TITAN CORP - 10-K Annual Report

PART I

Item 1. Business

Corporate Overview

The Titan Corporation is a leading technology developer and systems integrator for the Department of Defense, the Department of Homeland Security, and intelligence and other key government agencies. We provide a range of services and systems solutions. These solutions and services include research and development, design, installation, integration, test, logistics support, maintenance and training. We also provide services and solutions to government agencies with sophisticated information systems. These include information processing, information fusion, data management, and communication systems. In addition, we develop and produce digital imaging products, sensors, lasers, electro-optical systems, threat simulation/training systems, intelligence electronic hardware, signal intercept systems, and complex military specific systems.

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

Our consolidated revenues were approximately $1.4 billion for the year ended December 31, 2002.

Industry Overview. Recent defense budgets are significantly higher than in prior years, especially in areas related to intelligence, surveillance, and reconnaissance and homeland security because of increased counter-terrorism activities following 9/11, the U.S. military operations in Afghanistan, the war in Iraq and the resulting changes required in the Department of Defense to prepare for these types of threats. In addition, the U.S. government is increasingly using open systems that incorporate commercial off-the-shelf products to increase the adaptability and interoperability of its information technology systems architectures, creating greater contracting opportunities for systems and software integration work. The U.S. government is also increasingly using the Internet and web-based systems to improve its efficiency, providing contracting opportunities for Internet-based integration work. The U.S. government is among the largest buyers of information technology systems and services in the world. According to INPUT, Inc. (a market research organization), the U.S. government's information technology budget for fiscal year 2003, an important element of Titan’s addressable market, is projected to be approximately $50 billion, an increase of 11% from 2002. Current forecasts, according to INPUT, for federal information technology spending are for a compound annual growth rate of approximately 10% over the next three to five years.

The U.S. government's focus on modernization through increased spending on information technology reflects the critical role that this capability plays both in national security and in improving government efficiency. In outlining the priorities of the Bush Administration, Secretary of Defense Donald Rumsfeld has stated that one of his five key objectives is to modernize the U.S. government's C4ISR capabilities. The U.S. military is placing greater emphasis on interoperability and increasing productivity while using fewer resources by employing systems that act as force multipliers and increasing operating capabilities under differing conditions. To further this strategy, military and intelligence agencies continue to increase their reliance on communications products and systems that provide secure, reliable and efficient transmission of voice, video and data in very demanding environments.

The transition from the single threat, cold war era to today’s multiple and more widely dispersed threats, most notably the war on terrorism, coupled with the rapid rate of technological change, has increased the U.S. military’s need for more efficient and advanced information, communications, and military platform capabilities. President Bush coined the term “transformation” when he said, “Our security will require transforming the military…(to) be ready to strike at a moments notice in any dark part of the world”. Transformational Programs, especially in the C4ISR and information technology arena, represent a new paradigm in which there is growing importance on having systems that are designed, developed and cost-effectively built and very rapidly deployed. This is often accomplished through innovative uses of existing technologies and integrating low-cost, commercially-available components and products to achieve best of breed cost effective systems and solutions.

Competitive Strengths. We attribute our growth and performance to several factors:

		Long Standing Customer Relationships and Experienced Management. Founded in 1981, Titan has an extensive history of providing comprehensive information and communications products, solutions and services to U.S. defense, intelligence, and civil government agencies. Collectively, Titan’s executives and general managers have on average approximately 25 years of industry experience and have developed long-standing, key customer relationships across all of the U.S. military services and several allied countries. The industry experience of Titan’s executives and general managers has also helped to develop a significant presence with many civilian government agencies, which has contributed to Titan’s success in securing new contracts.

		Broad Solution Capabilities. Titan has extensive industry expertise in the development of comprehensive information and communications products, solutions and services for government customers. We provide products and solutions in areas such as signal processing, antenna design, low-detection waveforms, computer-aided target and image recognition, satellite communications hardware and software, signal direction-finding systems, and real-time object tracking and targeting. In addition, we have significant knowledge of legacy information technology and C4ISR systems currently in operation and the ability to integrate new solutions into existing systems. This ability to provide full-service products, solutions and services, coupled with our employee base of over 6,600 "Secret" and above-cleared personnel, is enabling us to bid on larger, more comprehensive government contracts than at any time in our history. During 2002, we won seven of eight competitive procurements with potential values exceeding $100 million in which we participated, including our largest contract ever, the $533 million Enterprise Architecture and Decision Support (EADS) contract with the National Security Agency.

		Our information systems solutions and services include systems analysis, design, and architecture, software development services and systems integration. Our initial work in this area generally involves a joint analysis of the customer's enterprise structure and processes and information and communications systems needs. Once this analysis is completed, we design the technology solution to meet the customer's needs. This process typically involves software development, coupled with integration of commercial off-the-shelf software and hardware. We also provide a variety of professional and technical support services, including electronics and mechanical design and fabrication, computer-aided design and manufacturing services, technical documentation and prototyping. In addition, we offer a variety of standard products, including satellite communications modems and terminals, signal direction-finding systems, lasers, sensors, and electro-optical systems. As a result of the complex nature of Titan’s customer solutions, our engagements often are long-term and involve follow-on contracts.

		Extensive Acquisition and Integration Experience. As a result of changes in U.S. government procurement policies toward consolidating programs and awarding larger, more comprehensive contracts, we placed more emphasis on an acquisition strategy that would broaden our capabilities to allow us to effectively compete for these larger contracts. Since January 1, 1998, we have acquired and successfully integrated 18 government information technology companies into Titan. These acquisitions occurred and are continuing to occur at a time when a broad consolidation in the government information technology industry was and is ongoing. We have won larger government contracts as a direct result of our successful integration of acquired technologies, expertise and intellectual property, and we continue to bid on larger, more comprehensive government contracts as a result of those acquired capabilities.

Strategy. Our objective is to expand market share in the national security and government IT markets, improve our operating margins and profitability, and generate strong net cash flow to reduce our overall debt. We intend to achieve these objectives with the following strategic initiatives:

	Maintain Technological Advantage. Our successful track record over the past 21 years with research and development projects has helped us create a diversified portfolio of technologies which in turn helps us obtain additional government research and development funding and ultimately new system and product contracts. We believe that our expertise and capabilities with a wide range of technologies make us well positioned to provide information technology and communications systems, products and services to our customers. We will seek to maintain this advantage by keeping pace with new developments in technology, and by continuing to compete for contracts that require high-quality, sophisticated technical solutions.

	Build Upon our Competitive Strengths to Bid on Larger, More Comprehensive Contracts. We have an extensive history of providing increasingly broader and more complex information systems and communications solutions and services to defense and intelligence-related government agencies. We have demonstrated that this experience, our reputation, our products and services, and the enhanced technical and personnel resources resulting from our acquisitions have enabled us to bid on and win larger dollar value and more comprehensive government contracts. We believe we will continue to successfully bid on and win larger and broader contracts due to our focused business development practices, our demonstrated strong performance on large contracts and due to increased outsourcing and consolidation of government programs.

	Improve Profitability. We are actively engaged in increasing our profitability by reducing facility and operations costs, and improved scale of efficiency on the larger contracts recently won. We are strengthening controls and incentives on business productivity, including profit margins and cash flow, across all our operations to promote increasing profitability both short and long term. Our business mix is expected to gradually change in order to derive a greater portion of revenue from higher margin products and systems production contract vehicles as products and systems move from development to production.

	Balanced Business Mix. Our current contract type and customer mix is well diversified. Our contract mix of approximately 36% cost reimbursement contracts provides a low risk and more predictable revenue and profit base, while the remaining 64% of our revenues which are derived from time and materials and fixed price contracts provide an opportunity to increase our operating margins. We intend to continue to maintain diversification in our customer mix by bidding and executing on contracts across all the Armed Services, intelligence agencies, Department of Homeland Security and other federal and civilian agencies. We also intend to maintain a diversified mix of cost plus, time and materials, and fixed price contracts; however, we are seeking to moderately increase the percentage of service revenue derived from time and materials contracts and decrease the percentage derived from cost-plus contracts. In addition, faster growth in our products and systems business should result in a greater percentage of revenues derived from fixed price contracts.

Four Focused and Interrelated Market Areas. We apply our core capabilities to provide technology, products and services with a focus in four often overlapping and synergetic market areas: C4ISR, Transformational Programs, Enterprise Information Technology, and Homeland Security and the War on Terrorism. Each of these markets are described in greater detail in the following sections, including specific examples of the work we are doing in these areas.

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

C4ISR has been the cornerstone of our expertise since we were founded in 1981 and it is the principal business foundation on which we have grown over the years. C4ISR can be described as the process of gathering military information through intelligence, surveillance, and reconnaissance measures, and transmitting this information digitally through high technology communications systems, processing the digitized information to facilitate command and control decision making, and discriminating such commands electronically back to military and intelligence platforms for execution. Computers and communications systems are the common vehicle for this information gathering, processing and deployment process. We are a key contributor to the significant C4ISR systems that support the United States military, Department of Defense agencies and organizations, and the evolving Department of Homeland Security. Through systems engineering, technical assistance, program management, products, and systems integration, we have been in the forefront of assisting our customers in reaching their C4ISR mission goals. The following are examples of our efforts in C4ISR:

·		The Joint Range Extension. We have developed an information solution that allows real-time tactical data link information developed by a variety of sensors to be transmitted over any communications medium. This innovative capability allows commanders to “see” and share the actual tactical events of a campaign at different locations simultaneously. This capability was used very successfully in the recent Afghanistan operations to provide commanders with a view of the battle space at extended ranges, thus allowing forces to be coordinated, sequenced, and deployed rapidly to meet the needs of the operational commander. We expect this system to be a key provider of extended situational awareness in any future contingencies or conflicts.

·		Advanced Digital Waveform for the U.S. Navy. Our Advanced Digital Waveform, or ADW, increases data throughput rates on dedicated ultra-high frequency satellite communication channels by up to four times current rates. Increased data transport is critical to support new platforms such as UAV’s, and to enhance weapons coordination and the command and control of naval forces. Our Mini-Demand Assigned Multiple Access, or Mini-DAMA, terminals will be the first U.S. Navy systems to receive ADW capability. Once this capability is installed, the terminals will be capable of passing information at three to four times the previous rate. The current project contemplates that the majority of the U.S. Navy's Mini-DAMA terminals will be outfitted with this improved communications feature within the next couple of years.

·			Systems Support Services. Our nation’s defense depends heavily upon sustaining fielded systems. U.S. Air Force, U.S. Army, Combatant Commanders, The National Reconnaissance Office (NRO), and intelligence agencies depend upon us to provide systems support in the form of rigorous engineering, program management and training. We provide the U.S. Navy with critical C4I systems and networks. Additionally, Titan is an essential Navy provider in the field engineering, installation and quality integration of sophisticated communications, weapons, hull, mechanical and engineering support systems for virtually all ship types. We provide the U.S. Marine Corps with its operational modeling and simulation system via the Marine Air Ground Task Force (MAGTF) Tactical Warfare Simulation System (MTWS).

·			System-Level Solutions. We develop, deliver and support system-level solutions for a wide range of weapon, sensor, surveillance, and reconnaissance systems. Additionally, we are conducting analysis of aircraft and ship structures, applying advanced corrosion control methodologies, and supporting the development of advanced materials. In support of information operations, we provide highly specialized information security and signal intelligence systems and services to the intelligence community. In the key national imperative areas of missile defense and combating terrorism, we conduct weapons effects analysis services and develop computer models for effects prediction.

·			Channel Control Modems for Integrated Monitoring and Power Control Subsystems. We are developing, integrating and producing a modem for the Integrated Monitoring and Power Control Subsystem, or IMPCS. IMPCS is being developed to reduce manpower requirements and increase the efficiency of communication between the various control terminals and deployed, tactical terminals that use the geosynchronous satellites of the Defense Satellite Communications System. Satellite network efficiency is improved greatly by balancing the power levels arriving at the satellites. Today's system uses a manpower-intensive manual approach to monitor the entire global network and conduct point-to-point communications with terminal operations to provide power-balancing direction. Our modem is expected to fully automate this process.

	·		Communications Products. We have provided the Department of Defense and Intelligence community with state-of-the-art products from our earliest days as a company. Our communications product specialization is in the development, manufacture and support of satellite communications (UHF, SHF, EHF) radios, modems, baseband systems, power amplifiers and complete terminals. We design and produce the AN/USC-42 DAMA terminal, which provides bandwidth efficient mobile satellite services at UHF for military users. We are the industry leader in small, lightweight, low-power signal intercept, direction finding and signal processing systems for Signal Intelligence (SIGINT) applications. These high-value SIGINT products include 20Mhz to 2GHz manportable, ground vehicle, maritime patrol craft and fixed-site applications.

	·		The Naval Air Systems Command/Naval Air Warfare Center. We are helping with the systems engineering and integration of Naval Aviation Reconnaissance and Surveillance systems under a multi-year contract. Under current tasking, our engineers provide design and analysis support for the installation and integration of state-of-the-art sensor systems in both manned and unmanned reconnaissance platforms. Systems level support typically includes concept exploration, specification preparation, interface design, laboratory integration, and test and evaluation. We also support tactical manned and unmanned platforms and avionics equipment. Our engineers provide design and analysis support for the integration of sophisticated subsystems into the avionics and weapons systems of many types of aircraft. These subsystems include electro-optic/infrared devices, radar, electronic warfare systems, mission planning modules, and tactical data links.

	·		Military Satellite Communications. Our engineers and technicians provide engineering, program and operational support to the Space and Naval Warfare Systems Command and the Space Warfare Systems Centers in San Diego, California, and Charleston, South Carolina. Our satellite communications experts are involved in all aspects of U.S. Navy and other military satellite programs including: the determination of requirements, laboratory and in-field operational testing, on-the-job and formal training, maintenance, operation, technical assistance, integration, and installation. Our members of the Fleet System Engineering Team provide on-site support at U.S. Navy satellite communications sites in Virginia, Hawaii, Italy and Bahrain.

Transformational Programs

We are developing new transformational systems for the Department of Defense that focus on national security challenges faced by the United States. We are seeking to win engineering development contracts and ultimately full-scale production contracts to provide low-cost, mission critical transformational systems. We also apply our expertise to the life cycle challenges of today. The following are several key initiatives in our portfolio of active “transformational” efforts:

	·	X-Craft. We have a contract to design, build and integrate a vessel for the United States Navy that is unlike any other currently in the fleet today. The X-Craft will be a high-speed aluminum catamaran 240 feet in length with a combined gas turbine or diesel propulsion plant, capable of speeds greater than 50 knots. It will be self-deployable over trans-Atlantic ranges. The craft will have two helicopter landing spots cable of handling H-60 series and smaller aircraft and the unique X-Craft’s mission module bay will be capable of simultaneously supporting the developing multiple mission packages that will be key to the follow-on new ship class, the Littoral Combat Ship (LCS). The X-Craft program incorporates not only innovative design, development and management methods, but also is using revolutionary acquisition processes intended to get this craft and the information derived from using the craft in support of the LCS in the hands of naval forces as rapidly as possible. The X-Craft is expected to be in the water in the summer of 2004. Extensive testing will follow to demonstrate tactics, techniques, procedures, and technology for the LCS, the Navy’s planned next generation of warship.

	·	Affordable Weapon. We are developing a loitering Unmanned Aerial Vehicle (“UAV”) that is designed to carry a 200-pound warhead at extended ranges and remain airborne and ready for rapid deployment for up to 24 hours. The UAV will be built using commercially-available off-the-shelf components at a cost expected to be approximately one-tenth of the cost of comparable missiles used by the military. We have built and tested 15 of these UAV’s, which can be launched from land, ship or aircraft.

	·	U.S. Army's Prophet Initiative. Our initial role as part of this initiative was to design and integrate a multi-faceted, radio frequency intercept and direction-finding system into an existing Army vehicle. We completed the initial 13 low-rate production systems ahead of schedule and were awarded the first full-scale, competitive production contract to produce and field up to 83 production-level mobile systems. In its eventual implementation, the U.S. Army's Prophet initiative is planned to be a combination of mobile, ground-based intercept/direction-finding receivers and an airborne complement of unmanned aerial vehicles. This innovative system was deployed successfully in the recent U.S. military operations in Afghanistan. The Prophet program validated our “transformational” systems development strategy -- applying innovation and technology insertion, taking a systems engineering focus on unique defense challenges, winning the development contract, providing stellar systems performance in test and evaluation, winning the production contract, providing life-cycle management, and participating in updates and follow-on systems.

	·	KaBand Satellite Terminal. In 2002, we received a contract from the U.S. Army to develop a new terminal for the KaSAT, the military’s new wideband gapfiller satellite communications system, scheduled for deployment in 2004. The terminal will provide KaSAT connectivity to ground forces as an adjunct to existing satellite communications and is expected to become an integral part of the Army’s Warfighter Information Network – Tactical, WIN-T, program. This program is an important part of the Army’s transformational concept of “SATCOM on the Move” allowing maneuvering forces to receive and transmit critical voice and data at high bandwidth without having to stop and erect satellite equipment.

Enterprise Information Technology

We provide complete enterprise information technology solutions that enable seamless connectivity from the strategic to the tactical level of a customer’s critical enterprise. By necessity, the defense and intelligence organizations require technology that enables information to flow into multi-disciplined, cross-organizational teams of analysts that respond quickly and effectively to continuing threats and immediate crises. Information is gathered through all source collection methods and assessed, and in many cases, enriched, to assure its relevance and use. We support many enterprise information technology and modernization efforts within our nation’s defense and intelligence communities, as well as mission critical networks for civilian agencies. The following are several examples of Enterprise Information Technology contracts:

	·	USSOCOM. Under the Enterprise Information Technology Contract (EITC), we are bringing the U.S. Special Operations Command (USSOCOM) an improved level of service and reliability in support of all worldwide Special Operations information technology requirements. EITC is an innovative solution meeting the Command’s enterprise needs while delivering strategic improvements, increased interoperability, and efficient support at all USSOCOM sites and locations. EITC includes the planning, management, operations and maintenance (O&M), and training, for all garrison and deployed Wide Area Networks (WAN), Metropolitan Area Networks (MAN), Local Area Networks (LAN), desktops, applications, databases, and communication and network infrastructures for data, voice, and video. This includes the O&M, development, integration, testing, training, and customer support for all desktops, portable computing devices, applications, messaging systems, databases, and web services used by Special Operations Forces (SOF). This program also includes information assurance, transmission, and communication security requirements, requirements management, configuration management, hardware maintenance, and disaster recovery.

	·	Supporting the Joint Deployable Intelligence Support System (JDISS). We are assisting with the systems engineering for JDISS, a worldwide intelligence network with over 10,000 nodes that we maintain on a seven day per week/24 hour per day basis (7/24). This very secure network provides critical intelligence information to all facets of the United States military and many homeland security agencies and is located at all front line combat locations.

	·	Navy Cash. We are assisting the U.S. Treasury, Naval Supply Systems Command, JP Morgan Chase and others in providing a cashless environment for sailors and marines deployed throughout the world, so that their money is safe and their families have 7/24 access to it. It is a system of point of sales, ATMs, and other automated financial services provided to service members.

	·	Information Assurance and e-Government Services. We provide systems and solutions related to information assurance, security consulting and e-government applications. We also focus on the design, installation and maintenance of local and wide area networks used to operate the U.S government's Internet-based initiatives. We design electronic filing, procurement and payment systems for the government agencies involved in those initiatives, along with Internet portals used to electronically distribute confidential and non-confidential information to other government entities and the public at large.

Homeland Security and the War on Terrorism

Although the U.S. Department of Homeland Security is a new organization, we have been providing homeland security solutions to various government agencies for over 15 years. As with our efforts in our traditional defense business, Titan brings innovation, integration, deployment, and life cycle service to the national imperative of homeland security and counter terrorism measures. We provide products and services in the following key homeland security areas:

	·	Support of First Responders. We support first responders through our communications systems such as APCO 25 compliant radio systems that greatly facilitate interoperability and crisis response. In addition, we develop, integrate and build emergency mobile command vehicles and systems to provide backup communications capability to governmental agencies and first responders. We also provide very realistic training facilities through our contract to run the Center for National Response and exercises to prepare first responders for a variety of potential terrorist threats.

	·	Defending Against Bio-terrorism. We provide engineering, analytical support, systems development, and integration of many key systems to agencies protecting our country against the threat of chemical and bio-terrorism. Some key examples of our efforts in this area include supporting over 200 cities through the HHS Metropolitan Medical Response System, and supporting the U.S. Army Soldier and Biological Chemical Command, which would be the center of any federal government effort to fight a bio-terrorism attack.

	·	Securing America’s Borders. Protecting America’s cyber borders is a major Titan endeavor, as network and information technology security and protecting critical infrastructure have become increasingly important initiatives in national security. We are also working in the areas of intelligence information distribution, such as wining the prime integrator role in the development of the Department of Defense’s Integrated Broadcast Service, which integrates and fuses near real-time correlated intelligence data via satellite to intelligence agencies and combatant commanders worldwide.

	·	21^st Century Technology to Secure the Homeland. We are in various stages of developing several new technologies to support homeland security, including a new digital data link between aircraft and the ground, concealed weapons detectors, through-the-wall surveillance capabilities, buried mine detection devices, fissile material detectors and RF (radio frequency) attack warning chips.

Contract Profile. We are currently performing work under approximately 2,500 contracts. No single contract accounted for more than 1.9% of our total 2002 revenues. Our total revenues from business with government agencies in 2002 were approximately $1.3 billion, of which approximately 43% were generated by time and materials contracts, approximately 36% were generated by cost reimbursement contracts, and approximately 21% were generated by fixed-price contracts. Since operating margins on time and materials contracts are generally higher than those generated by cost reimbursement contracts, we have made and continue to make an effort to generate an increasing amount of revenue from time and materials contracts.

Competition. We are one of many companies involved in providing information systems solutions, support services and communications products for a variety of programs for agencies of the U.S. government and civil governments. Most activities in which we engage are very competitive and require that we have highly skilled and experienced technical personnel to compete. Many of our competitors have significantly greater financial, personnel and other resources than us. These competitors include Computer Sciences Corporation, General Dynamics Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company, and Science Applications International Corporation. In addition, we compete with smaller and medium sized companies such as: Anteon Corporation, CACI International Inc., Dynamics Research Corporation, Veridian Corporation and ViaSat, Inc. We believe that the primary competitive factors for our information systems solutions, support services and communications products include reputation, technical skills, past contract performance, experience in the industry and customer relationships.

Commercial Businesses

We have restructured our organization to focus our primary efforts on our core national security business. However, we continue to own all or portions of commercial businesses that were built on technology we developed under government contracts, or acquired through our acquisition of other defense companies.

The following are examples of our commercial technology-based businesses and investments:

Titan Scan Technologies' core technologies and expertise were developed by us from our government contracts business. Titan Scan Technologies sells medical equipment sterilization systems and provides medical equipment sterilization services, which utilize the electron beam process that SureBeam Corporation (which we funded and spun-off in August 2002) uses for food irradiation. Titan Scan Technologies' medical equipment sterilization systems are currently used in the medical device production lines of Guidant Corporation in San Diego, California, Baxter Corporation in the Dominican Republic and in France, Mediscan in Austria, Rochialle Corporation in Wales, and Isotron in the United Kingdom. Titan Scan Technologies also offers contract sterilization services for medical product manufacturers at facilities that it owns in San Diego, California, Denver, Colorado and Lima, Ohio. Following the 2001 anthrax terrorism, Titan Scan Technologies became known for its efforts to sanitize the mail to mitigate this bioterrorism threat from treated mail and parcels. In addition to contracting for use of Titan Scan's facility for mail sanitization, the Postal Service purchased eight mail sanitization systems. Titan Scan has also begun to market the use of electron beam technology outside of its traditional medical device customer base, including the use of electron beam technology to improve material performance in semiconductors, aerospace composites, wire and cable, plastics and packaging films.

e-tenna's core technologies and expertise were acquired as part of our acquisition of Atlantic Aerospace Electronics Corporation during 1999 and then further developed by us. We have chosen to utilize external equity financing to help fund the development of this business and have retained an investment in this company. As a result, e-tenna's results are not consolidated with our results of operations. e-tenna is developing antennas and radio frequency systems based on electromagnetic technology that it expects will establish new performance standards for the next generation of radio frequency technology. The key features of the technology are that it suppresses undesired radio frequency currents, thereby isolating the antenna from influences that could degrade performance. It also improves signal strength by causing power to radiate away from the device or equipment in which the technology is being used. e-tenna is currently focused on creating products for the mobile device market where its technology has the potential to significantly reduce the size, increase the functionality, improve the performance, and decrease the cost of wireless equipment. Another key benefit of e-tenna's technology is the isolation property that allows multi-frequency devices such as phones, PDAs, and laptops to function efficiently and without significant interference.

In 1996, we contributed the core technology to form Servnow! NetTechnologies, Inc., which later became known as IPivot. Titan created the technology spin-off in 1996 to commercialize a concept developed in Titan’s software business unit. In October 1999, IPivot was sold to Intel Corporation.

Competition. Titan Scan and e-tenna employ different technologies and business models, and as such compete in different markets. Titan Scan competes against substantially larger enterprises involved in medical sterilization, including Ion Beam Applications, s.a., and Steris. e-tenna is a start-up enterprise and will be competing with larger more established component manufacturers in the mobile wireless device business.

Discontinued Operations

During 2002, the Company’s board of directors made the decision to exit a substantial portion of its commercial businesses, consisting of Titan Wireless, Cayenta, AverCom, and LinCom Wireless. Prior to these decisions to exit these businesses, the Company grouped its business into five segments – Titan Systems, Titan Wireless, Software Systems (including Cayenta), Titan Technologies and the SureBeam business. Titan is no longer reporting the results of operations by these segments, however, reference may be made to these segments in discussions of other historical information.

Titan Wireless (Discontinued July 11, 2002)

Overview. Titan Wireless provides communications services and systems to developing countries primarily in Africa, Central Asia, the Middle East and Latin America. Titan Wireless's network has been built using its own communications products and products purchased from other equipment vendors, which include advanced satellite ground terminals, Very Small Aperture Terminals, or VSATs, monitoring and control software, satellite voice/data modems, broadband access systems, packet switches and voice over Internet protocol (VoIP) gateways.

Despite our low cost technology and efficiency advantages, competition in the international telecommunications sector has driven market rates to levels that make operations of our networks at our existing size uneconomical. 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. In July 2002, we decided to exit our international telecommunications businesses through a combination of selling assets or businesses and shutting down operations. We are continuing to operate our networks while we complete the divestiture process to preserve the value of the businesses and assets we are seeking to sell.

For the year ended December 31, 2002, Titan Wireless had revenues of approximately $130.3 million.

Cayenta (Discontinued March 1, 2002)

Overview. Cayenta provided software applications and implementation and integration services to customers to solve specific business and operating problems. These software applications were tailored for the customers’ business and operating requirements and made accessible via the Internet. For the year ended December 31, 2002, Cayenta had revenues of approximately $6.4 million. These businesses were sold in July 2002. (Refer to Note 6 to the consolidated financial statements for further discussion).

Titan Technologies (Substantially Discontinued August 2002)

Overview. In Titan Technologies, we leveraged our intellectual property portfolio to create commercial technology applications or individual businesses from technologies primarily developed from government-sponsored research and development programs. We included in Titan Technologies at any given time those commercial technology applications and individual businesses that we have not at that point developed into separate operating segments. In 2002, Titan discontinued its AverCom business, its LinCom Wireless business, and other commercial information technology businesses. For the year ended December 31, 2002, the discontinued operations of Titan Technologies had revenues of approximately $31.4 million.

Government Contracts

A substantial portion of our revenues are dependent upon continued funding of United States and allied government agencies, as well as continued funding of the programs targeted by our businesses. Our revenues from U.S. government business represented approximately 90% of our total revenues for the year ended December 31, 2000, approximately 93% of our total revenues for the year ended December 31, 2001, and approximately 95% of our total revenues for the year ended December 31, 2002. Any significant reductions in the funding of United States government agencies or in the funding areas targeted by our businesses could materially and adversely affect our operating results.

U.S. government contracts are subject to termination for convenience by the government, as well as termination, reduction or modification in the event of budgetary constraints or any change in the government's requirements. When we subcontract with prime contractors, such subcontracts are also subject to the ability of the prime contractor to perform its obligations under its prime contract. We often have little or no control over the resources allocated by the prime contractor to the prime contract, and any failure by the prime contractor to perform its obligations under the prime contract could result in our loss of our subcontract. In 2002, approximately 20% of our revenue was derived under subcontracts with prime contractors. In addition, our contract-related costs and fees, including allocated indirect costs, are subject to audits and adjustments by negotiation between us and the U.S. government. As part of the audit process, the government audit agency verifies that all charges made by a contractor against a contract are legitimate and appropriate. Audits may result in recalculation of contract revenues and non-reimbursement of some contract costs and fees. Any audits of our contract-related costs and fees could result in material adjustments to our revenues. In addition, U.S. government contracts are conditioned upon the continuing availability of congressional appropriations. Congress usually appropriates funds on a fiscal year basis even though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually incrementally funded and additional funds are normally committed to the contract by the procuring agency as Congress makes appropriations for future fiscal years. Any failure of such agencies to continue to fund such contracts could have a material adverse effect on our operating results.

Our business with the U.S. government and prime contractors is generally performed under cost reimbursement, fixed-price or time and materials contracts. Cost reimbursement contracts for the government provide for reimbursement of costs plus the payment of a fee. Under fixed-price contracts, we agree to perform certain work for a fixed price. Under time and materials contracts, we are reimbursed for labor hours at negotiated hourly billing rates and are reimbursed for travel and other direct expenses at actual costs plus applied general and administrative expense. The following table gives the percentage of revenues realized by us from the three primary types of government contracts during the periods indicated.

	Year Ended December 31,

Contract Type	2002		2001		2000

Time and Materials	42.6	%	41.5	%	38.6	%
Cost Reimbursement	36.3		39.3		42.3
Fixed-Price	21.1		19.2		19.1

	100.0	%	100.0	%	100.0	%

Backlog

Contracts undertaken by us may extend beyond one year. Accordingly, portions are carried forward from one year to the next as part of backlog. Because many factors affect the scheduling of projects, no assurance can be given as to when revenue will be realized on projects included in our backlog.

Many of our contracts with the U.S. government are funded by the procuring agency from year to year, primarily based on its fiscal requirements. This results in two different categories of U.S. government backlog: funded and unfunded backlog. "Funded backlog" consists of the aggregate contract revenues remaining to be earned by us at a given time, but only to the extent such amounts have been appropriated by Congress and allocated to the contract by the procuring government agency. Although funded backlog is appropriated by Congress, we cannot guarantee that cancellations or scope adjustments will not occur. The majority of funded backlog represents contracts under the terms of which cancellation by the customer would entitle us to all or a portion of our costs incurred and potential cancellation fees. "Unfunded backlog" consists of the aggregate contract revenues expected to be earned as our customers incrementally allot funding to existing contracts, whether we are acting as a prime contractor or subcontractor, and the aggregate contract revenues to be funded on contracts which have been newly awarded to us. Unfunded backlog includes priced options, which consist of the aggregate contract revenues expected to be earned as a result of a customer exercising an option period that has been specifically defined in the original contract award. "Backlog" is the total of the government and commercial funded and unfunded backlog.

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

	As of December 31,

Backlog	2002		2001		2000

	(in thousands)
U.S. Government funded backlog	$	695,598	$	545,569	$	332,099
U.S. Government unfunded backlog		3,306,244		2,231,052		1,665,054
Commercial backlog		39,568		26,788		24,187

Total backlog	$	4,041,410	$	2,803,409	$	2,021,340

We expect to realize approximately 29% of our December 31, 2002 backlog by December 31, 2003.

Management believes that year-to-year comparisons of backlog are not necessarily indicative of future revenues. The actual timing of receipt of revenues, if any, on projects included in backlog could change because many factors affect the scheduling of projects. In addition, cancellations or adjustments to contracts may occur. Backlog is typically subject to large variations from quarter to quarter as existing contracts are renewed or new contracts are awarded. Additionally, all United States government contracts included in backlog, whether or not funded, may be terminated at the convenience of the United States government.

Manufacturing

We operate both fabrication and assembly facilities and also purchase certain components and assemblies from other suppliers. No one supplier accounts for a significant portion of total purchases. In limited cases, we obtain products from a sole supplier or a limited group of suppliers. For example, Titan currently relies upon SureBeam as an exclusive supplier of linear accelerators for its medical sterilization business, and SureBeam, in turn, relies on one supplier for some of the key components used to manufacture SureBeam's linear accelerators. Consequently, we risk disruptions in our supply of key products and components if these suppliers fail or are unable to perform because of strikes, natural disasters, financial condition or other factors.

Patents, Trademarks and Trade Secrets

Our policy is to apply for patents and other appropriate statutory protection when we develop new or improved technology, although we do not rely on patent protection in the normal course of our government contract operations. We presently hold over 100 U.S. and foreign issued patents, as well as a number of trademarks and copyrights. However, we do not rely solely on these statutory protections to protect our technology and intellectual property. In addition to seeking patent protection for our inventions, we rely on the laws of unfair competition and trade secrets to protect our unpatented proprietary rights. We attempt to protect our trade secrets and other unpatented proprietary information through agreements with customers, vendors, employees and consultants. In addition, various names used by us for our products and services have been registered with the United States Patent and Trademark Office.

Third parties could independently develop competing technology or design around our technology. If we are unable to successfully detect infringement and enforce our rights in our technology, we may lose competitive position in the applicable market. We cannot be certain that our means of protecting our proprietary rights in the U.S. or abroad will be adequate or that competing companies will not independently develop similar technology.

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

Research and Development

We maintain a staff of engineers, other scientific professionals and support personnel engaged in development of new applications of technology and improvement of existing products. These programs' costs are expensed as incurred. Titan-funded research and development expenditures were $5.7 million in the year ended December 31, 2000, $9.3 million in the year ended December 31, 2001, and $9.6 million in the year ended December 31, 2002. A portion of our research and development activities during 2002 was customer-funded and as such was paid for through contract revenues with an associated expense in operating expenses. All of our customer-funded research and development activity is funded under contracts with the U.S. government.

Government and Environmental Regulations

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

We are subject to environmental and safety laws and regulations governing the use, storage and disposal of hazardous substances or wastes and imposing liability for the cleanup of contamination from these substances. Although our business is not generally involved in the handling of hazardous materials, we cannot completely eliminate the risk of contamination or injury from these substances or wastes, and, in the event of such an incident, we could be held liable for any damages that result. From time to time, we have been notified of violations of government and environmental regulations. We attempt to correct these violations promptly without any material impact on our operations. In addition, we may be required to incur significant additional costs to comply with environmental laws and regulations in the future. These costs, and any future violations or liability under environmental laws or regulations, could have a material adverse effect on our business, financial condition and results of operations.

Titan Wireless must comply with applicable laws and obtain the approval of the regulatory authorities of each foreign country in which it operates. The laws and regulatory requirements relating to satellite communications and other wireless communications systems vary from country to country. Some countries have substantially deregulated satellite communications and other wireless communications, while other countries maintain strict and often burdensome regulations. The procedure to obtain these regulatory approvals can be time-consuming and costly, and the term of the approvals vary from different countries. In addition, in some countries there may be restrictions on the ability to interconnect satellite communications with ground-based communications systems. Titan Wireless's sale of products outside the U.S. is also subject to compliance with the U.S. Export Administration Regulations.

Employees

As of December 31, 2002, we employed approximately 9,900 employees, most of whom were located in the United States. We currently are not subject to collective bargaining arrangements, and we believe that our relationships with our employees are satisfactory.

Available Information

Our website address is www.titan.com. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments for those reports as soon as reasonably practicable after such material is electronically furnished to the Securities and Exchange Commission.

Item 2. Properties

Our operations' facilities occupy approximately 2,574,400 square feet of space located primarily throughout the United States. The large majority of the space is office space. Substantially all of our facilities are leased. We describe our lease commitments in Note 10 to the accompanying consolidated financial statements.

As a result of the merger of Titan Systems, Inc. into The Titan Corporation in September 2002, a charge of approximately $32.2 million was taken in 2002 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 and representing approximately 395,000 square feet of excess space. The Company is actively marketing 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.

Item 3. Legal Proceedings

On August 16, 2002, Perimex International Corporation (Perimex) filed a complaint against Titan, Titan Wireless and a former Titan Wireless employee in San Diego Superior Court in San Diego, California. The complaint alleges 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 provide wireless telecommunication services in Argentina and other related alleged misconduct. The complaint seeks damages of $53.65 million and seeks injunctive relief prohibiting Titan and Titan Wireless from transferring any of Titan Wireless’ assets. The court denied Perimex’s request for a preliminary injunction, sustained Titan and Titan Wireless’ demurrer as to all causes of action in the complaint and granted Perimex leave to amend the complaint. The court also ordered Perimex to post a bond for $0.09 million to secure payment of Titan and Titan Wireless’ costs if Titan prevails, or if Perimex does not prevail. Perimex elected not to post the bond, and the complaint was voluntarily dismissed without prejudice by Perimex. However, Perimex has the right to file a new complaint. The Company believes that Perimex’s claims are without merit and the Company intends to defend its position vigorously.

In the ordinary course of business, defense contractors are subject to many levels of audit and investigation by various government agencies. We have received a grand jury subpoena from the Antitrust Division of the Department of Justice requesting the production of documents relating to information technology service we performed for the Air Force at Hanscom Air Force Base in Massachusetts. We have been informed that other companies who have performed such services have received subpoenas as well. We have been and continue to cooperate fully with the investigation.

Further, we are subject to claims and from time to time are named as defendants in various types of legal proceedings. We may also assert claims from time to time. Based upon current information and review, in the opinion of management, the amount of ultimate liability or recovery with respect to these actions will not materially affect our financial position or results of operations taken as a whole. However, our evaluation of the likely impact of these actions could change in the future and an unfavorable outcome, depending upon the amount and timing, could have a material adverse effect on our results of operations or our cash flows in a future period.

Item 4. Submission of Matters To a Vote of Security Holders

No information is required by Item 4.

PART II

Item 5. Market for the Company's Common Equity and Related Stockholder Matters

The Company's common stock and cumulative convertible preferred stock are traded on the New York Stock Exchange (NYSE). As of March 20, 2003, there were approximately 3,688 holders of record of the Company's common stock and 465 holders of record of the Company's preferred stock, excluding beneficial owners of shares held in the names of brokers or other nominees. The closing prices for the common and preferred stock on the NYSE as of March 20, 2003, were $7.58 and $15.50, respectively. The quarterly market price ranges based on the high and low sales prices for the Company's common and preferred stock on the NYSE in 2002 and 2001 were as follows:

Common Stock	2002				2001

Fiscal Quarter	High		Low		High		Low

First	$	18.66	$	12.64	$	18.95	$	11.71
Second		17.43		12.72		18.70		9.81
Third		13.64		6.62		16.71		12.07
Fourth		13.94		8.86		21.57		13.25

Cumulative Convertible	2002				2001
Preferred Stock
Fiscal Quarter	High		Low		High		Low

First	$	20.40	$	18.20	$	21.25	$	17.75
Second		19.80		17.15		20.85		15.55
Third		17.10		13.30		18.90		16.75
Fourth		17.35		15.30		21.30		17.00

No cash dividends were paid on the Company's common stock in 2002 or 2001. Regular quarterly dividends of $.25 per share were paid on the cumulative convertible preferred stock in both years.

On August 5, 2002, we distributed to our stockholders in the form of a dividend 0.6986 shares of SureBeam Corporation for each outstanding share of Titan common stock. The common stock prices presented above for periods before August 5, 2002 are restated stock prices and reflect the distribution of our ownership in SureBeam to our stockholders. The market prices were restated by dividing by 1.345, the same adjustment made by Titan to outstanding Titan stock options to maintain the same aggregate intrinsic value of the stock options as before the spin-off. See Note 12 to our consolidated financial statements.

Equity Compensation Plan Information

The f

Delaware		95-2588754
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

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

Fiscal Quarter