-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D5P4DUkCnJq2IHvhbegi5DF4PsDdY2Ck9R+U4yQep/SkCPUqksOySg11yvmugRLM 4WOc6efpFzenfn54fYV+vQ== 0000950136-05-007543.txt : 20051123 0000950136-05-007543.hdr.sgml : 20051123 20051123171918 ACCESSION NUMBER: 0000950136-05-007543 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20051123 ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20051123 DATE AS OF CHANGE: 20051123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: L 3 COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001039101 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 133937436 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-46983 FILM NUMBER: 051225882 BUSINESS ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 1216971111 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: L 3 COMMUNICATIONS HOLDINGS INC CENTRAL INDEX KEY: 0001056239 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 133937434 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14141 FILM NUMBER: 051225881 BUSINESS ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126971111 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 8-K 1 file001.htm FORM 8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (date of earliest event reported): November 23, 2005

L-3 Communications Holdings, Inc.

L-3 Communications Corporation

(Exact Name of Registrants as Specified in Charter)

Delaware

(State or Other Jurisdiction of Incorporation)


001-14141 13-3937434
333-46983 13-3937436

(Commission File Number) (IRS Employer Identification No.)
600 Third Avenue, New York, New York 10016

(Address of Principal Executive Offices) (Zip Code)

(212) 697-1111

(Registrants’ Telephone Number, Including Area Code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[  ]  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[  ]  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[  ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[  ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13.e-4(c))

    




Item 8.01. Other Information

We are filing as exhibits to this Current Report on Form 8-K the following information which is incorporated by reference in L-3 Communications Holdings, Inc.'s Registration Statement on Form S-3, which will be filed on November 23, 2005, and included in L-3 Communications Corporation's Registration Statement on Form S-4, which will also be filed on November 23, 2005:

1. Unaudited financial statements of The Titan Corporation (which we acquired on July 29, 2005) for the period ended June 30, 2005. These financial statements are attached hereto as Exhibit 99.1.

2. Financial statements and financial statement schedule of The Titan Corporation for the year ended December 31, 2004. These financial statements are attached hereto as Exhibit 99.2.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.


Exhibit
Number
Description
23.1 Consent of KPMG LLP
99.1 Unaudited financial statements of The Titan Corporation for the period ended June 30, 2005
99.2 Financial statements and financial statement schedule of The Titan Corporation for the year ended December 31, 2004



SIGNATURES

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

L-3 COMMUNICATIONS HOLDINGS, INC.
L-3 COMMUNICATIONS CORPORATION
By: /s/ Christopher C. Cambria       
    Name:      Christopher C. Cambria
    Title:        Senior Vice President, Secretary and
      General Counsel

Dated: November 23, 2005




L-3 COMMUNICATIONS HOLDINGS, INC.
L-3 COMMUNICATIONS CORPORATION

EXHIBIT INDEX


Exhibit No. Description
23.1 Consent of KPMG LLP
99.1 Unaudited financial statements of The Titan Corporation for the period ended June 30, 2005
99.2 Financial statements and financial statement schedule of The Titan Corporation for the year ended December 31, 2004



GRAPHIC 2 spacer.gif GRAPHIC begin 644 spacer.gif K1TE&.#EA`0`!`(```````````"'Y!`$`````+``````!``$```("1`$`.S\_ ` end EX-23.1 3 file002.htm CONSENT

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the registration statements (Nos. 333-84826 and 333-99693) on Form S-3 and registration statements (Nos. 333-59281, 333-64389, 333-78317, 333-123424, 333-64300, 333-103752 and 333-120393) on Form S-8 of L-3 Communications Holdings, Inc. of our report dated March 16, 2005, with respect to the consolidated balance sheets of The Titan Corporation as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity, cash flows, and financial statement schedule for each of the years in the three-year period ended December 31, 2004, which report appears in the Form 8-K of L-3 Communications Holdings, Inc. and L-3 Communications Corporation dated November 23, 2005.

Our report on the consolidated financial statements states that on January 1, 2002, the Company changed its method of accounting for goodwill.

/s/ KPMG LLP

San Diego, California
November 21, 2005




EX-99.1 4 file003.htm FINANCIAL STATEMENTS 6/30/2005

Exhibit 99.1

THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)


  Three months ended
June 30,
Six months ended
June 30,
  2005 2004 2005 2004
Revenues $ 620,333   $ 514,932   $ 1,179,326   $ 968,954  
Costs and expenses:                        
Cost of revenues   517,445     438,082     987,940     820,354  
Selling, general and administrative   46,622     38,143     87,215     74,032  
Research and development   4,271     4,695     7,861     8,113  
Mergers, investigations and settlements cost (Notes 2 and 3)   74,260     34,423     80,078     52,002  
Asset impairment charges (Note 4)       15,495         15,495  
Total costs and expenses   642,598     530,838     1,163,094     969,996  
Operating profit (loss)   (22,265   (15,906   16,232     (1,042
Interest expense   (10,363   (9,158   (20,335   (18,274
Interest income   243     240     532     403  
Net gain on sale of investments (Note 9)   1,484         1,484      
Net gain on sale of assets (Note 9)               563  
Loss from continuing operations before income taxes   (30,901   (24,824   (2,087   (18,350
Income tax provision   14,795     68     25,456     2,911  
Loss from continuing operations   (45,696   (24,892   (27,543   (21,261
Income (loss) from discontinued operations, net of tax (Note 7)   1,562     (41,660   2,421     (42,232
Net loss   (44,134   (66,552   (25,122   (63,493
Dividend requirements on preferred stock               (190
Net loss applicable to common stock $ (44,134 $ (66,552 $ (25,122 $ (63,683
Basic earnings (loss) per share:                        
Loss from continuing operations $ (0.54 $ (0.30 $ (0.32 $ (0.26
Income (loss) from discontinued operations, net of tax   0.02     (0.49   0.03     (0.50
Net loss $ (0.52 $ (0.79 $ (0.30 $ (0.76
Weighted average shares   85,180     83,970     84,991     83,347  
Diluted earnings (loss) per share:                        
Loss from continuing operations $ (0.54 $ (0.30 $ (0.32 $ (0.26
Income (loss) from discontinued operations, net of tax   0.02     (0.49   0.03     (0.50
Net loss $ (0.52 $ (0.79 $ (0.30 $ (0.76
Weighted average shares   85,180     83,970     84,991     83,347  

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

1




THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share and per share data)


  June 30,
2005
December 31,
2004
Assets (Unaudited)  
Current Assets:            
Cash and cash equivalents $ 23,105   $ 16,672  
Accounts receivable — net   545,215     515,386  
Inventories   24,874     21,336  
Prepaid expenses and other   32,272     29,039  
Deferred income taxes   69,270     95,390  
Current assets of discontinued operations (Note 7)   3,389     1,665  
Total current assets   698,125     679,488  
Property and equipment — net   54,862     57,542  
Goodwill   501,022     464,469  
Intangible assets   21,834     19,819  
Other assets — net   38,855     41,599  
Deferred income taxes   49,935     52,647  
Non-current assets of discontinued operations (Note 7)   17,924     26,469  
Total assets $ 1,382,557   $ 1,342,033  
Liabilities and Stockholders' Equity            
Current Liabilities:            
Current portion of amounts outstanding under line of credit $ 3,500   $ 3,500  
Accounts payable   111,902     116,032  
Current portion of long-term debt   36     500  
Accrued compensation and benefits   112,007     98,368  
Other accrued liabilities   156,641     115,168  
Current liabilities of discontinued operations (Note 7)   8,201     20,995  
Total current liabilities   392,287     354,563  
Long-term portion of amounts outstanding under line of credit   383,269     352,750  
Senior subordinated notes   200,000     200,000  
Other long-term debt   469     491  
Other non-current liabilities   48,364     52,831  
Non-current liabilities of discontinued operations Note 7)   27,319     33,318  
Commitments and contingencies (Note 10)            
Stockholders' Equity:            
Preferred stock, $1 par value, authorized 5,000,000 shares:            
Series A junior participating, designated 1,000,000 authorized shares: None issued        
Common stock, $.01 par value, authorized 200,000,000 shares: 85,731,246 and 84,779,939 shares issued and outstanding as of March 31, 2005 and March 31, 2004, respectively   857     848  
Capital in excess of par value   693,764     684,934  
Deferred compensation   (18   (53
Accumulated deficit   (361,740   (336,618
Treasury stock at cost: 323,258 shares   (2,014   (1,031
Total stockholders' equity   330,849     348,080  
Total liabilities and stockholders' equity $ 1,382,557   $ 1,342,033  

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

2




THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)


  Six months ended
June 30,
  2005 2004
Cash Flows from Operating Activities:            
Loss from continuing operations $ (27,543 $ (21,261
Adjustments to reconcile loss from continuing operations to net cash provided by (used for) operating activities, net of effects of net assets sold and businesses acquired:            
Asset impairment charge (Note 4)       15,495  
Provision for estimated Class Action Settlement (Note 2 and 10)   67,400      
Net gain on investments   (1,483    
Depreciation and amortization   7,993     7,784  
Deferred income taxes and other   25,163     4,567  
Deferred compensation   35     853  
Changes in operating assets and liabilities, net of effects of net assets sold and businesses acquired:            
Accounts receivable   (24,827   (57,160
Inventories   (3,538   1,409  
Prepaid expenses and other assets   (6,330   (12,987
Accounts payable   (6,091   2,606  
Accrued compensation and benefits   12,591     (5,047
Accrual for FCPA investigation settlement charge   (28,500   25,500  
Other liabilities   1,165     2,321  
Net cash provided by (used for) continuing operations   16,035     (35,920
Income (loss) from discontinued operations   2,421     (42,232
Asset impairment charges (Note 4)       43,183  
Proceeds from divestiture of businesses (Note 7)   8,433     6,000  
Changes in net assets and liabilities of discontinued operations   (14,619   (5,819
Net cash provided by (used for) discontinued operations   (3,765   1,132  
Net cash provided by (used for) operating activities   12,270     (34,788
Cash Flows from Investing Activities:            
Capital expenditures   (4,158   (16,776
Acquisition of business, net of cash acquired   (39,844    
Proceeds from sale of investments and net assets   4,115     2,880  
Earnout payment related to prior year acquisition   (658   (2,460
Other investments   (66   (1,243
Other       1,103  
Net cash used for investing activities   (40,611   (16,496
Cash Flows from Financing Activities:            
Additions to debt   30,519     49,125  
Retirements and other payments of debt   (486   (241
Preferred stock redemption (Note 5)       (12,518
Proceeds from exercise of stock options and other   4,757     13,566  
Dividends paid       (190
Other   (16   (220
Net cash provided by financing activities   34,774     49,522  
Effect of exchange rate changes on cash       215  
Net increase (decrease) in cash and cash equivalents   6,433     (1,547
Cash and cash equivalents at beginning of period   16,672     26,974  
Cash and cash equivalents at end of period $ 23,105   $ 25,427  

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

3




THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands of dollars, except per share data)


  Cumulative
Convertible
Preferred
Stock
Common
Stock
Capital
In Excess
of Par
Value
Deferred
Compen-
sation
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Six Months Ended June 30, 2005                                                
Balances at December 31, 2004 $   $ 848   $ 684,934   $ (53 $ (336,618 $   $ (1,031 $ 348,080  
Exercise of stock options and other       6     5,734                 (983   4,757  
Amortization of deferred compensation               35                 35  
Shares issued under the employee
stock purchase plan
      3     3,096                     3,099  
Net loss                   (25,122           (25,122
Balances at June 30, 2005 $   $ 857   $ 693,764   $ (18 $ (361,740 $   $ (2,014 $ 330,849  
                                                 
Six Months Ended June 30, 2004                                                
Balances at December 31, 2003 $ 687   $ 822   $ 670,733   $ (1,584 $ (298,221 $ (215 $ (813 $ 371,409  
Exercise of stock options and other       21     13,673                 (128   13,566  
Redemption of preferred stock (Note 5)   (626       (11,892                   (12,518
Conversion of preferred stock   (61       61                      
Amortization of deferred compensation               853                 853  
Foreign currency translation adjustment                       215         215  
Shares issued under the employee stock purchase plan       3     2,715                     2,718  
Dividends on preferred stock —Cumulative convertible,
$.28 per share
          (190                   (190
Net loss                   (63,493           (63,493
Balances at June 30, 2004 $   $ 846   $ 675,100   $ (731 $ (361,714 $   $ (941 $ 312,560  

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

4




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

Note (1)    Basis of Financial Statement Preparation

The accompanying consolidated financial information of The Titan Corporation and its subsidiaries (Titan or the Company) should be read in conjunction with Titan's Annual Report on Form 10-K to the Securities and Exchange Commission (SEC) for the year ended December 31, 2004. The accompanying financial information includes substantially all subsidiaries on a consolidated basis and all normal recurring adjustments which are considered necessary by the Company's management for a fair presentation of the financial position, results of operations and cash flows for the periods presented. However, these results are not necessarily indicative of results for a full fiscal year. Additionally, certain prior period amounts have been reclassified to conform to the current period presentation.

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

Significant Accounting Policies

Reclassifications.    Certain reclassifications have been made to the prior year presentation to conform to the 2005 presentation.

Stock-Based Compensation.    As allowed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," Titan has elected to continue to apply the intrinsic value based method of accounting for stock options and has adopted the disclosure only provisions of the fair value method contained in SFAS No. 123. Compensation cost, if any, is measured as the excess of the quoted market price of Titan's stock on the date of grant over the exercise price of the grant. Had compensation cost for Titan stock-based compensation plans been determined based on the fair value method at the grant dates for awards under those plans, our results of operations would have been reduced to the pro forma amounts indicated below:


  Three months ended
June 30,
Six months ended
June 30,
  2005 2004 2005 2004
Net loss, as reported $ (44,134 $ (66,552 $ (25,122 $ (63,493
Add: Total stock-based employee compensation expense in reported net loss, net of related tax effects   11     202     22     512  
Less: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects   (1,861   (1,498   (3,680   (3,218
Net loss, pro forma $ (45,984 $ (67,848 $ (28,780 $ (66,199
Earnings (loss) per share:                        
Basic as reported $ (0.52 $ (0.79 $ (0.30 $ (0.76
Basic pro forma $ (0.54 $ (0.81 $ (0.34 $ (0.79
Diluted as reported $ (0.52 $ (0.79 $ (0.30 $ (0.76
Diluted pro forma $ (0.54 $ (0.81 $ (0.34 $ (0.79

Goodwill and Other Intangible Assets.    Goodwill represents the excess of costs over fair value of assets of businesses acquired. Effective January 1, 2002, Titan adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." Goodwill and

5




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets."

SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level at least annually, utilizing a two step methodology. The initial step requires Titan to assess whether indications of impairment exist. If indications of impairment are determined to exist, the second step of measuring impairment is performed, wherein the fair value of the relevant reporting unit is compared to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the reporting unit is impaired.

Titan performs its annual testing for impairment of goodwill and other intangible assets in connection with the preparation of its annual financial statements.

Note (2)    Merger with L-3 Communications Corporation

On June 2, 2005, Titan, L-3 Communications Corporation (L-3) and Saturn VI Acquisition Corp. (Merger Sub) entered into an Agreement and Plan of Merger (Merger Agreement), pursuant to which Merger Sub would be merged with and into Titan, with Titan continuing as the surviving corporation and a wholly-owned subsidiary of L-3 (the Merger). On July 29, 2005, the Merger was completed on the terms and subject to the conditions of the Merger Agreement, such that each share of common stock, par value $0.01 per share, of Titan (Titan Common Stock) was converted into the right to receive $23.10 in cash (the Merger Consideration). Each outstanding option to purchase Titan Common Stock was canceled and converted into the right to receive in cash the amount by which the Merger Consideration exceeded the exercise price. Also in connection with the acquisition, L-3 assumed all Titan's debt, including its Senior Credit Facility and its Senior Subordinated Notes (Note 8).

Concurrently with entering into the Merger Agreement, Titan entered into two memoranda of understanding (MOUs) to settle federal and state securities law class actions and derivative suits pending in both federal and state courts in California and the Delaware Court of Chancery. As part of the settlement, which became effective after the closing of the Merger, L-3 assumed a cash obligation of $67.4 million. The MOUs contemplated execution of separate stipulations of settlements that were filed in the California federal court and the Delaware Chancery Court. The MOUs resolved the class actions and derivative suits against Titan and its directors and officers arising out of, among other things, allegations involving the Foreign Corrupt Practices Act and the failed merger with Lockheed Martin. The settlement of the derivative action also resolved claims that were filed in the Delaware Court of Chancery on June 3, 2005 challenging the Merger (Note 10).

Note (3)    Merger, Investigation and Settlement Costs

Proposed Merger with L-3 Communications Corporation

In the three months ended June 30, 2005, Titan incurred $71.6 million of settlement provision, legal, accounting, printing and other professional fees and costs related to the proposed merger with L-3.

6




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

Terminated Merger with Lockheed Martin Corporation

On June 26, 2004, Lockheed Martin Corporation terminated the merger agreement pursuant to which Lockheed Martin was to have acquired Titan. The merger agreement was entered into in September 2003 and amended in March 2004 and April 2004 to provide additional time for Titan to resolve the Securities and Exchange Commission (SEC) and Department of Justice (DoJ) investigations under the Foreign Corrupt Practices Act (FCPA) (see Note 10).

On March 1, 2005, Titan settled the government investigations related to the FCPA. In the three and six months ended June 30, 2005, respectively, merger, investigation and settlement costs in the accompanying consolidated statement of operations include $1.9 million and $7.3 million in legal costs related to the resolution of the FCPA investigation and $0.8 million and $ 1.2 million in legal costs stemming from FCPA-related litigation and investigations (see Note 10).

In the three months and six months ended June 30, 2004, respectively, Titan incurred approximately $34.4 million and $52.0 million in settlement provision, legal, investment banking, accounting, printing and other professional fees and costs related to the terminated merger, which are reflected in merger, investigation and settlement costs in the accompanying consolidated statements of operations. The investigation related costs which approximated $6.2 million and $18.1 million of these costs in the three months and six months ended June 30, 2004, respectively, include the costs associated with the comprehensive internal review conducted by Titan to evaluate whether payments involving international consultants for Titan or its subsidiaries were made in violation of applicable law. The legal, accounting and other professional fees incurred also supported the related inquiry by the Department of Justice and the investigation by the Securities and Exchange Commission. Also included are costs of approximately $2.7 million and $8.4 million for the three and six months ended June 30, 2004, respectively, related to the merger transaction itself, including the exchange offer and consent solicitation for Titan's senior subordinated notes and the redemption of Titan's preferred stock, both of which were conditions to close the terminated merger.

In the three months and six months ended June 30, 2004, Titan recorded an additional provision of $25.5 million for anticipated settlement costs related to the government FCPA investigations. Titan had previously recorded $3.0 million as of December 31, 2003, for resolution of this matter, thereby bringing the total amount recorded to $28.5 million. Titan did not accrue for any remaining legal costs expected to be incurred to reach resolution of the FCPA matter, and those costs were expensed as incurred.

Note (4)    Asset Impairment Charges

During the three months and six months ended June 30, 2004, Titan recorded asset impairment charges totaling $15.5 million. Approximately $10 million of these charges pertain to impairment of fixed assets directly related to the termination of a program by a U.S. civilian government agency in the second quarter, and impairment of assets associated with a reduction in scope of planned business activities in Saudi Arabia. As a result of curtailing the activities in Saudi Arabia and with the U.S. civilian government agency, future cash flows will be insufficient to recover the carrying value of certain dedicated assets. Approximately $5.5 million related to a charge for impairment of a technology license Titan purchased from SureBeam in 2001 (see Note 10).

Note (5)    Redemption of Cumulative Convertible Preferred Stock

On March 15, 2004, Titan redeemed all outstanding shares of its cumulative convertible preferred stock. The redemption was a condition to the close of the terminated merger with Lockheed Martin. An aggregate of 625,846 shares were redeemed at $20 per share, plus cumulative dividends in arrears

7




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

of $0.03 per share, which utilized cash of approximately $12.5 million, and the remaining 60,983 shares of preferred stock were converted by shareholders into 47,580 shares of common stock. The redemption of the preferred stock is recorded in stockholders' equity.

Note (6)    Acquisition of Intelligence Data Systems

On April 21, 2005, Titan completed the acquisition of 100% of the outstanding shares of Intelligence Data Systems, Inc. (IDS), a high-technology and professional services firm supporting the U.S. intelligence community through highly specialized expertise in data mining, high-performance computing, data analysis, information fusion, and information sharing. The acquisition was to further Titan's goal of acquiring government information technology companies that fit strategically with its government business, particularly within the intelligence community marketplace. At the closing, Titan paid $39.9 million, net of cash acquired, plus applicable acquisition costs. Of this amount, $6.3 million has been placed in escrow to satisfy any indemnification claims by Titan. The excess of the $42.8 million purchase price over the estimated fair market value of the net assets acquired was approximately $41.2 million. In connection with the acquisition, Titan had an independent valuation completed by the McLean Group, LLC to assist management in its purchase price allocation for the IDS acquisition. The independent valuation was the basis for Titan's allocation of $36.5 million to goodwill and $4.7 million to intangible assets. The intangible assets consist of customer related intangibles, such as customer contracts and customer relationships, which will be amortized over the estimated useful life of 8 years. IDS's operations are reported in our operating results from April 22, 2005. The acquisition was accounted for as a purchase in accordance with the provisions of SFAS No. 141, "Business Combinations", and accordingly, the results of operations of IDS have been included in Titan's results of operations beginning as of the date of acquisition. Pro forma financial information has not been provided as the acquisition is not significant to Titan.

Note (7)    Discontinued Operations

In June 2004, Titan's board of directors decided to sell or otherwise divest its Datron World Communications business (Datron World) and its Titan Scan Technologies service business (Scan Services). These non-core operations did not perform to management's expectations, and their divestiture would allow Titan to better focus on its core National Security Solutions business. Subsequently, in November 2004, Titan sold its Datron World business for approximately $4.7 million, resulting in a loss of approximately $2.0 million. Additionally, in February 2005, Titan sold Scan Services for $4.9 million, resulting in a gain of $0.2 million. In connection with the sale, Titan assigned its lease on one facility to the buyer, but remained liable for facilities restoration costs on this facility. Prior to its sale, Scan Services generated revenues for the first quarter of 2005 of $0.6 million. These businesses have been reported as discontinued operations in accordance with SFAS No. 144, and all periods presented have been restated accordingly to reflect these operations as discontinued.

In July 2002, Titan's board of directors decided to exit all of its international telecommunications businesses by selling and winding down its Titan Wireless operation. Titan immediately began implementing these actions, which were substantially completed during 2003. Titan reported this exit of the Titan Wireless business as a discontinued operation in accordance with SFAS No. 144.

On December 10, 1999, Titan's wholly-owned subsidiary, Titan Africa, Inc. (Titan Africa), in connection with its contract to build a satellite-based telephone system for its customer, the national telephone company of Benin, Africa (the OPT), entered into a Loan Facility agreement for up to 30.0 billion Francs CFA (the currency of the African Financial Community), equivalent to approximately $45.0 million U.S. dollars, with a syndicate of five banks, with Africa Merchant Bank as the arranger. This financing was subsequently increased by 6.0 billion francs CFA to approximately

8




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

$54.0 million. This medium-term financing is a non-recourse loan to Titan Africa which is guaranteed by the OPT and secured by the OPT's equipment and revenues related to the project. The facility has a fixed interest rate of 9.5% per year and was originally to be repaid in seven equal semi-annual payments from the net receipts of this project, or by the OPT in the event that such receipts are not adequate to make these payments, which commenced on December 31, 2000 and were scheduled to end on December 31, 2003. The payment terms were subsequently amended calling for quarterly payments through mid-2006. The borrowings on this facility have been utilized to fund various equipment and subcontractor costs incurred most notably by Alcatel of France, a major subcontractor to this project.

Related to Titan's contract with the OPT, Titan has a $28.8 million gross receivable due from the OPT, less a reserve of $10.9 million, which is reflected as a net $17.9 million in non-current assets of discontinued operations as of June 30, 2005. The $17.9 million receivable is equal to the outstanding balance on the non-recourse loan, drawn to cover subcontract costs. The $17.9 million balance on the non-recourse loan is included in non-current liabilities of discontinued operations at June 30, 2005. The $10.9 million difference between the gross receivable of $28.8 million and the $17.9 million balance on the non-recourse loan represents amounts currently due from the OPT under the Titan settlement agreement entered into with the OPT in 2003. This agreement contemplated a $25 million payment by the OPT to Titan, which was due in full by November 30, 2003. On December 31, 2003, Titan received a partial payment of $11 million on the settlement. Based on the facts available in the second quarter of 2004, principally the OPT's cash flow deficiencies and inability to obtain adequate financing, Titan recorded a full reserve for the then remaining $14.3 million balance outstanding. Notwithstanding this reserve, Titan has commenced an international arbitration against the OPT seeking collection of this receivable. In July 2005, Titan received an additional cash payment from the OPT of $3.4 million which is reflected as income in the second quarter as the receivable was previously fully reserved.

At December 31, 2004, Titan Wireless had an accrual for $10.3 million for estimated costs of resolving a contingent liability with a subcontractor related to this project. In February 2005, Titan received a demand for full payment from the subcontractor, based on an international arbitration ruling which Titan was in the process of appealing. In light of this, Titan and the subcontractor later reached a final settlement whereby, in March 2005, Titan paid $9.0 million in full settlement of the matter, resulting in a gain of $1.3 million in the first quarter of 2005.

A summary of the utilization of exit and restructuring accruals related to the Titan Wireless discontinued operation during the six months ended June 30, 2005 is as follows:


  Balance
December 31,
2004
Cash Paid Change in
Estimate
Balance
June 30,
2005
Titan Wireless:                        
Contingent liability with subcontractor $ 10,311   $ (8,980 $ (1,331 $  
Estimated exit costs   3,192     (639   (594   1,959  
  $ 13,503   $ (9,619 $ (1,925 $ 1,959  

On June 2, 2004, Titan sold Cayenta Canada, its remaining commercial information technology business for a net $5.6 million in cash, with no resulting gain or loss recorded on the sale. Titan recorded current liabilities related to this sale of approximately $1.8 million related to potential purchase price adjustments due to the buyer and transaction-related costs and indemnification obligations related to the sale. Additionally, Titan had previously guaranteed performance on several customer contracts and leased a facility that was subleased to Cayenta Canada. Although the buyer agreed to indemnify Titan for performance on certain of these contracts and subleased the facility,

9




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

Titan was not released from its obligations under these guarantees or under the facility lease. The face value of the performance guarantees is approximately $14 million at June 30, 2005. Substantially all of the guarantees were issued prior to December 31, 2003 and are therefore not required to be recognized and measured under the provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." Titan has not had to make any payments with respect to performance guarantees provided to customers of this business since Titan acquired the business in 1999 and has not provided any reserves for these contingencies at June 30, 2005, based on management's assessment that such payments are not probable of being made.

In October 2001, Titan adopted a definitive plan to spin-off SureBeam in the form of a tax-free dividend to Titan stockholders within the next 12 months from that date. At the time Titan adopted the plan to spin-off SureBeam, in accordance with APB No. 30, Titan accounted for SureBeam as a discontinued operation. On August 5, 2002, Titan's remaining ownership interest in SureBeam was spun-off to Titan stockholders as a tax-free dividend. Prior to the adoption of the spin-off plan, Titan reported the SureBeam business as a separate segment.

In January 2004, SureBeam began liquidation proceedings under Chapter 7 of the United States Bankruptcy Code. During 2004, as a result of the bankruptcy proceedings, Titan assumed certain lease obligations and idle facilities which were previously guaranteed by Titan. Additionally, and since the time of the completion of the bankruptcy proceedings, Titan has incurred expenses and recorded charges related to these lease obligations and idle facilities that have been accounted for in discontinued operations, as such guarantees on the obligations of SureBeam existed at the time SureBeam was originally discontinued in October 2001. In the second and fourth quarters of 2004, the Company recorded charges aggregating $14.4 million to accrue the estimate of the shortfall between the amount of the SureBeam lease guarantees and the amount expected to be recovered by subleasing activities and for amounts to be incurred for facilities restoration costs.

As of June 30, 2005, the total amount of the accrual remaining to cover the aforementioned costs was $12.8 million, reflecting an approximate $0.6 million and $1.1 million use of the accrual for lease payments made on idle facilities in the three and six months ended June 30, 2005. In June 2005, Titan entered into a sub-lease agreement with a third party with the same rights and duties as Titan's lease. To date, Titan has not transferred any of the guaranteed leases to third parties. The gross obligations under leases and lease guarantees are approximately $20.5 million.

In relation to SureBeam's strategic alliance with Hawaii Pride, Titan has guaranteed repayment of Hawaii Pride's bank debt up to the greater of SureBeam's equity interest in Hawaii Pride (which is zero), or 19.9% of Hawaii Pride's $6.8 million, 15-year loan from its lender, WebBank. As of June 30, 2005, Titan has guaranteed approximately $1.0 million, or 19.9% of the current loan balance of $5.2 million. In the event that Hawaii Pride defaults on the loan, Titan currently expects to be obligated to cover any defaults on the entire outstanding balance of the loan if the default is not cured within 90 days. In late October 2003, Titan was notified by Hawaii Pride that Hawaii Pride had stopped receiving financial support from SureBeam and did not have sufficient cash resources to make its monthly principal and interest payments to WebBank. Titan subsequently extended a credit facility to Hawaii Pride of up to a maximum of $0.8 million in principal to cover shortfalls in debt service payments. This facility is secured by a second lien on the assets of Hawaii Pride, including a second mortgage on its facility. As of June 30, 2005, Titan has loaned approximately $0.6 million to Hawaii Pride and, to Titan's knowledge, Hawaii Pride is current in its debt service to WebBank. All amounts outstanding under the Titan credit facility are required to be repaid in twenty equal quarterly installments commencing on October 1, 2005.

10




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

Income Statement Summary

Following is a summary of the income (loss) from discontinued operations for 2005 and 2004:


  Three months ended
June 30,
Six months ended
June 30,
  2005 2004 2005 2004
Loss from discontinued operations $ (99 $ (2,519 $ (735 $ (3,611
Impairment of assets       (50,383       (50,383
Gain (loss) on subcontractor liability settlement       (3,900   1,331     (3,900
Collection of previously reserved receivable   3,389         3,389      
Change in estimated exit costs   110         594      
Gain on sale of businesses, net           185      
Net income (loss), pro forma   3,400     (56,802   4,764     (57,894
Tax expense (benefit)   1,838     (15,142   2,343     (15,662
Net income (loss) $ 1,562   $ (41,660 $ 2,421   $ (42,232

Balance Sheet Summary

Following is a table of all related balance sheet categories for discontinued operations:


  As of
June 30,
2005
As of
December 31,
2004
Current assets of discontinued operations:            
Accounts receivable, inventory and other $ 3,389   $ 1,665  
  $ 3,389   $ 1,665  
Non-current assets of discontinued operations:            
Accounts receivable $ 17,924   $ 23,387  
Fixed assets and other       3,082  
  $ 17,924   $ 26,469  
Current liabilities of discontinued operations:            
Subcontractor contingency reserve $   $ 10,311  
Lease obligations and facilities restoration   4,280     5,095  
Exit costs   1,959     3,192  
Other   1,962     2,397  
  $ 8,201   $ 20,995  
Non-current liabilities of discontinued operations:            
Non-recourse loan $ 17,924   $ 23,387  
Lease obligations and facilities restoration   9,395     9,931  
  $ 27,319   $ 33,318  

11




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

Note (8)    Debt

Senior Credit Facility

On May 23, 2002, Titan entered into an agreement with Wachovia Bank, National Association and Wachovia Securities for a $485 million senior credit facility from a syndicate of commercial banks including Wachovia Securities acting as sole lead arranger and Wachovia Bank, National Association, as Administrative Agent, The Bank of Nova Scotia and Comerica Bank as Co-Syndication Agents and Branch Banking and Trust Company and Toronto Dominion Bank as Co-Documentation Agents and other financial institutions. The senior credit facility is comprised of an aggregate credit commitment of $485 million, consisting of a seven-year term loan in an aggregate principal amount of $350 million and a six-year $135 million revolving credit facility. The seven-year term loan matures on June 30, 2009, and the senior revolver matures on May 28, 2008.

At June 30, 2005, total borrowings outstanding under Titan's senior credit facility were $386.8 million at a weighted average interest rate of 5.84%. Commitments under letters of credit, which reduce availability under the senior credit facility, were approximately $4.6 million at June 30, 2005, resulting in approximately $73.4 million of borrowing availability on the senior revolver at June 30, 2005. Of the total outstanding borrowings, $3.5 million was short-term. At June 30, 2005, Titan was in compliance with all financial covenants under its various debt agreements; which are comprised of a maximum total debt to EBITDA ratio of 4.5 to 1.0, a maximum total senior debt to EBITDA ratio of 2.75 to 1.0, a minimum interest coverage ratio of 3.0 to 1.0, a minimum fixed charge coverage ratio of 1.35 to 1.0 and a minimum net worth of approximately $278.0 million at June 30, 2005. The remaining unamortized deferred costs and expenses of $6.2 million related to the senior credit facility, which were incurred primarily in 2002, are included in Intangible Assets at June 30, 2005 and will be amortized over the remaining term of the senior credit facility, assuming no prepayment is made.

Senior Subordinated Notes

On May 15, 2003, Titan sold $200 million of 8% senior subordinated notes due May 15, 2011 in a private placement (the Notes). Titan used the net proceeds from the issuance of the Notes, plus borrowings of $50 million under its revolving credit facility and additional cash on hand, to redeem all of the $250 million of the then-outstanding 5¾% HIGH TIDES convertible preferred securities. The redemption of HIGH TIDES occurred on June 4, 2003.

Titan is required to make interest payments on the Notes semi-annually in arrears on May 15 and November 15 at the rate of 8% per annum. Titan may redeem the Notes, in whole or in part, on or after May 15, 2007 at the following redemption prices, plus accrued and unpaid interest and liquidated damages, if any:


Year Percentage
2007   104.0
2008   102.0
2009 and thereafter   100.0

In addition, on or prior to May 15, 2006, Titan may redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings at a redemption price of 108% of principal together with accrued and unpaid interest. The Notes are unsecured and rank or will rank equally with Titan's current or future senior subordinated indebtedness. Each of Titan's domestic subsidiaries, other than Cayenta, guarantee the Notes. The guarantees are unsecured and rank equally with each guarantor's senior subordinated indebtedness. The Notes and the guarantees are junior to all of Titan's and each guarantor's senior indebtedness and senior to all of Titan's and each guarantor's subordinated indebtedness (see Note 11).

12




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

On July 19, 2004, Titan completed the exchange of the existing Notes for a new series of substantially identical 8% senior subordinated notes due May 15, 2011 registered under the Securities Act.

The remaining unamortized deferred costs and expenses of $4.6 million related to the Notes, which were incurred in May 2003, are included in Intangible Assets at June 30, 2005, and will be amortized over the term of the Notes, assuming no prepayment is made.

Note (9)    Other Financial Information

Earnings Per Share

Basic and diluted earnings per share were computed based on net income (loss), less the regular quarterly dividend requirement for preferred stock and the accrued dividend to the date of redemption.

The following data summarize information relating to the per share computations for income from continuing operations:


  Three months ended June 30, 2005 Three months ended June 30, 2004
  Income
(loss)
(Numerator)
Shares
(000's)
(Denominator)
Per
Share
Amounts
Income
(Loss)
(Numerator)
Shares
(000's)
(Denominator)
Per
Share
Amounts
Loss from continuing operations $ (45,696             $ (24,892            
Basic EPS:                                    
Loss from continuing operations available to common stockholders   (45,696   85,180   $ (0.54   (24,892   83,970   $ (0.30
Effect of dilutive securities:                                    
Stock options and warrants                        
Diluted EPS:                                    
Loss from continuing operations available to common stockholders $ (45,696   85,180   $ (0.54 $ (24,892   83,970   $ (0.30

  Six months ended June 30, 2005 Six months ended June 30, 2004
  Income
(loss)
(Numerator)
Shares
(000's)
(Denominator)
Per
Share
Amounts
Income
(Loss)
(Numerator)
Shares
(000's)
(Denominator)
Per
Share
Amounts
Loss from continuing operations $ (27,543             $ (21,261            
Less preferred stock dividends                   (190            
Basic EPS:                                    
Loss from continuing operations available to common stockholders   (27,543   84,991   $ (0.32   (21,451   83,347   $ (0.26
Effect of dilutive securities:                                    
Stock options and warrants                        
Diluted EPS:                                    
Loss from continuing
operations available to common
stockholders
$ (27,543   84,991   $ (0.32 $ (21,451   83,347   $ (0.26

13




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

In the three months ended June 30, 2005, options and warrants to purchase approximately 8,741,600 shares of common stock at prices ranging from $1.04 to $18.03 per share were not included in the computation of diluted EPS, as the effect would have been anti-dilutive due to the net loss. In the three months ended June, 2005, options and warrants to purchase approximately 194,300 shares of common stock at prices ranging from $20.68 to $29.74 per share were not included in the computation of diluted EPS, as their effect was anti-dilutive due to the exercise price being higher than Titan's average market price in the period. In the three months ended June 30, 2004, options and warrants to purchase approximately 3,136,200 shares of common stock at prices ranging from $1.04 to $17.29 per share were not included in the computation of diluted EPS, as the effect would have been anti-dilutive due to the net loss. In the three months ended June 30, 2004, options and warrants to purchase approximately 362,500 shares of common stock at prices ranging from $19.43 to $29.74 were not included in the computation of diluted EPS, as their effect was anti-dilutive due to the exercise price being higher than Titan's average market price in the period.

In the six months ended June 30, 2005, options and warrants to purchase approximately 8,853,700 shares of common stock at prices ranging from $1.04 to $18.03 per share were not included in the computation of diluted EPS, as the effect would have been anti-dilutive due to the net loss. In the six months ended June 30, 2005, options and warrants to purchase approximately 198,600 shares of common stock at prices ranging from $19.43 to $29.74 per share were not included in the computation of diluted EPS, as their effect was anti-dilutive due to the exercise price being higher than Titan's average market price in the period. In the six months ended June 30, 2004, options and warrants to purchase approximately 3,448,800 shares of common stock at prices ranging from $1.04 to $19.43 per share were not included in the computation of diluted EPS, as the effect would have been anti-dilutive due to the net loss. In the six months ended June 30, 2004, options and warrants to purchase approximately 353,200 shares of common stock at prices ranging from $19.43 to $29.74 were not included in the computation of EPS, as their effect was anti-dilutive due to the exercise price being higher than Titan's average market price in the period.

Approximately 223,600 shares of common stock in the six month period in 2004 that could have been issued from the potential conversion of cumulative convertible preferred stock were not included in the computation of diluted EPS, as the effect would have been anti-dilutive. The change in potential dilution from 2004 to 2005 is the result of its redemption on March 15, 2004 (see Note 5).

Select Statement of Operations Data

Included in revenue for the three and six months ended June 30, 2005, are revenues related to a single contract with the U.S. Army to provide linguist services of $109.8 million and 194.8 million, representing 17.7% and 16.5% of total revenues for the three and six months, respectively. Revenues related to our enterprise information technology contract for U.S. Special Operations Command were $19.8 million and $38.7 million, or 3.2% and 3.3%, of total revenues for the three and six month periods, respectively. Revenues related to our Joint Deployable Intelligence Support Systems contract were $10.8 million and $24.6 million, or 1.7% and 2.1% of total revenues for the three and six months, respectively. Revenues related to our Enterprise Architecture and Decision Support contract for NSA were $12.2 million and $24.6 million, or 2% and 2.1% of total revenues for the three and six months, respectively. No other single contract accounted for more than 2% of total revenues for these periods.

Also included in revenues for the three and six months ended June 30, 2005 is $1.0 million related to the sale of SureBeam inventory, which was awarded to Titan during 2004 in liquidation proceedings under Chapter 7 of the United States Bankruptcy Code.

The net gain on sale of investments reflected in the consolidated statement of operations for the three months ended June 30, 2005 includes a gain of $2.6 million derived from proceeds received in a

14




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

capital distribution of $4.1 million as a result of the successful sale of a component of Titan Investment Partners (TIP), formerly E-Celerator, over the cost basis of $1.5 million. This gain was offset by a loss of $0.2 million on another component of TIP based on an indication from the Portfolio Manager that the fair market value was impaired and a loss of $0.9 million as a result of recording a full write-down on another investment.

The net gain on sale of assets reflected in the consolidated statement of operations for the six months ended June 30, 2004 represents a gain on the sale of certain contracts and related assets and liabilities of $0.9 million, which sale was completed in order to mitigate concerns raised by one customer related to organizational conflict of interest issues arising from the terminated merger with Lockheed Martin. The aforementioned gain was partially offset by a loss of $0.3 million on another sale of certain contracts and related assets and liabilities, which were sold as part of Titan's ongoing strategy to divest non-core assets and operations.

Select Balance Sheet Data

The following are details concerning certain balance sheet data:


  June 30,
2005
December 31,
2004
Accounts Receivable:            
U.S. government - - billed $ 395,413   $ 415,889  
U.S. government - unbilled   128,004     88,257  
Trade   25,026     14,648  
Less: Allowance for doubtful accounts   (3,228   (3,408
  $ 545,215   $ 515,386  
Inventories:            
Materials $ 9,332   $ 6,988  
Work-in-process   12,252     10,107  
Finished goods   3,290     4,241  
  $ 24,874   $ 21,336  

A summary of the utilization of exit and restructuring accruals during the six months ended June 30, 2005 is as follows:


  Balance
December 31,
2004
Cash Paid Change in
Estimate
Balance
June 30,
2005
Titan Systems restructuring:                        
Estimated facilities consolidation costs $ 14,856   $ (2,584 $ (195 $ 12,077  
Cayenta headquarters exit costs:                        
Lease commitment costs   383     (184   41     240  
Employee termination costs and other   45     (46   18     17  
    428     (230   59     257  
  $ 15,284   $ (2,814 $ (136 $ 12,334  

At June 30, 2005, $3.4 million of the exit and restructuring accruals are included in Other Accrued Liabilities and $8.9 million are included in Other Non-current Liabilities on the consolidated balance sheet. The remaining accrual balance is primarily comprised of amounts due under the excess facilities as a result of facilities consolidation, which requires lease payments and other lease costs, net of assumed sublease income, to be paid over the remaining lease terms, which expire in 2009.

15




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

Supplemental Cash Flow Information

Supplemental disclosure of cash flow information:


  Six months ended
June 30,
  2005 2004
Non-cash investing and financing activities:            
Shares contributed to employee benefit plans $ 3,099   $ 2,718  
Shares tendered for stock option exercises   983     128  
Cash paid for interest $ 18,028   $ 17,430  
Cash paid for income tax   2,018     869  

Note (10)    Commitments and Contingencies

Legal Matters

Foreign Corrupt Practices Act Investigation

During the first quarter of 2004, Titan learned of allegations that improper payments under the Foreign Corrupt Practices Act (FCPA) had been made, or items of value had been provided, involving international consultants for Titan or its subsidiaries to foreign officials. The allegations, which were identified as part of internal reviews conducted by Titan and Lockheed Martin Corporation (Lockheed) in connection with their failed merger, were reported at that time to the government. Titan's Board of Directors established a committee of the Board to oversee Titan's internal review of these matters. In connection with the internal review, the SEC commenced an investigation into whether payments involving Titan's international consultants were made in violation of applicable law, particularly the FCPA. In addition, the Department of Justice (DoJ) initiated a criminal inquiry into this matter, and also initiated an investigation into whether these same alleged practices violated provisions of the United States Internal Revenue Code of 1986, as amended.

On March 1, 2005, Titan announced that it had entered into a consent to entry of a final judgment with the SEC without admitting or denying the SEC's allegations, and reached a plea agreement with the DoJ, under which Titan pled guilty to three FCPA counts related to its overseas operations. These counts consist of violations of the anti-bribery and the books and records provisions of the FCPA and aiding and assisting in the preparation of a false tax return.

In connection with the FCPA settlement, Titan made total payments of $28,500, including a DoJ-recommended fine of $13,000 and payments to the SEC of $15,500. A federal judge also imposed a three-year term of supervised probation. As part of these agreements, Titan agreed to: (1) implement a best-practices compliance program designed to detect and deter future violations of the FCPA; and (2) retain an independent consultant to review its policies and procedures with respect to FCPA compliance and to adopt the consultant's recommendations. If Titan fails to comply with its sentence or the consent to entry of a final judgment, it could be subject to additional criminal and civil fines or penalties and limitations on its ability to enter into or perform under U.S. government contracts, which would have a material adverse effect on the Company's financial position, results of operations or cash flows.

Titan has made voluntary disclosures to the U.S. Department of State of suspected violations of law discovered in the course of Titan's internal FCPA investigation. The voluntary disclosures have not yet been resolved and may result in the assessment of fines or penalties against Titan. Further, as a result of Titan's plea agreement, Titan is currently unable to obtain new export licenses for items

16




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

regulated by the U.S. Department of State. Titan has been working with the U.S. Department of State to obtain relief from this licensing ineligibility rule, but there is no assurance that Titan will be able to obtain new export licenses or amendments to existing ones or to utilize licensing exemptions in the foreseeable future. In addition, Titan's privilege to export products or services under existing export licenses may also be suspended. If Titan were prevented from obtaining new licenses and/or exporting products or services under existing licenses for a significant period of time, this could breach its obligations under certain contracts and could cause Titan to suffer adverse consequences, including termination of contracts and/or claims for damages. Titan does not know when, or if, it will be able to obtain relief from the licensing ineligibility rule, or for any further export license suspensions. Certain of Titan's revenues are generated by contracts with international customers which require export licenses. For the year ended December 31, 2004, Titan had revenues of approximately $27,000 that required it to have export licenses.

On March 2, 2005, the Navy, acting on behalf of the DoD, and Titan executed an administrative settlement agreement that would allow Titan to continue to receive U.S. government contracts. The agreement imposes certain duties and limitations on Titan and provides that the Navy will monitor for three years Titan's compliance with, among other things, the FCPA and federal procurement laws and regulations. Under the agreement, the Navy agreed not to undertake any administrative action to propose Titan for debarment, but reserved the right to undertake appropriate administrative action, in its discretion, in the event of the indictment or conviction of any then-current (as of the date of execution of the agreement) officer or director of Titan or any of its wholly-owned subsidiaries arising out of continuing investigations into the underlying matters that were the subject of the Titan plea agreement or the final judgment entered by the SEC. The Justice Department is continuing its investigation of individuals involved in these matters. The Navy agreement defines "Titan" to include, among other things, Titan's "affiliates."

Titan has an ongoing obligation under its by-laws and under indemnity agreements with current and former employees to advance their costs of defense relating to the FCPA investigations and related class action and derivative litigation, subject to the individuals undertaking to repay the costs of defense if it is ultimately determined that such individual is not entitled to be indemnified by Titan.

Other Legal Matters

Titan is involved in legal actions in the normal course of its business, including audits and investigations by various governmental agencies that result from its work as a defense contractor. Titan and its subsidiaries are named as defendants in legal proceedings from time to time and third parties, including the government, may assert claims against Titan from time to time. In addition, Titan has acquired companies from time to time that have legal actions pending against them at the time of acquisition. Based upon current information, including consultation with its lawyers, Titan does not believe that the ultimate liability arising from any of these actions, including those discussed below, will materially affect its consolidated financial position. However, the March 1, 2005 FCPA settlement payment materially impacted cash flow and Titan's borrowings under its senior revolver in the first quarter of 2005. Titan's evaluation of the likely impact of these actions, including those discussed below, could change in the future and Titan could have unfavorable outcomes that it does not expect. Any of these matters could have a material adverse effect on Titan's results of operations or cash flows in a future period and could have other adverse effects on Titan's business.

Stockholder and Derivative Actions

Titan and its officers and directors are subject to several lawsuits arising out of the FCPA settlement and the failed merger with Lockheed Martin Corporation.

17




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

In re Titan Inc. Securities Litigation, No. 04-CV-0701-K(NLS), is a consolidated putative class action filed before the U.S. District Court for the Southern District of California (the Federal Securities Action). The complaint alleges, among other things, that Titan and its officers and directors violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Securities and Exchange Commission (SEC) Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, by issuing a series of press releases, public statements and filings disclosing significant historical and future revenue growth, but omitting to mention certain allegedly improper payments involving international consultants in connection with Titan's international operations, thereby artificially inflating the trading price of Titan's common stock. On July 18, 2005, an amended complaint in the securities action was filed that, among other things, added the claims that were previously pled in the "Holder Actions" described in the next paragraph. The Federal Securities Action and the Holder Actions are referred to collectively as the "Securities Action."

Certain Titan officers are also parties to putative class action complaints filed in the Superior Court for the State of California in and for San Diego County (the Holder Actions). These cases include Paul Berger v. Gene W. Ray, et al., No. GIC 828346, and Robert Garfield v. Mark W. Sopp, et. al, No. GIC 828345. These actions purport to be brought on behalf of all holders of Titan common stock as of April 7, 2004. The Holder Actions allege, among other things, that the defendants breached their fiduciary duties by acquiescing in or condoning Titan's alleged violations of the FCPA by failing to establish adequate procedures to prevent the alleged FCPA violations, and by failing, in bad faith, to voluntarily report the alleged FCPA violations to government officials.

Titan's directors and certain Titan officers, with Titan as a nominal defendant, are also party to Theodore Weisgerber v. Gene Ray, et al., No. 832018, which was filed in the Superior Court for the State of California, San Diego; Robert Ridgeway v. Gene Ray, et al., No. 542-N, which was filed in Delaware Court of Chancery, New Castle County; Bernd Bildstein v. Gene Ray, et al., No. 833701, which was filed in the Superior Court for the State of California, San Diego County; and Madnick v. Gene Ray, et al., No. 1215-N, which was filed in the Delaware Court of Chancery, New Castle County (the Derivative Actions). The Derivative Actions purport to be brought for the benefit of the nominal defendant, Titan, and allege that the defendants breached their fiduciary duties by failing to monitor and supervise management in a way that would have either prevented the alleged FCPA violations or would have detected the alleged FCPA violations. The Weisgerber complaint was subsequently amended to include allegations that the defendants breached their fiduciary duties by failing to monitor and supervise management in a way that would have prevented the alleged mistreatment of prisoners at the Abu Ghraib prison in Iraq, alleged billing errors relating to the work performed by foreign nationals, and the loss of contracts with the government. On June 3, 2005, an amended complaint was filed in the Ridgeway action which added, among other things, a claim alleging that Titan's directors breached their fiduciary duty in connection with their approval of the merger with the Company. The Company was named as a defendant in the Ridgeway action for allegedly aiding and abetting this alleged breach of fiduciary duty.

On June 6, 2005, a putative class action, Gentsch v. Titan Corp. et al., No. GIC 848598, was filed in Superior Court for the State of California against Titan and its board of directors challenging the merger between Titan and the Company.

Concurrently with entering into the merger agreement relating to the merger with L-3, two memoranda of understanding were executed. First, the defendants in the Securities Action, including Titan and certain of its directors and officers, entered into a memorandum of understanding (the Securities MOU) with plaintiffs in the Federal Securities and Holder actions. Pursuant to the Securities MOU, plaintiffs and their counsel will receive $61.5 million. Second, the defendants in the Derivative Actions, including Titan and certain of its directors and officers and the Company, entered into a separate memorandum of understanding (the Derivative MOU) with plaintiffs in the Derivative

18




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

Actions. As a result of negotiations by the plaintiffs in the Derivative Actions, the Company agreed to, among other things, increase the purchase price it was willing to pay for Titan's common stock to $23.10 per share of Titan's common stock and reduces the termination fee potentially payable by Titan. Pursuant to the Derivative MOU, the Company has agreed to pay any plaintiff attorneys' fees awarded by the Delaware Court of Chancery up to $5.9 million.

After the completion of confirmatory discovery, including the review by plaintiffs' counsel of certain documents of Titan and the Company and the taking of several depositions, the parties executed stipulations of settlement (i.e., the Securities Settlement and the Derivative Settlement) on July 22, 2005. The Derivative Settlement that was executed included the settlement of the Gentsch matter. The Securities Settlement was preliminarily approved on September 26, 2005 and a Final Settlement Hearing is scheduled for December 19, 2005. The Derivative Settlement was preliminarily approved on August 8, 2005 and received final approval on November 2, 2005.

SureBeam Related Litigation

In August 2002, Titan completed the spin-off of its former subsidiary, SureBeam Corporation. On January 19, 2004, SureBeam voluntarily filed for bankruptcy relief to be liquidated under Chapter 7 of the United States Bankruptcy Court. Various lawsuits have been filed against Titan and/or certain directors and executive officers of Titan in connection with SureBeam.

Titan, certain corporate officers of SureBeam, Dr. Gene Ray and Susan Golding, as SureBeam directors, and certain investment banks that served as lead underwriters for SureBeam's March 2001 initial public offering, have been named as defendants in several purported class action lawsuits filed by holders of common stock of SureBeam in the U.S. District Court. On October 6, 2003, these lawsuits were consolidated into In re SureBeam Corporation Securities Litigation, No. 03-CV-001721-JM (POR) in the U.S. District Court for the Southern District of California. The consolidated action seeks an unspecified amount of damages and alleges that each of the defendants, including Titan, as a "control person" of SureBeam within the meaning of Section 15 of the Securities Act, should be held liable under Section 11 of the Securities Act because the prospectus for SureBeam's initial public offering was allegedly inaccurate and misleading, contained untrue statements of material facts, and omitted to state other facts necessary to make the statements made therein not misleading. The consolidated action further alleges that the defendants, including Titan, as a control person of SureBeam within the meaning of Section 20(a) of the Exchange Act, should be held liable under Section 10(b) of the Exchange Act for false and misleading statements made during the period from March 16, 2001 to August 27, 2003. On January 3, 2005, the court granted in part and denied in part motions to dismiss the operative complaint. An amended complaint was filed on March 1, 2005. Titan intends to defend the claims vigorously.

On September 17, 2004, the bankruptcy trustee in the SureBeam Corporation bankruptcy pending in the United States Bankruptcy Court for the Southern District of California brought an action in San Diego Superior Court, on behalf of the bankruptcy estate, against certain directors and current and former executive officers of Titan who served at one time as directors or officers of SureBeam. The bankruptcy trustee's complaint raises claims of breach of fiduciary duties, gross mismanagement, abuse of corporate control, waste of corporate assets, breach of the duty of loyalty, unjust enrichment, breach of fiduciary duties for insider trading and violation of the California Corporation Code. Because the defendants were named by reason of the fact that they were serving as directors or officers of SureBeam at the request of Titan, Titan is covering the costs of defense of these claims, subject to indemnification agreements and bylaw provisions. L-3 has agreed to settle the bankruptcy trustee claim for $5.0 million and is in the process of working to finalize the settlement.

19




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

Government Investigations

In October 2002, Titan received a grand jury subpoena from the Antitrust Division of the DoJ requesting the production of documents relating to information technology services performed for the Air Force at Hanscom Air Force Base in Massachusetts and Wright-Patterson Air Force Base in Ohio. Titan has been informed that other companies who have performed similar services have received subpoenas as well. A senior Titan employee has provided a handwriting exemplar in connection with this matter and three Titan employees have previously testified before the grand jury in exchange for receiving immunity. Titan is not aware of any illegal or inappropriate conduct and has been cooperating and will continue to cooperate fully with the investigation.

In March 2003, Titan received a subpoena from the Office of Inspector General for the National Aeronautics and Space Administration (NASA) seeking certain records relating to billing for labor services in connection with its contracts with NASA. Titan also received a subpoena from the Office of Inspector General for the General Services Administration (GSA) seeking similar records relating to billing for labor categories in connection with contracts with GSA. In response to these subpoenas, Titan has provided documents relating to billing for labor services in connection with government contracts. Titan has been informed by NASA that the NASA investigation is closed. Titan is not aware of any illegal or inappropriate conduct and has been cooperating and will continue to cooperate fully with the ongoing GSA investigation.

These investigations are ongoing, and we are unable to predict their outcome at this time. Any penalties imposed by the U.S. Government in these matters could have a material adverse effect on our financial position, results of operations or cash flows.

Other Legal Proceedings

Since June 9, 2004, two lawsuits have been filed alleging that Titan and other defendants either participated in, approved of, or condoned the mistreatment of prisoners by United States military officials in certain prison facilities in Iraq in violation of federal, state and international law. The first of these cases, Saleh v. Titan Corporation, No. 04-CV-1143 R, was filed in the United States District Court for the Southern District of California against The Titan Corporation, CACI International, Inc. (CACI), and its affiliates, and three individuals (one formally employed by Titan and one by a Titan subcontractor). Plaintiffs in Saleh seek class certification. The second case, Ibrahim v. Titan Corporation, No. 04-CV-1248, was filed on July 27, 2004, on behalf of five individual plaintiffs against Titan, CACI and CACI affiliates, and contains allegations similar to those in Saleh. Class certification has not been requested in Ibrahim. Titan intends to defend these lawsuits vigorously.

On January 23, 2004, Titan, together with its wholly-owned subsidiary, Titan Wireless, Inc., and Titan Wireless's wholly-owned subsidiary, Titan Africa, Inc., were named as defendants in Gonzales Communications, Inc. v. Titan Wireless, Inc., Titan Africa, Inc., The Titan Corporation, Geolution International Inc., and Mundi Development, Inc., a lawsuit filed in the U.S. District Court for the Southern District of California, No. 04-CV-00147 WQH (JMA). The complaint relates to the purchase by Gonzales Communications of equipment and related services under an equipment purchase agreement entered into with Titan Wireless in June 2001. Gonzales Communications contends that the equipment and services delivered were unsatisfactory. In the complaint, Gonzales Communications seeks direct damages in the amount of $0.9 million plus interest, representing the amount Gonzales Communications alleges to have previously paid under the agreement, and consequential damages of approximately $16.3 million. To date, Titan and its subsidiaries have not received payment in full under the agreement for the equipment and services that were delivered to Gonzales Communications. Titan has filed a counterclaim against Gonzales Communications for in excess of $1.2 million. On July 11, 2005, the court granted in part and denied in part Titan's motion for summary judgment. Titan intends to defend its position vigorously.

20




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(in thousands, except share and per share data, or as otherwise noted)

On March 14, 2005, Makram Majid Chams, a former consultant of Titan filed a claim with the Preliminary Committee on Labor Disputes Settlement in Saudi Arabia. Mr. Chams alleges that Titan wrongfully terminated his consulting agreement and that he was defamed by Titan's publication in a local newspaper of a mandatory notice that he is no longer representing Titan. The plaintiff is seeking approximately $21.9 million in damages. Titan intends to defend its position vigorously.

In December 2001, the current occupants of a property formerly owned by Titan commenced an environmental action, Lefcourt Associates, Ltd. et al. v. The Thor Corporation, et al., against Titan and others in New Jersey state court. Plaintiffs contend that Titan is liable for the damages caused by hazardous waste materials originating from adjacent land to the extent that Titan purportedly provided indemnification to plaintiffs when it sold the property to them in 1986. Discovery is in progress, and we cannot predict the outcome of this litigation at this time.

Note (11)     Guarantor Condensed Consolidating Financial Statements

As discussed in Note 8, on May 15, 2003, Titan sold $200 million of 8% senior subordinated notes in a private placement. Titan used the net proceeds from the issuance of the 8% senior subordinated notes, plus borrowings of $50 million made under its revolving credit facility and additional cash on hand, to redeem all of the $250 million of the then-outstanding 5¾% HIGH TIDES convertible preferred securities. The redemption of HIGH TIDES occurred on June 4, 2003.

Following are consolidating condensed balance sheets as of June 30, 2005 (unaudited) and December 31, 2004, and unaudited statements of operations for the three and six months ended June 30, 2005 and 2004, and statements of cash flows for the six months ended June 30, 2005 and 2004 for the Guarantor Subsidiaries and the Non-guarantor Subsidiaries as defined below. The following consolidated condensed financial statements present financial information for:

Parent: The Titan Corporation on a stand-alone basis.

Guarantor Subsidiaries: All directly and indirectly owned domestic subsidiaries of Parent other than Cayenta Inc. on a stand-alone basis.

Non-guarantor Subsidiaries: Cayenta Inc., and all direct and indirect subsidiaries of Parent that are not organized under the laws of the United States, any state of the United States or the District of Columbia and that conduct substantially all business operations outside the United States.

Reclassifications and Eliminations:     Entries that eliminate the investment in subsidiaries and intercompany balances and transactions.

The Titan Corporation and Subsidiaries:     The financial information for The Titan Corporation on a condensed consolidated basis.

The classification of operating entities within each of the columns is based on the legal status of the entity as of June 30, 2005. Accordingly, certain legal entities that existed in prior years that have been merged into Titan as of June 30, 2005 have been reclassified in the prior year condensed financial statements to conform to the current year presentation.

21




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Three Months Ended June 30, 2005
(Unaudited)
(In thousands)


  Parent Guarantor
Subsidiaries
Non-
guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Revenues $ 598,641   $ 20,031   $ 2,720   $ (1,059 $ 620,333  
Costs and expenses:                              
Cost of revenues   498,893     16,895     2,631     (974   517,445  
Selling, general and
administrative
  44,369     955     1,298         46,622  
Research and development   3,579     692             4,271  
Mergers, investigations and settlements cost   74,260                 74,260  
Total costs and expenses   621,101     18,542     3,929     (974   642,598  
Operating profit (loss)   (22,460   1,489     (1,209   (85   (22,265
Interest expense   (10,278       (85       (10,363
Interest income   239     3     1         243  
Net gain on sale of investments   1,484                 1,484  
Income (loss) from continuing operations before income taxes   (31,015   1,492     (1,293   (85   (30,901
Income tax provision (benefit)   14,753     553     (479 ))    (32   14,795  
Income (loss) from continuing operations   (45,768   939     (814   (53   (45,696
Income (loss) from discontinued operations, net of taxes   (567   2,129             1,562  
Earnings (loss) before equity in earnings of subsidiaries   (46,335   3,068     (814   (53   (44,134
Equity in losses of subsidiaries   2,254             (2,254    
Net earnings (loss) $ (44,081 $ 3,068   $ (814 $ (2,307 $ (44,134

22




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Six Months Ended June 30, 2005
(Unaudited)
(In thousands)


  Parent Guarantor
Subsidiaries
Non-
guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Revenues $ 1,140,313   $ 36,304   $ 4,661   $ (1,952 $ 1,179,326  
Costs and expenses:                              
Cost of revenues   954,356     31,056     4,323     (1,795   987,940  
Selling, general and
administrative
  83,095     2,317     1,803         87,215  
Research and development   6,938     923             7,861  
Mergers, investigations and settlements cost   80,078                 80,078  
Total costs and expenses   1,124,467     34,296     6,126     (1,795   1,163,094  
Operating profit (loss)   15,846     2,008     (1,465   (157   16,232  
Interest expense   (20,250       (85       (20,335
Interest income   526     3     3         532  
Net gain on sale of investments   1,484                 1,484  
Income (loss) from continuing operations before
income taxes
  (2,394   2,011     (1,547   (157   (2,087
Income tax provision (benefit)   25,342     744     (572   (58   25,456  
Income (loss) from continuing operations   (27,736   1,267     (975   (99   (27,543
Income (loss) from discontinued operations, net
of taxes
  (578   2,999             2,421  
Earnings (loss) before equity in earnings of subsidiaries   (28,314   4,266     (975   (99   (25,122
Equity in losses of subsidiaries   3,291             (3,291    
Net earnings (loss) $ (25,023 $ 4,266   $ (975 $ (3,390 $ (25,122

23




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Three Months Ended June, 2004
(Unaudited)
(In thousands)


  Parent Guarantor
Subsidiaries
Non-
guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Revenues $ 491,387   $ 20,235   $ 5,611   $ (2,301 $ 514,932  
Costs and expenses:                              
Cost of revenues   410,699     18,013     11,135     (1,765   438,082  
Selling, general and administrative   36,209     (4   1,938     ––     38,143  
Research and development   3,952     743     ––     ––     4,695  
Merger, investigation and settlement costs   34,423     ––     ––     ––     34,423  
Asset impairment charges   5,500     ––     9,995     ––     15,495  
Total costs and expenses   490,783     18,752     23,068     (1,765   530,838  
Operating profit (loss)   604     1,483     (17,457   (536   (15,906
Interest expense   (9,158   ––     ––     ––     (9,158
Interest income   228     ––     12     ––     240  
Income (loss) from continuing operations before income taxes   (8,326   1,483     (17,445   (536   (24,824
Income tax provision (benefit)   6,667     593     (6,978   (214   68  
Income (loss) from continuing operations   (14,993   890     (10,467   (322   (24,892
Loss from discontinued operations, net of taxes   (23,991   (16,595   (1,074   ––     (41,660
Earnings (loss) before equity in earnings of subsidiaries   (38,984   (15,705   (11,541   (322   (66,552
Equity in losses of subsidiaries   (27,246   ––     ––     27,246     ––  
Net earnings (loss) $ (66,230 $ (15,705 $ (11,541 $ 26,924   $ (66,552

24




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Six Months Ended June 30, 2004
(Unaudited)
(In thousands)


  Parent Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Revenues $ 927,320   $ 32,283   $ 13,305   $ (3,954 $ 968,954  
Costs and expenses:                              
Cost of revenues   775,597     28,757     19,368     (3,368   820,354  
Selling, general and
administrative
  69,517     1,223     3,292     ––     74,032  
Research and development   7,129     984     ––     ––     8,113  
Merger, investigation and settlement costs   52,002     ––     ––     ––     52,002  
Asset impairment charges   5,500     ––     9,995     ––     15,495  
Total costs and expenses   909,745     30,964     32,655     (3,368   969,996  
Operating profit (loss)   17,575     1,319     (19,350   (586   (1,042
Interest expense   (18,274   ––     ––     ––     (18,274
Interest income   391     ––     12     ––     403  
Gain (loss) on sale of assets   863     (300   ––     ––     563  
Income (loss) from continuing operations before income taxes   555     1,019     (19,338   (586   (18,350
Income tax provision (benefit)   10,472     408     (7,735   (234   2,911  
Income (loss) from continuing operations   (9,917   611     (11,603   (352   (21,261
Loss from discontinued operations, net of taxes   (24,158   (17,209   (865   ––     (42,232
Loss before equity in losses of
subsidiaries
  (34,075   (16,598   (12,468   (352   (63,493
Equity in losses of subsidiaries   (29,066   ––     ––     29,066     ––  
Net earnings (loss) $ (63,141 $ (16,598 $ (12,468 $ 28,714   $ (63,493

25




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Balance Sheet
As of June 30, 2005
(Unaudited)
(In thousands)


  Parent Guarantor
Subsidiaries
Non-
guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Assets                              
Current Assets:                              
Cash and cash equivalents $ 19,578   $ 2,776   $ 751   $   $ 23,105  
Accounts receivable—net   512,586     22,027     10,602         545,215  
Inventories   24,874                 24,874  
Prepaid expenses and other   31,648     338     442     (156   32,272  
Deferred income taxes   69,270                 69,270  
Current assets of discontinued operations       3,389             3,389  
Total current assets   657,956     28,530     11,795     (156   698,125  
Property and equipment—net   53,610     753     499         54,862  
Goodwill   457,803     43,160     59         501,022  
Other assets—net   55,934     4,673     82         60,689  
Deferred income taxes   49,935                 49,935  
Non-current assets of discontinued operations       17,924             17,924  
Intercompany investments, advances and liabilities —net   382,745     (230,138   (152,607        
Total assets $ 1,657,983   $ (135,098 $ (140,172 $ (156 $ 1,382,557  
Liabilities and Stockholders' Equity                              
Current Liabilities:                              
Current portion of amounts outstanding under line of
credit
$ 3,500   $   $   $   $ 3,500  
Accounts payable   107,443     4,295     164         111,902  
Current portion of long-term
debt
  36                 36  
Accrued compensation and benefits   108,817     2,633     557         112,007  
Other accrued liabilities   153,298     2,040     1,303         156,641  
Current liabilities of discontinued operations   6,163     2,038             8,201  
Total current liabilities   379,257     11,006     2,024         392,287  
Long-term portion of amounts outstanding under line of credit   382,282     987             383,269  
Senior subordinated notes   200,000                 200,000  
Other long-term debt   469                 469  
Other non-current liabilities   48,221         143         48,364  
Non-current liabilities of discontinued operations   9,395     17,924             27,319  
Stockholders' equity (deficit)   638,359     (165,015   (142,339   (156   330,849  
Total liabilities and equity $ 1,657,983   $ (135,098 $ (140,172 $ (156 $ 1,382,557  

26




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Balance Sheet
As of December 31, 2004
(In thousands)


  Parent Guarantor
Subsidiaries
Non-
guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Assets                              
Current Assets:                              
Cash and cash equivalents $ 17,364   $ (611 $ (81 $   $ 16,672  
Accounts receivable—net   484,664     15,973     14,749         515,386  
Inventories   21,336                 21,336  
Prepaid expenses and other   28,885     501     230     (577   29,039  
Deferred income taxes   95,390                 95,390  
Current assets of discontinued operations       1,665             1,665  
Total current assets   647,639     17,528     14,898     (577   679,488  
Property and equipment—net   56,243     427     872         57,542  
Goodwill   456,033     8,377     59         464,469  
Other assets—net   61,325     21     72         61,418  
Deferred income taxes   52,647                 52,647  
Non-current assets of discontinued operations       26,469         26,469        
Intercompany investments, advances and liabilities—net   321,296     (171,744   (149,552        
Total assets $ 1,595,183   $ (118,922 $ (133,651 $ (577 $ 1,342,033  
Liabilities and Stockholders' Equity                              
Current Liabilities:                              
Current portion of amounts outstanding under line of credit $ 3,500   $   $   $   $ 3,500  
Accounts payable   107,991     7,296     745     116,032        
Current portion of long-term debt   500                 500  
Accrued compensation and benefits   93,412     2,213     2,743         98,368  
Other accrued liabilities   109,536     3,339     2,293         115,168  
Current liabilities of discontinued operations   6,872     14,123             20,995  
Total current liabilities   321,811     26,971     5,781         354,563  
Long-term portion of amounts outstanding under line of credit   352,750                 352,750  
Senior subordinated debt   200,000                 200,000  
Other long-term debt   491                 491  
Other non-current liabilities   50,899         1,932         52,831  
Non-current liabilities of discontinued operations   9,931     23,387             33,318  
Stockholders' equity (deficit)   659,301     (169,280   (141,364   (577   348,080  
Total liabilities and equity $ 1,595,183   $ (118,922 $ (133,651 $ (577 $ 1,342,033  

27




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Cash Flows
For the Six Months Ended June 30, 2005
(Unaudited)
(In thousands)


  Parent Guarantor
Subsidiaries
Non-
guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Cash Flows from Operating Activities:                              
Income (loss) from continuing operations $ (27,471 $ 1,267   $ (975 $ (364 $ (27,543
Adjustments to reconcile income (loss) from continuing operations to net cash used for continuing operations   52,901     (8,297   (1,390   364     43,578  
Net cash used by continuing operations   25,430     (7,030   (2,365       16,035  
Income (loss) from discontinued operations   (578   2,999             2,421  
Adjustments to reconcile income (loss) from discontinued operations to cash used for discontinued operations   4,541     (10,727           (6,186
Net cash provided (used) by discontinued operations   3,963     (7,728           (3,765
Net cash used by operating activities   29,393     (14,758   (2,365       12,270  
Cash Flows from Investing Activities:                              
Capital expenditures   (3,841   (230   (87       (4,158
Acquisition of business, net of cash acquired   (39,844                 (39,844
Proceeds from sale of investments and net assets   4,115                 4,115  
Earnout payment related to prior year acquisition   (658               (658
Proceeds (payments) on intercompany investments, advances and liabilities   (21,604   18,549     3,055          
Other   (295       229         (66
Net cash provided (used ) by investing activities   (62,127   18,319     3,197         (40,611
Cash Flows from Financing Activities:                              
Retirement of debt   (486               (486
Additions to debt   30,519                 30,519  
Proceeds from exercise of stock options and other   4,757                 4,757  
Other   158     (174           (16
Net cash provided (used) by financing activities   34,948     (174           34,774  
Net decrease in cash and cash equivalents   2,214     3,387     832         6,433  
Cash and cash equivalents at beginning of year   17,364     (611   (81       16,672  
Cash and cash equivalents at end of period $ 19,578   $ 2,776   $ 751   $   $ 23,105  

28




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Cash Flows
For the Six Months Ended June 30, 2004
(Unaudited)
(In thousands)


  Parent Guarantor
Subsidiaries
Non-
guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Cash Flows from Operating Activities:                              
Income (loss) from continuing operations $ (9,917 $ 611   $ (11,603 $ (352 $ (21,261
Adjustments to reconcile income (loss) from continuing operations to net cash used for continuing operations   (18,665   (7,326   10,980     352     (14,659
Net cash used for continuing operations   (28,582   (6,715   (623       (35,920
Loss from discontinued operations   (24,158   (17,209   (865       (42,232
Adjustments to reconcile loss from discontinued operations to cash provided by (used for) discontinued operations   16,402     11,753     15,209         43,364  
Net cash provided by (used for) discontinued operations   (7,756   (5,456   14,344         1.132  
Net cash provided by (used for) operating activities   (36,338   (12,171   13,721         (34,788
Cash Flows from Investing Activities:                              
Capital expenditures   (6,494   (10,001   (281       (16,776
Proceeds from sale of investments and net assets   2,494     386             2,880  
Earnout payment related to prior year acquisition   (2,460               (2,460
Other investments   (1,243               (1,243
Proceeds (payments) on intercompany investments, advances and liabilities   (6,078   22,072     (15,994        
Other   706     27     370         1,103  
Net cash provided by (used for) investing activities   (13,075   12,484     (15,905       (16,496
Cash Flows from Financing Activities:                              
Additions to debt   49,125                 49,125  
Retirement of debt   (241               (241
Preferred stock redemption   (12,518               (12,518
Proceeds from exercise of stock options and other   13,566                 13,566  
Dividends paid   (190               (190
Other   (35   (174   (11       (220
Net cash provided by (used for) financing activities   49,707     (174   (11       49,522  
Effect of exchange rate changes on cash           215         215  
Net increase (decrease) in cash and cash equivalents   294     139     (1,980       (1,547
Cash and cash equivalents at beginning of year   25,950     (941   1,965         26,974  
Cash and cash equivalents at end of
period
$ 26,244   $ (802 $ (15 $   $ 25,427  

29




EX-99.2 5 file004.htm FINANCIAL STATEMENTS 12/31/04

Exhibit 99.2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
The Titan Corporation:

We have audited the accompanying consolidated balance sheets of The Titan Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audit of the consolidated financial statements, we have also audited the valuation and qualifying accounts financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Titan Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 3 to the consolidated financial statements, the Company adopted the provisions of SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets" on January 1, 2002 and, accordingly, has changed its method of accounting for goodwill.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Titan Corporation's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

San Diego, California
March 16, 2005

1




THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)


  For the Years Ended December 31,
  2004 2003 2002
Revenues $ 2,046,525   $ 1,756,206   $ 1,369,729  
Costs and expenses:                  
Cost of revenues   1,729,963     1,464,709     1,113,273  
Selling, general and administrative   155,082     153,609     172,157  
Research and development   15,106     10,422     7,756  
Exit and restructuring charges and other (Note 6)           53,317  
Merger investigation and settlement costs   59,932     5,247      
Asset impairment charges (Note 5)   15,495     15,757      
Total costs and expenses   1,975,578     1,649,744     1,346,503  
Operating profit   70,947     106,462     23,226  
Interest expense   (37,684   (34,489   (32,553
Interest income   758     2,326     1,708  
Debt extinguishment costs       (12,423   (9,435
Loss on investments   (3,867   (6,154    
Net gain on sale of assets   563          
Income (loss) from continuing operations before income taxes, and cumulative effect of change in accounting principle   30,717     55,722     (17,054
Income tax provision (benefit)   16,953     23,813     (5,603
Income (loss) from continuing operations before cumulative effect of change in accounting principle   13,764     31,909     (11,451
Loss from discontinued operations, net of tax benefit of ($19,395), ($17,069), and ($110,127) (Note 7)   (52,161   (2,812   (219,899
Income (loss) before cumulative effect of change in accounting principle   (38,397   29,097     (231,350
Cumulative effect of change in accounting principle, net of tax benefit (Notes 3 and 7)           (40,111
Net income (loss)   (38,397   29,097     (271,461
Dividend requirements on preferred stock   (190   (688   (689
Net income (loss) applicable to common stock $ (38,587 $ 28,409   $ (272,150
Basic earnings (loss) per share:                  
Income (loss) from continuing operations before cumulative effect of change in accounting principle $ 0.16   $ 0.39   $ (0.16
Loss from discontinued operations, net of taxes   (0.62   (0.03   (2.89
Cumulative effect of change in accounting principle,
net of taxes
          (0.53
Net income (loss) $ (0.46 $ 0.36   $ (3.58
Weighted average shares   83,902     79,957     75,988  
Diluted earnings (loss) per share:                  
Income (loss) from continuing operations before cumulative effect of change in accounting principle $ 0.16   $ 0.37   $ (0.16
Loss from discontinued operations, net of taxes   (0.60   (0.03   (2.89
Cumulative effect of change in accounting principle, net of taxes           (0.53
Net income (loss) $ (0.44 $ 0.34   $ (3.58
Weighted average shares   86,962     83,398     75,988  

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

2




THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)


  As of December 31,
  2004 2003
Assets            
Current Assets:            
Cash and cash equivalents $ 16,672   $ 26,974  
Accounts receivable—net   515,386     381,265  
Inventories   21,336     21,430  
Prepaid expenses and other   29,039     23,702  
Deferred income taxes   95,390     91,272  
Current assets of discontinued operations (Note 7)   1,665     37,477  
Total current assets   679,488     582,120  
Property and equipment—net   57,542     52,508  
Goodwill   464,469     462,909  
Intangible assets—net   19,819     29,949  
Other assets—net   41,599     36,176  
Deferred income taxes   68,380     62,781  
Non-current assets of discontinued operations (Note 7)   26,469     64,192  
Total assets $ 1,357,766   $ 1,290,635  
Liabilities and Stockholders' Equity            
Current Liabilities:            
Current portion of amounts outstanding under line of credit $ 3,500   $ 3,500  
Accounts payable   116,032     90,086  
Current portion of long-term debt   500     863  
Accrued compensation and benefits   98,368     81,332  
Other accrued liabilities   115,168     93,129  
Current liabilities of discontinued operations (Note 7)   20,995     22,681  
Total current liabilities   354,563     291,591  
Long-term portion of amounts outstanding under line of credit   352,750     341,250  
Senior subordinated notes   200,000     200,000  
Other long-term debt   491     988  
Other non-current liabilities   68,564     50,352  
Non-current liabilities of discontinued operations (Note 7)   33,318     35,045  
Commitments and contingencies (Notes 4, 5, 6 and 11)            
Stockholders' Equity:            
Preferred stock: $1 par value, authorized 5,000,000 shares:            
Cumulative convertible, $13,700 liquidation preference,
designated 1,068,102 shares: None and 686,829 shares issued and outstanding
      687  
Series A junior participating, designated 1,000,000 authorized shares: None issued            
Common stock: $.01 par value, authorized 200,000,000 shares: 84,779,939 and 82,182,250 shares issued and outstanding   848     822  
Capital in excess of par value   684,934     670,733  
Deferred compensation   (53   (1,584
Accumulated deficit   (336,618   (298,221
Accumulated other comprehensive loss       (215
Treasury stock (278,652 and 265,124 shares), at cost   (1,031   (813
Total stockholders' equity   348,080     371,409  
Total liabilities and stockholders' equity $ 1,357,766   $ 1,290,635  

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

3




THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)


  For the Years Ended December 31,
  2004 2003 2002
Cash Flows from Operating Activities:                  
Income (loss) from continuing operations before cumulative effect of change in accounting principle $ 13,764   $ 31,909   $ (11,451
Adjustments to reconcile income (loss) from continuing operations to net cash provided by continuing operations, net of effects of businesses acquired and sold:                  
Debt extinguishment costs       12,423     9,435  
Loss on investments   3,867     6,154      
Depreciation and amortization   15,916     19,222     19,895  
Write-offs due to asset impairments   15,495     15,757      
Deferred income taxes and other   25,484     26,240     20,295  
Deferred compensation charges   1,531     7,207     27,835  
Changes in operating assets and liabilities, net of effects of businesses acquired and sold:                  
Accounts receivable   (137,480   (74,768   59,156  
Inventories   1,075     3,026     (4,727
Prepaid expenses and other assets   (10,925   (9,206   (7,173
Accounts payable   26,114     5,462     9,676  
Accrued compensation and benefits   18,422     21,209     (4,812
Accrual for settlement charge   25,500     3,000      
Other liabilities   6,492     13,733     41,744  
Net cash provided by continuing operations   5,255     81,368     159,873  
Loss from discontinued operations   (52,161   (2,812   (219,899
Holdback payment related to prior year acquisition (Note 8)       (2,000    
Proceeds from divesture of businesses (Note 7)   6,623     2,700      
Deferred compensation charge attributable to discontinued operations           7,780  
Issuance of stock in subsidiaries           172  
Minority interest attributable to discontinued operations           (130
Changes in net assets and liabilities of discontinued operations   39,542     (4,754   70,535  
Net cash used for discontinued operations   (5,996   (6,866   (141,542
Net cash provided by (used for) operating activities   (741   74,502     18,331  
Cash Flows from Investing Activities:                  
Capital expenditures   (22,591   (13,799   (23,305
Acquisition of businesses, net of cash acquired   (3,460   (14,089   27,409  
Capitalized software development costs           (1,532
Proceeds from sales of investments and net assets   2,880         6,917  
Advances to SureBeam on line of credit           (25,000
Other investments   (1,243   (1,615   (6,789
Other   2,685     457     7,588  
Net cash used for investing activities   (21,729   (29,046   (14,712
Cash Flows from Financing Activities:                  
Extinguishment of HIGH TIDES       (250,000    
Issuance of senior subordinated notes       200,000      
Other debt reductions   (860   (4,541   (4,647
Other debt additions   11,500         18,250  
Preferred stock redemption   (12,518        
Deferred debt issuance costs   (500   (8,924   (8,908
Debt extinguishment costs       (4,352    
Proceeds from stock issuances   14,619     15,491     8,566  
Issuance of stock by subsidiaries           19  
Dividends paid   (190   (688   (689
Decrease (increase) in restricted cash       394     (394
Other   (98   98     (54
Net cash provided by (used for) financing activities   11,953     (52,522   12,143  
Effect of exchange rate changes on cash   215     (83   (260
Net increase (decrease) in cash and cash equivalents   (10,302   (7,149   15,502  
Cash and cash equivalents at beginning of year   26,974     34,123     18,621  
Cash and cash equivalents at end of year $ 16,672   $ 26,974   $ 34,123  

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

4




THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands of dollars, except per share data)


  Cumulative
Convertible
Preferred
Stock
Common
Stock
Capital in
Excess of
Par Value
Deferred
Compensation
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Balances at December 31, 2001 $ 690   $ 701   $ 586,802   $ (34,519 $ (55,857 $ 128   $ (987 $ 496,958  
Spin-off of SureBeam               (124,722   19,318                       (105,404
Stock issued for acquisitions         68     137,431                       312     137,811  
Exercise of stock options and other         10     8,556                             8,566  
Shares contributed to employee benefit plans         4     7,519                       6     7,529  
Conversion of preferred stock   (2         2                              
Deferred compensation, related to the issuance of stock options               29,834     (29,834                      
Write-off of deferred compensation related to discontinued operations               (629   629                        
Amortization of deferred compensation                     35,615                       35,615  
Income tax benefit from employee stock transactions               3,648                             3,648  
Dividends on preferred stock—Cumulative Convertible, $1.00 per share               (689                           (689
Foreign currency translation adjustment                                 (260         (260
Net loss                           (271,461               (271,461
Balances at December 31, 2002   688     783     647,752     (8,791   (327,318   (132   (669   312,313  
Exercise of stock options and other         27     15,608                       (144   15,491  
Issuance of stock for acquisition (Note 4)         3     3,256                             3,259  
Return of shares related to acquisition (Note 8)               (2,000                           (2,000
Amortization of deferred compensation                     7,207                       7,207  
Shares contributed to employee benefit plans         9     6,518                             6,527  
Foreign currency translation adjustment                                 (83         (83
Conversion of preferred stock   (1         1                              
Income tax benefit from employee stock transactions               286                             286  
Dividends on preferred stock—Cumulative Convertible, $1.00 per share               (688                           (688
Net income                           29,097                 29,097  
Balances at December 31, 2003   687     822     670,733     (1,584   (298,221   (215   (813   371,409  
Exercise of stock options and other         23     14,814                       (218   14,619  
Shares contributed to employee benefit plans         3     2,715                             2,718  
Redemption of preferred stock   (626         (11,892                           (12,518
Conversion of preferred stock   (61         61                              
Amortization of deferred compensation                     1,531                       1,531  
Foreign currency translation adjustment                                 215           215  
Income tax benefit from employee stock transactions               8,693                             8,693  
Dividends on preferred stock—Cumulative Convertible, $1.00 per share               (190                           (190
Net loss                           (38,397               (38,397
Balances at December 31, 2004 $   $ 848   $ 684,934   $ (53 $ (336,618 $   $ (1,031 $ 348,080  

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

5




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Note 1.    Nature of Operations

The Titan Corporation (Titan) is a leading provider of comprehensive information and communications systems solutions and services to the Department of Defense, the Department of Homeland Security, and intelligence and other key government agencies. These systems, solutions, and services include research and development, design, assembly, installation, integration, test and evaluation, deployment, logistics and operations support, maintenance, and training. Systems and products Titan provides to military and government agencies include transformational weapons systems, sophisticated satellite communications systems, antennas/telemetry systems, tactical radios, signals intelligence systems, encryption devices, classified systems, and complex computer-based information systems for information processing, information fusion, dissemination, and data mining.

Titan's services include system procurement selection and acquisition management services, program management, systems engineering and integration for mission-critical defense platforms and communications systems, enterprise information technology network design, integration, deployment, and operations support, translation and interpreter services, military and first responder training and situational exercises and evaluation, and test, modeling, and continuity of operations analysis for blast, nuclear, electro-magnetic, and chemical/biological threats.

Titan applies its core capabilities to provide technology, products, and services with a focus in four often overlapping and synergetic market areas: C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance), Transformational Military Programs, Government Enterprise Information Technology, and the War on Terrorism/Homeland Security.

Prior to the discontinuance of certain operations in 2002, Titan grouped its businesses into five business segments—Titan Systems, Titan Wireless, Software Systems (including Cayenta), Titan Technologies and SureBeam. Titan is no longer reporting its results of operations by these segments; however, reference may be made to these segments in discussions of historical information (see Note 8). In accordance with Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," substantially all of Titan's operations are aggregated into one reportable segment given the similarities of economic characteristics between the operations and the common nature of the products, services and customers.

Note 2.    Merger, Investigation and Settlement Costs

On June 26, 2004, Lockheed Martin Corporation terminated the merger agreement pursuant to which Lockheed Martin was to have acquired Titan. The merger agreement was entered into in September 2003 and amended in March 2004 and April 2004 to provide additional time for Titan to resolve the Securities and Exchange Commission (SEC) and Department of Justice (DoJ) investigations under the Foreign Corrupt Practices Act (FCPA) (see Note 11).

In the year ended December 31, 2004, Titan incurred approximately $59.9 million in settlement provision, legal, investment banking, accounting, printing and other professional fees and costs related to the government investigations and the terminated merger with Lockheed Martin, which are reflected in merger, investigation and settlement costs in the accompanying consolidated statements of operations. The merger-related costs include the costs of an exchange offer and consent solicitation for Titan's senior subordinated notes and administrative costs associated with the redemption of Titan's preferred stock (see Note 12), both of which were conditions to close the proposed merger. The investigation-related costs which approximated $25.3 million in the year ended December 31, 2004, include the costs associated with the comprehensive internal review conducted by Titan to evaluate whether payments involving international consultants for Titan or its subsidiaries were made in violation of applicable law. The legal, accounting and other professional fees incurred also supported the related inquiry by the DoJ and the investigation by the SEC. Refer to Note 10 for a discussion of the impact of the terminated merger on Titan's outstanding debt.

6




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

In the year ended December 31, 2004, Titan recorded an additional provision of $25.5 million for its revised estimate of anticipated settlement costs related to the government FCPA investigations. Titan had previously recorded $3.0 million as of December 31, 2003, for resolution of this matter. Titan's $28.5 million provision does not include investigation related legal costs being incurred to reach resolution of the FCPA matter, as those costs are expensed as incurred each period. On March 1, 2005, in connection with the FCPA settlement, Titan made total payments of $28.5 million, the same figure it reserved for this purpose.

Note 3.    Significant Accounting Policies

Principles of Consolidation.    The consolidated financial statements include the accounts of Titan and its subsidiaries. All significant intercompany transactions and balances have been eliminated. From time to time, Titan makes investments in joint ventures which may involve international locations and operations. Management evaluates its investment in each joint venture on an individual basis for purposes of determining whether or not consolidation is appropriate. Titan also considers whether its investments are variable interest entities in accordance with Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN 46). Investments in such ventures are generally consolidated in instances where Titan retains control through decision-making ability and generally a greater than 50% ownership interest. In the absence of such factors, Titan generally accounts for these investments under the cost or equity method, depending upon management's evaluation of Titan's ability to exercise significant influence or control.

Reclassifications.    Certain reclassifications have been made to prior year presentations to conform to the 2004 presentation.

Stock-Based Compensation.    Titan has elected to adopt the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Accordingly, Titan accounts for its stock-based compensation plans under the provisions of Accounting Principles Board (APB) No. 25. Titan also follows the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," which amends SFAS No. 123.

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

7




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)


  2004 2003 2002
Net income (loss), as reported $(38,397) $29,097 $(271,461)
Add: Total stock-based employee compensation expense in reported net income (loss), net of related tax effects 965 4,324 5,759
Less: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (8,169) (8,812) (11,334)
Net income (loss), pro forma $(45,601) $24,609 $(277,036)
Earnings per share:      
Basic as reported $(0.46) $0.36 $(3.58)
Basic pro forma $(0.55) $0.30 $(3.66)
Diluted as reported $(0.44) $0.34 $(3.58)
Diluted pro forma $(0.53) $0.29 $(3.66)

Stock-based compensation expense included in income (loss) as reported results primarily from deferred compensation amortization (see Note 13).

Minority Interest in Subsidiaries.    Minority interest in subsidiaries consists primarily of equity securities issued in 2000 by Titan's subsidiary, Cayenta, Inc., which was the operations of the Software Systems business, which primarily included certain components which were discontinued in March 2002. Titan owned substantially all of the voting equity of Cayenta both before and after the transaction. Titan records minority interest to reflect the portion of the earnings or losses of majority-owned operations which are applicable to the minority interest partners. The minority interest percentages of Cayenta were approximately, 23% as of December 31, 2002 and 23% as of December 31, 2003. The minority interest portion of Cayenta's losses from the discontinued components are reflected in the loss from discontinued operations. In addition, the minority interest portion of the continuing components of Cayenta are reflected in continuing operations.

Financial Instruments.    The fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, line of credit and other long-term debt approximate the carrying amounts due to their short maturities or variable interests. The estimated fair value of Titan's senior subordinated notes at December 31, 2004, approximate $214 million compared with the carrying value of $200 million.

Foreign Currency Translation.    The financial statements of certain of Titan's foreign subsidiaries are measured using the local functional currency. Assets and liabilities of these subsidiaries are translated at exchange rates in effect as of the balance sheet date. Revenues and expenses are translated at average rates of exchange in effect during the year. The resulting cumulative translation adjustments have been recorded in other comprehensive income within stockholders' equity. Foreign currency transaction gains and losses are included in consolidated net income.

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

Revenue Recognition.    A majority of Titan's revenue is derived from products manufactured and services performed under cost-reimbursable, time-and-materials, and fixed-price contracts. Cost reimbursable contracts for the government provide for reimbursement of costs plus the payment of a fee. Under fixed-price contracts, the Company agrees to perform certain work for a fixed price. Under time and materials contracts, the Company is reimbursed for labor hours at negotiated hourly billing

8




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

rates and is reimbursed for travel and other direct expenses at actual costs plus applied general and administrative expense. Titan's contracts with government customers may use various cost-type contracts. They include cost-plus fixed fee, cost-plus award fee, cost-plus incentive fee with incentives based upon both cost and/or performance, and cost sharing contracts. Under fixed-price contracts, revenues are generally recognized as services are performed, using the percentage-of-completion method, applying the cost-to-cost or units of delivery method, in accordance with Accounting Research Bulletin No. 45 and American Institute of Certified Public Accountants (AICPA) Statement of Position 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" (SOP 81-1). Total estimated costs are based on management's assessment of costs to complete the project based upon evaluation of the level of work achieved and costs expended to date. Estimated contract losses are fully charged to operations when identified. Billings in excess of costs incurred are recorded as reductions in accounts receivable in the accompanying consolidated balance sheet. For award and incentive fee type contracts, the Company recognizes the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as prior award experience and communications with the customer regarding performance, including any interim performance evaluations rendered by the customer.

As most of Titan's revenue recognition practices are in accordance with SOP 81-1 and AICPA Statement of Position 97-2 "Software Revenue Recognition" (SOP 97-2), the adoption of Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" in 2000 had no material impact on the consolidated financial statements.

Deferred Revenues.    Included in other accrued liabilities are deferred revenues which consist principally of customer deposits whereby Titan receives payment in advance of performing the service.

Cash Equivalents.    All highly liquid investments purchased with an original maturity of three months or less are classified as cash equivalents.

Unbilled Accounts Receivable.    Unbilled accounts receivable are included in accounts receivable and include work-in-process which will be billed in accordance with contract terms and delivery schedules, as well as amounts billable upon final execution of contracts, contract completion, milestones or completion of rate negotiations. Generally, unbilled accounts receivable are expected to be billed and collected within one year. Payments to Titan for performance on certain U.S. government contracts are subject to audit by the Defense Contract Audit Agency. Revenues have been recorded at amounts expected to be realized upon final settlement. See Note 8 to the consolidated financial statements.

Concentration of Risk.    Sales to the U.S. government, including both defense and non-defense agencies, and sales as a subcontractor as well as direct sales, aggregated approximately $2.0 billion in 2004, $1.7 billion in 2003, and $1.3 billion in 2002. With the exception of Titan's linguist contract with the U.S. Army's Intelligence and Security Command and the contract to provide enterprise information technology support for the U.S. Special Operations Command which contributed 12.1% and 3.6% of total revenues for 2004, respectively, and 7.6% and 3.5% of total revenues for 2003, respectively, no other single contract accounted for more than 3% of total revenue for 2004. Substantially all of Titan's operations are located in the United States. Export and foreign revenues amounted to approximately $27.0 million, $29.2 million and $18.7 million, in 2004, 2003 and 2002, respectively, related primarily to customers in Europe, the Middle East, Africa and Asia. Sales of approximately $12 million, or 43.7% of total foreign revenues, and approximately $10 million, or 36.2% of total foreign revenues, were related to contracts with government customers in the United Kingdom, in 2004 and 2003, respectively.

A majority of Titan's total revenues are from U.S. government contracts. Any cancellations or modifications of its significant contracts or subcontracts, or failure by the U.S. government to exercise an option period relating to those contracts or subcontracts, could adversely affect Titan's financial

9




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

condition and results of operations in the short- and long-term. A significant and continuing decline in U.S. defense and other federal agency budgets also may negatively impact its business. Although Titan bids for and is awarded long-term U.S. government contracts and subcontracts, the U.S. government only funds these contracts on an annual basis, and many of its contracts and subcontracts include option years. The U.S. government may cancel these contracts at any time without penalty or may change its requirements, programs or contract budget, and generally has the right not to exercise option periods. The U.S. Congress may decline to appropriate funds needed to complete the contracts awarded to Titan or the prime contractor. On Titan's subcontracts, Titan generally does not control the prime contractor's allocation of resources. Titan also depends upon the prime contractor to perform its obligations on the primary government contract. In addition to contract cancellations and declines in agency budgets, Titan's financial condition and results of operations may be adversely affected by:

•  budgetary constraints affecting U.S. government spending generally, and changes in fiscal policy or available funding;
•  curtailment of the U.S. government's use of technology services providers;
•  the adoption of new laws or regulations;
•  U.S. government facilities closures or agency realignments;
•  competition and consolidation in Titan's business areas; and
•  general economic conditions.

These or other factors could cause government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts or not to exercise options to renew contracts. Any of these actions could have a material adverse effect on Titan's business, financial condition and results of operations.

Inventories.    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) and weighted average methods, or market. Titan periodically evaluates on-hand stock and makes appropriate dispositions of any stock deemed excess or obsolete.

Property and Equipment.    Property and equipment are stated at cost. Depreciation is provided using the straight-line method, with estimated useful lives of 5 to 30 years for buildings, 2 to 15 years for leasehold improvements, representing the lesser of the useful life of the improvement or the lease term, and 3 to 15 years for machinery and equipment and furniture and fixtures. In Titan's discontinued medical sterilization business, certain machinery and equipment is depreciated based on units of production.

Goodwill and Other Intangible Assets.    Goodwill represents the excess of costs over fair value of assets of businesses acquired. Effective January 1, 2002, Titan adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets."

SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level at least annually, utilizing a two step methodology. The initial step requires Titan to assess whether indications

10




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

of impairment exist. If indications of impairment are determined to exist, the second step of measuring impairment is performed, wherein the fair value of the relevant reporting unit is compared to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the reporting unit is impaired.

Titan performs its annual testing for impairment of goodwill and other intangible assets in connection with the preparation of its annual financial statements. Based on testing performed as of December 31, 2004, there were no indicators of impairment.

Initial Adoption

In connection with the initial adoption of this standard as of January 1, 2002, during the first quarter of 2002, Titan's independent valuation consultant, Bearing Point, completed step one of the test for impairment, which indicated that the carrying values of certain reporting units exceeded their estimated fair values, as determined utilizing various evaluation techniques including discounted cash flow and comparative market analysis. Thereafter, given the indication of a potential impairment, Titan completed step two of the test. Based on that analysis, a transitional impairment loss of $40.1 million, which was net of a $10.0 million tax benefit, was recognized in the first quarter of 2002 as the cumulative effect of an accounting change. The impairment charge resulted from a change in the criteria for the measurement of the impairment loss from an undiscounted cash flow method, as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," to an estimated fair value analysis as required by SFAS No. 142. The gross $50.1 million impairment charge recorded in the first quarter of 2002 was comprised of approximately $27.5 million in certain components of our Cayenta business, approximately $14.9 million in our AverCom business, which was previously reported in our Titan Technologies segment, both attributable to lower valuations and weakened outlook in commercial IT services, and approximately $7.7 million in our Titan Wireless business. The entire $50.1 million charge was related to discontinued businesses; approximately $42.4 million of this charge pertained to businesses that were discontinued by Titan on March 1, 2002 with the remaining charge of $7.7 million related to Titan's long distance telecommunications business that was discontinued in the third quarter of 2002.

All other intangible assets were amortized on a straight-line basis from 1 to 10 years.

Impairment Subsequent to Initial Adoption

In the second quarter of 2004, approximately $17.3 million of goodwill and purchased intangibles was impaired in connection with Titan's board of directors' decision to divest Datron World Communications (Datron World). The measurement of the impairment was based upon indications of fair value determined by offers from potential buyers.

As a result of Titan's board of directors' decision in July 2002 to exit its long distance telecommunications business, and the deterioration in pricing and valuations in the telecommunications industry, Titan recorded an additional impairment charge in 2002 of $74.8 million of goodwill in its international telecommunications business, Titan Wireless, based upon indications of fair value as determined by recent sales offers from potential buyers.

In connection with Titan's board of directors' decision in the third quarter of 2002 to divest its LinCom Wireless business, Titan recorded a $2.7 million impairment of goodwill in the third quarter of 2002 based upon indications of fair value as determined by offers from potential buyers. In October 2002, Titan shut down the operations of LinCom Wireless.

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

11




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

All impairment charges recognized subsequent to our initial adoption of SFAS No. 142 have been reported in the loss from discontinued operations, as all impairments were incurred in businesses held for sale or disposed of during both 2004 and 2002 (see Note 7).

Impairment of Investments in Non-marketable Securities.    Periodically, Titan reviews for possible impairments its non-marketable securities, which include its investments in emerging businesses, which are accounted for under the cost method. Whenever events or changes in circumstances indicate that the carrying amount of an asset is other than temporarily impaired, asset values are adjusted accordingly based on a write down of cost to estimated fair value. In evaluating whether a loss in the carrying value of an investment is other than temporary, Titan evaluates the financial condition and near-term prospects of the investee and the region and industry of the investee, including any specific events which may influence the operations of the investee such as changes in technology, and its overall investment intent. Titan will generally deem an impairment to be other than temporary if its cost basis has exceeded its fair value for a period of six to nine months. If a loss in the carrying value of an investment is deemed to be other than temporary, Titan recognizes such loss based on a write down of cost to realizable value. During 2004, Titan recorded impairments on investments totaling approximately $3.9 million, which was principally comprised of a write-off of its investment in Etenna Corporation.

Impairment of Long-Lived Assets.    SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. Titan adopted SFAS No. 144 on January 1, 2002. Refer to Note 7 for discussion of operations discontinued since Titan's adoption of SFAS No. 144.

In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value.

Income Taxes.    Titan accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes," 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 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.

Per Share Information.    Titan computes earnings per share based on the provisions of SFAS No. 128, "Earnings Per Share."

The following data summarize information relating to the per share computations for continuing operations before extraordinary loss and cumulative effect of change in accounting principle:

12




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)


  For the Year Ended December 31, 2004
  Income (Loss)
(Numerator)
Shares (000's)
(Denominator)
Per-Share
Amounts
Income from continuing operations   13,764              
Less preferred stock dividends   (190            
Basic EPS:                  
Income from continuing operations available to common stockholders   13,574     83,902     0.16  
Effect of dilutive securities: Stock options and warrants       3,060      
Diluted EPS:                  
Income from continuing operations available to common stockholders   13,574     86,962     0.16  

  For the Year Ended December 31, 2003
  Income (Loss)
(Numerator)
Shares (000's)
(Denominator)
Per-Share
Amounts
Income from continuing operations   31,909              
Less preferred stock dividends   (688            
Basic EPS:                  
Income from continuing operations available to common stockholders   31,221     79,957     0.39  
Effect of dilutive securities:                  
Stock options and warrants       3,441     (0.02
Diluted EPS:                  
Income from continuing operations available to common stockholders   31,221     83,398     0.37  

  For the Year Ended December 31, 2002
  Income (Loss)
(Numerator)
Shares (000's)
(Denominator)
Per-Share
Amounts
Loss from continuing operations   (11,451            
Less preferred stock dividends   (689            
Basic and Diluted EPS:                  
Loss from continuing operations available to common stockholders   (12,140   75,988     (0.16

13




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Note 3.    Significant Accounting Policies

In the year ended December 31, 2004, options and warrants to purchase approximately 1,026,800 shares of common stock at prices ranging from $17.05 to $29.74 per share were not included in the computation of diluted EPS, as their effect was anti-dilutive due to the exercise price being higher than Titan's average market price in the period.

In the year ended December 31, 2003, options and warrants to purchase approximately 2,531,700 shares of common stock at prices ranging from $13.85 to $29.74 per share were not included in the computation of diluted EPS, as their effect was anti-dilutive due to the exercise price being higher than Titan's average market price in the period.

In the year ended December 31, 2002, options to purchase approximately 3,357,700 shares of common stock at exercise prices ranging from $1.04 to $13.09 per share were not included in the computation of diluted EPS, as their effect was anti-dilutive due to the loss from continuing operations before cumulative effect of change in accounting principle. In the year ended December 31, 2002, options to purchase approximately 3,963,900 shares of common stock at prices ranging from $13.18 to $29.74 were not included in the computation of diluted EPS, as their effect was anti-dilutive due to the exercise price being higher than Titan's average market price in the period.

In 2003 and 2002, approximately 537,300 and 538,400 shares of common stock, respectively, that could result from the conversion of cumulative convertible preferred stock were not included in the computation of dilutive EPS, as the effect would have been anti-dilutive on the results of continuing operations. The preferred stock was redeemed on March 15, 2004 (see Note 12). Similarly, in 2003 and 2002, approximately 2,859,100 and 6,776,500 shares, respectively, that could result from the conversion of the remarketable term income deferrable equity securities (HIGH TIDES) were not included in the computation of diluted EPS. The change in potential dilution from 2002 to 2003 for the HIGH TIDES is due to their redemption on June 4, 2003.

Comprehensive Income.    Comprehensive income represents all changes in equity of an enterprise that result from transactions and other economic events of 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, 2004, Titan did not have any other comprehensive income items. During the years ended December 31, 2003 and 2002, Titan's only element of other comprehensive income resulted from foreign currency translation adjustments, which are reflected in the consolidated statements of changes in stockholders' equity as foreign currency translation adjustments within accumulated other comprehensive income.

New Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R (SFAS 123R), "Share-Based payment", which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statements whereas under the provisions of SFAS No. 123, Titan has adopted the disclosure only provision. With limited exception, the amount of compensation cost is measured based on the grant date fair value of the equity or liability instruments used. SFAS 123R requires liability awards to be re-measured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. SFAS123R is effective beginning the first interim or annual reporting period that begins after June 15, 2005. Titan plans to adopt the provisions of SFAS 123R prospectively during the third quarter of 2005. Titan is currently evaluating the effect of adopting this pronouncement and the ultimate impact of adopting SFAS 123R is not yet known.

14




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, "Revenue Recognition" (SAB No. 104), which codifies, revises and rescinds certain sections of SAB No. 101, "Revenue Recognition", in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the consolidated financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133 by requiring that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, and must be applied prospectively. The adoption of SFAS No. 149 had no effect on the consolidated financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Titan adopted SFAS No. 150 effective July 1, 2003, and the adoption did not have a material impact on the consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which addresses the consolidation of certain entities (variable interest entities, or VIEs) in which an enterprise has a controlling financial interest through other than voting interests. FIN 46 requires that a variable interest entity be consolidated by the holder of the majority of the expected risks and rewards associated with the activities of the variable interest entity. FIN 46 was effective for VIEs entered into prior to February 1, 2003 in periods beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on our consolidated financial condition or results of operations. In January 2004, the FASB issued a revision to FIN 46 (FIN 46R), to clarify some requirements and add new scope exceptions. The revised guidance is effective for the first reporting period beginning after December 15, 2003. The adoption of the provisions of FIN 46R did not have a material impact on the consolidated financial condition or results of operations.

In November 2002, the FASB's Emerging Issues Task Force (EITF) issued EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses how to determine whether a revenue arrangement involving multiple deliverables contains more than one unit of accounting for the purposes of revenue recognition and how the revenue arrangement consideration should be measured and allocated to the separate units of accounting. EITF Issue No. 00-21 applies to revenue arrangements entered into after June 15, 2003. The adoption of this statement did not have a material impact on the consolidated financial condition or results of operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are

15




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on Titan's financial statements. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The standard replaces the existing guidance provided by the FASB's Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Titan did not initiate any activities in 2003 or 2004 that would be included within the scope of this standard.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002", which was effective for fiscal years beginning after May 15, 2002. SFAS No. 145 rescinded SFAS No. 4 and SFAS No. 64, which required that all gains and losses from extinguishment of debt be aggregated, and if material, classified as an extraordinary item. As a result of changes in the criteria, gains and losses from debt extinguishment are to be classified as extraordinary only if they meet the criteria set forth in Accounting Principles Board (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." In accordance with SFAS 145 and APB 30, the deferred debt issuance costs and other extinguishment costs related to the HIGH TIDES were expensed upon extinguishment of that debt in 2003. The charge is reflected in the results of continuing operations as Debt Extinguishment Costs in the accompanying consolidated statement of operations. Also in accordance with SFAS No. 145, 2002 debt extinguishment costs associated with the termination of a senior credit facility have been reclassified from an extraordinary item to results from continuing operations. See Note 10 for further discussion of the charges.

Note 4.    Acquisitions

On November 3, 2003, Titan acquired Advent Systems for total cash consideration, net of cash acquired, of approximately $12.1 million. Advent provides intelligence, surveillance, reconnaissance, support and mission planning services to the U.S. government. The acquisition was to further Titan's strategic goal of acquiring government information technology companies that fit strategically with its government business. The transaction was accounted for using the purchase method, and accordingly, results of operations of Advent Systems are included in Titan's results of operations as of the date of purchase. The excess of the purchase price over the estimated fair market value of the net assets acquired was approximately $10.1 million, and has been reported as goodwill. Pro forma information related to the Advent Systems acquisition has not been presented, as the effect on Titan's results of operations is not significant.

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

During 2002, Titan completed three acquisitions within the U.S. government business that were accounted for using the purchase method and, accordingly, results of operations of the acquired companies are included in Titan's operating results as of the date of the purchase. The following table represents selected data regarding each acquisition.

16




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)


Name Date of Acquisition Consideration Paid
and Accrued
Goodwill and
Purchased Intangibles
Wave Science, Inc. September 12, 2002 $11.3 million* $10.9 million
Jaycor, Inc. March 21, 2002 $103.5 million $49.9 million
International Systems, LLC February 22, 2002 $7.9 million* $8.4 million
* Consideration paid is subject to adjustment if certain earn-out conditions are achieved.

On September 12, 2002, Titan completed the acquisition of 100% of the outstanding shares of Wave Science, Inc. (Wave Science), a privately held designer of radio components and communication systems, for a purchase price of approximately $8.5 million in cash, subject to post-closing adjustments and indemnification obligations. The acquisition was to further Titan's goal of acquiring government information technology companies which fit strategically with its government business, particularly the addition of Wave Science's experienced engineering team. The purchase agreement provided for additional consideration of up to $3.0 million based on achieving certain revenue and profit margin targets for the two-year period beginning January 1, 2002 through December 31, 2003, and additional consideration of up to $1.0 million based on the receipt of certain contract awards through December 31, 2004. Additional consideration of $1.8 million was accrued at December 31, 2003, representing the total amount due based on the revenue and profit margin targets through December 31, 2003, and was paid in February 2004. Additional consideration of $1.0 million was paid during 2004, representing the receipt of certain contract awards. No further amounts are payable under the provisions of the purchase agreement. These additional purchase price adjustments were accounted for as an increase to goodwill.

On March 21, 2002, Titan completed the acquisition of Jaycor, Inc. (Jaycor), a San Diego, California, based provider of information technology services and specialized communications and sensor products to further Titan's goal of acquiring government information technology companies which fit strategically with its government business. At the closing, Titan issued approximately 4,919,500 shares of Titan common stock for all the outstanding shares of common stock of Jaycor, based on an exchange ratio of 0.50160 shares of Titan common stock for each share of Jaycor common stock at an aggregate value of $99.6 million, based on $20.24 per Titan share, the average trading price ending March 20, 2002, the date on which the formula for the purchase consideration became fixed. The excess of the $99.6 million purchase price over the estimated fair market value of the net assets acquired ($57.6 million) was approximately $42.0 million. In April 2002, Titan obtained an independent valuation completed by Bearing Point to assist management in its purchase price allocation for the Jaycor acquisition. The independent valuation was used by Titan to allocate $38.1 million to goodwill and $3.9 million to intangible assets. The intangible assets consist of backlog, customer relationships and trade name of $0.7 million, $1.3 million, and $1.9 million, respectively, which are being amortized over the estimated useful lives of 1 year, 1 to 3 years and 5 years, respectively. At December 31, 2004, the unamortized balance of purchased intangibles was $1.0 million included in intangible assets in the consolidated balance sheet. The transaction value was increased by approximately $3.9 million to an aggregate total of $103.5 million to reflect an additional 173,099 shares issued in July 2003 to cover certain costs of the shareholders of Jaycor, and an additional 20,948 shares issued in July 2002 and August 2002 related to certain working capital adjustments. The additional purchase price of $3.9 million was accounted for as an increase to goodwill resulting in goodwill of $45.9 million.

On February 22, 2002, Titan completed the acquisition of International Systems, LLC (International Systems), which designs and builds low-cost combat systems for the Department of Defense and agencies of the Department of Defense, to further Titan's goal of acquiring government information technology companies which fit strategically with its government business. The purchase price, which aggregated approximately $1.8 million, was comprised of approximately 100,000 shares of

17




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Titan common stock, subject to post-closing adjustments and indemnification obligations. In addition, additional consideration may be paid based on the receipt of certain contract awards and the achievement of defined earnings level on all contracts by International Systems, which consideration may be satisfied with cash or Titan common stock. The additional consideration for defined earnings levels will be equal to 20% of International Systems' EBIT (earnings before income tax and benefit allowances) from certain specified defense technology programs for each year from 2002 to 2006 and 7.5% of International Systems' EBIT from those defense technology programs for each year from 2007 to 2011. In July 2002, 100,000 shares of Titan stock valued at $1.2 million were issued based on the receipt of certain of these contract awards. In July 2003, Titan issued 350,000 shares of common stock valued at $3.3 million and paid $0.2 million in cash of additional consideration related to the receipt of these contract awards and the percentage of EBIT earned in these contracts in 2002. The value of the shares, in addition to the cash paid, were recorded as an increase to goodwill. The additional consideration for contract awards was fully paid as of December 31, 2003. Additional consideration of $0.8 million and $0.6 million was accrued at December 31, 2003 and December 31, 2004, repectively, representing the total amount due based on EBIT achieved in each fiscal year. As the total consideration for the acquisition of International Systems may change based upon the achievement of defined earnings levels, goodwill will change to reflect any such additional consideration.

During 2002, approximately $2.0 million was paid in satisfaction of purchase price holdbacks for the SenCom Corporation acquisition made in 2000 and approximately $2.7 million was paid in satisfaction of purchase price holdbacks for the System Resources Corporation acquisition made in 1999. Each of these amounts had been recorded as liabilities in periods prior to January 1, 2002.

In 1999, Titan's subsidiary, Titan Systems Corporation, acquired Atlantic Aerospace Corporation. The terms of the acquisition provided for up to an additional $3.0 million in contingent consideration payable based upon the award of future contracts. During 2001, approximately $1.2 million of contingent consideration was paid upon the award of certain contracts. In the third quarter of 2003, Titan paid $1.8 million in full satisfaction of the contingent consideration payable. All amounts paid in 2001 and 2003 had been previously accrued.

In connection with the determination of the fair value of assets acquired in connection with acquisitions in 2001, 2000 and 1999, and pursuant to the provisions of SFAS No. 141, Titan has valued acquired contracts in process at contract price, minus the estimated costs to complete and an allowance for the normal industry profit on its effort to complete such contracts. This adjustment has been reflected in the accompanying consolidated balance sheet as an increase to goodwill and a corresponding increase to deferred profit. We recognized approximately $0.5 million, $0.2 million and $2.3 million as a reduction of costs against the deferred profit in 2004, 2003, and 2002, respectively. The remaining amount of $0.1 million at December 31, 2004 is estimated to reduce costs in 2005.

Note 5.    Asset Impairment Charges

In the second quarter of 2004, Titan recorded asset impairment charges totaling $15.5 million. Approximately $10 million of these charges pertained to impairment of fixed assets directly related to the termination of a program by a U.S. civilian government agency in the second quarter, and impairment of assets associated with a reduction in scope of planned business activities in Saudi Arabia. As a result of curtailing the activities in Saudi Arabia and with the U.S. civilian government agency, future cash flows will be insufficient to recover the carrying value of certain dedicated assets. Approximately $5.5 million related to a charge for impairment of a technology license Titan purchased from SureBeam in 2001. The termination of the program by a civilian agency has generated a claim for recovery of contract costs which Titan intends to file in 2005. Management believes the facts of the claim form a legal basis for successful recovery; however, if the claim is unsuccessful, an additional charge of up to approximately $5.8 million could be incurred to write-off uncollected contract costs. Management identified an impairment to the value of the asset based on revised estimates of future

18




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

cash flows from sales of systems, resulting in a charge of $5.5 million to reduce the carrying value. The remaining license balance will be amortized over a 5-year period. The license was purchased in September 2001 and includes a world-wide perpetual and exclusive, non-royalty bearing license to use SureBeam's intellectual property for all applications and fields other than the food, animal hide and flower markets. Titan utilizes this technology for its contract with the U.S. Postal Service to provide mail sanitization systems and has outstanding bids using these technology rights. The remaining unamortized balance of $1.1 million at December 31, 2004, is reflected as a non-current asset in intangible assets in the consolidated balance sheet.

Prior to and in connection with the spin-off of SureBeam Corporation, a former subsidiary of Titan, Titan and SureBeam entered into a number of agreements, including the extension of $25 million under a $50 million senior secured revolving credit facility, which was secured by a lien on substantially all of SureBeam's assets. In addition, Titan guaranteed certain lease obligations of SureBeam and subleased facilities to SureBeam. The aggregate amount of the lease obligations Titan has guaranteed as of December 31, 2004 is approximately $17.6 million. The leases extend through periods ending in 2023. The aggregate amount payable by Titan as December 31, 2004, for future obligations under the leases for approximately 63,800 square feet that were subleased to SureBeam for periods through 2010 is approximately $3.8 million. SureBeam's obligation to reimburse Titan for any amounts paid under the guarantees or subleases was secured under the senior credit facility.

On January 19, 2004, SureBeam voluntarily filed for bankruptcy relief to be liquidated under Chapter 7 of the United States Bankruptcy Code. As a result of this filing, Titan recorded an estimated pre-tax impairment charge of $15.8 million (and an associated tax benefit of $6.3 million) in the fourth quarter of 2003 related to the senior credit facility with SureBeam as well as SureBeam's other indebtedness and obligations to Titan. The impairment charge was offset by an $8.1 million liability previously accrued by Titan to SureBeam under a tax allocation agreement. The ultimate amount of impairment to be recognized is contingent upon the amount of actual proceeds recovered by Titan from the liquidation of assets provided to Titan under the settlement agreement with the SureBeam bankruptcy trustee described below. The current estimate of such proceeds, which includes estimated sales of equipment and inventory, primarily electron beam systems and other related components, is approximately $3.0 million. The actual amount of Titan's losses could be lower or higher than currently estimated depending on the proceeds received from the liquidation of SureBeam assets provided to Titan under the settlement agreement.

On April 5, 2004, the United States Bankruptcy Court for the Southern District of California approved the settlement agreement that Titan had entered into with the bankruptcy trustee of SureBeam Corporation and SB Operating Co LLC (SureBeam). Under the settlement agreement, substantially all of the SureBeam assets were transferred to Titan and the trustee, on behalf of the bankruptcy estate, released Titan from any claims held by SureBeam. These assets include all equipment and inventory, patents, intellectual property, certain customer receivables and leased and subleased properties. Titan agreed to exclude from the settlement agreement approximately $4 million in assets that will remain in the bankruptcy estate. The excluded assets consist of cash and two customer receivables. Costs incurred, primarily legal and other professional fees, in 2004 related to the bankruptcy settlement and other SureBeam related matters, including the defense of class action litigation, were approximately $2.9 million, and are reflected on the consolidated statement of operations in selling, general and administrative expenses.

Note 6.    Exit and Restructuring Charges and Other

Included in the year ended December 31, 2002, is $53.3 million of restructuring costs related to the merger of Titan Systems into Titan on September 25, 2002, and exit charges related to the shutdown of Cayenta's headquarters office. Approximately $11.7 million of these exit charges are related to the shutdown of the Cayenta headquarters office and network operations center, which

19




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

includes employee termination costs and other liabilities of approximately $4.5 million, lease commitment costs of approximately $4.8 million, and non-cash asset impairment charges of approximately $2.4 million relating primarily to the unamortized leasehold improvements and other fixed assets at the Cayenta headquarters. The remaining lease commitment costs are expected to be paid through future periods ending in January 2007. Included in the employee termination costs were 33 personnel reductions.

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

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

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

At December 31, 2004, accruals for all exit and restructuring charges totaled $15.3 million, comprised primarily of restructuring charges related to the merger of Titan Systems into Titan on September 25, 2002 and exit charges related to the shutdown of Cayenta's headquarters. These exit and restructuring activities were accounted for under EITF Issue No. 94-3, which allowed accrual of restructuring costs upon commitment to a plan and certain other criteria. Effective January 1, 2003, Titan was required to adopt SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to defer recognition of a liability for a cost associated with an exit or disposal activity until that liability is incurred and can be measured at fair value. As these restructuring activities were entered into prior to Titan's adoption of SFAS No. 146, Titan has accounted for these activities under EITF 94-3. A summary of exit and restructuring charges and other recorded and the utilization of those accruals during the years ended December 31, 2003 and 2004 is as follows:

20




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)


  Balance
December 31,
2002
Cash paid
2003
Balance
December 31,
2003
Cash paid
2004
Change in
Estimate
Asset
Disposal
Balance
December 31,
2004
Titan Systems restructuring:                                          
Estimated facilities consolidation costs $ 32,071   $ (4,775 $ 27,296   $ (11,804 $ 1,110   $ (1,746 $ 14,856  
Employee termination/retention costs and other   1,738     (1,738                          
    33,809     (6,513   27,296     (11,804   1,110     (1,746   14,856  
Transaction costs for unsuccessful deals   597     (597                            
    34,406     (7,110   27,296     (11,804   1,110     (1,746   14,856  
Cayenta headquarters exit costs:                                          
Lease commitment costs   3,136     (2,511   625     (499   257         383  
Asset impairment costs                                    
Employee termination costs and other   219     (212   7     (88   126         45  
    3,355     (2,723   632     (587   383         428  
  $ 37,761   $ (9,833 $ 27,928   $ (12,391 $ 1,493   $ (1,746 $ 15,284  

At December 31, 2004, $5.1 million of the exit and restructuring accruals are included in Other Accrued Liabilities on the consolidated balance sheet and $10.2 million are included in Other Non-current Liabilities. The remaining accrual balance is primarily comprised of amounts due under the facilities consolidation, which requires payments in 2005 for certain lease cancellation fees and other lease costs, net of assumed sublease income, with the remainder expected to be paid over the remaining lease terms, which expire in 2009.

Note 7.    Discontinued Operations

2004 Discontinued Operations

In June 2004, Titan's board of directors decided to sell or otherwise divest Datron World and its Titan Scan Technologies service business (Scan Services). These non-core operations did not perform to management's expectation, and their divestiture will allow Titan to better focus on its National Security Solutions business. Previously, Datron World was reported in the Titan Systems segment, and Scan Services was reported in the Titan Technologies segment and they are presented below within those segments. These businesses have been reported as a discontinued operation in accordance with SFAS No. 144, and all periods presented have been restated accordingly to reflect these operations as discontinued. During the fourth quarter of 2004, Datron World was sold for approximately $4.7 million, resulting in a loss of approximately $2.0 million. In February 2005, the Scan Services was sold for approximately $4.9 million, which did not result in a material gain on the transaction.

The results of discontinued operations for the year ended December 31, 2004, include asset impairment charges of approximately $20.3 million for Datron World, consisting of goodwill and purchased intangibles of approximately $17.3 million and approximately $3.0 million related to inventory value not expected to be recovered in the disposal of this business. Revenues for Datron World for the year ended December 31, 2004, were $9.9 million.

21




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

The results of discontinued operations for the year ended December 31, 2004, include asset impairment charges of approximately $8.5 million for Scan Services, primarily representing fixed asset values not expected to be recovered in the disposal of the business. The estimate of value expected to be recovered upon disposition is based on indications of interest and proposed letters of intent received by Titan. Revenues for Scan Services for the year ended December 31, 2004, were $5.5 million.

2002 Discontinued Operations

In August 2002, Titan's board of directors made the decision to sell or otherwise divest its LinCom Wireless business and to sell Cayenta Canada, Titan's remaining commercial information technology business, both of which were previously reported in Titan's Titan Technologies segment. Accordingly, Titan has reflected both operations as discontinued in accordance with SFAS No. 144. In October 2002, the LinCom Wireless business was shut down. On June 2, 2004, Titan sold Cayenta Canada for a net $5.6 million in cash, with no resulting gain or loss recorded on the sale. Titan retained current liabilities related to this business which are included in Titan Technologies below, of approximately $1.8 million related to potential purchase price adjustments due to the buyer and transaction-related costs and indemnification obligations related to the sale. Additionally, Titan had previously guaranteed performance on several customer contracts and a facility lease related to this business and these guarantees were not transferred to the buyer in the June 2004 sale. The face value of these guarantees is approximately $14 million at December 31, 2004. Substantially all of the guarantees were issued prior to December 31, 2003 and are therefore not required to be recognized and measured under the provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." Titan has not had to make any payments with respect to contract guarantees related to this business since its acquisition in 1999 and has not provided any reserves for these contingencies at December 31, 2004, based on management's assessment that such payments are not probable of being made.

In July 2002, Titan's board of directors made the decision to exit all of its international telecommunications business through a combination of selling and winding down Titan's operations within its Titan Wireless segment. Titan immediately began implementing these actions, which were substantially completed during 2003. Titan reported this exit of the Titan Wireless segment as a discontinued operation in accordance with SFAS No. 144.

During the first quarter of 2002, Titan's board of directors made the decision to sell certain of its commercial information technology operations within the Cayenta segment and the AverCom business within the Titan Technologies segment. These businesses were sold in 2002.

In the third quarter of 2003, Titan completed the sale of its GlobalNet business. Payments received for the sale of GlobalNet consisted of approximately $2 million in cash, notes receivable of approximately $1.5 million, and the buyer's assumption of all of the outstanding liabilities of GlobalNet, which aggregated to approximately $21 million at the time of the consummation of the sale. Titan has collected approximately $0.6 million of the amounts due under the notes receivable; however, the remaining $0.9 million is past due and was previously reserved, as Titan has no assurance that this remaining balance will ultimately be collected. In accordance with SFAS No. 144, all commercial operations that have been sold or are held for sale have been reflected as discontinued operations for all periods presented in Titan's consolidated financial statements.

Titan Wireless

Overview

On July 11, 2002, Titan announced it would exit all of its international telecommunications business, directly as a result of an increasingly deteriorating market, particularly in the wholesale long

22




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

distance business. Notably, the bankruptcies of Global Crossing, Ltd., WorldCom, Inc. and Phone1Globalwide Corporation (formerly Globaltron Corporation), and the dire financial condition of other providers, such as ibasis, imposed a rapid and sudden deterioration in wholesale prices in 2002. As a direct result of decreasing wholesale margins, and the difficulty of providers to obtain financing to invest in new projects globally, Titan's telecommunications business operating results declined substantially beginning in the second quarter of 2002. The losses in the second quarter of 2002 and the bleak outlook of the telecommunications market globally led to the July 2002 Titan board of directors decision to exit these markets. Titan has substantially completed the sale and winding down of all of its operations within Titan Wireless, including all of the operations discussed below.

Acquisitions and Investments

GlobalNet, Inc.

On March 21, 2002, Titan completed the acquisition of GlobalNet, Inc. (GlobalNet), a provider of international voice, data, and Internet services. Titan issued approximately 1,452,800 shares of its common stock for all the common stock of GlobalNet at an aggregate value of $28.6 million, based on $19.67 per Titan share, the average trading price ending March 15, 2002, the date on which the formula for consideration became fixed, and assumed stock options and warrants representing approximately 77,900 shares of Titan common stock at an aggregate value of $0.8 million, based on an exchange ratio of 0.3853 shares of Titan common stock for each share of GlobalNet common stock. GlobalNet's operations from March 22, 2002 were reported in Titan's, Titan Wireless business, which was discontinued in the third quarter of 2002. The transaction was accounted for as a purchase. The excess of the purchase price of $29.4 million over the estimated fair market value of the net liabilities acquired of approximately $26.4 million was approximately $55.8 million. In April 2002, Titan obtained an independent valuation completed by independent valuation specialists Bearing Point to assist in its purchase price allocation of the GlobalNet acquisition. The independent valuation was used by Titan to allocate $55.8 million to goodwill and $0 to intangible assets as of March 31, 2002.

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

23




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Ivoire Telecom

On June 28, 2000, Titan Wireless Afripa Holding, Inc., a subsidiary of Titan Wireless, made a $5 million investment to acquire 80% of the outstanding equity interests in Ivoire Telecom S.A., a Luxembourg-chartered company that intended to engage, through various majority-owned local subsidiaries, in a wireless telecommunications business in Africa using a satellite uplink through France. In the third quarter of 2002, the entire carrying value of the investment of approximately $52 million was determined to be impaired and was written off. This investment was subsequently sold in the second quarter of 2003 for approximately $0.5 million cash consideration.

Sakon LLC

In January 1999, the Company invested approximately $0.5 million for a 19.9% ownership interest in a joint venture with Sakon. In July 2000, Titan loaned Sakon $15 million pursuant to a loan agreement. In October 2000, Titan exercised its option pursuant to the loan agreement to convert amounts owed under the loan into additional equity interest of 30.0% of Sakon, bringing the total equity interest in Sakon to 49.9%. This equity interest was converted in August 2002 from a 49.9% voting interest to a 15% voting interest and a 34.9% non-voting interest. At such time, the amount outstanding of $15 million under the loan was converted to purchase consideration as the initial payment due under the terms of the agreement and recorded as goodwill. Under the terms of the agreement, an additional $12.5 million of consideration was due and payable upon certain revenue targets being attained. These targets were met in January 2001, and a $5.0 million installment was made in the second quarter of 2001, a $3.75 million installment was made in the first quarter of 2002, and the remainder was paid in the third quarter of 2002. The excess of the purchase price over the estimated fair market value of the net assets acquired, which has been amortized over 20 years, was approximately $26.8 million at December 31, 2001. In connection with the new requirements for evaluation of goodwill under SFAS No. 142, the $26.8 million was determined to be impaired and was fully expensed in the third quarter of 2002. Prior to August 2002, Titan consolidated the operating results of Sakon due to Titan's ability to control and significantly influence the operations and policies of Sakon, in accordance with a management agreement with Sakon. In August 2002, the management agreement was modified to nullify Titan's ability to control Sakon, and Titan resigned from the management committee of Sakon. Accordingly, Titan has no ability to substantially influence or control the operations of Sakon. Thereafter, Titan's investment in Sakon has been accounted for under the cost method, for which the investment carrying value was written down to zero in 2002.

Benin

On December 10, 1999, Titan's wholly owned subsidiary, Titan Africa, Inc. (Titan Africa), in connection with its contract to build a satellite-based telephone system for its customer, the national telephone company of Benin, Africa (the OPT), entered into a Loan Facility agreement for up to 30.0 billion Francs CFA (the currency of the African Financial Community), equivalent to approximately $45.0 million U.S. dollars, with a syndicate of five banks, with Africa Merchant Bank as the arranger. This financing was subsequently increased by 6.0 billion francs CFA to approximately $54.0 million. This medium term financing is a non-recourse loan to Titan Africa which is guaranteed by the OPT and secured by the OPT's equipment and revenues related to the project. The facility has a fixed interest rate of 9.5% per year and was originally to be repaid in seven equal semi-annual payments from the net receipts of this project, or by the OPT in the event that such receipts are not adequate to make these payments, which commenced on December 31, 2000 and were scheduled to end on December 31, 2003. The payment terms were subsequently amended calling for quarterly payments through mid 2006. The borrowings on this facility have been utilized to fund various equipment and subcontractor costs incurred most notably by Alcatel of France, a major subcontractor to this project.

24




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Related to Titan's contract with the OPT, Titan has a $37.7 million gross receivable due from the OPT, of which $14.3 million is reflected in current assets of discontinued operations and of which $23.4 million is reflected in non-current assets of discontinued operations as of December 31, 2004. The $23.4 million receivable is recorded as a net non-current receivable on the project, reflecting the outstanding balance on the non-recourse loan, drawn to cover subcontract costs. The $23.4 million balance on the non-recourse loan is included in non-current liabilities of discontinued operations at December 31, 2004. The $14.3 million difference between the gross receivable of $37.7 million and the $23.4 million balance on the non-recourse loan represents amounts currently due from the OPT under the Titan settlement agreement entered into with the OPT in 2003. This agreement contemplated a $25 million payment by the OPT to Titan, which was due in full by November 30, 2003. On December 31, 2003, Titan received a partial payment of $11 million on the settlement. Based on the facts available in the second quarter of 2004, principally the OPT's cash flow deficiencies and inability to obtain adequate financing, Titan recorded a full reserve for the $14.3 million balance outstanding. Notwithstanding this reserve, Titan has commenced an international arbitration against the OPT seeking collection of this receivable. The Titan Wireless results of discontinued operations also reflect a provision totaling approximately $5.3 million recorded during 2004, for estimated costs of resolving a contingent liability with a subcontractor related to this project. The current liabilities of $13.5 million of Titan Wireless include approximately $10.3 million for estimated costs of resolving the aforementioned contingent liability with a subcontractor and $3.2 million of remaining exit costs.

In February 2005, Titan received a demand for full payment from the subcontractor, based on an international arbitration ruling which Titan was in the process of appealing. In light of this, Titan and the subcontractor later reached a final settlement whereby, in March 2005, Titan agreed to pay $9.0 million in full settlement of the matter.

Operating Results

While Titan continues to hold assets and liabilities of Titan Wireless in discontinued operations, there were no revenues in Titan Wireless for the year ended December 31, 2004. The net loss of $14.1 million for the year ended December 31, 2004, is mostly composed of a provision to impair accounts receivable from the OPT and a provision for litigation related to a subcontractor on the Benin contract.

For the year ended December 31, 2003, Titan Wireless generated $71.5 million of revenues and net income of $1.0 million, net of a $7.4 million tax benefit. The revenues were primarily generated by the GlobalNet business for the period prior to the sale of the business in the third quarter of 2003. The net income was primarily a result of operating losses of $2.8 million, and the gain from the disposition of the GlobalNet business of $12.2 million, resulting from a previous write-down of the carrying value of the net assets, for which a tax provision was not provided due to prior losses. The gain was offset by impairment charges of $10.8 million resulting from the terms of the settlement agreements with Titan's customers in Nigeria and Benin, and by approximately $5 million of charges accrued for the exit activities in Benin. Included in the operating losses of Titan Wireless for 2003 is interest expense allocated to discontinued operations of $0.7 million.

Included in Titan Wireless' net loss for the year ended December 31, 2002 are impairment charges of $211.4 million, or $137.4 million, net of tax, that were recorded as a result of Titan's decision to exit its international telecommunications business. The charges were comprised of the following: (1) impairment of goodwill in accordance with SFAS No. 142 of approximately $74.8 million, primarily comprised of Titan's acquisition of GlobalNet discussed above and Sakon, recorded in accordance with SFAS No. 142; (2) impairment of investments of approximately $62.6 million, primarily comprised of Titan's investment in Ivoire Telecom discussed above; (3) and impairment of fixed and other assets of approximately $74.0 million.

25




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

In addition, exit charges of approximately $20.1 million were recorded in the third quarter of 2002, primarily related to outstanding commitments of warranty obligations of $3.9 million, commitments for space satellite segments of $3.0 million, and outstanding lease obligations of $1.6 million. The remaining $11.6 million of the charge is primarily related to employee termination costs of $2.6 million, other estimated direct costs to exit these businesses of $4.0 million and the estimated settlements of other obligations of approximately $5.0 million. Such commitments are expected to be paid through the first half of 2004. As of December 31, 2003, approximately $9.8 million is included in current and non-current liabilities of discontinued operations.

In summary, included in Titan Wireless' net loss for 2002 is an impairment charge of $211.4 million, exit charges of $20.1 million and pre-tax losses excluding impairment and exit charges of $8.8 million for the year ended December 31, 2002. Included in the operating losses of Titan Wireless for 2002 is interest expense allocated to discontinued operations of $0.7 million.

Titan Technologies

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

For the year ended December 31, 2002, the discontinued operations of Titan Technologies generated revenues of $31.4 million and a net loss of $48.0 million, net of a $20.6 million tax benefit. Included in Titan Technologies' net loss for 2002 is an impairment charge of $43.7 million, related to LinCom Wireless, AverCom and Titan's commercial information technology business. The measurement of this impairment is based upon indications of fair value, resulting in a write-off of the carrying value of its assets which included an impairment of goodwill of $21.0 million, in accordance with SFAS No. 142, and impairment of other assets of $22.7 million consisting primarily of fixed assets and capitalized software. In addition, exit charges of approximately $4.3 million were recorded primarily related to employee termination costs, lease termination costs and other outstanding commitments.

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

In addition to the impairment charges discussed above, pre-tax losses excluding impairment and exit charges for the Titan Technologies businesses for 2002 were $20.5 million. Included in the operating losses for 2002 is interest expense allocated to discontinued operations of $0.8 million.

Cayenta

In July 2002, the two information technology businesses of Cayenta were sold, for cash received to date of $0.2 million. For the year ended December 31, 2002, these businesses generated revenues of $6.4 million and a net loss of $4.8 million, net of a tax benefit of $2.7 million. Included in the net loss

26




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

is a charge for goodwill impairment in accordance with SFAS No. 142 associated with these two businesses of approximately $1.1 million, and other asset impairments of approximately $3.2 million. In addition, a $27.5 million impairment of goodwill was recorded on January 1, 2002, when Titan adopted SFAS No. 142 which was reported as a cumulative effect of a change in accounting principle. In addition to the impairment charges noted above, operating losses, net of tax, for the year ended December 31, 2002 were $3.2 million, and included $0.1 million in interest expense allocated to discontinued operations.

The consolidated financial statements of Titan for all periods presented have been restated to reflect all businesses discussed above as discontinued in accordance with SFAS No. 144.

2001 Discontinued Operations

On March 16, 2001, SureBeam Corporation, Titan's former subsidiary that provided electronic irradiation systems and services, completed an initial public offering (IPO) of 6,700,000 shares of Class A common stock at a price of $10 per share. On October 16, 2001, Titan adopted a definitive plan to spin off SureBeam in the form of a tax-free dividend to Titan stockholders within the next 12 months from that date. On August 5, 2002, Titan's remaining ownership interest in SureBeam was spun-off to Titan stockholders as a tax-free dividend. Prior to the adoption of the spin-off plan, Titan reported the SureBeam business as a separate segment. The net assets of SureBeam as of August 5, 2002 and tax liabilities and other costs resulting from the spin-off resulted in a net dividend of approximately $105.4 million which was recorded as a decrease to paid-in-capital, partially offset by the reduction in deferred compensation related to deferred compensation charges in 2000 and 2001, reflecting the net value distributed to Titan's stockholders

At the time Titan adopted the plan to spin-off SureBeam, in accordance with APB No. 30, it recorded a charge of $35.4 million for estimated costs of disposal and for estimated operating losses up to the date of disposal. This charge was recorded in the third quarter of 2001. All losses incurred by SureBeam after that time were charged against this accrual. Losses charged against the accrual in 2001 were $14.9 million and in 2002 were $20.5 million in the six months ended June 30, 2002. An additional charge of $11.0 million was taken during the second quarter of 2002 to record the net losses (in excess of the accrual) incurred by SureBeam during the second quarter of 2002 as well as estimated operating losses and spin-off expenses expected to be incurred through the spin-off date of August 5, 2002. Subsequent to that date, SureBeam is no longer included in Titan's results of operations. Losses through August 5, 2002 charged against the accrual in the third quarter of 2002 were $1.8 million. Approximately $3.5 million of costs related to the spin-off were charged against the loss accruals, which is $0 as of December 31, 2004.

In the second and fourth quarters of 2004, Titan recorded pre-tax charges of $7.2 million to accrue Titan's estimate of the shortfall between the amount of the SureBeam lease guarantees and the amount expected to be recovered by subleasing activities. Titan also incurred $0.4 million of costs associated with maintaining facilities during 2004. The total of $14.8 million has been reflected in the accompanying consolidated Statement of Operations as a $9.3 million loss, net of tax in discontinued operations, as all of such costs relate to obligations of SureBeam operating facilities and such operations were discontinued in 2001.

To date, Titan has not yet subleased or otherwise transferred any of the guaranteed leases or lease obligations to third parties. The current estimate of such mitigation of obligations under leases and lease guarantees is approximately $21.4 million.

In relation to SureBeam's strategic alliance with Hawaii Pride, Titan has guaranteed repayment of Hawaii Pride's bank debt up to the greater of SureBeam's equity interest in Hawaii Pride (which is zero), or 19.9% of Hawaii Pride's $6.8 million, 15-year loan from its lender, WebBank. As of December 31, 2004, Titan has guaranteed approximately $1.1 million, or 19.9% of the current loan balance of $5.4 million. In the event that Hawaii Pride defaults on the loan, Titan currently expects to

27




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

be obligated to cover any defaults on the entire outstanding balance of the loan if the default is not cured within 90 days. In late October 2003, Titan was notified by Hawaii Pride that Hawaii Pride had stopped receiving financial support from SureBeam and did not have sufficient cash resources to make its monthly principal and interest payments to WebBank. As of December 31, 2004, Titan has loaned approximately $0.6 million to Hawaii Pride under a new credit facility for a maximum amount of $0.8 million to be advanced to Hawaii Pride to cover shortfalls in debt service payments. All amounts outstanding under this facility are required to be repaid in twenty equal quarterly installments commencing on October 1, 2005. In the impairment charge discussed above, Titan has assumed that Hawaii Pride will repay amounts advanced on the new credit facility.

28




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Following are summaries in tabular format of the loss from discontinued operations for 2004, 2003 and 2002:


  Year ended December 31, 2004
  Titan
Systems
Titan
Wireless
Titan
Technologies
SureBeam Total
Subcontractor contingency reserves $   $ (5,311 $   $   $ (5,311
Impairment of assets   (20,332   (14,351   (8,500       (43,183
Loss of sale of assets   (2,054               (2,054
    (22,386   (19,662   (8,500       (50,548
Losses from operations   (1,397   (2,774   (2,044   (14,793   (21,008
    (23,783   (22,436   (10,544   (14,793   (71,556
Tax benefit   (2,083   (8,301   (3,537   (5,474   (19,395
Net loss $ (21,700 $ (14,135 $ (7,007 $ (9,319 $ (52,161

  Year ended December 31, 2003
  Titan
Systems
Titan
Wireless
Titan
Technologies
Total
Gain on sale of business, net $   $ 12,195   $   $ 12,195  
Subcontractor contingency reserves       (5,000       (5,000
Impairment assets       (10,790   (2,679   (13,469
        (3,595   (2,679   (6,274
Losses from operations   (2,269   (2,783   (8,555   (13,607
    (2,269   (6,378   (11,234   (19,881
Tax benefit   (969   (7,392   (8,708   (17,069
Net loss $ (1,300 $ 1,014   $ (2,526 $ (2,812

As discussed above, the 2003 tax benefit reflected in Titan Wireless was impacted by the GlobalNet sale for which a tax provision was not provided due to prior losses, and the Titan Technologies tax benefit was impacted by an adjustment to the carrying value of certain assets which are currently held for sale in Titan's remaining commercial information technology business that was previously part of Titan Technologies.


  Year ended December 31, 2002
  Titan
Systems
Titan
Wireless
Titan
Technologies
Cayenta SureBeam Total
Impairment of goodwill $   $ (74,818 $ (21,022 $ (1,121 $   $ (96,961
Impairment of investments       (62,600               (62,600
Impairment of fixed and other assets       (74,001   (22,714   (3,134       (99,849
Exit charges       (20,062   (4,341           (24,403
        (231,481   (48,077   (4,255       (283,813
Losses from operations   (3,026   (8,824   (20,151   (3,197   (11,014   (46,212
    (3,026   (240,305   (68,228   (7,452   (11,014   (330,025
Tax benefit   (993   (84,888   (20,446   (2,698   (1,101   (110,126
Net loss $ (2,033 $ (155,417 $ (47,782 $ (4,754 $ (9,913 $ (219,899

29




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Balance Sheet Summary

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


  As of December 31,
  2004 2003
Current assets of discontinued operations:            
Titan Systems $   $ 13,747  
Titan Wireless       14,277  
Titan Technologies   1,665     9,453  
  $ 1,665   $ 37,477  
Non-current assets of discontinued operations:            
Titan Systems $   $ 19,153  
Titan Wireless   23,387     32,307  
Titan Technologies   3,082     12,732  
  $ 26,469   $ 64,192  
Current liabilities of discontinued operations:            
Titan Systems $   $ 3,442  
Titan Wireless   13,503     12,540  
Cayenta       97  
Titan Technologies   2,798     6,602  
SureBeam   4,694      
  $ 20,995   $ 22,681  
Non-current liabilities of discontinued operations:            
Titan Systems $   $ 208  
Titan Wireless   23,387     32,307  
Cayenta       535  
Titan Technologies   723     1,995  
SureBeam   9,208      
  $ 33,318   $ 35,045  

Included in the total assets of Titan Wireless as of December 31, 2004 is the net $23.4 million accounts receivable from the OPT. The current liabilities of $13.5 million of Titan Wireless include a $10.3 million provision for litigation related to a subcontractor on the Benin contract and $3.2 million of remaining exit costs. The non-current liabilities of $23.4 million is the non-recourse loan to Titan Africa which is guaranteed by the OPT and secured by OPT's equipment and revenues related to the project.

The current assets of Titan Technologies as of December 31, 2004 are primarily comprised of accounts receivable balances, inventory and prepaid assets.

The total liabilities of SureBeam as of December 31, 2004 represent Titan's estimate of the shortfall between the amount of the SureBeam lease guarantees and the amount expected to be recovered by subleasing activities as well as amounts to be incurred for facilities restoration costs.

30




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Note 8.    Other Financial Data

Following are details concerning certain balance sheet accounts:

Accounts Receivable:


  At December 31,
  2004 2003
U.S. Government—billed $ 415,889   $ 307,601  
U.S. Government—unbilled   88,257     63,141  
Trade   14,648     14,070  
Less allowance for doubtful accounts   (3,408   (3,547
  $ 515,386   $ 381,265  

Billing in excess of costs incurred are recorded as reductions to accounts receivable and total $0.2 million and $5.1 million at December 31, 2004 and 2003, respectively. Deferred revenue included in Other Accrued Liabilities totaled $16.5 million at December 31, 2004.

Inventories:


  At December 31,
  2004 2003
Materials $ 6,988   $ 5,493  
Work-in-process   10,107     12,227  
Finished goods   4,241     3,710  
  $ 21,336   $ 21,430  
Property and Equipment:            
Machinery and equipment $ 73,642   $ 107,008  
Furniture and fixtures   21,255     21,250  
Land, buildings and leasehold improvements   38,723     24,551  
Construction in progress   736     1,985  
    134,356     154,794  
Less accumulated depreciation and amortization   (76,814   (102,286
  $ 57,542   $ 52,508  

Intangible Assets:


  As of December 31, 2004
  Gross
Carrying
Amount
Accumulated
Amortization
Net Value
Purchased intangibles $ 16,522   $ 11,660   $ 4,862  
License agreement   2,456     1,365     1,091  
Deferred financing costs   17,041     5,012     12,029  
All other intangible assets   2,556     719     1,837  
  $ 38,575   $ 18,756   $ 19,819  

There are no estimated salvage values related to Titan's intangible assets. In 2004, 2003 and 2002, aggregate amortization expense totaled $5.5 million, $7.0 million and $7.5 million, respectively. Amortization of deferred financing costs included in interest expense in 2004, 2003 and 2002 totaled

31




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

$2.4 million, $2.1 million and $1.7 million, respectively. The remaining amortization expense is included in selling, general and administrative expense on the consolidated statement of operations.


  Deferred
Financing Fees
Purchased
and Other
Total
Estimated aggregate amortization expense:                  
2005 $ 2,414   $ 2,653   $ 5,067  
2006   2,414     2,282     4,696  
2007   2,414     695     3,109  
2008   2,414     603     3,017  
2009   1,328     320     1,648  
Thereafter   1,045     1,237     2,282  
  $ 12,029   $ 7,790   $ 19,819  

Supplemental disclosures of cash flow information:


  2004 2003 2002
Noncash investing and financing activities:                  
Stock issued for acquisitions $   $ 3,259   $ 137,811  
Deferred compensation related to the issuance of stock options           29,834  
Shares contributed to employee benefit plans   2,718     6,527     7,529  
Write-off of deferred debt issuance costs       8,071     9,435  
Write-off of deferred compensation related to discontinued operations           629  
Shares tendered for option exercises       144      
Cash paid for interest $ 33,661   $ 31,557   $ 32,408  
Cash paid (refunds) for taxes   (1,129   1,149     (8,747

In 2002, Titan issued 172,153 shares of Titan common stock valued at $3.8 million as consideration for the purchase of assets of a company which became part of the Cayenta business, now reported in discontinued operations. In the second quarter of 2003, the indemnification period as defined per the asset purchase agreement expired, and as provided for in the purchase agreement, Titan elected to exchange all of the Titan common stock for cash of $2.0 million and the extinguishment of notes receivable of $1.8 million for cash advances made in 2002.

Details regarding the acquisition of businesses, net of cash acquired, in the consolidated statements of cash flows are as follows:


  Year Ended December 31, 2004
  Cash Paid Cash
Acquired
Net
Acquisition:                  
International Systems $ (679 $   $ (679
Wave Science   (2,781       (2,781
  $ (3,460 $   $ (3,460

32




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)


  Year Ended December 31, 2003
  Cash Paid Cash
Acquired
Net
Acquisition:                  
Advent Systems $ (14,781 $ 2,682   $ (12,099
International Systems   (217       (217
Earn-out consideration for Atlantic Aerospace Electronics Corporation   (1,773       (1,773
  $ (16,771 $ 2,682   $ (14,089

  Year Ended December 31, 2002
  Cash Paid Cash
Acquired
Net
Acquisition:                  
Jaycor $   $ 35,982   $ 35,982  
Wave Systems   (8,476   4,678     (3,798
International Systems       172     172  
Purchase adjustments for prior year acquisitions   (4,947       (4,947
  $ (13,423 $ 40,832   $ 27,409  

Non-Marketable Securities:

Titan's investments in non-marketable securities as of December 31, 2004 includes a $4.2 million investment in E-Celerator, reported in Other Assets. In 2004, Titan recorded a loss on investments of $3.9 million, mostly attributable to the write-off of the remaining $3.5 million equity carrying value for Etenna Corporation. Due to lack of product acceptance and capitalization, Titan expects that Etenna and/or its technology will be sold at a value less than the threshold required to earn a return of capital. In 2004, Titan also wrote down its investment in Wavestream Wireless by $0.4 million to reflect the reduction in fair market value due to a dilutive financing transaction in 2004.

Titan's investments in non-marketable securities as of December 31, 2003, include $3.5 million in Etenna Corporation, reported in Other Assets. In 2003, Titan recorded a loss on investments of $6.2 million related to an unrealized loss on the carrying value of its investment in Etenna Corporation based upon recent indications of fair value, and an unrealized loss on its investment in DOAR Communications that was subsequently sold at a loss in January 2004. All other investments in non-marketable securities totaled $1.8 million and $8.5 million at December 31, 2004 and December 31, 2003, and are reported in Other Assets.

Sales Information:

Substantially all of Titan's operations are located in the United States. Export and foreign revenues amounted to approximately $27.0 million, $29.2 million and, $18.7 million, in 2004, 2003 and 2002, respectively, related primarily to customers in Europe, the Middle East, Africa and Asia. Sales of approximately $12 million, or 43.7% of total foreign revenues, and approximately $10 million, or 36.2%, of total foreign revenues, were related to contracts with Titan customers in the United Kingdom, in 2004 and 2003, respectively.

Sales to the U.S. government, including both defense and non-defense agencies, and sales as a subcontractor as well as direct sales, aggregated approximately $1,983.5 million in 2004, $1,695.5 million in 2003, and $1,313.1 million in 2002.

33




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Note 9.    Income Taxes

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


  2004 2003 2002
Current:                  
Federal $   $   $  
Foreign   307          
State   454     2,372     1,458  
    761     2,372     1,458  
Deferred   16,192     21,441     (7,061
  $ 16,953   $ 23,813   $ (5,603

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


  2004 2003 2002
Expected federal tax provision on continuing operations $ 10,751   $ 19,470   $ (5,798
State income taxes, net of federal income tax benefit   1,382     2,457     (1,048
State taxes in separate filing states, net of federal benefit           963  
FCPA settlement   9,435     1,110      
Settlement of audits and other tax accruals   (4,535   (2,285    
Capital loss on investment not benefited   1,431     2,277      
Acquisition charges and other   (796   796      
Meals and entertainment   484     399     251  
Other   (1,199   (411   29  
Actual tax provision (benefit) on continuing operations $ 16,953   $ 23,813   $ (5,603

The net deferred tax asset as of December 31, 2004 and 2003, results from the following temporary differences:


  2004 2003
Loss carryforward $ 101,363   $ 92,336  
Employee benefits   23,928     24,696  
Purchased other intangibles   (2,019   (3,287
Tax credit carryforwards   1,104      
Inventory, contract loss and other reserves   37,337     39,254  
Accounts and unbilled receivables   (12,386   (6,471
Accrued liabilities   13,596     11,974  
Depreciation and amortization   (14,886   (9,027
Other   7,333     2,277  
    155,370     151,752  
Valuation allowance   (7,333   (8,767
Deferred tax asset, net $ 148,037   $ 142,985  

Realization of certain components of the net deferred tax asset is dependent upon our generating sufficient taxable income prior to expiration of loss and credit carryforwards. The federal net operating losses at December 31, 2004, to be carried forward to 2005 are approximately $274 million, which carryforwards will expire in periods from 2010 through 2024. Although realization is not assured, management believes it is more likely than not that the net deferred tax asset will be fully

34




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. In order to fully utilize the net operating loss carryforwards prior to the expiration dates, taxable income of $274 million needs to be generated. Given that the Company has incurred recent net operating losses, management considered whether a valuation allowance should be recorded to reduce the carrying value of the total deferred tax asset, including the component related to net operating losses. In evaluating whether a valuation allowance was needed, management considered negative evidence and positive evidence as required under the provisions of SFAS No. 109. The primary negative evidence considered by management is the Company's cumulative loss position. The cumulative losses have been generated primarily by businesses that have been discontinued, sold or wound down and, consequently, no significant recurring losses are expected to be generated by those operations in future periods. The positive evidence considered by management is the historical profitability of the Company's continuing operations, which consist almost entirely of government contracting activities. As of December 31, 2004, those operations have significant funded and unfunded backlog. Consequently, management concluded that the positive evidence regarding the realization of the deferred tax asset out weighed the negative evidence and that a valuation allowance for the deferred tax assets was not deemed necessary.

The valuation allowance recorded is provided against certain capital loss carryforwards which may not be utilized. The change in the valuation allowance from 2003 to 2004 primarily reflects the sale of Canco, LLC (Cayenta Canada) in 2004, and to the capital losses that were not benefited in 2004. The provision for income taxes was reduced by $4.5 million due to net favorable adjustments related to previously estimated tax liabilities. Prepaid Expenses and Other at December 31, 2004 and 2003 include prepaid taxes of $2.0 million and $3.5 million. Other Non-current Liabilities at December 31, 2004 and 2003 include a deferred tax liability of $15.7 million and $11.1 million, respectively.

During 2004, 2003 and 2002, Titan recognized tax deductions related to stock option exercises in the amount of $23.5 million, $0.8 million, and $9.9 million, respectively, or $8.7 million, $0.3 million, and $3.6 million, net of tax. The net benefits were recorded as an increase to capital in excess of par value.

Note 10.    Debt

Senior Credit Facility

On May 23, 2002, Titan entered into an agreement with Wachovia Bank, National Association and Wachovia Securities for a $485 million senior credit facility from a syndicate of commercial banks including Wachovia Securities acting as sole lead arranger and Wachovia Bank, National Association, as Administrative Agent, The Bank of Nova Scotia and Comerica Bank as Co-Syndication Agents and Branch Banking and Trust Company and Toronto Dominion Bank as Co-Documentation Agents and other financial institutions. The senior credit facility is comprised of an aggregate credit commitment of $485 million, consisting of a seven-year term loan in an aggregate principal amount of $350 million and a six-year $135 million revolving credit facility.

On September 2, 2004, Titan entered into an amendment of its senior credit facility, which ties its effective borrowing rate on its term loan within the facility, within a limited range, to changes in ratings from the two major agencies. The amendment immediately reduced the interest rate on Titan's term loan by 50 basis points from LIBOR plus 325 basis points (or prime plus 200 basis points) to LIBOR plus 275 basis points (or prime plus 150 basis points). The rate reduction is based on Titan's current senior debt credit rating and outlook from Moody's Investor Services and Standard & Poor's. The amendment includes a provision that automatically increases or decreases the rate on the term loan to either LIBOR plus 300 basis points (or prime plus 175 basis points) or LIBOR plus 250 basis

35




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

points (or prime plus 125 basis points), if Titan's senior debt credit rating from Standard & Poor's or Moody's Investor Services changes, per the terms of the amendment. As of March 10, 2005, both rating agencies completed their credit reviews of Titan reflecting the resolution of the government FCPA investigation. Both agencies confirmed Titan's existing ratings, but improved Titan's credit outlook to "stable". As a result, effective March 10, 2005 the rate on Titan's Senior Secured Term B loan of $341 million was reduced by 25 basis points (bps) to LIBOR plus 250 bps (or prime plus 125 bps).

The amendment does not affect the interest rate on Titan's senior revolver within its credit facility. The senior credit facility, as amended, provides for interest rates per annum applicable to amounts outstanding under the senior revolver that are, at Titan's option, either the administrative agent's most recently established base rate for U.S. dollars loaned in the United States (or, if greater, the Federal Funds Rate plus 0.5%) plus a margin of 0.75% per annum to 1.50% per annum, based on its ratio of total debt to EBITDA (as defined in the senior credit facility), or the LIBOR rate for the applicable interest period plus a margin of 2.00% per annum to 2.75% per annum, based on Titan's ratio of total debt to EBITDA. Currently, interest rates for base rate and LIBOR revolving loans are 0.25% higher than Titan's interest rates for base rate and LIBOR term loans. Titan is required to pay the lenders under the senior credit facility a non-utilization fee ranging from 0.50% per annum to 1.00% per annum, payable quarterly in arrears, based on the applicable percentage of the undrawn portion of the senior revolver. Titan is also required to pay letter of credit fees for outstanding letters of credit equal to 0.25% per annum of the stated amount of the letter of credit, plus the product of the applicable margin (from 2.00% to 2.75%, based on its ratio of total debt to EBITDA) for loans under the revolving credit facility maintained as LIBOR loans multiplied by the stated amount of the letter of credit.

The seven-year term loan matures on June 30, 2009, and the revolving credit facility matures on May 23, 2008. The seven-year term loan amortizes at 1.0% per year for years one through six (through the quarter ending June 30, 2008), with the remaining 94% due in equal quarterly payments in year seven of the loan (through the quarter ending June 30, 2009). Titan may prepay amounts borrowed under the term loan and the revolving credit facility at its option without any fee, provided that any voluntary prepayment of the outstanding term loan made before September 3, 2005, resulting from a refinancing of the term loan (other than any refinancing resulting from a change of control) shall be at 101% of the par value. Titan is also required to make prepayments, subject to certain exceptions, of the outstanding amounts under the term loan and the revolving credit facility from asset sales, issuance of subordinated debt and equity securities, insurance or condemnation proceeds and from excess cash flows.

The terms of the senior credit facility require Titan to provide certain customary covenants for a senior credit facility, including certain financial covenants. As amended, these financial covenants, as set forth in the senior credit agreement for fiscal year 2004, are comprised of a maximum total debt to EBITDA ratio of 4.75 to 1.0, declining to 4.0 to 1.0 in subsequent years, a maximum total senior debt to EBITDA ratio of 3.00 to 1.0, declining to 2.50 to 1.0 in subsequent years, a minimum interest coverage ratio of 3.0 to 1.0, a minimum fixed charge coverage ratio of 1.35 to 1.0 and a minimum net worth of approximately $268.0 million at December 31, 2004. Titan was in compliance with all financial covenants as of December 31, 2004.

Deferred costs and expenses of $7.1 million related to the senior credit facility are included in intangible assets at December 31, 2004 and are being amortized over the remaining term of the senior credit facility.

Senior Subordinated Notes

On May 15, 2003, Titan sold $200 million of 8% senior subordinated notes due May 15, 2011 in a private placement (the Notes). Titan used the net proceeds from the issuance of the Notes, plus

36




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

borrowings of $50 million under its revolving credit facility and additional cash on hand, to redeem all of the $250 million of the then-outstanding 534% HIGH TIDES convertible preferred securities. The redemption of HIGH TIDES occurred on June 4, 2003.

Titan is required to make interest payments on the Notes semi-annually in arrears on May 15 and November 15 at the rate of 8% per annum. Titan may redeem the Notes, in whole or in part, on or after May 15, 2007 at the following redemption prices, plus accrued and unpaid interest and liquidated damages, if any:


Year Percentage
2007   104.0
2008   102.0
2009 and thereafter   100.0

In addition, on or prior to May 15, 2006, Titan may redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings at a redemption price of 108% of the principal together with accrued and unpaid interest. The Notes are unsecured and rank or will rank equally with Titan's current or future senior subordinated indebtedness. Each of Titan's domestic subsidiaries other than Cayenta guarantee the Notes. The guarantees are unsecured and rank equally with each guarantor's senior subordinated indebtedness. The Notes and the guarantees are junior to all of Titan's and each guarantor's senior indebtedness and senior to all of Titan's and each guarantor's subordinated indebtedness.

On July 19, 2004, Titan completed the exchange of the existing Notes for a new series of substantially identical 8% senior subordinated notes due May 15, 2011 registered under the Securities Act.

Liquidated damages of 0.25% per annum per $1,000 whole dollars in principal amount of the then-outstanding Notes began to accrue in October 2003 when we did not complete an exchange offer required under the registration rights agreement because of the proposed merger with Lockheed Martin. Beginning in January 2004, the liquidated damages rate increased to 0.50% and such liquidated damages continued to accrue at rates increasing every 90 days by 0.25% per annum per $1,000 whole dollars in principal amount of existing Notes up to a maximum of 2.00%, until the exchange offer described below was completed. The remaining balance accrued at September 30, 2004 of $0.3 million was paid with the regular semi-annual interest payment on November 15, 2004.

Deferred costs and expenses of $5.0 million related to the issuance of the Notes are included in intangible assets at December 31, 2004, and are being amortized over the term of the Notes.

At December 31, 2004, Titan had other secured and unsecured debt outstanding under various agreements totaling $0.5 million short-term and $0.5 million long-term, with interest rates ranging from 8.5% to 9.3%. These agreements mature by 2015.

37




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Other Debt Information

Details of long-term debt are as follows:


  December 31,
  2004 2003
Senior credit facility $ 356,250   $ 344,750  
Senior subordinated debt   200,000     200,000  
Note payable to bank, interest at 9.30%, due February 2005, secured by a First Deed of Trust on an office building   280     355  
Note payable to Urban Business Development Corporation, interest at 8.58%, due January 2015, guaranteed by the Small Business Administration and secured by a Second Deed of Trust on an office building   524     558  
Acquisition related notes payable of acquired companies, interest at 8.5%, due March 2005   187     938  
    557,241     546,601  
Less: Current portion   (4,000   (4,363
  $ 553,241   $ 542,238  

Titan Debt Maturities

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


2005 $ 4,000  
2006   3,538  
2007   3,541  
2008   181,295  
2009   164,549  
Thereafter   200,318  
  $ 557,241  

Note 11.    Commitments and Contingencies

Leases

Titan leases certain buildings and equipment under non-cancelable operating lease agreements. These leases generally require Titan to pay all executory costs such as taxes, insurance and maintenance related to the leased assets. Certain of the leases contain provisions for periodic rate accelerations to reflect cost-of-living increases. Rental expense under these leases was $47.3 million in 2004, $39.3 million in 2003 and $38.8 million in 2002. In February 2000, Titan's Cayenta subsidiary entered into a new long-term lease agreement which requires future minimum lease payments of approximately $6.6 million over 7 years. Titan is a guarantor on the lease. Due to Titan's discontinuance of its Cayenta business, Titan has subleased this facility under agreements that extend through 2007. Rental expense in 2002 includes $0.9 million, paid related to this space.

Future minimum lease payments under non-cancellable operating leases at December 31, 2004, are as follows:

38




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)


2005 $ 53,933  
2006   49,606  
2007   40,839  
2008   31,264  
2009   23,569  
Thereafter   93,608  
Total minimum lease payments $ 292,819  

Obligations under capital leases were $0.1 million at December 31, 2004, which were primarily long-term and included in Other Non-current Liabilities in the consolidated balance sheet.

During the first quarter of 2003, Titan entered into new long-term lease and sublease agreements for office space in Virginia and Maryland as part of its restructuring efforts to consolidate various facilities of its government business into centralized locations (see Note 6). The lease and subleases in Virginia require future minimum lease payments of approximately $81 million over approximately 13 years, commencing on various dates from May 2003 through May 2004. The lease in Maryland requires future minimum lease payments of approximately $57 million over 10 years, commencing approximately July 1, 2004.

Legal Matters

    Foreign Corrupt Practices Act Related Investigations

As previously disclosed, during the first quarter of 2004, Titan learned of allegations that improper payments under the Foreign Corrupt Practices Act (FCPA) had been made, or items of value had been provided, involving international consultants for Titan or its subsidiaries to foreign officials. The allegations were identified as part of internal reviews conducted by Titan and Lockheed Martin, and jointly reported by them to the government. Titan's board of directors established a committee of the board to oversee Titan's internal review of these matters.

The internal review began with a focus on Titan's Datron World Communications unit, which was discontinued in June 2004 and sold in November 2004, but the internal review later was expanded to a number of Titan's international businesses, including Titan Wireless (which was discontinued in 2002 and was substantially wound down in 2003) and Titan's National ID Card contract in Saudi Arabia. Titan agreed to, and did, provide the Securities and Exchange Commission (SEC) and the Department of Justice (DoJ) with the results of the investigation on an ongoing basis. In connection with the internal review, the SEC commenced an investigation into whether payments involving Titan's international consultants were made in violation of applicable law, particularly the FCPA. In addition, the DoJ initiated a criminal inquiry into this matter, and also initiated an investigation into whether these same alleged practices violated provisions of the United States Tax Code.

As previously disclosed, Titan had recorded a provision of $3.0 million as of December 31, 2003 for resolution of the government FCPA investigations. Titan recorded an additional provision of $25.5 million in the second quarter of 2004 to reflect the change in its estimate of the cost of resolving these investigations.

As a result of the investigation, Titan began to implement significant expanded FCPA and International Traffic in Arms Regulations (ITAR) policies. To lead and oversee those expanded policies, in September 2004, Titan brought in Dave Danjczek as its Vice-President for Compliance and Ethics.

On March 1, 2005, Titan announced that it had entered into a consent to entry of a final judgment with the SEC without admitting or denying the SEC's allegations, and reached a plea

39




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

agreement with the DoJ, under which Titan pled guilty to three felony FCPA counts related to its overseas operations, including in particular its operations in Benin. These counts consist of violations of the anti-bribery and the books and records provisions of the FCPA and aiding and assisting in the preparation of a false tax return. Matters resolved through the plea agreement with the DoJ involved commercial international business that Titan had discontinued and is in the process of winding down. As a part of the settlement, Titan was given credit for self reporting and cooperating with the government, and for accepting responsibility.

On March 1, 2005, in connection with the FCPA settlement, Titan made total payments of $28.5 million, the same figure Titan reserved for this purpose in 2003 and 2004. The total includes a DoJ-recommended fine of $13 million, and payments to the SEC consisting of disgorgement of $12.6 million and prejudgment interest of $2.9 million. The Hon. Roger T. Benitez, a judge of the Federal District Court in San Diego, imposed upon Titan a fine of $13 million and a three-year term of supervised probation, both of which are consistent with the DoJ's and Titan's agreed-upon recommendations to the Court. In addition, the sentence imposed by the Court incorporated Titan's agreement to implement a best-practices compliance program designed to detect and deter future violations of the FCPA.

Further, as a result of Titan's plea agreement, Titan is currently unable to obtain new export licenses. Titan has been working with the U.S. Department of State to obtain relief from this automatic statutory provision.

The IRS agreement requires Titan to file an amended corporate tax return for 2002 to correct deductions previously taken with respect to matters at issue in the investigations. The amended tax return will not result in additional taxes, but will reduce Titan's net operating loss carry forward benefit by approximately $1.3 million. The tax provision affect of the amended tax return was made in the fourth quarter of 2004. Under the Consent to Entry of Final Judgment with the SEC, Titan agreed, within 30 days, to retain a qualified independent consultant to review Titan's policies and procedures with respect to its compliance with the FCPA, and to adopt the consultant's recommendations.

After the plea was entered, Titan and the Navy executed an administrative settlement agreement that will allow Titan to continue to conduct business under U.S. government contracts and receive U.S. government contracts. The agreement also provides for Navy monitoring of Titan's compliance activities for three years.

On June 26, 2004, Lockheed Martin Corporation terminated the merger agreement pursuant to which Lockheed Martin was to have acquired Titan. The merger agreement was entered into in September 2003 and amended in March 2004 and April 2004 to provide additional time for Titan to resolve the FCPA investigations.

    Other Legal Matters

Titan is involved in legal actions in the normal course of its business, including audits and investigations by various governmental agencies that result from its work as a defense contractor. Titan and its subsidiaries are named as defendants in legal proceedings from time to time and third parties, including the government, may assert claims against Titan from time to time. In addition, Titan has acquired companies from time to time that have legal actions pending against them at the time of acquisition. Based upon current information, including consultation with its lawyers, Titan does not believe that the ultimate liability arising from any of these actions, including those discussed below, will materially affect its consolidated financial position. The March 1, 2005 FCPA settlement payment will materially impact cash flow in the first quarter of 2005. Titan's evaluation of the likely impact of these actions, including those discussed below, could change in the future and Titan could

40




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

have unfavorable outcomes that it does not expect. Any of these events could have a material adverse effect on Titan's results of operations or cash flows in a future period and could have other adverse effects on Titan's business.

    Stockholder Class Actions

Since April 2, 2004, two stockholder class action lawsuits have been filed against Titan and certain of its officers, asserting claims under the federal securities laws, which we refer to collectively as the federal securities actions. On September 17, 2004, these class action lawsuits were consolidated as In re Titan Inc. Securities Litigation, No. 04-CV-0701-K(NLS), a consolidated purported class action filed before the U.S. District Court for the Southern District of California. The federal securities action purports to be brought on behalf of all purchasers of Titan common stock during the period from July 24, 2003 through and including March 22, 2004. The complaint seeks an unspecified amount of damages. The complaint alleges, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and SEC Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, by issuing a series of press releases, public statements and filings disclosing significant historical and future revenue growth, but omitting to mention certain allegedly improper payments involving international consultants in connection with Titan's international operations, thereby artificially inflating the trading price of Titan's common stock. On January 14, 2005, Titan and certain individual defendants jointly filed a motion to dismiss. The hearing on the defendants' motion is currently scheduled to be heard on May 9, 2005. Titan intends to defend the claims vigorously.

Since April 7, 2004, two stockholder class action complaints have been filed against certain Titan officers, asserting that these officers breached their fiduciary duties to Titan's stockholders. The complaints, which we refer to as the fiduciary duty actions, were filed in the Superior Court for the State of California in and for San Diego County. The cases include Paul Berger v. Gene W. Ray, et al., No. GIC 828346, and Robert Garfield v. Mark W. Sopp, et. al, No. GIC 828345. The fiduciary duty actions purport to be brought on behalf of all holders of Titan common stock as of April 7, 2004. The fiduciary duty actions allege, among other things, that the defendants breached their fiduciary duties by acquiescing in or condoning Titan's alleged violations of the FCPA by failing to establish adequate procedures to prevent the alleged FCPA violations, and by failing, in bad faith, to voluntarily report the alleged FCPA violations to government officials. The complaints seek compensatory damages in respect of the loss of value sustained by Titan stockholders as a result of the reduction in merger consideration payable to them under the terms of the amendment to the merger agreement with Lockheed Martin delivered on April 7, 2004. The Berger and Garfield matters have been consolidated and are now treated, for all purposes, as the Garfield matter. Additionally, plaintiffs and defendants have agreed that defendants are not required to answer or otherwise respond to the Garfield complaint until the motions to dismiss in the federal securities action have been denied or granted with prejudice. Titan intends to defend the claims vigorously.

Since June 28, 2004, three shareholder derivative lawsuits have been filed against Titan directors and certain Titan officers, naming Titan as a nominal defendant, which we refer to collectively as the derivative actions. The derivative actions include Theodore Weisgerber v. Gene Ray, et al., No. 832018, which was filed in the Superior Court for the State of California, San Diego; Robert Ridgeway v. Gene Ray, et al., No. 542-N, which was filed in Delaware Court of Chancery, New Castle County; and Bernd Bildstein v. Gene Ray, et al., No. 833701, which was filed in the Superior Court for the State of California, San Diego County. The derivative actions purport to be brought for the benefit of the nominal defendant, Titan, and allege that the defendants breached their fiduciary duties by failing to monitor and supervise management in a way that would have either prevented alleged FCPA violations or would have detected the FCPA violations. The Weisgerber complaint was subsequently amended to include allegations that the defendants breached their fiduciary duties by failing to

41




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

monitor and supervise management in a way that would have prevented the alleged mistreatment of prisoners at the Abu Ghraib prison in Iraq, alleged billing errors relating to work performed by foreign nationals, and the loss of contracts with the government. The plaintiffs seek to recover the costs incurred in the internal and external investigations, penalties or damages paid to settle private litigation or government proceedings, and lost goodwill. The Weisgerber and Bildstein matters have been consolidated and are now treated, for all purposes, as the Weisgerber matter. Titan intends to defend the claims vigorously.

    SureBeam Related Litigation

In August 2002, Titan completed the spin-off of its former subsidiary, SureBeam Corporation. On January 19, 2004, SureBeam voluntarily filed for bankruptcy relief to be liquidated under Chapter 7 of the United States Bankruptcy Court. Various lawsuits have been filed against Titan and/or certain directors and executive officers of Titan in connection with SureBeam.

Since August 2003, Titan, certain corporate officers of SureBeam Corporation, a former subsidiary of Titan, Dr. Gene Ray and Susan Golding, as SureBeam directors, and certain investment banks that served as lead underwriters for SureBeam's March 2001 initial public offering, have been named as defendants in several purported class action lawsuits filed by holders of common stock of SureBeam in the U.S. District Court. On October 6, 2003, these class action lawsuits were consolidated into In re SureBeam Corporation Securities Litigation, No. 03-CV-001721-JM (POR), a single class action for which an amended consolidated class action complaint was filed on March 24, 2004, with the U.S. District Court for the Southern District of California. The complaint seeks an unspecified amount of damages. The SureBeam class action complaint alleges that each of the defendants, including Titan, as a "control person" of SureBeam within the meaning of Section 15 of the Securities Act, should be held liable under Section 11 of the Securities Act because the prospectus for SureBeam's initial public offering was allegedly inaccurate and misleading, contained untrue statements of material facts, and omitted to state other facts necessary to make the statements made not misleading. The SureBeam class action complaint also alleges that the defendants, including Titan, as a control person of SureBeam within the meaning of Section 20(a) of the Exchange Act, should be held liable under Section 10(b) of the Exchange Act for false and misleading statements made during the period from March 16, 2001 to August 27, 2003. On January 3, 2005, the court granted in part and denied in part motions to dismiss the amended consolidated complaint. The court granted plaintiffs 45 days leave to amend their complaint, which amended complaint has been filed. Titan intends to defend the claims vigorously.

On September 17, 2004, the bankruptcy trustee in the SureBeam Corporation bankruptcy pending in the United States Bankruptcy Court for the Southern District of California brought an action in San Diego Superior Court, on behalf of the bankruptcy estate, against certain directors and current and former executive officers of Titan who served at one time as directors or officers of SureBeam. Titan is not named as defendant in this litigation and received a prior release of claims from the bankruptcy trustee. Because the defendants were named by reason of the fact that they were serving as directors or officers of SureBeam at the request of Titan, Titan is covering the costs of defense of these claims, subject to indemnification agreements and bylaw provisions.

    Other Legal Proceedings

Since June 9, 2004, two lawsuits have been filed alleging that Titan and other defendants either participated in, approved of, or condoned the mistreatment of prisoners by United States military officials in certain prison facilities in Iraq in violation of federal, state and international law. The first of these cases, Saleh v. Titan Corporation, No. 04-CV-1143 R, was filed in the United States District Court for the Southern District of California against The Titan Corporation, CACI International, Inc.

42




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

(CACI), and its affiliates, and three individuals (one formally employed by Titan and one by a Titan subcontractor). Plaintiffs in Saleh seek class certification. The second case, Ibrahim v. Titan Corporation, NO. 04-CV-1248, was filed on July 27, 2004, on behalf of five individual plaintiffs against Titan, CACI and CACI affiliates, and contains allegations similar to those in Saleh. Class certification has not been requested in Ibrahim. Titan intends to defend these lawsuits vigorously.

On August 16, 2002, Perimex International Corporation (Perimex) filed a complaint against Titan, Titan Wireless, Inc. (Titan Wireless) and a former Titan Wireless employee in San Diego Superior Court in San Diego, California. The complaint alleged breach of contract, breach of the covenant of good faith and fair dealing, intentional interference with existing contractual relationships and prospective business advantage and violation of the California unfair competition law arising from an alleged failure of Titan Wireless to enter a joint venture with Perimex to develop a telecommunications network in Argentina and other related alleged misconduct. The complaint sought damages of $52.7 million and sought injunctive relief prohibiting Titan and Titan Wireless from transferring any of Titan Wireless's assets. The court denied Perimex's request for a preliminary injunction, sustained Titan's and Titan Wireless's demurrer as to all causes of action in the complaint and granted Perimex leave to amend the complaint. Perimex dismissed its complaint voluntarily without prejudice. On May 22, 2003, however, Perimex filed a new complaint in the United States District Court for the Southern District of California, NO. 03-cv-1037 IEG (WMC), alleging substantially similar causes of action and claiming a similar amount of damages. Perimex twice amended this federal complaint to add additional claims. Titan intends to defend the claims vigorously.

On January 23, 2004, Titan, together with its wholly-owned subsidiary, Titan Wireless, Inc., and Titan Wireless's wholly-owned subsidiary, Titan Africa, Inc., were named as defendants in Gonzales Communications, Inc. v. Titan Wireless, Inc., Titan Africa, Inc., The Titan Corporation, Geolution International Inc., and Mundi development, Inc., a lawsuit filed in the U.S. District Court for the Southern District of California, NO. 04-cv-0147 WQH (WMc). The complaint relates to the purchase by Gonzales Communications of equipment and related services under an equipment purchase agreement entered into with Titan Wireless in June 2001. Gonzales Communications contends that the equipment and services delivered were unsatisfactory. In the complaint, Gonzales Communications seeks direct damages in the amount of $0.9 million plus interest, representing the amount Gonzales Communications alleges to have previously paid under the agreement, and consequential damages of approximately $16.3 million. To date, Titan and its subsidiaries have not received payment in full under the agreement for the equipment and services that were delivered to Gonzales Communications. Titan has filed a counterclaim against Gonzales Communications for in excess of $1.2 million. Titan intends to defend its position vigorously.

In October 2002, Titan received a grand jury subpoena from the Antitrust Division of the DoJ requesting the production of documents relating to information technology services performed for the Air Force at Hanscom Air Force Base in Massachusetts. Titan has been informed that other companies who have performed similar services have received subpoenas as well. Titan is not aware of any illegal or inappropriate conduct and has been cooperating and will continue to cooperate fully with the investigation.

In March 2003, Titan received a subpoena from the Office of Inspector General for the National Aeronautics and Space Administration, or NASA, seeking certain records relating to billing for labor services in connection with its contracts with NASA. Titan also received a subpoena from the Office of Inspector General for the General Services Administration, or GSA, seeking similar records relating to billing for labor categories in connection with contracts with GSA. Titan is not aware of any illegal or inappropriate conduct and has been cooperating and will continue to cooperate fully with the investigation.

43




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Note 12.    Cumulative Convertible Preferred Stock

On March 15, 2004, Titan redeemed all outstanding shares of its cumulative convertible preferred stock. The redemption was a condition to the closing of the then-proposed merger with Lockheed Martin. An aggregate of 625,846 shares were redeemed at $20 per share, plus cumulative dividends in arrears of $0.03 per share, which utilized cash of approximately $12.5 million, and the remaining 60,983 shares of preferred stock were converted by shareholders into 47,580 shares of common stock. The redemption of the preferred stock is recorded as a reduction to stockholders' equity.

Note 13.    Common Stock

At December 31, 2004, approximately 4,100,000 common shares were reserved for future issuance for employee benefit and stock incentive plans.

On September 25, 2002, Titan Systems Corporation, Titan's national security subsidiary, was merged into The Titan Corporation. As a result of this merger, outstanding stock options held by employees of Titan Systems Corporation were exchanged using an exchange ratio of .8371, for approximately 5.4 million stock options in The Titan Corporation. The exchange ratio was determined by Titan using a valuation of Titan Systems Corporation, as determined by a globally recognized valuation firm, and the average Titan Corporation closing stock price for the 20 trading days ending on the day before the merger.

The exchange of Titan options resulted in a non-cash deferred compensation charge of approximately $21.3 million in the third quarter of 2002, which is reflected in selling, general and administrative expense in the accompanying consolidated statements of operations. Approximately $1.5 million, $4.8 million and $2.0 million was amortized in 2004, 2003 and 2002, respectively. Unamortized non-cash deferred compensation of $0.1 million will be amortized in 2005 as the options become fully vested.

On July 26, 2001, Titan sold 8,048,685 shares of its common stock in a public offering, which included an over-allotment of 1,125,000 shares, at a price of $18.00 per share. We received approximate aggregate proceeds from the offering of $137.6 million in July 2001, net of underwriters' commissions. Transaction expenses related to the offering were approximately $1.4 million. In addition, certain Titan stockholders sold 576,315 shares, including 489,972 shares from the exercise of options, from which Titan received proceeds of $3.0 million.

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

If a person or group acquires 15% or more of Titan's common stock, each Right (other than Rights held by the acquiring person or group which become void) will entitle the holder to receive upon exercise a number of shares of Titan's common stock having a market value of twice the Right's exercise price. If Titan is acquired in a transaction not approved by the Board, each Right may be exercised for common shares of the acquiring company having a market value of twice the Right's exercise price. Titan may redeem the Rights at $.01 per Right, subject to certain conditions. The Rights expire on August 17, 2005.

Options authorized for grant under the 2002 Employee and Director Stock Option and Incentive Plan (the 2002 Plan) and under the 2000 Employee and Director Stock Option Plan (the 2000 Plan)

44




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

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

Under the 2002 and 2000 Employee and Director plans, and previous employee plans, an option's maximum term is ten years. Under these plans, vested options expire 90 days after a grantee's termination of employment or other relationship. Under the 1996 Directors' Plan, options expire 90 days after the option holder ceases to be a director. Under the applicable plans, directors may elect to receive stock in lieu of fees, such stock to have a fair market value equal to the fees. Employee options may be granted throughout the year; directors' options are granted annually. Under the 2000 Plan, vesting for directors and first-time option grantees is over four years, with 25% exercisable at the completion of one year, and monthly vesting thereafter. For option grants prior to the 2000 Plan, vesting is monthly over 4 years. Options in the Stock Option Plans of 1994 and 1997 and the 1996 Directors' Plan vest in 25% increments beginning one year after the grant date. Stock options assumed by Titan as a result of the mergers in prior years generally retain the terms under which they were granted. Stock options assumed by The Titan Corporation as a result of the merger with Titan Systems Corporation discussed above retain the terms of the Titan Systems plans.

Titan elected to follow APB No. 25 and related interpretations in accounting for its stock options. See Note 3 for a calculation of Titan's pro forma net income and earnings per share under the fair value method pursuant to SFAS No. 123.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: zero dividend yield and an expected life of 5 years in all years; expected volatility of 78% in 2004, 73% in 2003, and 73% in 2002; and a risk free interest rate of 3.38% in 2004, 3.82% in 2003, and 3.82% in 2002.

A summary of the status of Titan's fixed stock option plans as of December 31, 2004, 2003 and 2002, and changes during the years ending on those dates is presented below:

45




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)


  2004 2003 2002
  Shares
(000)
Weighted-
Average
Exercise
Price
Shares
(000)
Weighted-
Average
Exercise
Price
Shares
(000)
Weighted-
Average
Exercise
Price
Outstanding at beginning of year   9,648   $ 9.04     11,006   $ 8.56     5,128   $ 14.45  
Granted   2,519     13.48     2,108     8.14     952     13.32  
Adjustment for TSC merger                   5,248     4.55  
Adjustment for SureBeam spin-off                   1,789      
Exchanged in acquisitions                   14     12.79  
Exercised   (2,214   6.61     (2,758   5.57     (1,209   6.92  
Canceled   (796   11.67     (708   12.04     (916   9.07  
Outstanding at end of year   9,157     10.61     9,648     9.04     11,006     8.56  
Options exercisable at year-end   5,473           6,190           6,957        
Weighted-average fair value of options granted during the year $ 8.74         $ 5.08         $ 8.49        

The following table summarizes information about fixed stock options outstanding at December 31, 2004:


  Options Outstanding Options Exercisable
Range of
Exercise Prices
Number
Outstanding
at 12/31/04
Weighted-Average
Remaining
Contractual Life
Weighted-Average
Exercise Price
Number
Exercisable
at 12/31/04
Weighted-Average
Exercise Price
$1.04-$6.86   1,875,817     4.07   $ 3.29     1,857,001   $ 3.25  
6.88- 10.90   2,531,164     7.46     8.57     1,411,100     8.60  
10.94- 13.44   2,777,607     9.15     13.16     496,278     12.59  
13.58- 17.29   1,773,193     6.09     15.41     1,510,278     15.55  
19.43- 29.74   198,849     5.17     27.29     197,949     27.32  
1.04- 29.74   9,156,630     6.96     10.61     5,472,606     9.75  

As a result of the SureBeam spin-off, all Titan outstanding stock options under each of Titan's stock option plans were adjusted such that the number of options was increased by a factor of 1.345 and the exercise price was decreased by dividing by 1.345. This adjustment maintained the same aggregate intrinsic value of the stock options that existed prior to the spin-off compared to the aggregate intrinsic value of the stock options immediately after the transaction and ensured that the ratio of the exercise price per share to the market value per share was not reduced. The adjustment was determined in accordance with the FASB's Financial Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock Compensation," and resulted in no compensation charge.

Under the 2002 Employee Stock Purchase Plan, Titan is authorized to issue up to 2,500,000 shares of common stock to its full-time employees. This plan replaced Titan's 2000 Employee Stock Purchase Plan and Titan's 1995 Employee Stock Purchase Plan, which were authorized to issue 1,500,000 and 500,000 shares respectively. All employees of Titan are eligible to participate in the plan. Under the terms of the plan, employees may elect to have between 1 and 15 percent of their regular earnings, as defined in the plan, withheld to purchase Titan's common stock. The purchase price of the stock is 85 percent of the lower of its market price at the beginning or at the end of each offering period. An offering period is six months, beginning January 1 and July 1 of each year. Approximately 17%, 14%, and 21% of eligible employees participated in the Plan and purchased approximately 305,000, 784,000, and 655,100 shares of Titan's common stock in 2004, 2003, and 2002, respectively. During 2003 and 2002, grants of approximately 243,400 and 202,800 shares of Titan stock under the 2002 Employee and Director Stock Option and Incentive Plan were utilized to fulfill Titan's funding requirement under the

46




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

2000 Employee Stock Purchase Plan. The weighted-average fair value of the purchase rights granted in 2004, 2003, and 2002 was $3.32, $2.37, and $3.73, respectively, which represents the approximate intrinsic value to the participants related to the benefits of participation in the plan as determined in accordance with SFAS 123.

Note 14.    Related Party Transactions

Agreements With Executive Officers

Employment Agreements.    On April 2, 2003, Titan entered into an Employment Agreement with Dr. Ray in connection with his duties as Chairman, Chief Executive Officer and President of Titan. Among other things, the terms of the agreement provide for continued employment of Dr. Ray by Titan for a term of three years, and eligibility to receive annual incentive awards and to participate in long-term incentive, employee benefit and retirement programs. In the event that Dr. Ray is terminated without cause, or retires at the end of the term of the agreement, he will be entitled to a lump sum equal to three times the sum of his current base salary and target bonus, vesting of all outstanding stock options and participation for Dr. Ray and his dependents in Titan's extended health benefits program for retired senior executives.

Also, on April 2, 2003, Titan entered into Employment Agreements with Messrs. Costanza and Sopp in connection with their duties as Senior Vice President, General Counsel and Secretary and Senior Vice President, Chief Financial Officer and Treasurer, respectively. Among other things, the terms of their agreements provide for continued employment by Titan for a term of two years, eligibility to receive annual incentive awards and to participate in long-term incentive, employee benefit and retirement programs. In the event of termination without cause, Messrs. Costanza and Sopp will each be entitled to a lump sum equal to two times the sum of their respective current base salaries and target bonuses, vesting of all outstanding stock options and continued medical and dental benefits coverage for a period of two years. Messrs. Ray, Costanza and Sopp have agreed to non-competition and non-solicitation covenants in connection with their respective employment agreements.

In March of 2005, Titan entered into agreements to renew the term of the Employment Agreements, previously entered into with Messrs. Costanza and Sopp. These agreements renew the terms of the original agreements, on the same terms, for an additional two years.

In no event, however, shall the Executive be entitled to duplication as to any item of compensation or benefit or as to any other entitlement that is provided under both the Employment Agreement and the Change of Control Agreement described below. In the case of any such duplication, the Executive shall be entitled to the provision of the Employment Agreement or the Change of Control Agreement described below that is most favorable to the Executive.

Change in Control Agreements.    In March 2000, Titan entered into executive agreements with Titan's Chairman of the Board, President and Chief Executive Officer (hereinafter referred to as the CEO) and Titan's General Counsel, which provide special benefits after a change in control. The parties subsequently amended these agreements on September 14, 2003 to clarify certain terms and conditions as they related to the change in control that would result from the then proposed merger with Lockheed Martin. Effective as of August 20, 2003, Titan also entered into an executive agreement with Titan's Chief Financial Officer, which mirrors the executive agreement, as amended, for Titan's General Counsel. Pursuant to these agreements, as amended, if (1) there is a change in control of Titan and (2) the executive is terminated by Titan other than for "Cause" (as defined in the agreements) or such executive terminates his employment for "Good Reason" (as defined in the agreements) within three years following a change in control or if the executive is terminated prior to a change in control and the executive reasonably believes that his termination arose in connection

47




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

with or anticipation of a change in control, the terminated executive will be entitled to a lump sum payment amount equal to three times the sum of his base salary and his "Highest Annual Bonus" (as defined in the agreements). Each executive will have a right under these agreements to resign for "Good Reason" if at the effective time of a change of control Titan will cease to be a publicly traded company. Also, the executive will receive a prorated bonus for the year of termination and continuation of the executive's and his family's welfare benefits (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) for three years after the later of the executive's date of termination or, as applicable, the expiration of the executive's continuation coverage period under the Consolidated Omnibus Budget Reconciliation Act, referred to as COBRA. In addition, all options that have been previously granted to the executive to acquire shares of Titan or any affiliate of Titan that have not previously been forfeited or exercised will vest and become exercisable in full and will remain exercisable for the remainder of their original terms. Titan will be obligated under these agreements to reimburse the CEO, Titan's General Counsel and Titan's Chief Financial Officer for all legal fees and all expenses which they incur in asserting or in defending their rights under these agreements.

In June 2004, Titan's Board adopted resolutions that provide for executive agreements with Dr. Delaney and each of Messrs. Branch, Brennan, Frederickson, Gorda, Osterloh, Pontius, Rose and Sullivan, which shall provide for substantially the same rights of such individuals upon a change of control as Messrs. Costanza and Sopp are entitled under their current agreements of similar purpose. The principal difference between the rights under these executive agreements and those of Messrs. Costanza and Sopp is that "Good Reason" to terminate employment with Titan does not include Titan ceasing to be a publicly traded company as it does for Messrs. Costanza and Sopp. Mr. Gorda may, in his sole discretion, retain his existing rights pursuant to an executive severance agreement between Mr. Gorda and the Company entered into in November 1995 or he may elect to receive the new benefits.

Investor Relations Consulting Agreements

In September 2004, Titan entered into an agreement with the Berlin Group, an investor relations firm. A principal in the firm is a family member of one of its senior executives. Management believes the terms of the agreement reflect the market value of the services received.

Certain Relationships And Related Transactions

In conjunction with Titan's exit of its international telecommunications business, Titan entered into an agreement with Geolutions, Inc. (Geolutions) to assume and perform all of Titan Wireless's outstanding warranty obligations. Geolutions was a newly formed company, founded by a former executive of Titan Wireless and former officer of Titan. Titan entered into a fixed price contract of $1.9 million, plus incidental expenses of up to $0.6 million and other third party costs of an aggregate maximum of $1.4 million, which was subsequently reduced by $0.5 million. These fees were payable through September 2004, the period over which Titan's warranty obligations exist on its existing customer contracts. In March 2004, Titan settled its remaining contractual liability to Geolutions and no longer has outstanding warranty obligations concerning Titan Wireless.

In March 2002, Titan's Board of Directors adopted a stock option relinquishment program, the primary purpose of which was to align the interests of its directors and senior executives more closely with its stockholders' interests by allowing directors and senior executives to participate in the appreciation in Titan equity value:

•  without requiring Titan's Directors and executive officers to trade shares of its common stock obtained through the exercise of options on the open market; and
•  without the dilutive and potentially stock-price depressive effects associated with the exercise and subsequent sale of stock option shares.

48




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

The program also was intended to assist the participants with their individual financial planning. Under the program, a participant was allowed to relinquish eligible, in-the-money stock options in exchange for a loan, the principal amount of which was 150% of the difference between the aggregate exercise price of the options and the product of (i) the number of shares issuable upon exercise of the options and (ii) a 20 day trailing average of the daily high and low sales price of Titan's common stock prior to relinquishment. The loans bear interest at a rate equal to the applicable federal rate as published by the Internal Revenue Service for the month in which the loan was made. The loans were made contingent upon the participant's utilizing a portion of the loan proceeds to purchase a life insurance policy with a death benefit sufficient to repay the loan and accrued interest thereon upon maturity.

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

•  Dr. Ray, Chairman of the Board and Chief Executive Officer: 222,380 options relinquished on June 18, 2002, $3,985,725 principal amount of loan, 5.48% interest per annum;
•  Mr. Fink, Director: 15,000 options relinquished on June 27, 2002, $336,337.50 principal amount of loan, 5.48% interest per annum; and
•  Mr. Alexander, Director: 19,972 options relinquished effective June 19, 2002, $499,999 principal amount of loan, 5.48% interest per annum.

The amount of the stock options relinquished under the program do not reflect any adjustment as a result of the spin-off of Titan's subsidiary SureBeam Corporation on August 5, 2002, since the relinquishment occurred before the date for said adjustment. Titan has recorded interest income of $0.5 million to date related to the accrued interest on the outstanding loans due from the directors noted above.

As of the effective date of the Sarbanes-Oxley Act in July 2002, which precludes such loans to company officers and directors, the Stock Option and Relinquishment Plan was no longer available to Titan Directors and executive officers.

An officer of one of Titan's operating units has a financial interest in a facility rented by the unit. Total rent paid by the unit in 2003 related to this facility was $0.2 million and this facility was sold by the officer to an unrelated party in the first quarter of 2004.

Note 15.    Benefit Plans

Titan has various defined contribution benefit plans covering certain employees. Titan's contributions to these plans were $17.6 million, $19.5 million, and $14.6 million, in 2004, 2003, and 2002, respectively. No discretionary contributions were made in 2004, 2003, or 2002.

Titan has a non-qualified executive deferred compensation plan for certain officers and key employees. Titan's expense for this plan, including interest, was $0.9 million, $1.9 million, and $0.9 million, in 2004, 2003, and 2002, respectively. Interest expense for the years ended December 31, 2004, 2003, and 2002 includes $0.5 million, $0.3 million, and $0.6 million, respectively, related to the plan. This obligation has been fully funded and is carried in a Rabbi trust. Included in other non-current liabilities is $21.7 million and $15.6 million related to this plan at December 31, 2004 and 2003, respectively. Included in other current liabilities is $1.7 million related to this plan at December 31, 2004. Cash surrender value of the life insurance related to this plan was $23.1 million and $15.8 million included in Other Assets in the consolidated balance sheet at December 31, 2004 and 2003, respectively. Titan also has performance bonus plans for certain of its employees. Related expense amounted to approximately $21.7 million, $21.9 million, and $14.5 million in 2004, 2003, and 2002, respectively.

Titan has previously provided for post-retirement benefits for employees of certain operations discontinued in prior years. Titan also implemented a post-retirement medical benefit plan for senior

49




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

executives in 2000. All values related to this plan are immaterial. Titan has no other post-retirement benefit or pension obligations for any of its continuing operations or for its recently discontinued businesses.

Note 16.    Guarantor Condensed Consolidating Financial Statements

On May 15, 2003, Titan sold $200 million aggregate principal amount of 8% senior subordinated notes in a private placement. Titan used the net proceeds from its issuance of the 8% senior subordinated notes, plus borrowings of $50 million we made under its revolving credit facility and additional cash on hand, to redeem all of its then-outstanding 534% HIGH TIDES convertible preferred securities, effective June 4, 2003.

Following are consolidating condensed financial statements to quantify the financial position as of December 31, 2004, and 2003, and the operations and cash flows for the years ended December 31, 2004, 2003, and 2002, for the Guarantor Subisdiaries listed below and the Non-Guarantor Subsidiaries listed below. The following consolidating condensed balance sheets, consolidating condensed statements of operations and consolidating condensed statements of cash flows present financial information for:

Parent: The Titan Corporation on a stand-alone basis.

Guarantor Subsidiaries: All directly and indirectly owned domestic subsidiaries of Parent other than Cayenta Inc. on a stand-alone basis.

Non-guarantor Subsidiaries: Cayenta Inc. and all direct and indirect subsidiaries of Parent that are not organized under the laws of the United States, any state of the United States or the District of Columbia and that conduct substantially all business operations outside the United States.

Reclassifications and Eliminations: Entries that eliminate the investment in subsidiaries and intercompany balances and transactions.

The Titan Corporation and Subsidiaries: The financial information for The Titan Corporation on a condensed consolidated basis.

The classification of operating entities within each of the columns is based on the legal status of the entity as of December 31, 2004. Accordingly, certain legal entities that existed in prior years that had been merged into Titan as of December 31, 2004 have been reclassified in the prior year condensed financial statements to conform with the current year presentation.

50




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Year Ended December 31, 2004
(In thousands)


  Parent Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Reclassifications
and Eliminations
The Titan
Corporation and
Subsidiaries
Revenues $ 1,960,374   $ 72,244   $ 21,273   $ (7,366 $ 2,046,525  
Cost and expenses:                              
Cost of revenues   1,644,098     62,410     30,244     (6,789   1,729,963  
Selling, general and
administrative
  142,223     5,160     7,699         155,082  
Research and development   13,464     1,642             15,106  
Merger, investigation and settlement   59,932                 59,932  
Asset impairments   5,500         9,995         15,495  
Total costs and expenses   1,865,217     69,212     47,938     (6,789   1,975,578  
Operating profit (loss)   95,157     3,032     (26,665   (577   70,947  
Interest expense   (37,684               (37,684
Interest income   745         13         758  
Loss on investments   (3,867               (3,867
Net gain on sale of asset   863     (300           563  
Income (loss) from continuing operations before income taxes   55,214     2,732     (26,652   (577   30,717  
Income tax provision (benefit)   26,017     1,011     (9,861   (214   16,953  
Income (loss) from continuing operations   29,197     1,721     (16,791   (363   13,764  
Loss from discontinued operations, net of taxes   (31,217   (20,052   (892       (52,161
Earnings (loss) before equity in losses of subsidiaries   (2,020   (18,331   (17,683   (363   (38,397
Equity in losses of subsidiaries   (36,013           36,013      
Net earnings (loss) $ (38,033 $ (18,331 $ (17,683 $ 35,650   $ (38,397

51




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Year Ended December 31, 2003
(In thousands)


  Parent Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Reclassifications
and Eliminations
The Titan
Corporation and
Subsidiaries
Revenues $ 1,667,509   $ 60,065   $ 31,376   $ (2,744 $ 1,756,206  
Cost and expenses:                              
Cost of revenues   1,389,111     50,769     27,365     (2,536   1,464,709  
Selling, general and
administrative
  140,215     7,836     5,558         153,609  
Research and development   8,368     2,054             10,422  
Impairment charge related to SureBeam   15,757                 15,757  
Merger related costs   5,247                 5,247  
Total costs and expenses   1,558,698     60,659     32,923     (2,536   1,649,744  
Operating profit (loss)   108,811     (594   (1,547   (208   106,462  
Interest expense   (34,463       (26       (34,489
Interest income   2,315     4     7         2,326  
Debt extinguishment costs   (12,423               (12,423
Loss on investments   (6,154               (6,154
Income (loss) from continuing operations before income taxes   58,086     (590   (1,566   (208   55,722  
Income tax provision (benefit)   24,781     (251   (633   (84   23,813  
Income (loss) from continuing operations   33,305     (339   (933   (124   31,909  
Loss from discontinued operations, net of taxes   (1,578   (419   (815       (2,812
Earnings (loss) before equity in losses of subsidiaries   31,727     (758   (1,748   (124   29,097  
Equity in losses of subsidiaries   (2,506           2,506      
Net earnings (loss) $ 29,221   $ (758 $ (1,748 $ 2,382   $ 29,097  

52




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Year Ended December 31, 2002
(In thousands)


  Parent Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Reclassifications
and Eliminations
The Titan
Corporation and
Subsidiaries
Revenues $ 1,327,284   $ 17,169   $ 30,306   $ (5,030 $ 1,369,729  
Cost and expenses:                              
Cost of revenues   1,084,257     14,964     18,586     (4,534   1,113,273  
Selling, general and
administrative
  159,733     4,960     7,464         172,157  
Research and development   7,378     378             7,756  
Exit and restructuring charges and other   41,642         11,675         53,317  
Total costs and expenses   1,293,010     20,302     37,725     (4,534   1,346,503  
Operating profit (loss)   34,274     (3,133   (7,419   (496   23,226  
Interest expense   (32,551       (2       (32,553
Interest income   1,708                 1,708  
Debt extinguishment costs   (9,435               (9,435
Loss from continuing operations before income taxes and cumulative effect of change in accounting principle   (6,004   (3,133   (7,421   (496   (17,054
Income tax benefit   (503   (262   (4,783   (55   (5,603
Loss from continuing operations before cumulative effect of change in accounting principle   (5,501   (2,871   (2,638   (441   (11,451
Loss from discontinued operations, net of taxes   (18,711   (157,240   (43,948       (219,899
Loss before cumulative effect of change in accounting principle   (24,212   (160,111   (46,586   (441   (231,350
Cumulative effect of change in accounting principle, net of tax benefit   (9,414       (30,697       (40,111
Loss before equity in losses of subsidiaries   (33,626   (160,111   (77,283   (441   (271,461
Equity in losses of subsidiaries   (237,394   (35,972       273,366      
Net earnings (loss) $ (271,020 $ (196,083 $ (77,283 $ 272,925   $ (271,461

53




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Balance Sheet
As of December 31, 2004
(In thousands)


  Parent Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Assets                              
Current Assets:                              
Cash and cash equivalents $ 17,364   $ (611 $ (81 $   $ 16,672  
Accounts receivable—net   484,664     15,973     14,749         515,386  
Inventories   21,336                 21,336  
Prepaid expenses and other   28,885     501     230     (577   29,039  
Deferred income taxes   95,390                 95,390  
Current assets of discontinued operations       1,665             1,665  
Total current assets   647,639     17,528     14,898     (577   679,488  
Property and equipment, net   56,243     427     872         57,542  
Goodwill   456,033     8,377     59         464,469  
Other assets—net   61,325     21     72         61,418  
Deferred income taxes   68,380                 68,380  
Non-current assets of discontinued operations       26,469             26,469  
Intercompany investments and advances—net   319,519     (171,744   (147,775        
Total assets $ 1,609,139   $ (118,922 $ (131,874 $ (577 $ 1,357,766  
Liabilities and Stockholders' Equity                              
Current Liabilities:                              
Current portion of amounts outstanding under line of credit $ 3,500   $   $   $   $ 3,500  
Accounts payable   107,991     7,296     745         116,032  
Current portion of long-term debt   500                 500  
Accrued compensation and benefits   93,412     2,213     2,743         98,368  
Other accrued liabilities   109,536     3,339     2,293         115,168  
Current liabilities of discontinued operations   5,095     14,123     1,777         20,995  
Total current liabilities   320,034     26,971     7,558         354,563  
Long-term portion of amounts outstanding under line of credit   352,750                 352,750  
Senior subordinated debt   200,000                 200,000  
Other long-term debt   491                 491  
Other non-current liabilities   66,632         1,932         68,564  
Non-current liabilities of discontinued operations   9,931     23,387             33,318  
Stockholders' equity (deficit)   659,301     (169,280   (141,364   (577   348,080  
Total liabilities and equity $ 1,609,139   $ (118,922 $ (131,874 $ (577 $ 1,357,766  

54




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Balance Sheet
As of December 31, 2003
(In thousands)


  Parent Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Assets                              
Current Assets:                              
Cash and cash equivalents $ 25,950   $ (941 $ 1,965   $   $ 26,974  
Accounts receivable—net   339,580     14,324     27,361         381,265  
Inventories   12,676     1,918     6,836         21,430  
Prepaid expenses and other   23,076     538     296     (208   23,702  
Deferred income taxes   91,272                 91,272  
Current assets of discontinued operations   13,747     15,545     8,185         37,477  
Total current assets   506,301     31,384     44,643     (208   582,120  
Property and equipment, net   37,541     3,028     11,939         52,508  
Goodwill   455,016     7,834     59         462,909  
Other assets—net   57,825     8,295     5         66,125  
Deferred Income tax   62,781                 62,781  
Non-current assets of discontinued operations   19,153     45,039             64,192  
Intercompany investments and advances—net   348,309     (182,666   (165,643        
Total assets $ 1,486,926   $ (87,086 $ (108,997 $ (208 $ 1,290,635  
Liabilities and Stockholders' Equity                              
Current Liabilities:                              
Current portion of amounts outstanding under line of credit $ 3,500   $   $   $   $ 3,500  
Accounts payable   76,685     10,499     2,902         90,086  
Current portion of long-term debt   863                 863  
Accrued compensation and benefits   77,271     2,752     1,309         81,332  
Other accrued liabilities   87,695     3,667     1,767         93,129  
Current liabilities of discontinued operations   3,810     14,148     4,723         22,681  
Total current liabilities   249,824     31,066     10,701         291,591  
Long-term portion of amounts outstanding under line of credit   341,250                 341,250  
Senior subordinated debt   200,000                 200,000  
Other long-term debt   988                 988  
Other non-current liabilities   47,152         3,200         50,352  
Non-current liabilities of discontinued operations   1,249     32,798     998         35,045  
Stockholders' equity (deficit)   646,463     (150,950   (123,896   (208   371,409  
Total liabilities and equity $ 1,486,926   $ (87,086 $ (108,997 $ (208 $ 1,290,635  

55




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Cash Flows
For the Year Ended December 31, 2004
(In thousands)


  Parent Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Cash Flows from Operating Activities:                              
Income (loss) from continuing operations $ 29,197   $ 1,722   $ (16,791 $ (364 $ 13,764  
Adjustments to reconcile income (loss) from continuing operations to cash provided by (used for) continuing operations, net of effects of businesses acquired   (23,422   (3,892   18,441     364     (8,509
Net cash provided by (used for) continuing operations   5,775     (2,170   1,650         5,255  
Income (loss) from discontinued operations   (31,217   (20,052   (892       (52,161
Adjustments to reconcile income (loss) from discontinued operations to cash used for discontinued operations   20,123     11,350     14,692         46,165  
Net cash provided by (used for) discontinued operations   (11,094   (8,702   13,800         (5,996
Net cash provided by (used for) operating activities   (5,319   (10,872   15,450         (741
Cash Flows from Investing Activities:                              
Capital expenditures   (10,869   (11,509   (213       (22,591
Proceeds from sale of investments and net assets   2,494     386             2,880  
Earnout payments on prior year
acquisitions
  (3,460               (3,460
Other investments   (1,243               (1,243
Proceeds (payments) on intercompany investments and advances   (4,631   22,499     (17,868        
Other   2,315         370         2,685  
Net cash provided by (used for) investing activities   (15,394   11,376     (17,711       (21,729
Cash Flows from Financing Activities:                              
Extinguishment of HIGH TIDES and other debt reductions   (860               (860
Issuance of senior subordinated notes and other debt additions   11,500                 11,500  
Preferred stock redemption   (12,518               (12,518
Deferred debt issuance costs   (500               (500
Proceeds from stock issuances   14,619                 14,619  
Dividends paid   (190               (190
Other   76     (174           (98
Net cash used for financing activities   12,127     (174           11,953  
Effect of exchange rate changes on cash           215         215  
Net increase (decrease) in cash and cash equivalents   (8,586   330     (2,046       (10,302
Cash and cash equivalents at beginning of year   25,950     (941   1,965         26,974  
Cash and cash equivalents at end of year $ 17,364   $ (611 $ (81 $   $ 16,672  

56




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Cash Flows
For the Year Ended December 31, 2003
(In thousands)


  Parent Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Cash Flows from Operating Activities:                              
Income (loss) from continuing operations $ 33,305   $ (339 $ (933 $ (124 $ 31,909  
Adjustments to reconcile income (loss) from continuing operations to cash provided by (used for) continuing operations, net of effects of businesses acquired   76,690     (16,614   (10,741   124     49,459  
Net cash provided by (used for) continuing operations   109,995     (16,953   (11,674       81,368  
Income (loss) from discontinued operations   (1,578   (419   (815       (2,812
Adjustments to reconcile income (loss) from discontinued operations to cash used for discontinued operations   (3,425   5,985     (6,614       (4,054
Net cash provided by (used for) discontinued operations   (5,003   5,566     (7,429       (6,866
Net cash provided by (used for) operating activities   104,992     (11,387   (19,103       74,502  
Cash Flows from Investing Activities:                              
Capital expenditures   (10,795   (2,940   (64       (13,799
Acquisition of businesses, net of cash acquired   (13,872   (217           (14,089
Other investments   (1,595   (20           (1,615
Proceeds (payments) on intercompany investments and advances   (34,283   12,980     21,303          
Other   570     (144   31         457  
Net cash provided by (used for) investing activities   (59,975   9,659     21,270         (29,046
Cash Flows from Financing Activities:                              
Extinguishment of HIGH TIDES and other debt reductions   (254,541               (254,541
Issuance of senior subordinated notes and other debt additions   200,000                 200,000  
Deferred debt issuance costs   (8,924               (8,924
Debt extinguishment costs   (4,352               (4,352
Proceeds from stock issuances   15,491                 15,491  
Dividends paid   (688               (688
Decrease in restricted cash   394                 394  
Other   163     (6   (59       98  
Net cash used for financing activities   (52,457   (6   (59       (52,522
Effect of exchange rate changes on cash           (83       (83
Net increase (decrease) in cash and cash equivalents   (7,440   (1,734   2,025         (7,149
Cash and cash equivalents at beginning of year   33,390     793     (60       34,123  
Cash and cash equivalents at end of year $ 25,950   $ (941 $ 1,965   $   $ 26,974  

57




The Titan Corporation
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Cash Flows
For the Year Ended December 31, 2002
(In thousands)


  Parent Guarantor
Subsidiaries
Non-guarantor
Subsidiaries
Reclassifications
and
Eliminations
The Titan
Corporation
and
Subsidiaries
Cash Flows from Operating Activities:                              
Loss from continuing operations $ (6,023 $ (2,349 $ (2,638 $ (441 $ (11,451
Adjustments to reconcile loss from continuing operations to cash provided by (used for) continuing operations, net of effects of businesses acquired   144,520     29,648     (3,285   441     171,324  
Net cash provided by (used for) continuing operations   138,497     27,299     (5,923       159,873  
Loss from discontinued operations   (18,711   (157,240   (43,948       (219,899
Adjustments to reconcile loss from discontinued operations to cash used for discontinued operations   (84,063   124,863     37,557         78,357  
Net cash used for discontinued operations   (102,774   (32,377   (6,391       (141,542
Net cash provided by (used for) operating activities   35,723     (5,078   (12,314       18,331  
Cash Flows from Investing Activities:                              
Capital expenditures   (13,454   (1,663   (8,188       (23,305
Acquisition of businesses, net of cash acquired   27,237     172             27,409  
Capitalized software development costs       (1,287   (245       (1,532
Proceeds from sales of investments   6,917                 6,917  
Advances to SureBeam on line of credit   (25,000               (25,000
Other investments   (6,789               (6,789
Proceeds (payments) on intercompany investments and advances   (27,319   9,328     17,991          
Other   4,301     (46   3,333         7,588  
Net cash provided by (used for) investing activities   (34,107   6,504     12,891         (14,712
Cash Flows from Financing Activities:                              
Additions to debt   18,250                 18,250  
Retirements of debt   (4,177   (470           (4,647
Deferred debt issuance costs   (8,908               (8,908
Proceeds from stock issuances   8,566                 8,566  
Issuance of stock in subsidiaries   15     4             19  
Dividends paid   (689               (689
Increase in restricted cash   (394               (394
Other   139         (193       (54
Net cash provided by (used for) financing activities   12,802     (466   (193       12,143  
Effect of exchange rate changes on cash       (220   (40       (260
Net increase in cash and cash equivalents   14,418     740     344         15,502  
Cash and cash equivalents at beginning of year   18,972     53     (404       18,621  
Cash and cash equivalents at end of year $ 33,390   $ 793   $ (60 $   $ 34,123  

58




THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise noted)

Note 17.    Unaudited Quarterly Financial Data


2004 First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Year
Revenues $ 454,022   $ 514,932   $ 525,997   $ 551,574   $ 2,046,525  
Gross profit   71,750     76,850     80,893     87,069     316,562  
Income (loss) from continuing operations   3,629     (24,892   16,644     18,383     13,764  
Net income (loss)   3,057     (66,552   15,805     9,293     (38,397
Basic earnings per share:                              
Income (loss) from continuing operations $ 0.04   $ (0.30 $ 0.20   $ 0.22   $ 0.16  
Net income (loss)   0.03     (0.79   0.19     0.11     (0.46
Diluted earnings per share:                              
Income (loss) from continuing operations   0.04     (0.30   0.19     0.21     0.16  
Net income (loss)   0.03     (0.79   0.18     0.11     (0.44

2003 First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Year
Revenues $ 374,228   $ 433,934   $ 468,397   $ 479,646   $ 1,756,206  
Gross profit   62,313     71,857     74,774     82,554     291,498  
Income from continuing operations   8,563     6,667     15,572     1,107     31,909  
Net income   7,000     5,865     15,177     1,055     29,097  
Basic earnings per share:                              
Income from continuing operations $ 0.11   $ 0.08   $ 0.19   $ 0.01   $ 0.39  
Net income   0.09     0.07     0.19     0.01     0.36  
Diluted earnings per share:                              
Income from continuing operations   0.10     0.08     0.18     0.01     0.37  
Net income   0.09     0.07     0.18     0.01     0.34  

The above financial information for each quarter reflects all normal and recurring adjustments. The above income from continuing operations for the second quarter of 2004 reflects the reclassification of $7.2 million of pre-tax charges to discontinued operations. Such costs, which were associated with obligations related to SureBeam, and discontinued in prior years, were previously reported as asset impairment charges in continuing operations in the second quarter of 2004. The above net income figure in the fourth quarter includes an additional $7.2 million pre-tax charge associated with the obligations related to SureBeam.

The 2004 net income includes pre-tax merger, investigation and pre-tax settlement costs of $59.9 million, asset impairment charges of $15.5 million, legal and other professional fees of $2.9 million related to the SureBeam bankruptcy settlement and the defense of the SureBeam-related class action litigation and a loss on investments of $3.9 million. The 2003 net income includes an estimated impairment charge of $15.8 million related to Titan's former subsidiary, SureBeam Corporation, debt extinguishment costs of $12.4 million and a loss on investments of $6.2 million.

59




THE TITAN CORPORATION
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2004, 2003, and 2002

(in thousands of dollars)


  Balance at
beginning
of year
Additions
(charges to
expense)(a)
Charged to
Other
Accounts

Deductions
Balance at
end of year
2004:                              
Accrued exit charges $ 27,928   $ 1,493   $ 1,746   $ 12,391   $ 15,284  
Allowance for doubtful accounts   3,547     620         759     3,408  
2003:                              
Accrued exit charges $ 37,761   $   $   $ 9,833   $ 27,928  
Allowance for doubtful accounts   6,699     1,818     213     4,757     3,547  
Accrual for estimated losses for discontinued operations   266             266      
2002:                              
Accrued exit charges $   $ 53,317   $   $ 15,556   $ 37,761  
Accrued merger and integration costs   1,298             1,298      
Allowance for doubtful accounts   5,104     4,149         2,554     6,699  
Accrual for estimated losses for discontinued operations   17,004     11,014         27,752     266  
(a) Includes $117 added through acquisitions in 2002.
(b) Valuation allowance for unbilled receivables not in accrued merger and integration costs.

Following is a description of all exit charges and acquisition and integration charges:

Fiscal 2002 Charges

Included in the year ended December 31, 2002 is $53.3 million of restructuring costs related to the merger of Titan Systems into Titan on September 25, 2002 and exit charges related to the shutdown of Cayenta's headquarters. Approximately $11.7 million of these exit charges are related to the shutdown of the Cayenta headquarters and network operations center, which includes employee termination costs and other liabilities of approximately $4.5 million, lease commitment costs of approximately $4.8 million, and non-cash asset impairment charges of approximately $2.4 million relating primarily to the unamortized leasehold improvements and other fixed assets at the Cayenta headquarters. The remaining lease commitment costs are expected to be paid through future periods ending in January 2007. Included in the employee termination costs are 33 personnel reductions.

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

Approximately $7.7 million of the Titan Systems restructuring costs are primarily related to employee termination costs, employee retention costs, duplicate transition costs and professional fees related to acquisitions and certain reorganization and consolidation activities within Titan Systems.

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

60




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