increase in the number of customers testing products at our Sioux City and Chicago service centers and a number of
potential customers are 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 for Cargill's Excel subsidiary 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 2001, food processing services represented a small portion, or 3%, of our total revenues versus system sales.

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, pork, cut beef, egg 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
2001, in addition to performing activities which are part of our core strategy, we were also involved in the sale of SureBeam equipment to the United States Postal Service for
treatment of mail to eliminate the threat of anthrax. Titan entered into a contract with the United States Postal Office to sell it electronic irradiation equipment and we sold the equipment to Titan
to enable it to fulfill the contract.

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 that food-borne bacteria
cause more than 5,100 deaths, 325,000 hospitalizations, and 76 million cases of illness annually in the United States alone. In 1997, the United States Department of Agriculture, or USDA,
ordered Hudson Foods Inc. to close its Columbus, Nebraska meat processing plant and recall 25 million pounds of ground beef after it was linked to an outbreak of E-coli
contamination. In 2000, the USDA recalled nearly 20 million pounds of food in over 60 reported product recalls relating to food-borne bacteria and in 2001, it recalled nearly
17 million
pounds of food in over 45 reported product recalls. Additionally, zero tolerance liability laws on E-coli and listeria and increasing litigation related to other food-borne
illnesses are exerting additional pressure on food processors to meet increasing food safety standards. As a result, food processors spend substantial amounts of capital to minimize the risk of food
contamination. For example, in response to the zero tolerance laws in Saudi Arabia on salmonella, RESAL's Saudi facilities will use our SureBeam process primarily to destroy salmonella
in poultry.

The
United States Food and Drug Administration, or FDA, has stated that the only effective methods of safeguarding against E-coli and other food-borne bacteria
are cooking foods to 160°F or irradiating food. 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

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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, 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. For instance, Hawaii Pride's facility disinfests produce, and it is expected that RESAL's Saudi facilities also will disinfest dates, while our facility in Brazil is
intended to use our SureBeam process 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 allow compliance with the disinfestations
regulations in an environmentally responsible manner.

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 challenged due to its negative environmental impact. 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 since 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. We believe that 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. In
addition, the World Health Organization has approved the irradiation of all foods. The World Health Organization's 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:



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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:



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The SureBeam System

Our SureBeam system is based principally on publicly available electron beam accelerator technology initially developed in the 1980's. For the past
18 years, Titan, SureBeam's parent corporation, has worked 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. This technology was contributed to SureBeam prior to our
initial public offering. We have successfully demonstrated the reliability of our SureBeam system with over 120,000 operating hours logged on our systems for both medical equipment sterilization and
food irradiation applications.

We
believe our patented SureBeam process is the only turnkey electronic food irradiation solution currently on the market. Our SureBeam system can be integrated into a customer's
production line such that a packaged or unpackaged product can be processed by our SureBeam system. Other food irradiation processes that utilize radioactive isotopes as their power source require
extensive space and must meet additional requirements of the Nuclear Regulatory Commission that we believe have proven impractical in an in-line production setting. Existing food
processing facilities are not constructed to comply with these standards and we do not believe that food processors will be willing to build new processing facilities to accommodate systems utilizing
radioactive isotopes.

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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 and 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. 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 is 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 be configured to include electron beam or x-ray capabilities or both, 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 control systems include components to
detect failures and unscheduled downtime. 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. Unlike systems that utilize radioactive isotopes, our systems can be turned off at any time and produce no radiation when off.

The
FDA has approved all forms of food irradiation technology, including the use of an electron beam 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 that utilizes our
SureBeam process must be validated prior to opening by the FDA to ensure compliance with the FDA standards.

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Our Services

We offer services for the electronic irradiation of food through in-line turnkey 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 turnkey systems have as yet been installed in our customers' production facilities, two company-owned
service centers are currently in operation with the third and fourth under construction.

Company-owned Service Centers.In 1999, we began operating the nation's first electronic food irradiation service center in
Sioux City, Iowa. In October 2001, we began the operation of our second service center located in Chicago, Illinois. Each of these facilities currently has the capacity to process up to
approximately 40,000 pounds of meat per hour. To date, both service centers have been currently 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 additional company-owned service centers in Los Angeles, California and Rio de Janeiro, Brazil. We expect the Los Angeles service center to be operational by the
second quarter of 2002 and the Brazil service center to be operational by the third quarter of 2002. We are currently assessing the potential market demand for a company-owned service center on the
east coast of the United States.

In-line Turnkey Systems.We offer turnkey 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. For example, we have entered into an agreement with Cargill to engineer,
manufacture and install in-line electronic food irradiation systems for two of Excel's processing facilities. In limited circumstances, we may sell turnkey systems directly to our
customers, recognize revenue for the sale and charge a royalty fee for the use of our technology.

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. We generally structure these relationships so that we receive an option to acquire a minority equity interest in a company to be formed by the third party or receive a royalty
fee for the technology 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
July 2000, Hawaii Pride began operating a service center using our technology in Hilo, Hawaii for the disinfestation of fruits and vegetables. We sold our SureBeam system to
Hawaii Pride and we have an option to acquire a 19.9% interest in the service center.

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, our exclusive partner in Brazil, and Titan SureBeam Brazil Ltd., our wholly owned subsidiary, are to provide, among other things, food
irradiation services through four planned service centers to various food companies in Brazil. 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

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agreement with Tech Ion to purchase an additional 60.1% of SureBeam Brasil, bringing our total equity ownership to 80% in SureBeam Brasil. 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 transfer of title 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
market value of the assets purchased. The intangible asset will be amortized over five years. We estimate that we will be required to spend an additional $4.0 million to complete, install, and
begin operation of the first service center in Brazil and will be obligated to provide additional working capital to fund its operations through its startup phase 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 an order in the aggregate of $50.0 million from RESAL Saudi Corporation for ten electronic food irradiation systems to operate in four service centers
in the Saudi Arabia region for irradiating poultry or disinfesting and prolonging the shelf life of dates. We commenced construction on six of these systems and have recognized, under the
percentage-of-completion method of accounting, $12.2 million of revenue for the year ended December 31, 2001. We are in the process of negotiating a processing
agreement, which will govern 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. We expect to enter into this agreement by the end of the second quarter of 2002.

Customers

We currently have agreements with over 40 customers regarding food irradiation services at our Sioux City and Chicago service centers. Six 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 one year 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 gamma 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 over the next four years. 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 a test period followed by a commercial production period. 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.

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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 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 television, print, radio, and in-store advertising and promotional events, to support the promotion
and sale of our SureBeam system 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 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, animal hides and flowers through December 2003. We also have agreed to supply Ion Beam Applications S.A. its
requirements for systems for processing and sanitizing mail until January 2006. We expanded our manufacturing capacity during 2001, which we believe 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

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working with Texas A&M on several research projects which include studies on shelf life extension, food products application testing, and the effectiveness of SureBeam's technology versus other
technologies. In addition, we often benefit from the research and development efforts of our component suppliers. Research and development expenditures for 2000 and 2001 were $524,000 and
$2.2 million, respectively. There were no research and development expenses in 1999.

Patents and Proprietary Rights

We own 49 U.S. and foreign patents and patent applications, consisting of 11 U.S. and foreign issued patents and 38 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.

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, 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 us to Titan for
additional shares of our 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. We received the first installment of $4.0 million on September 30, 2001. We recognized $1.0 million of the cash payments
related to the license agreement as other income in 2001. We will recognize $1.0 million as other income each quarter, over the next seven quarters beginning in the first quarter of 2002. 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, Engineering,
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. The action attacked the validity of our core patent, sought a declaration that IBA and its customers had not infringed
any of the 62 claims in our patent, and alleged that Titan and we engaged in unfair competition and that Titan and our

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conduct constituted patent misuse. The case was moved to the federal court in San Diego. On November 22, 2000, IBA filed an amended complaint alleging, in addition to the original claims, that
Titan and we and engaged in false advertising, monopolization, restraint on trade and unfair business practices.

On
January 25, 2002, Titan and 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 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 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.

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 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

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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 sets its own irradiation regulations. Government regulatory bodies in 50 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. These jurisdictions may apply
different criteria from the FDA in connection with their approval processes. We believe that we currently comply with all applicable regulations in countries where we intend to provide services. In
addition, a segment of the USDA, the Animal and Plant Health Inspection Service, or APHIS, must approve the use of irradiation for disinfestation of foods to be imported into the United States. To
date, APHIS has not given this approval for any foreign countries.

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 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, 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. 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 competitors include Flow
International Corporation, 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

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ray irradiation. In addition, the cost of overall operation of our SureBeam system is comparable to that of other irradiation products. However, gamma ray irradiation does not require products to be
removed from the shipping pallet prior to processing, while our SureBeam process does when products are processed in the service centers. 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, 2001, we employed 135 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.

Risk Factors

Risks Related to Our Business

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

We
will 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, as a stand-alone entity. However, our
future capital requirements will depend on many factors, including:



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 agreed to extend us a new $50.0 million senior credit
facility to be secured by all of our assets. This facility will be subject to limits in the amounts that can be drawn each quarter, and subject to customary financial covenants and affirmative and
negative covenants. Titan lenders have approved up to $25.0 million under this credit facility, but the remaining $25.0 million is subject to approval by Titan's lenders, which Titan has
informed us it expects to obtain prior to our spin-off. We cannot assure you that Titan will extend additional funding to us. If our capital requirements vary from our current plans, we may require
additional financing sooner than we

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anticipate. We expect we will need to obtain additional debt or equity financing in order to execute our business strategy. Future equity financings would be dilutive to the existing holders of our
common stock. Future debt financings would most likely involve restrictive covenants. We will likely not be able to obtain financing with interest rates or other terms as favorable as those that we
have obtained from Titan and 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 2002, but we would have to significantly reduce our current business plan and delay, curtail or eliminate some of our operations or capital expenditures, which could
have a material adverse effect on our results of operations and financial condition.

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:



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 had originally expected. As of December 31, 2001, five 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, which represents a substantial potential
market. We processed 11.1 million pounds of food products in 2001, up from 5.9 million pounds processed in 2000. 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 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.

The
markets for our SureBeam system are unproven. Our SureBeam technology may not gain adequate commercial acceptance or success. A variety of the risk factors discussed in this section
will determine the success of our market development and commercialization efforts and the rate and extent of market acceptance of our SureBeam system.

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

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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.

We have a history of 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, 2001, we had an accumulated deficit of approximately $92.4 million, our
net loss for the year ended December 31, 2000 was approximately $1.8 million, and our net loss for the year ended December 31, 2001 was approximately $74.4 million,
including approximately $54.3 million of non-cash deferred compensation expense. At the time of our initial public offering, we recorded deferred compensation of approximately
$78.6 million, of which $53.5 million was recognized as an expense during the year ended December 31, 2001. 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 from 2002 to 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 for the foreseeable future.

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, for 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. For example, for the year ended December 31, 1999 revenue from three customers represented approximately 40% of our total revenues, for
the year ended December 31, 2000 revenue from three customers represented approximately 79% of our total revenues, and for the year ended December 31, 2001 revenue from three customers
represented approximately 89% 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

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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. 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
substantially over the past twelve months. If a customer defaults on its payment obligations under a contract accounted for using the percentage-of-completion method or if we
determine that the contract is otherwise impaired, we would take an impairment charge to earnings for 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. The $1.2 million represents the portion of revenue not associated with the manufacturing of the linear accelerator,
as management believes the linear accelerator can be utilized on a future contract without significant modification costs.

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 $17.8 million in 2000 and $49.0 million in 2001. Also, in connection with our agreements with our customers, we have advanced funds
aggregating $5.1 million to a strategic alliance entity in Hawaii Pride to be used primarily for land acquisition, building construction, and for working capital purposes. We do not expect
significant repayments of these advances until 2003. We do not expect to receive any progress payments from RESAL until the third quarter of 2002. In addition, we have entered into a number of
commitments to lease land, facilities and equipment in connection with construction of two service centers for which we have and will continue to expend significant funds for construction of the
facilities and food irradiation systems. We also expect to expend approximately $1.8 million to complete and deliver the system for Texas A&M, and approximately $8.0 million to construct
and install two in-line systems for Cargill's Excel subsidiary that we will own and operate. We have limited sources of committed liquidity including our cash resources. Titan has agreed
to extend as a new $50.0 million senior credit facility to be secured by all of our assets. This facility will be subject to limits in the amounts that can be drawn each quarter, subject to
customary financial covenants and affirmative and negative covenants. Titan lenders have approved $25.0 million under this credit facility, but the remaining $25.0 million is subject to
approval by Titan's lenders, which Titan has informed us it expects to obtain prior to our spin-off. 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.

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

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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 need, 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.

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 cannot develop and maintain positive SureBeam brand awareness, our revenues may be materially adversely affected.

To
promote awareness of our brand, we intend to continue to spend significant amounts of capital on an aggressive brand-enhancement campaign. Our efforts to develop and maintain positive
SureBeam® brand awareness with consumers and our customers may be unsuccessful. As a result, SureBeam systems may not gain market acceptance causing our revenues, customer relationships
and business prospects to be materially adversely affected.

If we cannot efficiently integrate our SureBeam systems into our customers' processing facilities, we may not meet anticipated market demand or our product commercialization
schedule.

To
be successful, we will have to integrate our SureBeam systems into our customers' facilities in a timely manner at acceptable costs while also preserving high product quality, safety
and reliability. If we cannot integrate our systems in a timely manner at acceptable costs, our business will be adversely affected. We may encounter difficulties integrating our systems, including
problems with the compatibility of process control systems as well as the configuration of a customer's existing facility. As a result, we may not meet our product commercialization schedule or
satisfy the requirements of our customers.

Our sales through our affiliate Titan generally produce lower profit margins than our sales to non-affiliated entities. A higher percentage of sales through Titan
could reduce our overall profit margins.

Our
sales to Titan are typically structured on a fixed 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 a non-affiliate. We anticipate that a higher volume of sales to or through Titan may have the effect of reducing our overall profit margins. Such
could have a material adverse effect upon our results of operations.

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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. 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.

A
segment of the USDA, the Animal and Plant Health Inspection Service, or APHIS, must approve the use of irradiation for disinfestation of foods to be imported into the United States. To
date, APHIS has not given its approval for any foreign countries. Unless APHIS approves the export of irradiated food from Brazil, we will be unable to export to the United States, a key export market
for Brazilian fruits and vegetables, which may negatively impact our business. Some of our potential customers also may delay entering into agreements with us pending approval by APHIS for irradiated
foods to be imported into the United States from the customers' countries. This delay could adversely affect the
growth of our revenues derived from our food irradiation systems sales and food processing in foreign countries.

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.

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Efforts to change the labeling requirements with respect to electronic food irradiation may not be successful and may result in consumer confusion.

Along
with food industry groups and others, we are seeking to change the labeling requirements for foods treated with electronic irradiation to allow the use of words like "cold
pasteurization" or "electronic pasteurization" instead of "irradiation" or "radiation." Although we believe that the proposed changes may improve the overall acceptance of our SureBeam process, we
cannot assure you that the proposed changes will be accepted, or if accepted, that we will recognize any benefit from such changes. Additionally, a continued reference to our SureBeam process as
"irradiation" or "radiation" could adversely affect the consumer acceptance of our process.

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 an order to install systems in Saudi Arabia 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 business. Furthermore, international operations
are subject to several inherent risks that could increase our costs and decrease our profit margins including:



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

If
we fail to effectively manage our internal 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 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

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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 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.

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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:



We have 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 for the elimination of anthrax.

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, after December 31, 2003, we anticipate we will receive no 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.

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 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

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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 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.

Risks Related to our Relationship with Titan

Titan has adopted a plan to distribute its shares of our common stock to Titan stockholders subject to receipt of a favorable ruling from the Internal Revenue Service, or IRS,
and required third-party consents. If the spin-off is completed, we will have complete separation from Titan, which will involve a variety of risks for SureBeam, including risks related to
access to financing sources and corporate services and facilities previously provided by Titan. Our inability to successfully address these risks could negatively impact the operation of our business
and financial results.

While
the continued control of our company by Titan involves a variety of risks as described above, our potential separation from Titan also involves numerous risks. For instance, we
have to date relied upon Titan to finance a significant portion of our liquidity requirements through the provision of an unsecured, subordinated credit line that was exchanged for equity in SureBeam
with this transaction being completed in February 2002. Titan has agreed to extend us a new $50.0 million senior credit facility to be secured by all of our assets. This facility will be
subject to limits in the amounts that can be drawn each quarter, and subject to customary financial covenants and affirmative and negative covenants. Titan lenders have approved up to
$25.0 million under this credit facility, but the remaining $25.0 million is subject to approval by Titan's lenders, which Titan has informed us it expects to obtain approval prior to
our spin-off. After the spin-off, if it is executed, we would be required to develop our own credit and other liquidity sources. We cannot assure you that the $50.0 million credit
facility will be adequate for our liquidity needs or that we would be able to obtain any additional credit on as
favorable terms or at all. Titan has provided for our general corporate and administrative support, which is principally comprised of administrative and clerical functions necessary to implement our
management decisions and operations, including benefits administration and information technology support, through a corporate services agreement. If there is a spin-off, the corporate
services agreement

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will automatically terminate unless Titan and we agree to an extension of the agreement. If the corporate service agreement terminates, we will have to develop our own systems and services. However,
we may not be able to develop these systems or retain these services successfully, at a comparable cost or in a timely manner.

For
the distribution of our stock by Titan to qualify as tax-free to Titan, 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 intended 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 the spin-off, we expect to enter into a tax sharing and disaffiliation agreement that will provide 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 qualify as a tax-free transaction. In addition, we would 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. In addition, until the spin-off occurs, the risks discussed above relating to Titan's control of us and the potential business
conflicts of interest between Titan and us will continue to be relevant to purchasers of our Class A common stock.

Titan may not be able to affect the tax-free spin-off of its ownership interest in SureBeam in accordance with its announced
plan.

Titan
has filed a request for a letter ruling from the Internal Revenue Service to enable Titan to distribute its remaining ownership interest in SureBeam to Titan's stockholders on a
tax-free basis as soon as practical following receipt of a favorable letter ruling. Titan also is seeking consent from its lenders under its credit facility in order to effect the
spin-off its ownership interest in SureBeam and Titan cannot be certain that its lenders will authorize this spin-off under these circumstances. Titan may not obtain a
favorable letter ruling from the Internal Revenue Service. Further, Titan is not obligated to make such a distribution and the distribution may not occur at all if Titan's board of directors
determines that the distribution is no longer in Titan's best interest or the best interest of Titan's stockholders. However, Titan's board of directors has adopted a plan to spin-off its
ownership interest in SureBeam and, as a result, Titan has discontinued SureBeam for financial reporting purposes.

Stockholders other than Titan will be unable to affect stockholder voting.

Titan
currently owns all of our outstanding shares of Class B common stock, which has ten votes per share, representing approximately 98% of our voting power. As a result, Titan
has the ability to control the outcome of all matters requiring stockholder approval, including the election and removal of our board of directors, approval of any merger, consolidation or sale of all
or substantially all of our assets.

Titan's control of our company could make it difficult for another company to acquire us, which could depress our stock price.

Titan
has the ability to control our management and affairs. This control could discourage others from initiating any potential merger, takeover or other change of control transaction
that may otherwise be beneficial to our business or our stockholders. As a result, this control could reduce the price that investors are willing to pay in the future for shares of our Class A
common stock.

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Our business may be materially adversely affected if Titan's interests receive priority over our interests.

Conflicts
of interest have arisen and may in the future arise between Titan and us in a number of areas relating to our past and ongoing relationships. Titan is a diversified technology
company whose offerings include information technology products and services that it markets to defense, intelligence and other government agencies. Potential factors that may create a conflict of
interest between Titan and us include the following:



Titan
is under no obligation to resolve any conflicts that might develop between it and us in a manner that is favorable to us and we cannot guarantee that such conflicts will not result
in harmful consequences to our business or prospects.

Two of our directors also are directors or executive officers of Titan, which could cause Titan's interests to receive priority over our interests.

Two
of our directors, Gene W. Ray and Susan Golding, also are directors or executive officers of Titan. During 2001, Ms. Golding was a consultant to Titan. Because our financial
results may be considered in computing Titan's compliance with certain financial covenants under its senior credit facility, these directors may consider not only the short-term and
long-term impact of financial and operating decisions on us, but also the impact of these decisions on Titan's consolidated financial results and its stockholders. In addition, Titan has
adopted a plan to distribute its ownership interest through a tax-free dividend and intend to complete the SureBeam spin-off as soon as practical following receipt of a
favorable ruling from the Internal Revenue Service and receipt of all third-party consents. Titan may make decisions based upon its requirements to obtain third-party consents and otherwise affect the
spin-off. In some instances, the impact of these decisions could be disadvantageous to us while advantageous to Titan. We cannot guarantee that all conflicts will be resolved in a manner
that is favorable to us or that such conflicts will not result in harmful consequences to our business or prospects. In addition, the members of our board of directors currently have and may have in
the future an equity interest in Titan that represents a significant portion of their personal financial portfolio. This equity interest could affect their decisions in resolving conflicts between
Titan and us.

Our business may suffer because we have entered into affiliate agreements with Titan that may not be based on arms' length negotiations. For example, although costs to develop
Titan's medical product sterilization business were allocated to us, we will not receive any royalties related to the medical sterilization business.

We
have entered into various intercompany agreements with Titan including a corporate services agreement, tax allocation agreement, contribution agreement, amended and restated license
agreement, manufacturing subcontract, exchange agreements and a contract for purchase and sale of equipment and services. We are in the process of negotiating additional agreements in connection with
the spin-off. Because we are currently a majority-owned subsidiary of Titan, these agreements were negotiated between related parties, and the results may differ from results obtained from
arms-length third parties. Substantially all of our assets and liabilities were contributed to us by Titan on August 4, 2000. This contribution was not made on
arms-length terms and recourse to Titan is limited since

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representations regarding title to transferred assets and related matters are not contained in the contribution agreement. In connection with such contributions we licensed our patents and technology
to Titan to be used for medical equipment sterilization. On October 17, 2001, we and Titan amended and restated the license agreement where Titan purchased a perpetual and exclusive,
non-royalty bearing license to use our intellectual property on all applications other than the food, 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 current $75.0 million debt owed Titan to 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 file a consolidated tax return with Titan, we would be obligated to pay taxes for the entire group of Titan companies if those companies defaulted in the payment of their taxes.
Under the terms of our tax allocation agreement with Titan, 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.

Titan has pledged its equity interest in us as collateral for its credit facility. A default by Titan could result in an inadvertent change in control.

As
collateral for the credit facility, Titan has pledged its equity interest in us. Therefore, if Titan defaults on its credit facility, Titan's creditors could obtain ownership of
Titan's equity interest in us, which would effectuate a change in our control.

ITEM 2. PROPERTIES

Our principal executive office is 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:

|Location                |  | Principal Function          |  | Approximate
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      |  | 22,300                  |  | 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 February 2020. 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 8,200 square feet of office space that we occupy pursuant to a corporate
services agreement with Titan through December 31, 2002 and that is automatically renewable for one-year terms and has been renewed for 2002. In February 2002, we entered
into a lease agreement with WCB Thirty-One Limited Partnership for its principal executive office located in San Diego, California. The lease will commence on May 1, 2002 and has an
initial term of 64 months with 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,

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California. Our lease for the manufacturing space is on a monthly basis with an option to extend the lease term to five years. For our planned Los Angeles service center, we lease approximately
31,200 square feet of space 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, at a discounted rate, to irradiate at the facility 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 February 28, 2020, 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 and at a high level of efficiency. Existing facilities are considered to be generally suitable and adequate
for our present needs.

ITEM 3. LEGAL PROCEEDINGS

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. The action attacked the validity of our core patent, sought a declaration that IBA and its
customers had not infringed any of the 62 claims in our patent, and alleged that Titan and we engaged in unfair competition and that Titan and our conduct constituted patent misuse. The case was moved
to the federal court in San Diego. On November 22, 2000, IBA filed an amended complaint alleging, in addition to the original claims, that Titan and we engaged in false advertising,
monopolization, restraint on trade and unfair business practices.

On
January 25, 2002, Titan and 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 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 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.

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, 2001.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on The Nasdaq National Market under the symbol "SURE" since our initial public offering on March 16, 2001. As of March 22,
2002, there were approximately 13,240 holders of record of the Company's Class A common stock and one holder of record of the Company's Class B 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 2001
|------------------------------------------------ |  | -----------
|
|First Quarter (March 16, 2001 to March 31, 2001) |  | $          
|Second Quarter                                   |  |            
|Third Quarter                                    |  |            
|Fourth Quarter                                   |  |            

No
cash dividends were declared or paid in fiscal 2001. 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 to Titan

On December 31, 2001, $2.0 million of our subordinated note payable was exchanged for 190,385 shares of our Class B common stock. Pursuant to
the terms of the note payable, the $2.0 million was converted into shares of our Class B common stock based upon the fifteen day trading average of our stock of $10.505 ending
December 28, 2001. This issuance of shares was pursuant to an exemption from registration under the Securities Act of 1933, as amended, set forth in Section 4(2) and/or
Section 3(a)(9) of such act.

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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 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, |        
|------------------------------------------- | ----------------- | ----------------------- | -------
|
|Revenues                                    |                   | $                       | 23,000 
|Revenues from affiliate                     |                   |                         | 18,267 
|                                            |                   |                         |        
|Total revenues                              |                   |                         | 41,267 
|                                            |                   |                         |        
|Cost of revenues                            |                   |                         | 14,988 
|Cost of revenues from affiliate             |                   |                         | 12,115 
|                                            |                   |                         |        
|Total cost of revenues                      |                   |                         | 27,103 
|                                            |                   |                         |        
|Gross profit                                |                   |                         | 14,164 
|Selling, general and administrative expense |                   |                         | 83,824 
|Research and development                    |                   |                         | 2,153  
|                                            |                   |                         |        
|Income (loss) from operations               |                   |                         | (71,813
|Interest income                             |                   |                         | 1,267  
|Interest expense                            |                   |                         | (7,022 
|Other income, net                           |                   |                         | 874    
|                                            |                   |                         |        
|Income (loss) before income tax             |                   |                         |        
|provision (benefit)                         |                   |                         | (76,694
|Income tax provision (benefit)              |                   |                         | (2,319 
|                                            |                   |                         |        
|Net income (loss)                           |                   | $                       | (74,375
|                                            |                   |                         |        
|Basic earnings (loss) per common share:     |                   |                         |        
|                                            | Net income (loss) |                         | $      
|                                            |                   |                         |        
|Weighted average sharesbasic               |                   |                         | 54,534 
|                                            |                   |                         |        
|Diluted earnings (loss) per common share:   |                   |                         |        
|                                            | Net income (loss) |                         | $      
|                                            |                   |                         |        
|Weighted average sharesdiluted             |                   |                         | 54,534 
|                                            |                   |                         |        
|Financial Position                          |                   |                         |        
|Cash and cash equivalents                   |                   | $                       | 4,131  
|Total assets                                |                   |                         | 117,784
|Subordinated promissory note                |                   |                         | 72,208 
|Total stockholders' equity (deficit)        |                   |                         | 28,352 

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of the financial condition and results of operations with our consolidated financial statements
and notes included elsewhere in the Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to, those
discussed in the "Risk Factors" section of Item 1 of this Form 10-K. Our actual results may differ materially from those contained in any forward-looking
statements.

This report 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 the risk of gaining consumer acceptance, risks relating to the Company's history of losses and liquidity, and those referred to above under "Risk
Factors."

Introduction

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 historical financial information included in this 10-K prior to 2001 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 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 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, 2001, does not reflect 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 years ended December 31, 1999 and 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 an affiliate. Revenues to an affiliate, namely Titan, are for products and services in
markets except for food, animal hide and flower applications relating to the linear accelerators, including medical equipment sterilization and sanitizing mail for anthrax.

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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. Our profit margins on irradiation services
currently are higher than the profit margins on system sales. Accordingly, if we can increase the portion of our revenues attributable to processing, as opposed to system sales, our profit margins
could increase.

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. Revenues from an affiliate are derived from either fixed price or cost plus contracts using
the percentage-of-completion method. These 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 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.

Recent Acquisitions and Strategic Alliance

In June 2001, we received an order in the aggregate amount of $50.0 million from RESAL Saudi Corporation for ten electronic food irradiation systems
to operate in four service centers in the Saudi Arabia region for irradiating poultry and disinfesting and prolonging shelf life of dates. We commenced construction on six of these systems for RESAL
and have recognized, under the percentage-of-completion method of accounting, $12.2 million in revenue for the year ended December 31, 2001. Three electronic food
irradiation systems are scheduled to be shipped in 2002, with the remainder to be shipped in 2003.

On
October 23, 2001, we entered into a stock purchase agreement with Tech Ion to purchase an additional 60.1% of SureBeam Brasil, bringing our total equity ownership to 80%. For
consideration of $1.0 million to Tech Ion, a payment of $750,000 was paid upon execution of the agreement and $250,000
is due and conditioned upon the transfer of title for the Rio de Janeiro facility equipment from Tech Ion to SureBeam Brasil. In addition, we exchanged unbilled trade receivables of
$22.4 million due from Tech Ion and forgave $3.5 million of its loan to us, representing the outstanding balance on Tech Ion's working capital line advanced by us, to Tech Ion for a
plant and certain equipment. In connection with this purchase, we recorded an intangible asset of $2.5 million, and it is being amortized on a straight-line basis over a
five-year life, the amount by which the purchase consideration exceeded the fair market value of the assets purchased. The intangible asset represents a land lease obtained by Tech Ion for
SureBeam Brasil and is being amortized over five years, the free rent period of the ten-year lease. We estimate that we will be required to spend an additional $4.0 million to
complete, install, and begin operation of the first service center in Brazil 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.

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Deferred Compensation

During 1999, we granted options to purchase 3,237,578 shares of our Class A common stock with a weighted average exercise price of $0.1438. These option
grants resulted in deferred compensation charge calculated as the difference between the fair value of the shares of common stock underlying the option at the grant date and the option exercise price.
The deferred compensation is amortized over the vesting period of the underlying option, which is four years. Accordingly, we recorded deferred compensation of approximately $17,000 that resulted in
an insignificant non-cash compensation amortization expense for the year ended December 31, 1999. During 2000, we granted options under the 2000 Stock Option and Incentive Plan and
recorded deferred compensation for which the fair market value on the date of grant exceeded the exercise price. We recorded deferred compensation amortization on these options of $648,000 and
$808,000 for the years ended December 31, 2000 and 2001, respectively. Unamortized deferred compensation for these options at December 31, 2001 was $1.8 million. 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 compensation of $78.6 million was recorded, representing the extent to which the $10 per share offering price exceeded the exercise price of the options. Additionally,
since a substantial portion of these options were vested at the time of completion of the public offering, approximately $38.7 million was recognized at that time. The remaining deferred
compensation balance related to these options will be recognized as compensation expense over the remaining four-year vesting period of these options. There was no deferred compensation
amortization for these options during 1999 and 2000 and we recorded $53.5 million of deferred compensation amortization related to these options during 2001. Unamortized deferred compensation
for these options at December 31, 2001 was $25.1 million.

Results of Operations (in thousands)

|                                            |  | Year Ended December 31, |        
|------------------------------------------- |  | ----------------------- | -------
|
|Total revenues                              |  | $                       | 41,267 
|Total cost of revenues                      |  |                         | 27,103 
|                                            |  |                         |        
|Gross profit                                |  |                         | 14,164 
|Selling, general and administrative expense |  |                         | 83,824 
|Research and development                    |  |                         | 2,153  
|                                            |  |                         |        
|Income (loss) from operations               |  |                         | (71,813
|Interest income (expense), net              |  |                         | (5,755 
|Other income, net                           |  |                         | 874    
|Income tax provision (benefit)              |  |                         | (2,319 
|                                            |  |                         |        
|Net income (loss)                           |  | $                       | (74,375
|                                            |  |                         |        

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As a Percentage of Revenues

|                                            |  | Year Ended December 31, |   
|------------------------------------------- |  | ----------------------- | --
|
|Total revenues                              |  | 100.0                   | % 
|Total cost of revenues                      |  | 65.7                    |   
|                                            |  |                         |   
|Gross profit                                |  | 34.3                    |   
|Selling, general and administrative expense |  | 203.1                   |   
|Research and development                    |  | 5.2                     |   
|                                            |  |                         |   
|Income (loss) from operations               |  | (174.0                  | ) 
|Interest income (expense), net              |  | (13.9                   | ) 
|Other income, net                           |  | 2.1                     |   
|Income tax provision (benefit)              |  | (5.6                    | ) 
|                                            |  |                         |   
|Net income (loss)                           |  | (180.2                  | )%
|                                            |  |                         |   

Revenues

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 revenues increased 105% from $14.3 million in
1999 to $29.4 million in 2000 and increased 40% to $41.3 million in 2001. 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 563% from $3.8 million in 1999 to $25.2 million in 2000 and increased 64% to $41.3 million in 2001,
including $18.3 million of revenues from an affiliate in 2001 for sales of systems for non-food processing applications.

For
the year ended December 31, 1999, our first year of operations in the electronic food irradiation business, sales of our SureBeam systems were equal to $3.8 million or
26% of total revenue. This revenue primarily resulted from the project for Hawaii Pride. Revenues derived from medical sterilization systems were $2.0 million or 14% of total revenues. Revenues
derived from medical equipment sterilization services were $5.2 million or 36% of total revenues and revenues derived from the sale of linear electron beam accelerators sold to the federal
government were $3.3 million or 23% of total revenues.

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 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.

For
the year ended December 31, 2001, we had electronic food irradiation system sales and food processing revenues of $23.0 million or 56% of total revenue. Of this
$23.0 million, 96%, or $22.0 million, was derived from sales of electronic food irradiation systems primarily to three customers and 4%, or $1.0 million, was derived from food
processing services. The 2001 system sales revenues from sales of our electronic food irradiation systems, were derived using the percentage-of-completion method of accounting,
principally to Tech Ion, a Brazilian food irradiation company, prior to the execution of the stock purchase agreement between Tech Ion and us, and RESAL Saudi Corporation, a

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subsidiary of a private Saudi conglomerate headquartered in Riyadh, Saudi Arabia. Food processing service revenues were primarily derived in connection with our customer production runs as well as
test marketing programs. Volumes for food processed for customers increased in a same customer basis
between 2000 and 2001 and we have added customers with commercial productions. No irradiated product was commercially available in 2000. In addition, in 2001, we had affiliate revenues of
$18.3 million or 44% of total revenues. The revenues from affiliate were primarily related to revenues recognized from sales of our electronic irradiation systems, using the
percentage-of-completion method of accounting, principally in support of Titan's United States Postal Service, or USPS, contract for which we are the main
sub-contractor, which represented $12.5 million or 68% of the revenues from an affiliate. In order to meet the time requirements on this contract, we reallocated certain long
lead-time components being used to manufacture systems for the RESAL contract to the USPS contract. This movement resulted in negative revenue of $3.0 million from third parties in
the fourth quarter of 2001. The balance of revenue from an affiliate was from the sale of medical equipment sterilization systems. We entered into an exclusive contract for the sale of systems and
integration services to Titan and its affiliates under the USPS contract. Titan will be obligated to purchase its requirements for linear accelerators and systems from us through December 31,
2003 and its requirement for integration services through December 31, 2003, subject to some limited exceptions. Equipment and 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
services that will be purchased.

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, electronic food irradiation systems and mail sanitizing 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.

Selling, General and Administrative

Our selling, general and administrative expenses consist primarily of personnel costs, occupancy costs, staff recruiting costs, travel expenses, depreciation
expense, sales, marketing and promotional costs and amortization of deferred compensation and intangible assets. Administrative expenses also include an expense allocation 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. We have entered into a corporate
services agreement with Titan under which Titan will provide these services until December 31, 2002. However, if we are spun off by Titan as planned, the corporate services agreement will
automatically terminate unless both parties agree to an extension of the agreement and we have not reached any agreement on an extension.

Our
selling, general and administrative expenses increased 109% from $4.1 million in 1999 to $8.6 million in 2000 and increased 870% from $8.6 million in 2000 to
$83.8 million in 2001. As a percentage of total revenues, selling, general and administrative expenses were 29% in both 1999 and 2000 and increased to 203% in 2001. Excluding the impact of the
medical sterilization business and the government linear accelerator business, which are no longer our businesses, our selling, and general and administrative increased from $1.1 million in
1999 to $7.5 million in 2000, and increased to $83.8 million in 2001. As a percentage of total revenue and excluding the effects of the medical
sterilization business and the government linear accelerator business, selling, general and administrative expenses were 30% in both 1999 and 2000 and increased to 203% in 2001. The dollar increase
from 1999 to 2000 is primarily attributed to increased personnel and related costs of hiring along with

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increased amortization of deferred compensation, amortization of the intangible asset related to the Applied Power Associates, Inc. purchase, and the initiation of sales and marketing
expenses. The increase from 2000 to 2001 was primarily attributable to the increased amortization of deferred compensation expense related to the initial public offering of $53.5 million along
with the increased sales and marketing expenses, and compensation expense primarily due to increased headcount. The deferred compensation will continue to amortize over the next three years until it
is fully amortized.

Research and Development

Our research and development expenses increased from $524,000 in 2000 to $2.2 million in 2001. Research and development expenses, as a percentage of total
revenues increased from 2% in 2000 to 5% in 2001. 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. 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 shelf life extension, food products application
testing, and the effectiveness of SureBeam's technology versus other technologies. 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 a nominal increase in our research and development expenses as a percent of sales during fiscal year 2002.

Interest income expense, net

Our interest expense increased from $1.3 million in 1999 to $3.8 million in 2000 and increased to $7.0 million in 2001. There was no impact
on either interest income or expense from the medical sterilization business or the government linear accelerator business in 1999 or 2000. The increases are due to the increased borrowing on the
subordinated note payable to Titan. Titan agreed to lend us a maximum amount of $75.0 million including accrued interest to fund working capital requirements. In 2002, Titan agreed to exchange
up to $75.0 million of our debt for additional Class B and Class A shares of our common stock. On December 31, 2001, $2.0 million of our subordinated note payable
was exchanged for 190,385 shares of our Class B common stock, based upon the fifteen day trading average of our stock of $10.505 ending on December 28, 2001. Additionally, the remaining
$73.0 million of our
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, based on
the twenty day trading average of our common stock of $9.521 ending February 12, 2002. We believe that this exchange of debt will serve to decrease our interest expense. However, should we
require additional financing, we will likely incur additional interest expense in the future. During 2001, our investments 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. We have been using these funds in accordance with our prospectus and our cash balances and investments
were reduced to $7.9 million as of December 31, 2001. Unless we raise additional funds in the future through equity offerings, we do not expect to see this amount of interest income in
the future.

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Other income (expense), net

During 2001, we recorded $874,000 of other income. This amount represents $1.0 million of license fee income from Titan that was reduced by $126,000 of
realized losses from the sale of available-for-sale marketable securities. Titan has agreed to purchase a perpetual and exclusive, non-royalty bearing license to
use our intellectual property for all applications and fields other than food, animal hide and flower markets for $8.0 million. As part of this agreement, we will be recording
$1.0 million a quarter of license fee income for eight quarters, which began in the fourth quarter of 2001.

Income Taxes

Income taxes reflect effective rates of a provision of 37% in 1999 and benefit rates of 39% in 2000 and 3% in 2001. Pursuant to our tax sharing agreement with
Titan, Titan will compensate us for any tax benefit received by Titan from the use of our losses in Titan's consolidated return. The compensation is payable on the earlier of when we could have used
the loss or when the losses expire (20 years). We had an operating loss during 2001 and expect to continue to incur losses during 2002. Therefore, our tax benefit is dependent upon the usage of
our losses by Titan. Titan was not able to use our tax benefits in 2001, so we did not benefit from this agreement and we do not know when Titan will be able to use our losses. If the
spin-off occurs, we will be deconsolidated from Titan and Titan will no longer have the right to use our losses.

Net income (loss)

In 1999, we recorded net income of $205,000, a net loss of $1.8 million in 2000 and a net loss of $74.4 million in 2001. The increase in net loss in
2001 was primarily related to deferred compensation amortization expense of approximately $54.3 million resulting primarily from our initial public offering
on March 16, 2001. In addition, our selling, general and administrative expense increased as a result of our marketing initiatives and the building of our infrastructure.

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 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:



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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 spending significant funds to construct new company-owned service centers and systems. At December 31, 2001, we
had available cash, cash equivalents and investments available for sale of $7.9 million.

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Our
cash requirements have been met primarily through proceeds of approximately $59.8 million, net of underwriting commissions, fees and other offering costs, from our initial
public offering, advances under the $75 million credit facility with Titan discussed below, payments from Titan for work performed on medical sterilization and mail sanitation system sales, and
a $4.0 million license fee payment from Titan. 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 the 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 the maximum of $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. Titan's effective weighted average interest rate under its senior credit facility for the year ended December 31, 2001 was 7.5%.
As of December 31, 2001, we had $72.2 million in principal and accrued interest outstanding under the note accruing interest at 10% per annum. On December 31, 2001,
$2.0 million of our subordinated note payable was exchanged for 190,385 shares of our Class B common stock. Additionally, the remaining $73.0 million of our 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. Titan has agreed to extend
us a new $50.0 million senior credit facility to be secured by all of our assets. This facility will be subject to limits in the amounts that can be drawn each quarter, and subject to customary
financial covenants and affirmative and negative covenants. Titan lenders have approved Titan's extension of up to $25.0 million under this credit facility, but the remaining
$25.0 million is subject to approval by Titan's lenders, which Titan has informed us it expects to obtain prior to our spin-off. We cannot assure you that Titan will extend additional funding
to us. If our capital requirements vary from our current plans, we may require additional financing sooner than we anticipate.

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. Titan has filed a letter ruling request with the Internal Revenue Service seeking confirmation that the distribution can be made on a tax free basis and Titan has stated it intends to
execute the spin-off as soon as practical following the receipt of a favorable ruling on that request, subject to obtaining all required third party consents.

Our
operating activities used cash of $49.0 million for the year ended December 31, 2001, primarily due to an increase in accounts receivable of $31.0 million, an
increase in deferred tax assets of $3.1 million and to a lesser extent, to an increase in inventories of $3.3 million, as well as personnel costs and other expenditures associated with
the development of the electronic food irradiation business. The increase in accounts receivable principally relates to unbilled revenues that have been recognized under the
percentage-of-completion method but where payments have not yet been due or made under such contracts. The increase in deferred income taxes principally relates to deferred tax
assets recorded as a result of net operating losses generated during the quarter.

Our
investing activities used cash of $24.3 million for the year ended December 31, 2001, primarily due to the purchase of available-for-sale
investments of $3.7 million and capital expenditures of $19.9 million related to our service centers under construction and completed in 2001. Also included in cash used for investing
activities for the year ended December 31, 2001 were advances to the Hawaii Pride LLC, or Hawaii Pride, and Tech Ion aggregating $3.9 million to be used for start-up,
including, but not limited to, the purchase of land and construction of the facility in Brazil, and working capital requirements. We exchanged the advance made to Tech Ion as part of our purchase of
an additional 60% interest in SureBeam Brasil.

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. Prior to Hawaii Pride obtaining third party financing, we advanced $5.1 million to Hawaii Pride, which is included in the
accompanying balance sheet as other

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assets, net of an impairment charge of $1.4 million that was recorded in the fourth quarter of 2001. This impairment charge reflects our estimate of any erosion of our collateral basis in
Hawaii Pride. The monies advanced were utilized for costs relating to the acquisition of land, construction of the building and infrastructure, equipment (excluding the SureBeam system) and other
start-up costs. 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
the remaining balance 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 10%, 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. Titan has agreed that upon our
acquisition of any equity interest in Hawaii Pride, it will guarantee a percentage amount of the USDA loan equal to the greater of 19.9% or the percentage of our equity interest in Hawaii Pride. 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. We agreed to reimburse Titan if Titan is obligated to pay any amounts
under this guarantee.

In
early 2000, as part of the settlement of a patent infringement case we brought against Electron Ventures Limited, we acquired from Electron Ventures a linear accelerator system and
all ancillary equipment for $2.5 million for use in Titan's medical equipment sterilization business. We also assumed some of Electron Ventures' liabilities, including a long-term
capital lease on the linear accelerator with an aggregate value of $1.2 million as of the acquisition date. The excess of the purchase price over the net assets acquired of approximately
$1.2 million is being amortized over five years. Electron Ventures also entered into a consent decree acknowledging the validity of our core patents and their infringement of our core patents
and ceased business operations.

In
May 2000, we acquired the intangible assets of Applied Power Associates, Inc., which included a customer list, know-how related to food irradiation and
product installation and two-year agreements from two key employees not to compete in the food irradiation industry, for $5.0 million in cash and a warrant to acquire 372,670 shares
of SureBeam Class A common stock at a price per share of $0.1438.
The warrant was exercised in connection with our initial public offering. The purchase price of approximately $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 agreements included as part of this transaction.

In
May 2000, we received purchase orders from Tech Ion Industrial Brasil s.a. for eleven electronic food irradiation systems. We began construction of these systems in
July 2000. Tech Ion was not obligated to make, and did not make, any progress payments to us during the construction of its food irradiation systems. Although Tech Ion was obligated to fully
pay for each food irradiation system upon delivery and installation, it did not have sufficient resources to pay for the systems without obtaining financing to complete the delivery and installation
of these systems. Also in May 2000, our wholly owned subsidiary, Titan SureBeam Brazil Ltd., and Tech Ion jointly established SureBeam Brasil Ltda., or SureBeam Brasil, to
provide, among other things, food irradiation services through four planned service centers to various food companies in Brazil. We acquired a 19.9% equity interest in SureBeam Brasil without charge
at the time of its signing of the agreement to establish SureBeam Brasil, which is a start up company that was created with no initial capital contribution from either party. Tech Ion and we were each
entitled to elect an equal number of directors of SureBeam Brasil and therefore these representatives must mutually agree on any board actions. The agreement further provided that we or another Titan
affiliate provide a $5.0 million working capital line of credit to Tech Ion, and advances will bear interest at 10% per annum and are secured by the stock and assets of Tech Ion. Our

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agreement with Tech Ion also entitles us to intellectual property rights and subjects us to intellectual property obligations. On October 23, 2001, we entered into a stock purchase agreement
with Tech Ion to purchase an additional 60.1% of SureBeam Brasil, bringing our total equity ownership to 80%. For consideration of $1.0 million to Tech Ion, a payment of $750,000 was paid upon
execution of the agreement and $250,000 is due and conditioned upon the transfer of title for the Rio de Janeiro facility equipment from Tech Ion to SureBeam Brasil. In addition, we exchanged unbilled
trade receivables of $22.4 million due from Tech Ion and forgave $3.5 million of its loan to us, representing the outstanding balance on Tech Ion's working capital line advanced by us,
to Tech Ion for a plant and certain equipment. In connection with this purchase, we recorded an intangible asset of $2.5 million, and it is being amortized on a straight-line basis
over a five-year life, the amount by which the purchase consideration exceeded the fair market value of the assets purchased. The intangible asset represents a favorable land lease
obtained by Tech Ion for SureBeam Brasil and is being amortized on a straight-line basis over five years, the free rent period of the ten-year lease.

In
June 2001, we received an order in the aggregate amount of $50.0 million from RESAL Saudi Corporation for ten electronic food irradiation systems to operate in four
service centers in the Saudi Arabia region for irradiating poultry and disinfesting and prolonging shelf life of dates. We commenced construction on six of these systems for RESAL and have recognized,
under the percentage-of-completion method of accounting, $12.2 million in revenue for the year ended December 31, 2001. Three electronic food irradiation systems
are scheduled to be shipped in 2002, with the remainder to be shipped in 2003. We are in the process of negotiating a processing agreement, which will govern our strategic relationship with the
operator of these systems, including royalty fees and the management and equity ownership of the operator that will operate the service centers. We expect to have this agreement finalized by the end
of the second quarter of 2002.

In
October 2001, we contracted to manufacture eight SureBeam systems for $26 million for Titan in connection with Titan's agreement with the United States Postal Service.
Under this agreement, Titan has arranged to provide electron beam systems and services to sanitize mail by eliminating anthrax. We will be working with Titan and Titan's business units in providing
the systems to the United States Postal Service. We will be 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 in 2002, of which $6.0 million is an advance against future manufacturing cost and services.

The
accompanying consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. During 2001, we have
incurred substantial losses from operations primarily resulting from our marketing and brand awareness campaign, and management believes we will continue to do so for the next several quarters as we
continue to make significant investments in infrastructure, sales and marketing. 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, etc. where no material uncertainties exist. As a result, our unbilled receivables from our customers have increased
substantially over the past twelve months. Also in connection with our agreements with our customers, we have advanced funds aggregating $5.1 million to Hawaii Pride, which was used primarily
for land acquisition and for working capital purposes. We do not expect significant repayments of the advances from Hawaii Pride until 2003. We also have entered into a number of commitments to lease
land, facilities and equipment in connection with construction of two service centers for which we have and will continue to expend significant funds for construction of the facilities and food
irradiation systems. We also expect to expend approximately $1.8 million to complete and deliver the system for Texas A&M. In addition, in 2002, we expect to construct and install two
in-line systems for Cargill Incorporated's Excel subsidiary that we will own and operate.

43

---

In
addition to management's 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. We agreed to sell Titan a perpetual and exclusive, non-royalty bearing license to use our intellectual property for all applications and fields other than the food,
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, 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 us to Titan for
additional shares of our Class B and Class A common stock, which occurred in December 2001 and February 2002, and 3) a cash payment of $8.0 million, with a
$4.0 million payment on September 30, 2001 and four installments of $1.0 million payable on each of March 31, 2002, June 30, 2002, September 30, 2002 and
December 31, 2002, with the first installment having been made. On December 31, 2001, $2.0 million of our subordinated note payable was exchanged for 190,385 shares of our
Class B common stock. Additionally, the remaining $73.0 million of our 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. In addition, we are negotiating other agreements with Titan in connection with our planned 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 50% or
more in voting power or value as part of Titan's spin-off plan. This risk could limit our ability to access public equity markets. If funds from Titan 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.

At
December 31, 2001, we had $7.9 million of cash, cash equivalents and investments available-for-sale. This balance along with the additional credit facility from Titan
will be sufficient for our 2002 cash needs. 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.

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.

44

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  AND FINANCIAL STATEMENT SCHEDULE

PageReport of Independent Public Accountants

46Consolidated Statements of Operations for the three years ended
December 31, 2001

47Consolidated Balance Sheets at December 31, 2001 and December 31, 2000

48Consolidated Statements of Cash Flows for three years ended
December 31, 2001

49Consolidated Statements of Stockholders' Equity (Deficit) for the three years ended
December 31, 2001

50Notes to Consolidated Financial Statements

51Supporting Financial Schedule covered by the Foregoing Report of
Independent Public Accountants:Schedule II Valuation and Qualifying Accounts

77


45

---

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

46

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SureBeam Corporation and Subsidiaries  CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share data)

|                                                    |                   | Year Ended December 31, |        
|--------------------------------------------------- | ----------------- | ----------------------- | -------
|
|Revenues                                            |                   | $                       | 23,000 
|Revenues from affiliate                             |                   |                         | 18,267 
|                                                    |                   |                         |        
|Total revenues                                      |                   |                         | 41,267 
|                                                    |                   |                         |        
|Cost of revenues                                    |                   |                         | 14,988 
|Cost of revenues from affiliate                     |                   |                         | 12,115 
|                                                    |                   |                         |        
|Total cost of revenues                              |                   |                         | 27,103 
|                                                    |                   |                         |        
|Gross profit                                        |                   |                         | 14,164 
|Selling, general and administrative expense         |                   |                         | 83,824 
|Research and development                            |                   |                         | 2,153  
|                                                    |                   |                         |        
|Income (loss) from operations                       |                   |                         | (71,813
|Interest income                                     |                   |                         | 1,267  
|Interest expense                                    |                   |                         | (7,022 
|Other income, net                                   |                   |                         | 874    
|                                                    |                   |                         |        
|Income (loss) before income tax provision (benefit) |                   |                         | (76,694
|Income tax provision (benefit)                      |                   |                         | (2,319 
|                                                    |                   |                         |        
|Net income (loss)                                   |                   | $                       | (74,375
|                                                    |                   |                         |        
|Basic earnings (loss) per share:                    |                   |                         |        
|                                                    | Net income (loss) |                         | $      
|                                                    |                   |                         |        
|Weighted average sharesbasic                       |                   |                         | 54,534 
|                                                    |                   |                         |        
|Diluted earnings (loss) per share:                  |                   |                         |        
|                                                    | Net income (loss) |                         | $      
|                                                    |                   |                         |        
|Weighted average sharesdiluted                     |                   |                         | 54,534 
|                                                    |                   |                         |        

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

47

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SureBeam Corporation and Subsidiaries  CONSOLIDATED BALANCE SHEETS  (in thousands, except share information)

|                                               |                                                                                                                                                                        | December 31,                                         |       
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------
|
|Assets                                         |                                                                                                                                                                        |                                                      |       
|Current Assets:                                |                                                                                                                                                                        |                                                      |       
|                                               | Cash and cash equivalents                                                                                                                                              |                                                      | $     
|                                               | Investments, available-for-sale                                                                                                                                        |                                                      |       
|                                               | Accounts receivable-net of allowances of $1,428 in 2001 and $250 in 2000                                                                                               |                                                      |       
|                                               | Receivable from affiliate                                                                                                                                              |                                                      |       
|                                               | Inventories                                                                                                                                                            |                                                      |       
|                                               | Prepaid expenses and other                                                                                                                                             |                                                      |       
|                                               |                                                                                                                                                                        |                                                      |       
|                                               |                                                                                                                                                                        | Total current assets                                 |       
|Property and equipment-net                     |                                                                                                                                                                        |                                                      | 41,903
|Due from affiliate                             |                                                                                                                                                                        |                                                      | 2,319 
|Intangible assets-net                          |                                                                                                                                                                        |                                                      | 3,549 
|Other assets                                   |                                                                                                                                                                        |                                                      | 12,032
|                                               |                                                                                                                                                                        |                                                      |       
|                                               |                                                                                                                                                                        | Total assets                                         |       
|                                               |                                                                                                                                                                        |                                                      |       
|Liabilities and Stockholders' Equity (Deficit) |                                                                                                                                                                        |                                                      |       
|Current Liabilities:                           |                                                                                                                                                                        |                                                      |       
|                                               | Accounts payable                                                                                                                                                       |                                                      | $     
|                                               | Accrued compensation and benefits                                                                                                                                      |                                                      |       
|                                               | Other current liabilities                                                                                                                                              |                                                      |       
|                                               |                                                                                                                                                                        |                                                      |       
|                                               |                                                                                                                                                                        | Total current liabilities                            |       
|                                               |                                                                                                                                                                        |                                                      |       
|Subordinated promissory note to affiliate      |                                                                                                                                                                        |                                                      | 72,208
|Deferred tax liability                         |                                                                                                                                                                        |                                                      |      
|Other long-term liabilities                    |                                                                                                                                                                        |                                                      | 613   
|                                               |                                                                                                                                                                        |                                                      |       
|                                               |                                                                                                                                                                        | Total liabilities                                    |       
|                                               |                                                                                                                                                                        |                                                      |       
|Commitments and Contingencies                  |                                                                                                                                                                        |                                                      |       
|Stockholders' Equity (Deficit):                |                                                                                                                                                                        |                                                      |       
|                                               | 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, 11,605,440 issued and 11,601,911 outstanding in 2001, and 232,919 issued and outstanding in 2000 |                                                      |       
|                                               | Class B common stock, $.001 par value, 50,000,000 shares authorized, 46,774,235 issued and outstanding in 2001, and 46,583,850 issued and outstanding in 2000          |                                                      |       
|                                               | Additional paid-in capital                                                                                                                                             |                                                      |       
|                                               | Deferred compensation                                                                                                                                                  |                                                      |       
|                                               | Accumulated other comprehensive income                                                                                                                                 |                                                      |       
|                                               | Treasury stock, at cost: 3,529 shares in 2001 and 0 shares in 2000                                                                                                     |                                                      |       
|                                               | Retained deficit                                                                                                                                                       |                                                      |       
|                                               |                                                                                                                                                                        |                                                      |       
|                                               |                                                                                                                                                                        | Total stockholders' equity (deficit)                 |       
|                                               |                                                                                                                                                                        |                                                      |       
|                                               |                                                                                                                                                                        | Total liabilities and stockholders' equity (deficit) |       
|                                               |                                                                                                                                                                        |                                                      |       

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

48

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SureBeam Corporation and Subsidiaries  CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)

|                                                                                     |                                                        | Year Ended December 31,                          |        
|------------------------------------------------------------------------------------ | ------------------------------------------------------ | ------------------------------------------------ | -------
|
|Cash Flows from Operating Activities:                                                |                                                        |                                                  |        
|Net income (loss)                                                                    |                                                        | $                                                | (74,375
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |                                                        |                                                  |        
|                                                                                     | Nonmonetary research consideration                     |                                                  |        
|                                                                                     | Depreciation and amortization                          |                                                  |        
|                                                                                     | Asset impairment and other non-cash charges and credit |                                                  |        
|                                                                                     | Due from affiliate                                     |                                                  |        
|                                                                                     | Deferred compensation charge                           |                                                  |        
|                                                                                     | License fee from affiliate recognized                  |                                                  |        
|Change in operating assets and liabilities, net of effects of business acquired:     |                                                        |                                                  |        
|                                                                                     | Accounts receivable                                    |                                                  |        
|                                                                                     | Inventories                                            |                                                  |        
|                                                                                     | Prepaid expenses and other                             |                                                  |        
|                                                                                     | Other assets                                           |                                                  |        
|                                                                                     | Accounts payable                                       |                                                  |        
|                                                                                     | Accrued compensation and benefits                      |                                                  |        
|                                                                                     | Other accrued liabilities                              |                                                  |        
|                                                                                     |                                                        |                                                  |        
|                                                                                     |                                                        | Net cash used in operating activities            |        
|                                                                                     |                                                        |                                                  |        
|Cash Flows from Investing Activities:                                                |                                                        |                                                  |        
|Purchases of available-for-sale investments                                          |                                                        |                                                  | (3,719 
|Capital expenditures                                                                 |                                                        |                                                  | (19,894
|Cash from license fee from affiliate                                                 |                                                        |                                                  | 4,000  
|Payment for purchase of business, net of cash acquired                               |                                                        |                                                  | (750   
|Advances to Tech Ion                                                                 |                                                        |                                                  | (2,775 
|Advances to Hawaii Pride                                                             |                                                        |                                                  | (1,156 
|Cash paid for purchase of linear accelerator                                         |                                                        |                                                  |       
|Cash paid for purchase of intangible assets                                          |                                                        |                                                  |       
|                                                                                     |                                                        |                                                  |        
|                                                                                     |                                                        | Net cash used in investing activities            |        
|                                                                                     |                                                        |                                                  |        
|Cash Flows from Financing Activities:                                                |                                                        |                                                  |        
|Net proceeds from issuance of common stock                                           |                                                        |                                                  | 59,777 
|Borrowings on subordinated promissory note                                           |                                                        |                                                  | 16,136 
|Proceeds from exercise of stock options and warrants                                 |                                                        |                                                  | 1,550  
|Purchase of treasury stock                                                           |                                                        |                                                  | (42    
|Titan investment, net                                                                |                                                        |                                                  |       
|Net effect of reorganization                                                         |                                                        |                                                  |       
|                                                                                     |                                                        |                                                  |        
|Net cash provided by financing activities                                            |                                                        |                                                  | 77,421 
|                                                                                     |                                                        |                                                  |        
|Net change in cash and cash equivalents                                              |                                                        |                                                  | 4,131  
|                                                                                     |                                                        | Cash and cash equivalents at beginning of period |        
|                                                                                     |                                                        |                                                  |        
|                                                                                     |                                                        | Cash and cash equivalents at end of period       |        
|                                                                                     |                                                        |                                                  |        
|Supplemental Cash Flow Information:                                                  |                                                        |                                                  |        
|Non-Cash Investing and Financing Activities:                                         |                                                        |                                                  |        
|Conversion of subordinated promissory note to equity                                 |                                                        | $                                                | 2,000  
|Increase in fair value of investments, available-for-sale                            |                                                        |                                                  | 47     
|Conversion of parent company investment into subordinate promissory note             |                                                        |                                                  |       
|                                                                                     |                                                        |                                                  |        

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

49

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SureBeam Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)

|                              |                                                                                                   | Shares of
Common Stock |       |        |     |   |    |   |   |    |   |   |         |        |   |         |         |   |    |    |  
|----------------------------- | ------------------------------------------------------------------------------------------------- | ---------------------- | ----- | ------ | --- | - | -- | - | - | -- | - | - | ------- | ------ | - | ------- | ------- | - | -- | -- | -
|
|
|
|Balances at December 31, 1998 |                                                                                                   |                       |       | 46,584 |     | $ |   |   | $ | 47 |   | $ |        |        | $ |        |         | $ |   |    | $
|                              | Net income                                                                                        |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         |        |   |    |   |  
|                              | Titan investment, net                                                                             |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         |        |   |    |   |  
|                              | Proceeds from issuance of common stock in conjunction with exercise of stock options              |                        | 233   |        |    |   |    |  |   |    |  |   |         | 34     |   |         |        |   |    |   |  
|                              | Deferred compensation related to the issuance of stock options                                    |                        |      |        |    |   |    |  |   |    |  |   |         | 17     |   |         | (17     | ) |    |   |  
|                              | Amortization of deferred compensation                                                             |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         | 2       |   |    |   |  
|                              |                                                                                                   |                        |       |        |     |   |    |   |   |    |   |   |         |        |   |         |         |   |    |    |  
|Balances at December 31, 1999 |                                                                                                   | 233                    |       | 46,584 |     |   |   |   |   | 47 |   |   | 51      |        |   | (15     | )       |   |   |    |  
|                              | Net loss                                                                                          |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         |        |   |    |   |  
|                              | Titan investment, net                                                                             |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         |        |   |    |   |  
|                              | Issuance of warrants                                                                              |                        |      |        |    |   |    |  |   |    |  |   |         | 2,419  |   |         |        |   |    |   |  
|                              | Deferred compensation related to the issuance of stock options                                    |                        |      |        |    |   |    |  |   |    |  |   |         | 3,217  |   |         | (3,217  | ) |    |   |  
|                              | Amortization of deferred compensation                                                             |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         | 648     |   |    |   |  
|                              | Impact of reorganization                                                                          |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         |        |   |    |   |  
|                              | Conversion of parent company investment into subordinate promissory note                          |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         |        |   |    |   |  
|                              |                                                                                                   |                        |       |        |     |   |    |   |   |    |   |   |         |        |   |         |         |   |    |    |  
|Balances at December 31, 2000 |                                                                                                   | 233                    |       | 46,584 |     |   |   |   |   | 47 |   |   | 5,687   |        |   | (2,584  | )       |   |   |    |  
|                              | Net loss                                                                                          |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         |        |   |    |   |  
|                              | Issuance of common stock in IPO, net of issuance costs                                            |                        | 6,700 |        |    |   |    | 7 |   |    |  |   |         | 59,770 |   |         |        |   |    |   |  
|                              | Issuance of warrants                                                                              |                        | 2,236 |        |    |   |    | 2 |   |    |  |   |         | 1,052  |   |         |        |   |    |   |  
|                              | Proceeds from issuance of common stock in conjunction with exercise of stock options              |                        | 2,412 |        |    |   |    | 2 |   |    |  |   |         | 347    |   |         |        |   |    |   |  
|                              | Shares issued under compensation plan                                                             |                        | 21    |        |    |   |    |  |   |    |  |   |         | 147    |   |         |        |   |    |   |  
|                              | Issuance of common stock in conjunction with conversion of subordinated promissory note to equity |                        |      |        | 190 |   |    |  |   |    |  |   |         | 2,000  |   |         |        |   |    |   |  
|                              | Deferred compensation for stock options issued                                                    |                        |      |        |    |   |    |  |   |    |  |   |         | 78,604 |   |         | (78,604 | ) |    |   |  
|                              | Amortization of deferred compensation                                                             |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         | 54,270  |   |    |   |  
|                              | Unrealized gain on investments                                                                    |                        |      |        |    |   |    |  |   |    |  |   |         |       |   |         |        |   |    | 47 |  
|                              |                                                                                                   |                        |       |        |     |   |    |   |   |    |   |   |         |        |   |         |         |   |    |    |  
|Balances at December 31, 2001 |                                                                                                   | 11,602                 |       | 46,774 |     | $ | 11 |   | $ | 47 |   |   | 147,607 |        | $ | (26,918 | )       | $ | 47 |    | $
|                              |                                                                                                   |                        |       |        |     |   |    |   |   |    |   |   |         |        |   |         |         |   |    |    |  

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

50

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SureBeam Corporation and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2001

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.

Concurrent
with the contribution by Titan to SureBeam in August 2000, the board of directors and stockholders approved a 9.31677 for 1 stock split. The consolidated financial
statements and all references to common stock contained in these consolidated financial statements and notes thereto give retroactive effect to the stock split.

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 retained earnings (deficit).

On
October 16, 2001, Titan adopted a definitive plan to spin-off its investment in the Company in the form of a tax-free dividend to Titan's stockholders
within 12 months from that date. Titan has filed a letter ruling request with the Internal Revenue Service seeking approval of the tax-free distribution and Titan intends to execute
the spin-off as soon as practical, subject to obtaining all required third party consents.

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 market 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 our 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, with the first installment having been made on September 30, 2001. The Company recognized $1.0 million of the cash payments
related to the license agreement as other income in 2001.

51

---

The Company will recognize $1.0 million as other income each quarter, over the remaining term of the license agreement.

Titan
has agreed to extend the Company a new $50.0 million senior credit facility to be secured by all of the Company's assets. This facility will be subject to limits in the
amounts that can be drawn each quarter, and subject to customary financial covenants and affirmative and negative covenants. Titan's lenders have approved Titan's extension of up to
$25.0 million under this credit facility, but the remaining $25.0 million is subject to approval by Titan's lenders, which Titan has informed the Company it expects to obtain prior to
the Company's spin-off. In 2001, Titan agreed to exchange up to $75.0 million of the Company's debt for additional Class B and Class A shares of the Company's common stock. 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.

The
accompanying consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. During 2001, 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 suffer
losses for the next several
quarters, as the Company will continue to make significant investments in infrastructure, 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 require a substantial use of cash for at least 12 to 18 months. The Company's arrangements to sell food irradiation
systems to strategic alliances typically contain milestone provisions for payment, which are typically based upon time, stage of completion, etc. where no material uncertainties exist. Also in
connection with the Company's agreements with its customers, it has advanced funds aggregating $5.1 million to Hawaii Pride. Management does not expect significant repayments of the advances to
Hawaii Pride until late 2003. The Company has also entered into a number of commitments to lease land, facilities and equipment in connection with construction of two service centers for which the
Company has and will continue to expend significant funds for construction of the facilities and food irradiation systems. The Company also expects to expend approximately $1.8 million to
complete and deliver the system for Texas A&M. In addition, the Company expects to construct and install two in-line systems for Cargill Incorporated's Excel subsidiary that it will own
and operate.

In
addition to management's current operating plans, which focus on increasing 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 and drawing down the Company's line of credit with Titan. If these funds are not sufficient for the Company
and/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, 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 the Company's ability to meet its business objectives.

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 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.

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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 compensation of $78.6 million was recorded, representing the extent to which the $10 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 compensation expense at
that time period. Included in selling, general and administrative expense for the year ended December 31, 2001, is $53.5 million in compensation expense associated with these options.
The remaining deferred compensation balance related to these options will be recognized as compensation expense of approximately $13.4 million, $10.0 million, and
$1.7 million in 2002, 2003, and 2004, respectively, the remainder of the four-year vesting period of the options. Included in selling, general and administrative expense for the
years ended December 31, 2001, 2000 and 1999, is $808,000, $648,000 and $2,000, respectively, of compensation expense related to options granted prior to completion of the initial public
offering under the 2000 Stock Option and Incentive Plan for which the fair market value on the date of grant exceeded the exercise price.

Note (3) Summary of Significant Accounting Policies

Principles of Consolidation.The accompanying consolidated financial statements include SureBeam's
accounts and those of its majority owned subsidiary, SureBeam Brasil Ltda. All 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:



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Revenue Recognition.Revenues derived from providing medical equipment sterilization and electronic
food irradiation services are recorded at the time services are performed. 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. The Company applies the percentage-of-completion method 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 our customers' production
lines. Certain other revenues, principally those arising from the sales of linear accelerator systems, are recognized using the percentage-of-completion method. 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 to accounting
for fixed-price contracts, the Company considers the risks associated with estimating its costs to complete a 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).

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Unbilled Accounts Receivable.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.

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 two to fifteen 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 on certain assets under construction, including
the facilities in Sioux City, Iowa, Chicago, Illinois, and Los Angeles, California, as well as the expansion of the Company's testing facility for its linear accelerators. See Note (7). During
2001, total interest costs were $7.3 million, of which $259,000 was capitalized. During 2000, total interest costs were $4.1 million, of which $252,000 was capitalized. During 1999,
total interest costs were $1.5 million, of which $160,000 was capitalized.

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. During the fourth quarter of 2001, the Company recorded an impairment charge of $1.4 million to provide an allowance on its advances to Hawaii Pride. This impairment charge reflects
the Company's estimate of any erosion in its collateral basis in Hawaii Pride.

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.

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 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.

The
Company and Titan have a Tax Allocation Agreement under which the Company is included in Titan's consolidated federal and certain state income tax returns. The Company believes that
the agreement was structured so that in the years in which the Company has taxable income, it will pay Titan amounts comparable to the taxes the Company would have paid if it had filed separate tax
returns. For so long as Titan maintains beneficial ownership of at least 80% of the total voting power and 80% of the total value of the outstanding common stock, the Company will be included in the
consolidated federal and certain state income tax returns filed by Titan.

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Minority Equity Investments.Investments in entities less than 20 percent owned are accounted
for under the cost method. The Company periodically reviews for possible impairment its investments in investees. 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.

Per Share Information.Basic and diluted earnings (loss) per share are 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 earnings per share have been
computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share include 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,
|------------------------------------------ | -------------------------------------------- | -----------------------
|
|Net income (loss)                          |                                              | $                      
|Weighted average shares outstanding:       |                                              |                        
|                                           | Basic                                        |                        
|                                           | Effect of dilutive securities: stock options |                        
|                                           |                                              |                        
|                                           | Diluted                                      |                        
|                                           |                                              |                        
|Net income (loss) per common sharebasic   |                                              | $                      
|                                           |                                              |                        
|Net income (loss) per common sharediluted |                                              | $                      
|                                           |                                              |                        

During
the years ended December 31, 2001 and 2000, the weighted average number of options and warrants to purchase approximately 7,116,000 and 7,491,000 shares of
Class A common stock, respectively, at prices ranging from $0.14 to $16.09 and less than $.01 to $0.72 per share, respectively, were not included in the competition of diluted earnings per
share, as the effect would have been anti-dilutive due to the loss from continuing operations. For the year ended December 31, 1999, the computation of diluted net income per common share
includes approximately 6,452,000 shares of Class A common stock, which represent the effect of potential dilutive securities.

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

Comprehensive Income.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.

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 $47,000. See Note (7). The Company had no components of comprehensive income for the years ended December 31, 2000 and 1999.

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Research and Development Costs.Historically, the benefits 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 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 $2.2 million, $524,000 and $0 of expenses related to such independent research and development activities for the years ended December 31, 2001, 2000
and 1999, respectively. Of the $2.2 million of research and development activities recorded in 2001, $150,000 was recognized related to research and development services received from Texas A&M
University. See Note (4).

Start-Up Costs.The Company expenses the costs of start-up activities as
incurred.

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 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.

New Accounting Standards.In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that
Opinion). The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of
SFAS No. 144 to have a material impact on its consolidated financial position or results of operations. Also in August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset
retirement costs. It applied to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction,
development and/or normal operation of long-lived assets, except for certain obligations of leasees. This statement amends SFAS No. 19, "Financial Accounting and Reporting by Oil
and Gas Producing Companies," and is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management does not believe that the adoption of these statements
will have a material impact on its financial position or results of operations.

In
June 2001, the FASB issued two new pronouncements: SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the
pooling-of-interests method is no longer permitted. SFAS No. 142 requires that upon adoption, of goodwill will cease and instead, the carrying value of goodwill will be
evaluated for impairment at least annually using a fair value test. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed at least annually for impairment
using a method appropriate to the nature of the intangible asset. The Company implemented SFAS No. 141 on July 1, 2001 and adopted SFAS No. 142 on January 1, 2002.
Management does not believe that the adoption of this statement will have a material impact on its financial position or results of operations.

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In
December 1999, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition in Financial Statements," which
became effective in 2000. This SAB summarizes the SEC's new view in applying generally accepted accounting principles to revenue recognition in financial statements. As most of the Company's revenue
recognition practices are in conformance with AICPA SOP 81-1, the adoption of SAB 101 had no material impact 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 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 $300,000 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 long-term asset for the fair value received by the Company in this transaction. The asset will consist 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, a
long-term asset is being recorded which will be realized over the ten-year term of the arrangement. The percentage-of-completion method has been applied
using the cost-to-cost method whereby revenues are recorded based on the percentage that total costs incurred

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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
carrying amount of this 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 long-term
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, the Company recorded revenues of $3.4 million, $4.7 million, and $0 during 2001, 2000, and 1999,
respectively, on the Texas A&M contract. These amounts have been recorded as a long-term asset and no profit has been recognized in 2001 and prior. As of December 31, 2001, the
Company had deferred profits amounting to $235,000, which are included as other liabilities in the accompanying balance sheet. These deferred profits 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. As of December 31, 2001, the long-term asset 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 related
to discounted services received. The deferred profit of $235,000 as of December 31, 2001 represents the difference between the cumulative costs incurred and the cumulative revenues recognized.
As of December 31, 2001, none of the deferred profit had been amortized to income, since final delivery of the system had not yet taken place.

With
respect to the impact of the transaction with Texas A&M on the Company's liquidity, it has expended funds of approximately $7.9 million related to the construction of the
system from inception through December 31, 2001. These costs have been incurred primarily related to the design of the system, construction of and modification to the physical structure, which
will house the system, and for the manufacture of the linear accelerators and x-ray components as well as the material handling and conveyor systems. The Company estimates that there will
be approximately $1.8 million of additional costs to be incurred to complete and deliver the system. The Company expects that all of the remaining costs will be incurred in 2002.

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
2001, the Company contracted to manufacture eight SureBeam systems for $26.0 million for Titan in connection with Titan's agreement with the United States Postal Service. Under
this agreement, Titan has arranged to provide electron beam systems and services to sanitize mail by eliminating anthrax. The Company will be working with Titan and Titan's business units, in
providing

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the systems to the United States Postal Service. The Company is a principal subcontractor to build systems for Titan under its prime contract. For the year ended December 31, 2001, the Company
recognized $12.5 million as revenues from affiliate under this contract, which is included in receivable from affiliate as of December 31, 2001 on the accompanying consolidated financial
statements. In order to meet the time requirements on this contract, the Company reallocated certain long lead-time components being used to manufacture systems for the RESAL contract to
this contract. This movement resulted in negative revenue of $3.0 million from third parties in the fourth quarter in 2001.

In
June 2001, the Company received an order with an aggregate value of $50.0 million from RESAL Saudi Corporation, or RESAL, for ten electronic food irradiation systems to
operate in four service centers in the Saudi Arabia, or RESAL, region for irradiating poultry and disinfesting and prolonging shelf life of dates. The Company commenced construction of these systems
for RESAL and has recognized, under the percentage-of-completion method of accounting, $12.2 million in sales revenue for the year ended December 31, 2001. Three
electronic food irradiation systems are scheduled to be shipped in 2002, with the remainder in 2003.

In
December 1999, the Company 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. In December 2001, management of Zero Mountain Cold Storage had not moved forward
with its obligation under the contract. Accordingly, the Company recorded an allowance for doubtful accounts of $1.2 million against its receivable from Zero Mountain Cold Storage. The
$1.2 million represents the portion of revenue not associated with the linear accelerator, as management believes the linear accelerator can be utilized on a future contract without significant
modification costs.

In
November 1999, SureBeam entered into an agreement with Hawaii Pride LLC, or 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
$3.9 million to Hawaii Pride, which is included in the accompanying balance sheet as other long-term assets as of December 31, 2000. The monies advanced were utilized for
costs relating to the acquisition of land, construction of the building and infrastructure, equipment (excluding the SureBeam system) and other start-up costs. During 2001, the Company
advanced an additional $1.2 million to Hawaii Pride for working capital purposes. Also
during 2001, the Company recorded an impairment charge of $1.4 million against the advances to Hawaii Pride. As of December 31, 2001, the balance of outstanding advances, net of the
allowance, was $3.7 million, and is included in other assets in the accompanying consolidated balance sheets .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 SureBeam also has the ability to convert an additional $1.9 million of the remaining balance of the advance into 50% ownership of
Hawaii Pride, the conversion feature may only be exercised upon default of its USDA loan, a liquidity event or if Hawaii Pride engages in illegal, unethical, immoral or other practices deemed to be
damaging to the Company's reputation. The remaining balance of the advance represents a note receivable bearing interest at 10%, with interest payments due to the Company 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 loan obligations, or fails to comply with USDA requirements,
SureBeam has the right to acquire 100% of the equity of Hawaii Pride for a nominal amount. Titan has agreed that upon SureBeam's acquisition of any equity interest in Hawaii Pride, it will guarantee a
percentage amount of the USDA loan equal to the greater of 19.9% or the percentage of SureBeam's equity interest in Hawaii Pride. 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. No management fees were received during the years ended December 31, 2001 and prior.

On
future strategic transactions, the Company anticipates negotiating terms that require standby letters of credit or significant down payments from its customers.

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Note (5) Acquisitions

In May 2000, Tech Ion Industrial Brasil S.A., or Tech Ion, placed purchase orders with the Company for eleven electronic food irradiation systems for
$55 million, of which $22.4 million was recognized as revenue through September 30, 2001. SureBeam Brasil Ltda., or SureBeam Brasil, which was jointly established by Tech
Ion, the Company's exclusive partner in Brazil, and Titan SureBeam Brazil Ltd., the Company's wholly owned subsidiary, will provide, among other things, food irradiation services through four
planned service centers to various food companies in Brazil. 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 60.1% of SureBeam Brasil bringing the Company's total equity ownership to 80% in SureBeam
Brasil. 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 transfer of title 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. The Company has recorded an intangible asset of
$2.5 million that represents the total consideration amount of the agreement that exceeds the fair market value of the assets purchased. The intangible asset will be amortized over five years.
The Company estimates that it will be required to spend an additional $4.0 million to complete, install, and begin operation of the first service center in Brazil 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. Prior to the acquisition, the Company was building eleven linear
accelerators for Tech Ion for $55.0 million. This contract began in May 2000, and was at various stages of completion at the date the Company began to negotiate to acquire the above
assets. Through the date the Company began negotiations, the Company recognized $6.8 million in fiscal year 2001 and $22.4 million in total related to this contract.

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. 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 obtained by Tech Ion for SureBeam Brasil and is being amortized on a straight-line basis over five years, the free rent period of the
ten-year lease. See Note (5). The net book value of this intangible asset was $2.9 million as of December 31, 2001.

On
January 26, 2000, the Company entered into an agreement to acquire certain assets and assume certain liabilities of Electron Ventures Limited. Specifically, the Company
acquired a linear accelerator system and all ancillary equipment for $2.5 million and assumed a long-term capital lease on the accelerator. The assets acquired and liabilities
assumed were recorded at their estimated fair value at the date of acquisition. The excess of the purchase price over the net assets acquired of approximately $1.2 million is being amortized
over five years. In connection with the contribution by Titan to SureBeam in August 2000, the net book value of these assets of $1,060 was retained by Titan.

In
May 2000, the Company entered into a non-compete agreement with Applied Power Associates, Inc., or APA, and paid APA $5.0 million in cash and issued
it 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

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computed using the Black-Scholes option-pricing model. The net book value of this intangible asset was $1.0 million and $3.8 million as of December 31, 2001 and 2000,
respectively.

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 December 31, 2001 and 2000, the Company's capitalized patent costs included in intangible assets were $147,000 and $177,000, respectively, net of amortization.

Accumulated
amortization related to intangible assets was $4.8 million and $1.8 million as of December 31, 2001 and December 31, 2000, respectively.

The
Company periodically re-evaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated lives of its intangibles. The
criteria used for these evaluations include management's estimate of the asset's continuing ability to generate positive income from operations and positive cash flow in future periods as well as the
strategic significance of the intangible asset to the Company's business objectives.

Note (7) Other Financial Data

Following are details concerning certain balance sheet accounts as of December 31, 2001 and 2000:

December 31,2001

2000Investments, available-for-sale (in thousands)

$
3,766

$



The
Company invests its excess cash primarily in mortgage-backed securities. 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 $4.1 million at December 31, 2001, are primarily invested in commercial paper and money market funds. There
were no cash equivalents as of December 31, 2000.

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, 2001 were $126,000. There were no realized gains or losses recorded in 2000 and 1999.

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

Amortized
Cost

Market
Value

Unrealized
GainMortgage backed securities (in thousands)

$
3,719

$
3,766

$
47


62

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There
were no marketable securities at December 31, 2000.

December 31,2001

2000Accounts receivable (in thousands):Billed

$
12,556

$
99Unbilled


14,020


17,829Less allowance for doubtful accounts


(1,428
)

(250
)$
25,148

$
17,678


December 31,2001

2000Inventories (in thousands):Materials

$
15,510

$
3,994Work-in-process


4,254


1,771$
19,764

$
5,765


December 31,2001

2000Property and equipment (in thousands):Machinery and equipment

$
9,937

$
7,341Furniture, fixtures and leasehold improvements


1,252


1,248Construction in progress


33,390


2,63744,579


11,226Less accumulated depreciation and amortization


(2,676
)

(1,864
)Property and equipment, net

$
41,903

$
9,362


Construction
in progress represents costs incurred for the construction of three food irradiation service center facilities and the expansion of the Company's testing facility for its
linear accelerators. Such costs will remain in construction in progress until the facilities are completed and placed in service. Depreciation expense was $814,000, $757,000 and $840,000 for the years
ended 2001, 2000 and 1999, respectively.

December 31,2001

2000Other assets (in thousands):Texas A&M

$
7,210

$
4,701Advances to Hawaii Pridenet


3,674


3,900Advances to Tech Ion





2,225Prepaid rent


796


1,177Loan receivable from officer


225


300Other


127


105$
12,032

$
12,408


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).

63

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In
connection with the Company's agreements with its customers, it has advanced $5.1 million to Hawaii Pride to be used and for working capital purposes. During 2001, the Company
recorded an impairment charge of $1.4 million to provide an allowance against amounts advanced to Hawaii Pride. Management does not expect significant repayments of the advances to Hawaii Pride
until late 2003.

In
connection with the Company's agreement with Tech Ion, the Company advanced Tech Ion $5.0 million in a working capital line of credit. On October 23, 2001, the Company
entered into a stock purchase agreement with Tech Ion to purchase an additional 60.1% of SureBeam Brasil, bringing its total equity ownership to 80%, for consideration of $1.0 million to Tech
Ion. In addition, the Company forgave $3.5 million of its loan, representing the outstanding balance on Tech Ion's working capital line
advanced by the Company. The $1.5 million balance of the loan is included in prepaid expense and other current assets in the accompanying balance sheet. See Note (5).

The
Company has recorded prepaid rent in connection with its agreement with Cloverleaf Cold Storage, or Cloverleaf, 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 $1,911,000 was computed using the Black-Scholes option-pricing model and has been recorded as prepaid rent in the consolidated
accompanying 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 immediately exercisable by
Cloverleaf on the date of the Company's initial public offering.

December 31,2001

2000Other current liabilities (in thousands):Deferred revenue

$
3,000

$
Other


1,756


3,516$
4,756

$
3,516


In
connection with the Company's license agreement with Titan, the Company received $4.0 million in 2001 for Titan's right to use the Company's intellectual property for all
applications other than food, animal hide, and flower markets. Of the $4.0 million received, $1.0 was recorded as other income in 2001, with the remaining $3.0 million deferred until
2002.

During
the year ended December 31, 2001 and 2000, the Company did not make any cash payments related to interest or income taxes.

64

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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 as more fully described below. These agreements provide, among other things, continuation of services, which have historically been
provided by Titan to SureBeam, while the Company builds its corporate infrastructure on a stand-alone basis. As consideration for these services, Titan will charge to the Company an allocation of the
cost for these services to the extent that they pertain to SureBeam. Management believes that these allocations are reasonable.

Corporate Services Agreement.Titan provides or makes available to the Company certain routine corporate services, which is
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 shares certain Titan systems, including its accounting system and human resource system. Because Titan engages in government contracts work, Titan allocates costs
to the Company based upon government cost accounting requirements. The Company pays 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 pays 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 may adjust its fees based upon its assessment of the Company's relative use of these
services.

The
initial term of the Corporate Services Agreement extends through December 31, 2001. This agreement has automatically renewed for 2002 and expires at the date of the
spin-off. Amounts aggregating $1.4 million, $620,000, and $951,000 related to allocations under this agreement are 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, 2001, 2000 and 1999, respectively.
Management believes that these allocations are reasonable.

Facilities Allocation.Titan has allocated approximately 8,200 square feet of facility space in San Diego, California to the
Company. Under the Corporate Services Agreement, Titan charges 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 pays Titan an annual fee determined by the Company's percentage of Titan's annual costs for this facility. This percentage is based upon the percentage of the total square feet
in the facility that the Company occupies. Amounts aggregating $370,000, $207,000 and $92,000 are 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, 2001, 2000, and 1999, respectively.

Tax Allocation Agreement.As long as Titan maintains 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 will be included in Titan's consolidated federal income tax returns.

SureBeam
and Titan have entered into a Tax Allocation Agreement. Under the Tax Allocation Agreement, the Company will agree 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. Titan will have broad

65

---

discretion in determining the amount of separate taxable income and tax liability that the Company would realize on such a separate return. In computing this separate tax 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 will be liable for the federal income tax of the Titan group if Titan or any
member of the group fails to pay its taxes.

License Agreement.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 our 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, with the first installment having been made on
September 30, 2001. Of the $4.0 million received in 2001, $1.0 was recorded as other income in 2001, with the remaining $3.0 million deferred until 2002.

Employee Benefit Plans.The Company's employees are eligible to participate in the Titan benefit plans. Those plans include a
401(k) plan, an employee stock ownership plan, a non-qualified executive deferred 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 are charged by Titan to the Company. The
Company's contributions to these plans were $313,000, $226,000, and $129,000 in 2001, 2000, and 1999, 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 are now 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. In December 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. See Note (16).

Loan Receivable.In October 1999, the Company loaned its President and Chief Executive Officer $375,000. Pursuant to
his employment agreement, the loan will bear interest at 6.5% and be ratably forgiven over a five-year period unless the employment agreement is voluntarily terminated or he is terminated
for cause. If he voluntarily terminates or if he is terminated for cause, he will be responsible for repaying the unforgiven balance plus interest. The loan balance is included in other assets on the
accompanying balance sheets as of December 31, 2001 and 2000.

Revenues from Affiliate.Titan has subcontracted the Company to design and construct SureBeam systems for Titan's various
contracts with third parties. These systems are 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 $18.3 million for the year ended December 31, 2001.

66

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Receivable from Affiliate.As of December 31, 2001, the Company's receivable from Titan was $12.5 million,
which represents the receivable generated from Titan's subcontract with the Company to manufacture eight SureBeam systems in connection with Titan's contract with the United States Postal Service.

Note (9) Significant Customers

Revenue from three customers represented 44%, 28% and 17% of the 2001 total revenues, 52%, 16% and 11% of the 2000 total revenues, and 15%, 14% and 11% of the
1999 total revenues, respectively. No other single customer accounted for 10% or more of the revenues for these periods. In 2001, one customer with greater than 10% of total revenue was an affiliate.

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 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 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 SureBeam relating to SureBeam's patents for its systems. The action attacked the validity of SureBeam's core patent, sought a declaration that IBA and its customers had not
infringed any of the 62 claims in SureBeam's patent, and alleged that Titan and SureBeam engaged in unfair competition and that Titan and SureBeam's conduct constituted patent misuse. The case was
moved to the federal in San Diego. On November 22, 2000, IBA filed an amended complaint alleging, in addition to the original claims that Titan and SureBeam engaged in false advertising,
monopolization, restraint on trade and unfair business practices.

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 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 our 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 $1,911,000 was computed using the Black-Scholes option-pricing model and has been recorded as prepaid rent in the accompanying

67

---

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 $2,044,000, $1,400,000 and $514,000 for
the years ended December 31, 2001, 2000, and 1999, respectively. The related future minimum lease payments as of December 31, 2001 are as follows:

Year Ending December 31,2002

$
1,823,0002003


2,011,0002004


2,021,0002005


1,617,0002006


1,586,000Thereafter


13,816,000$
22,874,000


On
February 4, 2002, the Company entered into a lease agreement with a third party lessor for its principal executive office located in San Diego, California. The lease will
commence on May 1, 2002 and has an initial term of 64 months with an option to extend the lease term for an additional five years and the payments related to this lease are included in
the table above.

Note (11) Income Taxes

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

|         |         | 2001 |            | 2000       |   | 1999       |        
|-------- | ------- | ---- | ---------- | ---------- | - | ---------- | -------
|Current: |         |      |            |            |   |            |        
|         | Federal |      | $          | (3,132,000 | ) | $          | 147,000
|         | State   |      |            |           |   |            | 26,000 
|         |         |      |            |            |   |            |        
|         |         |      | (3,132,000 | )          |   | 173,000    |        
|Deferred |         |      | 813,000    |            |   | (1,303,000 | )      
|         |         |      |            |            |   |            |        
|         |         | $    | (2,319,000 | )          | $ | (1,130,000 | )      
|         |         |      |            |            |   |            |        

68

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Following
is a reconciliation of the income tax provision (benefit) expected (based on the United States federal income tax rate applicable in each year) to the actual tax provision on
income:

|                                                       |  | 2001 |             | 2000 |   | 1999      
|------------------------------------------------------ |  | ---- | ----------- | ---- | - | ----------
|Expected federal income tax provision (benefit)        |  | $    | (26,075,960 | )    | $ | (1,003,000
|State income taxes, net of federal income tax benefits |  |      | (2,300,820  | )    |   | (177,000  
|Increase in valuation allowance                        |  |      | 24,657,000  |      |   | 50,000    
|Present value adjustment                               |  |      | 768,000     |      |   |          
|Other                                                  |  |      | 632,780     |      |   |          
|                                                       |  |      |             |      |   |           
|Actual income tax provision (benefit)                  |  | $    | (2,319,000  | )    | $ | (1,130,000
|                                                       |  |      |             |      |   |           

The
net deferred tax asset as of December 31, 2001 and 2000, resulted from the following temporary differences:

|                                      |  | 2001 |             | 2000 |  
|------------------------------------- |  | ---- | ----------- | ---- | -
|Net operating losses                  |  | $    | 9,524,000   |      | $
|Accrued payroll and employee benefits |  |      | 742,000     |      |  
|Deferred compensation                 |  |      | 12,951,000  |      |  
|Reserves                              |  |      | 1,148,000   |      |  
|Depreciation and amortization         |  |      | (103,000    | )    |  
|Other                                 |  |      | 395,000     |      |  
|                                      |  |      |             |      |  
|Deferred tax asset                    |  |      | 24,657,000  |      |  
|Valuation allowance                   |  |      | (24,657,000 | )    |  
|                                      |  |      |             |      |  
|Net deferred tax asset                |  | $    |            |      | $
|                                      |  |      |             |      |  

Included
in prepaid expenses and other at December 31, 2001 and 2000, are approximately $0 and $1.6 million of deferred tax assets. In connection with the contribution by
Titan to SureBeam in August 2000, approximately $997,000 of deferred tax liabilities related to the medical equipment sterilization business and the linear accelerator business were retained by
Titan.

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, 2001, 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. As of December 31, 2001, Titan owns 100% of the issued and outstanding
Class B common stock.

In
December 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.

69

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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
August 11, 1999, the Company issued 116,460 options at $0.14 per share to employees under the 1998 Plan. On this date the deemed fair value of a share of the Company's
Class A common stock was $0.29 per share. Accordingly, the Company has recognized deferred compensation related to these grants of $17,000 on August 11, 1999. On February 1, 2000,
the Company issued 46,584 shares of Class A common stock under the 1998 Plan. 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 has recognized deferred 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. 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 compensation related to these grants of $2,574,000. This deferred charge will be amortized to expense over the four year vesting period of these
options, $808,000, $648,000 and $2,000 of such expense was recognized in 2001, 2000 and 1999, respectively. The fair value of these option grants were estimated on the date of grant using Black-
Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1999 and 2000: zero dividend yield; expected volatility of 0%; a risk-free interest
rate of 5.5%; and an expected life of five years.

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.

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 compensation has been recorded to the extent that book value exceeds the exercise price of the options at the date of grant. Deferred compensation is
also recorded for changes in book value occurring subsequent to the initial grant date. Compensation expense related to these grants is recognized as these options vest. The Company has not recognized
compensation expense 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, 2001, 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 compensation of $78.6 million was recorded, representing the extent to which the $10 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 compensation expense at that time period.
Included in selling, general and administrative expense for the year ended December 31, 2001, is $53.5 million in compensation

70

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expense associated with these options. The remaining deferred compensation balance related to these options will be recognized as compensation expense of approximately $13.4 million,
$10.0 million, and $1.7 million in 2002, 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. The Company has 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. 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, 2001, options to purchase a total of 821,374 shares of Class A
common stock were granted and 1,349,426 shares remained available for grant.

In
August 2000, the Company also adopted an Employee Stock 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. As of December 31, 2001, 20,822 shares of Class A common stock were purchased for
participants and 229,178 shares of Class A common stock remained available for purchase.

As
of December 31, 2001, approximately 1,625,188 shares of Class A common stock were reserved for future issuance for the stock incentive plans and employee benefit plans.

A
summary of the status of the Company's stock-based compensation plans as of December 31, 2001, 2000 and 1999 and changes during the years ended on those dates is presented
below:

|                                   |  | 2001       |   | 2000 |      | 1999
|---------------------------------- |  | ---------- | - | ---- | ---- | ----
|
|Outstanding at beginning of period |  | 8,063,643  |   | $    | 0.14 |     
|Granted                            |  | 733,368    |   | $    | 8.94 |     
|Exercised                          |  | (2,414,713 | ) | $    | 0.14 |     
|Terminated                         |  | (47,084    | ) | $    | 0.25 |     
|                                   |  |            |   |      |      |     
|Outstanding at end of year         |  | 6,335,214  |   | $    | 1.16 |     
|                                   |  |            |   |      |      |     
|Options exercisable at end of year |  | 1,769,023  |   | $    | 0.14 |     
|                                   |  |            |   |      |      |     

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The
following table summarizes information about stock options outstanding at December 31, 2001:

|                |  |           |  | Options Outstanding |  | Options Exercisable
|--------------- |  | --------- |  | ------------------- |  | -------------------
|
|$  0.01-$  7.50 |  | 5,863,214 |  | 6.22                |  | $                  
|$  7.51-$10.00  |  | 52,000    |  | 9.24                |  |                    
|$10.01-$16.09   |  | 420,000   |  | 9.50                |  |                    
|                |  |           |  |                     |  |                    
|                |  | 6,335,214 |  | 6.47                |  | $                  
|                |  |           |  |                     |  |                    

As
permitted, the Company has adopted the disclosure only provisions of SFAS 123. Accordingly, no compensation expense, except as specifically described above, has been recognized
for the stock option plans. Had compensation expense been determined based on the fair value at the date of the grant for the years ended December 31, 2001, 2000 and 1999 consistent with the
provisions of SFAS 123, the Company's net income (loss) and net income (loss) per common share would have been reported as the pro forma amounts indicated below:

|                                              |  | Year Ended December 31,
|--------------------------------------------- |  | -----------------------
|
|Net income (loss)as reported                 |  | $                      
|Net income (loss)pro forma                   |  |                        
|Basic earnings per common share-as reported   |  | $                      
|Basic earnings per common share-pro forma     |  |                        
|Diluted earnings per common share-as reported |  | $                      
|Diluted earnings per common share-pro forma   |  |                        

Certain
officers and key employees participate in the Titan non-qualified executive deferred compensation plan. The Company also has performance bonus plans for certain of
its employees. Related expense for these two plans amounted to approximately $2,369,000, $22,000 and $300,000 in the years ended December 31, 2001, 2000 and 1999, respectively.

Note (14) Geographic Operations

The Company has historically operated in one business segment related to its electron beam technology, principally in the United States, South America, and Saudi
Arabia. At December 31, 2001, the Company had $13.5 million of construction in progress in Brazil related to the construction of the company-owned service center.

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Note (15) Quarterly Financial Data (unaudited)

The following tables contain selected consolidated statement of operations data for each quarter of fiscal years ended 2001 and 2000 (in thousands, except per
share amounts):

|                                     |         | Fiscal 2001 Quarter Ended |        
|------------------------------------ | ------- | ------------------------- | -------
|
|Total revenues                       |         | $                         | 5,476  
|Gross profit                         |         |                           | 2,526  
|Loss from operations                 |         |                           | (43,428
|Net loss                             |         | $                         | (40,573
|Loss per common share:               |         |                           |        
|                                     | Basic   |                           | $      
|                                     | Diluted |                           | $      
|Weighted average shares outstanding: |         |                           |        
|                                     | Basic   |                           |        
|                                     | Diluted |                           |        
|                                     |         |                           |        

|                                     |         | Fiscal 2000 Quarter Ended
|------------------------------------ | ------- | -------------------------
|
|Total revenues                       |         | $                        
|Gross profit                         |         |                          
|Income (loss) from operations        |         |                          
|Net income (loss)                    |         | $                        
|Earnings (loss) per common share:    |         |                          
|                                     | Basic   |                          
|                                     | Diluted |                          
|Weighted average shares outstanding: |         |                          
|                                     | Basic   |                          
|                                     | Diluted |                          

Note (16) Subsequent Events

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.

On
March 29, 2002, Titan, as a part of its commitment to extend a $50.0 million line of credit, executed a $25.0 million irrevocable funding commitment to the Company. The
terms of the $25 million credit facility are as follows: the interest rate will be equal to Titan's effective weighted average debt rate plus 300 basis points; the credit facility will be
secured by all assets of SureBeam; and the credit facility will mature the earlier of (i) December 31, 2005, (ii) the date on which Titan's lenders accelerate the date for payment
by Titan of amounts outstanding, (iii) the date of termination of Titan's Credit Agreement, and (iv) the date the Company enters into a $50 million credit facility with Titan.

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PART III

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

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 2002.

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 2002.

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 2002.

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 2002.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



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:                 
| |  |                     
| |  | Date:               
| |  |                     
| |  | By:                 
| |  |                     
| |  | Date:               
| |  |                     

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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/GENE W. RAYGene W. Ray, Ph.D.              |  | Director, Chairman of the Board              |  | March 29, 2002
|/s/LAWRENCE A. OBERKFELLLawrence A. Oberkfell |  | President, Chief Executive Officer, Director |  | March 29, 2002
|/s/JOHN ARMEJohn Arme                         |  | Director                                     |  | March 29, 2002
|/s/SUSAN GOLDINGSusan Golding                 |  | Director                                     |  | March 29, 2002
|/s/WILLIAM C. HALEWilliam C. Hale             |  | Director                                     |  | March 29, 2002
|/s/MICHAEL J. LICATAMichael J. Licata         |  | Director                                     |  | March 29, 2002

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SureBeam Corporation and Subsidiaries  SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS  For the Years ended December 31, 2001, 2000 and 1999  (in thousands of dollars)

|                                |  | Balance at
Beginning
of year |     | Additions
(charges to
expense) |   | Deductions |  | Balance at
End
of year
|------------------------------- |  | ---------------------------- | --- | ------------------------------ | - | ---------- |  | ----------------------
|2001:                           |  |                              |     |                                |   |            |  |                       
|Allowance for doubtful accounts |  | $                            | 250 |                                | $ | 1,178      |  | $                     
|2000:                           |  |                              |     |                                |   |            |  |                       
|Allowance for doubtful accounts |  |                              | 350 |                                |   |           |  |                       
|1999:                           |  |                              |     |                                |   |            |  |                       
|Allowance for doubtful accounts |  |                              | 350 |                                |   |           |  |                       
|                                |  |                              |     |                                |   |            |  |                       

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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).                               
|               |  |                                                                                                                                                                                                                                        

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|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).                                                                                             
|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 "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 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 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.                                                                                                                 
|10.29  |  | Lease dated November 28, 2001 between X H Partners and the Registrant.                                                                                                                                                                                         
|10.30  |  | Amendment to Lease dated as of November 28, 2001 between X H Partners, L.P. and the Registrant.                                                                                                                                                                
|10.31  |  | Exchange Agreement dated as of December 31, 2001 between the Registrant and The Titan Corporation.                                                                                                                                                             
|10.32  |  | Exchange Agreement dated as of February 11, 2002 between the Registrant and The Titan Corporation.                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                

E-2

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|10.33 |  | Contract for Purchase and Sale of Equipment and Services dated as of February 11, 2002 between the Registrant and The Titan Corporation.                                        
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.34 |  | Amended and Restated License Agreement dated as of October 17, 2001 between SB Operating Co., Inc. and The Titan Corporation.                                                   
|10.35 |  | Amendment to License Agreement dated as of October 17, 2001 between SB Operating Co., Inc. and The Titan Corporation.                                                           
|10.36 |  | Quota Purchase Agreement dated October 23, 2001 between the Registrant, Tech Ion Industrial Brasil, S.A., SureBeam Holding Company LTDA., and José Francisco Bufara de Medeiros.
|10.37 |  | Letter Agreement dated as of March 29, 2002 between the Registrant and The Titan Corporation.                                                                                   
|21.1  |  | Subsidiaries of the Registrant.                                                                                                                                                 
|23.1  |  | Consent of Arthur Andersen LLP, Independent Public Accountants.                                                                                                                 
|99.1  |  | Representation Letter of Arthur Andersen dated March 29, 2002.                                                                                                                  

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