The Devs never discussed this issue,

they obviously are fine with it,

but its ridiculous.

The gameplay issue is that if you manage to take out a high level titan and don't allow their crews to transfer, then the other player is pretty much toast at that point - game over.  We are looking at balancing this out more in the 1.04 update so that titan build costs increase based on level.

The hit ( penalty) should be pretty dramatic........

Try doing this against a decent human opponent online and see how far it gets you. His titan will level up more from the XP gained from killing yours, then say goodbye to a planet or two when he pushes and your titan is still rebuilding. We're alot more proactive than the AI you know.

Yarlen also explained the other reason too. If your titan died and lost all its levels you might as well quit since the advantage of your opponent will be insurmountable from that point on.

Also... holy hell. That's a pretty awesome change. 1.04 can't come quickly enough.

Also, increasing titan build times based upon level as well, so that a lvl 10 titan that gets taken out would take 1.5-2.0 x longer to recover.  This will allow you to engage the opponents fleet and/or take a planet or two from them so that when you kill the titan you do actually  gain the time required to take territory in the mid/endgame.  

Ok. Here's what I'd like to see.

Rebellion should have an option to toggle the following playing styles off and on:

1. titan death means lose one level

2. titan death means the titan can never come back

3. titan death means the titan comes back at level 1

4. titan death means the titan comes back at a cost commensurate to its level (10000 for every level) and at a build time increasing with hit points

5. cap ships have no level limitation. at every level past 10, a cap ship would continue gaining hps, hull, antimatter, shields, speed.

6. titans continue levelling.

Right now i'm playing as the vasari against 9 AI on a 150 planet map. I have 14 cap ships at level 10 and the titan is maxed as well. The 9 AI slowly get stronger, since every time I kill them they return with the same ship levels, which reduces the fun of it in my opinion. If I blow up somebodies ship, it should really be dead, and I should continue to gain some sort of benefit for it. Now, to concede a point, I think the exp required to get to level 11 should be huge, so that it would be virtually impossible to ever hit, say, level 80, but on a 150 planet map, fighting 9 AI, I bet you could eventually level ships up to 40 or so.

Personally I'd like to see titan's have their vulnerable infancy period extended as well as the risks of building a titan increased;  perhaps something like:

-Increase exp needed to reach each level on titans by 50-60%

-Increase exp granted for killing enemy titans by 50-60%

That way rushing a titan will carry some risk, as the guy who's fleeting up with frigates has a fair chance of killing the titan before it reaches level 2 or 3.  Would also make frigates a bit better as relatively speaking they would feed titan less then they presently do(smaller cost of using them).

Also, I  very much understand why the devs don't want titans dropping to level 1 when rebuilt- that said, I see no reason why a small exp level loss is unreasonable.  Losing a single level wouldn't be an atuolose yet would make taking risks on a titan to rake up some extra exp before dying less of a tennable strategy.

Heck, It could be even less then a level.  Honestly I think it would make a big difference if destroyed titans even just lost their current progress towards the next level on  death(have titans always revive at the minimum exp necessary to be their current level).