UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                [X] Annual Report Pursuant to Section 13 or 15(d)
                       The Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 1999


              [ ]Transition Report Pursuant to Section 13 or 15(d)
                       The Securities Exchange Act of 1934

                         Commission file number: 1-8443

                                TELOS CORPORATION

             (Exact name of registrant as specified in its charter)

         Maryland                                            52-0880974
  (State of Incorporation)                  (I.R.S. Employer Identification No.)

 19886 Ashburn Road, Ashburn, Virginia                          20147
(Address of principal executive offices)                     (Zip Code)

                         Registrant's Telephone Number,
                       including area code: (703) 724-3800

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

                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share

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

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

No public market exists for the registrant's Common Stock.

As of March 28, 2000, the  registrant  had  21,241,980  shares of Class A Common
Stock, no par value; 4,037,628 shares of Class B Common Stock, no par value; and
3,185,586 shares of 12% Cumulative  Exchangeable Redeemable Preferred Stock, par
value $.01 per share, outstanding.

Incorporation by Reference:  None

NUMBER OF PAGES IN THIS REPORT (EXCLUDING EXHIBITS): 58

<PAGE>


PART 1

ITEM 1.       BUSINESS

HISTORY AND INTRODUCTION

         Founded in 1968, Telos Corporation  ("Telos" or the "Company") delivers
enterprise  integration  solutions and services to customers in the U.S. federal
government and industry.  Telos'  product and service  offerings span the entire
systems life cycle, including network and systems design,  software development,
systems  integration,  hardware  and software  maintenance,  and  solutions  for
emerging  needs  for  enterprise   network   infrastructure   management,   data
integration,  and information security. The Company is headquartered in Ashburn,
Virginia,  part of Northern Virginia's growing Netplex region of high technology
companies.

         In  today's   dynamic   business   environment,   timely  and  accurate
information flow is critical for success.  Telos'  specialized  approach to this
information  challenge  is based on  leveraging  customers'  IT  infrastructure,
delivering user centric  information,  and enabling  customers to achieve a fast
return on investment.  Many customers are turning to the virtual enterprise as a
model for improving  business  performance  through enhanced  communications and
business  processes.  The virtual  enterprise is a demand driven  partnership of
customers,  employees,  partners  and  suppliers  to deliver  solutions.  Telos'
solutions  are aimed at overcoming  the critical  barriers that face the virtual
enterprise:  (1) the difficulty in accessing  disparate  data without  extensive
programming,  (2) the  inability to quickly  integrate  data to ensure  customer
responsiveness,   manufacturing   and   distribution   efficiency   and  overall
competitive strength,  (3) the problem of effectively  distributing  information
quickly and securely  and (4) the  challenge  of making the  organizational  and
technological complexity invisible to end users.

         Over  each  of  the  past  three  years,  Telos  has  made  significant
investments in the  development of software and service  solutions to facilitate
the  transition  of its  business  toward a larger mix of fixed  price  commerce
solutions.  As part of this strategy,  the Company has  discontinued or divested
itself of those elements of its  traditional  business which were not consistent
with this  strategy.  In February  1998,  Telos sold Telos  Information  Systems
("TIS"),  a contract labor division,  for $14.7 million.  In September 1999, the
Company sold Telos Field Engineering ("TFE"), its computer maintenance division,
for $10 million.

     On  December  30,  1999,   Enterworks  completed  a  private  placement  of
convertible  preferred stock, and the Company and Enterworks  completed a series
of concurrent transactions.  As a result,  Enterworks  deconsolidated from Telos
(See Note 2 of Notes to Consolidated Financial Statements).

REPORTABLE OPERATING SEGMENTS

         During 1999, the Company provided its business  solutions through three
operating  segments:  Systems and Support Services,  the Products Group, and its
Enterworks  subsidiary.  On December 30, 1999,  the  Enterworks  subsidiary  was
deconsolidated due to a private placement  offering and concurrent  transactions
(See Note 2 to the Consolidated Financial Statements).

SYSTEMS AND SUPPORT SERVICES

      The  Company's  Systems  and  Support  Services  Group  provides  software
development and support services for software and hardware including  technology
insertion, system redesign, software re-engineering,  Help Desk, and third party
maintenance. Key customers of this segment include: The U.S. Army at Ft. Sill in
Lawton,  Oklahoma;  the U.S. Army at Ft.  Monmouth in Red Bank, New Jersey;  and
until September,  1999 the U.S. Army's Redstone Arsenal in Huntsville,  Alabama.
Telos is one of the largest  providers of software  engineering  services to the
U.S. Army,  maintaining  over 50 million lines of software code for fire support
systems. In addition,  the Company has supported  seventy-nine tactical land and
satellite  communications systems for the  Communications-Electronics  Command's
Research,  Development,  and Engineering  Center. The Company's largest hardware
services  contract  was for the  Redstone  Arsenal  where the Telos Call  Center
responded  to support the Army's  Aviation and Missile  Command.  In addition to
these  traditional  Telos  customers and services,  the Company has  information
security,  data  integration,   advance  messaging,  and  wireless  network  and
enterprise   management   practices  which  generate  higher  margins  than  the
traditional business and represent a growing component of this segment.


<PAGE>



         For 1999, the Systems and Support  Services Group generated  revenue of
$93.5 million, or 54.6%, of the Company's reported consolidated revenue. The TFE
and TIS divisions  were part of the Systems and Support  Services Group prior to
their respective sales in 1999 and 1998.

PRODUCTS GROUP

         The Products  Group  delivers  product-based  solutions for  networking
environments.  This group sells  commercial  products  from most major  original
equipment  manufacturers.  The  Company is capable of staging,  installing,  and
deploying large network infrastructures with little disruption to the customer's
ongoing operations.

         This  operating  segment  also  held the  largest  network  integration
contract  ever  awarded by the U.S.  federal  government,  the Small  Multi-user
Computer ("SMC-II") contract which had a three-year term that commenced with the
original  award in September  1995,  and was extended  through  April 1999.  The
Products Group was awarded the follow-on to the SMC II Contract,  Infrastructure
Solutions 1, or IS1, awarded in February 1999.

         For 1999, the Products  Group had revenues of $77.8 million,  or 45.4%,
of the Company's reported consolidated revenues.

ENTERWORKS, INC.

     Enterworks  develops,  markets  and  supports  a  software  framework  that
integrates  content  and  processes  for  companies  seeking to  participate  in
e-business.  They target  operators  and users of  e-marketplaces  and  portals.
E-marketplaces   and  portals  are  Web-based   destinations   where  employees,
customers,  partners  and  suppliers  can interact to obtain  information  about
products  and  services,  and conduct  business  more  efficiently.  Enterworks'
products enable customers to build or join  e-marketplaces  and portals rapidly,
add new content and e-business  participants easily, and automate the end-to-end
processes required for e-business interaction.

         Enterworks'  products are  designed to meet the business and  technical
challenges  faced by  operators  and  users of  e-marketplaces  and  portals  by
delivering integrated,  real-time content and automating business processes that
bring together  employees,  customers,  partners and  suppliers.  These products
offer numerous  competitive  advantages over traditional  solutions by combining
both content and process  integration,  and by guiding people through e-business
interactions.

     At the end of 1999, Enterworks completed a private placement of convertible
preferred stock and the Company and Enterworks  completed a series of concurrent
transactions.  As a result,  Enterworks deconsolidated from Telos (See Note 2 of
Notes to Consolidated Financial Statements).

REVENUE BY MAJOR MARKET AND SIGNIFICANT CUSTOMERS

Revenue by major market for the Company are as follows:
<TABLE>
<CAPTION>

                                                   PERCENTAGE OF TOTAL CONSOLIDATED REVENUE FOR
                                                   --------------------------------------------
                                                  1999(1)                1998                  1997
                                                  -------                ----                  ----
<S>                                               <C>                    <C>                   <C>
Federal government                                92.8%                  92.9%                 94.6%
Commercial                                         5.9                    5.1                   3.9
State and local governments                        1.3                    2.0                   1.5
                                                   ---                   ----                  ----
         TOTAL                                   100.0%                 100.0%                100.0%
                                                 ======                 ======                =====
<FN>
1.       Major market revenue includes Enterworks revenue.
</FN>
</TABLE>


<PAGE>



         Total consolidated revenue derived from the federal government for 1999
includes 57.4% of revenue from  contracts with the United States Army,  12.2% of
revenue from contracts  with the United States Navy,  7.4% of revenue with other
Department of Defense  customers,  and 6.8% of revenue from the Federal Judicial
branch.

COMPETITION

         The segments of the information  services industry in which the Company
operates  are  highly  fragmented  with no  single  company  or  small  group of
companies in a dominant position. Some of the Company's competitors also operate
in international markets,  along with other entities,  which operate exclusively
or primarily  outside the United  States.  Some of the large  competitors  offer
services in a number of markets  which  overlap  many of the same areas in which
the Company offers services,  while certain companies are focused on only one or
a few of these  markets.  The firms which  compete with the Company are computer
services firms, applications software companies and consulting firms, as well as
the computer  service arms of computer  manufacturing  companies and defense and
aerospace firms.  Thousands of firms fall into these categories.  As the Company
becomes more focused on network-enabled  enterprise  computing,  the competition
shifts to include  companies that perform  enterprise  integration for large and
complex information technology environments. In addition, the internal staffs of
client   organizations,   non-profit   federal  contract  research  centers  and
universities are competitors of the Company.

         The Company  believes  that the  principal  competitive  factors in the
segments of the information and network  technology  market in which it competes
include  project  management  capability,  technical  expertise,  reputation for
providing  quality  service,  and price.  The  Company  believes  its  technical
competence in computer engineering,  systems software,  engineering,  system and
network  integration,  and  hardware  maintenance  will  enable  it  to  compete
favorably in the information and network technology market.

EMPLOYEES

         The Company  employed 833 persons as of December  31,  1999,  down from
1,155 at December 31, 1998. The decline was  principally  due to the sale of TFE
and the deconsolidation of Enterworks. The services the Company provides require
proficiency  in many fields,  such as computer  science,  mathematics,  physics,
engineering, operations research, economics, and business administration.

         Of the  total  Company  personnel,  570  provide  Systems  and  Support
Services,   while  122  provide  System  Integration   (Products)  Services.  An
additional  141 employees  provide  corporate and business  services  functions.
Enterworks employed 168 persons as of December 31, 1999.

BACKLOG

         Many of the Company's  contracts with the U.S. Government are funded by
the  procuring  government  agency from year to year,  primarily  based upon the
government's fiscal  requirements.  This results in two different  categories of
backlog:  funded and unfunded.  Total backlog consists of the aggregate contract
revenues  remaining to be earned by the Company at a given time over the life of
its contracts,  whether or not funded.  Funded backlog consists of the aggregate
contract  revenues  remaining  to be earned by the Company at a given time,  but
only to the extent, in the case of government  contracts,  funded by a procuring
government  agency  and  allotted  to the  contracts.  Unfunded  backlog  is the
difference  between  total  backlog  and funded  backlog.  Included  in unfunded
backlog are  revenues  which may be earned only if customers  exercise  delivery
orders and/or renewal options to continue existing contracts.

         A number of contracts  undertaken by the Company extend beyond one year
and, accordingly, portions of contracts are carried forward from one year to the
next as part of the  backlog.  Because many factors  affect the  scheduling  and
continuation  of projects,  no assurance can be given as to when revenue will be
realized on projects included in the Company's backlog.

         At December  31, 1999 and 1998,  the  Company  had total  backlog  from
existing   contracts  of  approximately   $242.2  million  and  $923.3  million,
respectively. This is the maximum value of additional future orders for systems,
products, maintenance and other support services presently allowable under those
contracts,  including renewal options available on the contracts if exercised by
the client, over periods extending up to seven years. Included in the backlog at
December 31, 1998 was $786 million from the Company's  Small  Multi-Computer  II
("SMC-II") contract,  which expired in April 1999 and therefore, did not convert
to orders and  revenue of this  magnitude  in 1999.  The Company was awarded the
follow-on contract to SMC II,  Infrastructure  Solutions-1 ("IS1"), in the first
quarter of 1999.  This contract has a five-year term with an award amount not to
exceed $380 million.  Approximately $45 million and $56 million of the total was
funded backlog at December 31, 1999 and 1998, respectively.

         While backlog remains a measurement consideration,  in recent years the
Company,  as well as other  federal  contractors,  experienced  a change  in the
manner in which the federal government  procures  equipment and services.  These
procurement   changes  include  the  growth  in  the  use  of  General  Services
Administration  ("GSA") schedules which allow agencies of the federal government
to purchase  significant  amounts of equipment and services.  The use of the GSA
schedules results in a significantly  shorter and much more flexible procurement
cycle,  as well as increased  competition as many companies hold such schedules.
Along with the GSA schedules,  the federal government is awarding a large number
of omnibus contracts with multiple awardees.  These contracts  generally require
extensive marketing efforts by the awardees to procure business.  The use of GSA
schedules  and  omnibus  contracts,  while  generally  not  providing  immediate
backlog,  provide  areas of  potential  growth  that the  Company  continues  to
aggressively pursue.

OVERVIEW OF 1999

         During 1999,  Telos continued to execute its strategy of  transitioning
its business toward a larger mix of commerce solutions.

     These efforts  included the continued  development of Enterworks'  software
suite which includes Enterworks Content Integrator(TM) ("ECI"), formerly Virtual
DB, and Enterworks Process Integrator(TM)  ("EPI"),  formerly Enterworks Process
Manager.  ECI 3.5 was  released  in  December  1999 and EPI 2.0.1  was  released
February  2000.  These efforts also included  doubling the size of the sales and
marketing  infrastructure.  As a result of these  efforts,  Enterworks'  revenue
increased in excess of 50% from 1998 revenue.

         In December 1999,  Enterworks  completed a private placement  financing
whereby the Company's  voting  interest in Enterworks was reduced to 34.8%. As a
result of this decrease in ownership, effective December 30, 1999 Enterworks has
been  deconsolidated  from the Company's  operating  results.  As a result,  the
Company will no longer be required to fund the continuing  investment needed for
Enterworks sales and marketing infrastructure and product development.

     The  Company's  1999  investments  were also  focused on its higher  margin
information  security,   data  integration,   advanced  messaging  and  wireless
networking practices. Revenue for these practices approximated $15.8 million for
1999,  which  represents a more than doubling of comparable  1998 revenues.  The
Company  expects total revenue for these practices will continue to grow in 2000
based in part on its  continuing  investments  in sales and marketing to support
these practices.

         The Company's 1999  activities  also focused on reducing or eliminating
certain of its least profitable  contracts.  With these business reductions came
decreases in related corporate  infrastructure costs, including selling, general
and administrative  ("SG&A") expenses.  However, on a total company basis, these
cost  reductions  were more than  offset by  increases  in SG&A costs to support
Enterworks and the other higher margin businesses noted above.

         In  September  1999,  the Company sold all of the net assets of its TFE
division for $10 million in cash.

ITEM 2.  PROPERTIES

         The Company leases  191,700  square feet of space in Ashburn,  Virginia
for its corporate headquarters, integration facility, and primary service depot.
This lease  expires in March 2016,  with a ten-year  extension  available at the
Company's option.  This facility  supports all three of the Company's  operating
segments.

         As of January 1, 2000,  Enterworks,  Inc. is subleasing 35,214 rentable
square feet of space from Telos  Corporation at the Ashburn,  Virginia  location
for its corporate headquarters and operating segments. This sublease will expire
in March 2001 unless a renewal of the  sublease  is reached by mutual  agreement
between the Company and Enterworks.

         The Company leases  additional space for regional  contract work sites,
training,  and sales offices in 11 separate  facilities  located in 4 states and
Europe under various  leases,  which expire on various dates through March 2004.
At December 31, 1999, the Company sold the remaining building it owned in Amery,
Wisconsin. This facility principally supported the Company's Systems and Support
Services operating segment.

ITEM 3.       LEGAL PROCEEDINGS

         The  Company is a party to  various  lawsuits  arising in the  ordinary
course  of  business.  In the  opinion  of  management,  while  the  results  of
litigation cannot be predicted with certainty, the final outcome of such matters
will not have a material adverse effect on the Company's  consolidated financial
position, results of operations or of cash flows.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         During the fourth  quarter of 1999, no matters were submitted to a vote
of security holders.


<PAGE>


PART II

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

       No  public  market  exists  for the  Company's  Class A or Class B Common
Stock.  As of March 1, 2000,  there were 83  holders  of the  Company's  Class A
Common Stock and 3 holders of the Company's Class B Common Stock.

ITEM 6.  SELECTED FINANCIAL DATA

       The  following  should  be  read  in  connection  with  the  accompanying
information presented in Item 7 and Item 8 of this document.
<TABLE>

                                                                        OPERATING RESULTS

                                                                     YEAR ENDED DECEMBER 31,
                                            ----------------------------------------------------------------------
                                              1999          1998            1997           1996             1995
                                              ----          ----            ----           ----             ----
                                                                     (amounts in thousands)
<CAPTION>
<S>                                        <C>            <C>              <C>           <C>              <C>
Sales (4)(6)                               $171,364       $207,086         $253,787      $188,895         $175,759
(Loss) income  from
  continuing operations                      (9,979)        (9,171)           1,412        (9,816)             592
Discontinued operations:
   Income from discontinued
   Operations                                    --             --               --           500              423
   Gain on sale of
   Consulting Services                           --             --               --        11,524               --
(Loss) income  before
   extraordinary items                       (9,979)        (9,171)           1,412         2,208            1,015
Extraordinary items(5)                        8,015             --               --            --               --

Net (loss) income                            (1,964)        (9,171)           1,412         2,208            1,015

                                                                     FINANCIAL CONDITION
                                                                      As of December 31,
                                             --------------------------------------------------------------------
                                              1999(6)       1998            1997           1996             1995
                                              -------       ----            ----           ----             ----
                                                                   (amounts in thousands)

Total assets (4)                           $ 56,886       $ 95,251         $109,718      $110,064          $94,492
Long-term debt (1)                           25,045         54,651           56,875        32,857           47,316
Capital lease obligations, long-term (2)     11,362         11,710           12,085        12,537               --
Senior redeemable preferred stock (3)         6,054          5,631            5,207         4,828            4,494
Class B redeemable
   preferred stock (3)                           --             --           12,035        11,087           10,252
Redeemable preferred Stock (3)               36,975         31,729           29,951        24,230           18,647
<FN>
(1)  See note 5 to the  consolidated  financial  statements  in item 8 regarding
     long-term debt obligations of the company. Total long-term debt obligations
     include  amounts  due under the senior  credit  facility  and  subordinated
     notes.
(2)  See Note 9 to the Consolidated Financial Statements in Item 8 regarding the
     capital lease obligations of the Company.
(3)  See Note 6 to the  Consolidated  Financial  Statements  in Item 8 regarding
     redeemable preferred stock of the Company.
(4)  See Note 3 to the Consolidated Financial Statements in Item 8 regarding the
     sales of TFE and TIS.
(5)  See Note 2 to the Consolidated Financial Statements in Item 8 regarding the
     extraordinary   item  relating  to  the  concurrent   transactions  of  the
     Enterworks private placement.
(6)  See Note 2 to the Consolidated Financial Statements in Item 8 regarding the
     income statement presentation and exclusion of the assets,  liabilities and
     equity of Enterworks from the consolidated accounts.
</FN>
</TABLE>

<PAGE>

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

GENERAL

     Over the last three years, the Company has made significant  investments in
the development of software products, in sales and marketing, and in positioning
its infrastructure to support its new business to business e-commerce  products.
The Company's  investments in new software  products provide the Company with an
expanded  product line that, the Company  believes,  offers its customers unique
value added  solutions for their computing and  information  gathering  analysis
problems.  The  investment  in  software  products  has been  primarily  through
Enterworks Inc. and is focused on the eBusiness  infrastructure  market, through
content and process integration  products.  As of December 31, 1999, the Company
will no longer fund  Enterworks'  activities as Enterworks is no longer included
in the Company's consolidated financial results.  Additionally,  the Company has
established  a  comprehensive  offering  of  products  and  services  on its GSA
schedule.  These  investments  have  enabled  the  Company  to win  most  of its
significant  contract rebids,  and continue to provide  significant new business
opportunities.

     During   1999,   the   Company   experienced   decreases   in  revenue  and
profitability.  Revenue decreased $35.7 million,  or 17.2%, as compared to 1998.
Approximately  $23.9 million of this decrease was attributable to the expiration
of the  Products  segment's  SMC II contract in April 1999 and the timing of the
subsequent  start up period on IS-1.  This decline is also due to the effects of
the deconsolidation of Enterworks, which presents the results from operations of
Enterworks in a single line item entitled  "Equity in Net Losses of Enterworks".
Operating income for 1999 was $2.2 million,  as compared to an operating loss of
$7.3 million in 1998. Operating  profitability  improved principally as a result
of the deconsolidation of Enterworks  discussed above.  Exclusive of Enterworks,
the  Company's  earnings  before  interest  and taxes for 1999 were $2.2 million
compared to $4.3  million for 1998.  This  decline  was  principally  due to the
decline in operating profit of the Products segment of $2.0 million from 1998 to
1999.

     During 1998, the Company's revenue and profitability  decreased as compared
to 1997.  Revenue  decreased  $46.7  million,  or  18.4%,  primarily  due to the
expiration of two large contracts in 1997 (further  discussed below).  Operating
losses for 1998 were $7.3  million,  as compared to an operating  profit of $7.4
million in 1997. Operating profitability declined principally as a result of the
decreases  in  revenue,  as  well  as  the  Company's  continued  investment  in
Enterworks.

REVENUE BY CONTRACT TYPE

     Approximately 94% of the Company's total revenues in 1999 were attributable
to  contracts  with  federal,  state,  and  local  governments,   including  93%
attributable  to the federal  government.  The Company's  revenues are generated
from a number of  contract  vehicles.  In  general,  the  Company  believes  its
contract  portfolio is characterized as having low to moderate financial risk as
the  Company has  limited  long-term  fixed  price  development  contracts.  The
Company's firm fixed price  contracts  consist  principally of contracts for the
purchase of computer  equipment at established  contract prices or contracts for
maintenance of computer hardware. A significant portion of the Company's revenue
is from time and material  contracts,  which generally allow the pass-through of
allowable costs plus a profit margin.  For 1999, revenue by contract type was as
follows (includes revenues generated by Enterworks):  time and materials, 37.3%;
firm fixed price, 51.0%; cost reimbursable,  6.4%; fixed monthly rate, 4.8%; and
other,  0.5%.  While the  Company has not  experienced  any  significant  recent
terminations  or  renegotiations,  government  contracts  may be  terminated  or
renegotiated at any time at the convenience of the government.


<PAGE>


STATEMENT OF OPERATIONS DATA

         The following table sets forth certain consolidated  financial data and
related percentages for the periods indicated:
<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                                      ---------------------------------------------------------------
                                                           1999                   1998                      1997
                                                           ----                   ----                      ----
                                                                     (dollar amounts in thousands)
<S>                                                <C>           <C>         <C>        <C>          <C>         <C>
Sales                                              $171,364      100.0%      $207,086   100.0%       $253,787    100.0%
Cost of sales                                       151,216       88.2        182,915    88.3         218,430     86.1
Selling, general and
   administrative expenses                           17,459       10.2         30,842    14.9          27,054     10.7
Goodwill amortization                                   489        0.3            589     0.3             892      0.3
                                                        ---        ---            ---     ---             ---      ---

   Operating (loss) income                            2,200        1.3         (7,260)   (3.5)          7,411      2.9
Interest expense                                     (6,065)      (3.5)        (6,555)   (3.1)         (7,455)    (2.9)
Gain on sale of assets                                4,731        2.8          5,683     2.7              --       --
Equity in net losses of Enterworks                  (18,765)     (11.0)            --      --              --       --
Other income (expense)                                   67         --             64      --             124       --
                                                     ------       ----          -----     ---           -----      ---
(Loss) income before taxes                          (17,832)     (10.4)        (8,068)   (3.9)             80       --
Income tax benefit (provision)                        7,853        4.6         (1,103)   (0.5)          1,332      0.6
                                                      -----        ---         -------   -----          -----      ---

(Loss) income before
  extraordinary item                                 (9,979)      (5.8)        (9,171)   (4.4)          1,412      0.6
Extraordinary item                                    8,015        4.7             --      --              --       --
                                                      -----        ---          -----     ---           -----      ---


Net (loss) income                                  $ (1,964)      (1.1)%     $ (9,171)   (4.4)%        $1,412      0.6%
                                                   ========       ====       ========    ====          ======      ===
</TABLE>

FINANCIAL DATA BY OPERATING SEGMENT

     The Company had three  reportable  operating  segments:  Enterworks,  Inc.,
Systems and Support Services, and Products.  Enterworks, Inc. was deconsolidated
as of December 30, 1999 and therefore  will not be reflected as a segment in the
year 2000.
         Sales,  gross profit and gross margin by market segment for the periods
designated below are as follows:
<TABLE>
<CAPTION>

                                                                           YEAR ENDED DECEMBER 31,
                                                           ------------------------------------------------------
                                                           1999                  1998                         1997
                                                           ----                  ----                         ----
<S>                                                      <C>                  <C>                         <C>
                                                                       (dollar amounts in thousands)
Revenue:
    Enterworks, Inc.                                    $     --              $   7,073                   $   3,398
    Systems and Support Services                          93,538                 98,277                     121,052
    Products                                              77,826                101,736                     129,337
                                                         -------                -------                     -------
      TOTAL                                             $171,364              $ 207,086                   $ 253,787
                                                        ========                =======                     =======

Gross Profit:
    Enterworks, Inc.                                    $     --              $   1,542                   $    (132)
    Systems and Support Services                          16,158                 14,046                      20,614
    Products                                               3,990                  8,583                      14,875
                                                         -------                 ------                      ------
      TOTAL                                             $ 20,148              $  24,171                   $  35,357
                                                        ========                =======                      ======

Gross Margin:
    Enterworks, Inc.                                         --%                  21.8%                      (3.9)%
    Systems and Support Services                           17.3%                  14.3%                      17.0%
    Products                                                5.1%                   8.4%                      11.5%

     TOTAL                                                 11.8%                  11.7%                      13.9%
</TABLE>

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1999 AND 1998

     Revenue for 1999 was $171.3 million, a $35.7 million or 17.2% decrease from
1998.  Approximately  $23.9  million of this  decrease was  attributable  to the
Products  Group,  which  experienced  a decline in revenue  primarily due to the
expiration of the Small Multi User Computer II ("SMCII") contract in April 1999.
The SMCII contract contributed revenue of approximately $44.1 million in 1998 as
compared to $8.8 million in 1999. In addition,  the Systems and Support Services
Group experienced a $4.7 million decrease in revenue for the year ended December
31, 1999 as compared to the same period in 1998. This decrease was primarily due
to the sale of TIS in February 1998. TIS contributed  $4.0 million of revenue in
1998  prior  to its  sale.  In  addition  revenue  declined  in part  due to the
deconsolidation   of  Enterworks  to  an  "Equity  in  Enterworks  nets  losses"
presentation.

     Cost of sales was 88.2% of sales for the year ended  December 31, 1999,  as
compared  to 88.3% for the same  period in 1998.  The major  changes  in cost of
sales are  attributable  to favorable  changes in contract mix and a high margin
transaction  with one of the Company's  partners  within the Systems and Support
Services  Group,  offset by the  elimination  of high  margin  sales  within the
Enterworks Group.

     Gross  profit  decreased to $20.1  million for the year ended  December 31,
1999 compared to the same 1998 period due to the aforementioned  deconsolidation
of Enterworks. Gross margins were 11.8% for 1999 as compared to 11.7% for 1998.

     Selling,   general,  and  administrative   expense  ("SG&A")  decreased  by
approximately  $13.4  million  or 43.4%,  to $17.4  million  for the year  ended
December  31, 1999 from $30.8  million in the  comparable  period of 1998.  This
decrease  is due  primarily  to the  deconsolidation  of  Enterworks.  SG&A as a
percentage of revenues  decreased to 10.2% for 1999 from 14.9% in the comparable
1998 period.

     Goodwill  amortization  expense decreased $100,000 for the comparative year
periods of 1999 and 1998.  This  reduction  is due to a decrease in the goodwill
balance  associated  with the sales of TIS in early 1998,  and TFE in  September
1999.

     Operating  income of the Company  increased by $9.5 million to $2.2 million
for the year ended  December 31, 1999 from an operating  loss of $7.3 million in
the comparable 1998 period.  The increase in operating profit for the comparable
year periods is attributable to the decreases in S,G&A discussed above.

     At the end of the third quarter of 1999, the Company sold substantially all
of the assets of its  computer  maintenance  and service  business,  Telos Field
Engineering Inc.  ("TFE"),  to TFE Technology  Holdings L.L.C.,  an affiliate of
Carr & Company,  for $10  million.  As a result of this sale,  the  Company  has
recorded a gain of $4.7 million in its consolidated  statement of operations for
the year ended December 31, 1999.

     Telos sold  substantially  all of the net  assets of one of its  divisions,
TIS, in the first quarter of 1998. The transaction generated approximately $14.7
million in cash  proceeds  and a gain of $5.7  million was recorded for the year
ended December 31, 1998.

     In order to present the statement of operations in accordance  with APB 18,
the revenues,  cost of sales,  selling general and  administrative  and interest
expenses  for  Enterworks  Inc.  were  presented in one line item "Equity in net
losses in Enterworks" due to the  deconsolidation  of Enterworks on December 30,
1999. (See Note 2 to the consolidated financial  statements).  The equity in net
losses in Enterworks for 1999 was $18.8 million.

     Interest  expense  decreased  $490,000  from $6.6  million  in 1998 to $6.1
million for 1999. The decrease for the year period is due to the  deconsolidated
presentation of Enterworks partially offset by increased debt levels in 1999.

     The income tax benefit was $7.8  million  for the year ended  December  31,
1999.  The  benefit  recorded  was a result of the net  operating  losses of the
Company,  partially  offset  by the gain  from the sale of TFE.  For  1998,  the
Company   incurred  a  tax   provision  of  $1.1  million  which  was  primarily
attributable to state income taxes and an increase in allowances relating to the
recoverability  of deferred  tax assets.  The  Company's  net deferred tax asset
includes  substantial  amounts of net operating loss  carryforwards.  Failure to
achieve forecasted taxable income may affect the ultimate realization of the net
deferred tax assets.  Management's  tax strategy  contemplates the generation of
taxable  income in excess of operating  losses  sufficient in amounts to realize
the net deferred tax assets.

     On  December  30,  1999 the  Company  entered  into a number of  concurrent
transactions  with its noteholders and its Enterworks  subsidiary (See Note 2 of
Consolidated   Financial   Statements).   The  two  most   noteworthy  of  these
transactions affecting Telos were as follows:

1.       The  Company  converted   approximately  $7.6  million  of  its  Senior
         Subordinated  Notes,  Series  B, C and D held by  investors,  plus  the
         accrued interest and the waiver of prepayment  premium  associated with
         these notes, into shares of Enterworks' Common Stock currently owned by
         the Company at an  exchange  ratio of one share of  Enterworks'  Common
         Stock  for  each  $1.00  principal  amount  of  notes  payable.   These
         subordinated notes had a maturity date of October 1, 2000.

2.       Enterworks purchased 5,000,000 shares of Enterworks' Common Stock owned
         by the  Company at a price of $1.00 per share.  This amount was reduced
         by 20% of the Agent's fee, the Company's pro rata share of the proceeds
         from  the  transaction.  The net  amount  received  by  Telos  was $4.7
         million.

         These two transactions  resulted in an extraordinary  gain, net of tax,
         of  $8.0  million,  and is  included  in  the  Company's  statement  of
         operations for the year ended December 31, 1999.

  YEARS ENDED DECEMBER 31, 1998 AND 1997

     Revenue for 1998 was $207.1 million, a $46.7 million or 18.4% decrease from
1997.  Approximately  $27.6  million of this  decrease was  attributable  to the
Products Group,  which experienced lower revenue primarily due to the completion
of the Immigration and Naturalization  Services Contract ("INS Contract") in the
third quarter of 1997. The INS contract  contributed revenue of $27.8 million in
1997. In addition,  the Systems and Support  Services Group  experienced a $22.8
million decrease in revenue for the year ended December 31, 1998 compared to the
same  period of 1997.  This  decrease  was  primarily  due to the sale of TIS in
February 1998 and the expiration of its Immigration and Naturalization  Services
Blanket Purchase  Agreement for Field Operation  Support Contract ("INS BPA") in
the fourth quarter of 1997. TIS and INS BPA contributed revenue of $24.7 million
and $12.2 million, respectively, during 1997 with corresponding 1998 revenues of
$4.0 million and  $100,000,  respectively.  The declines in Products and Systems
and  Support  Services  revenue  were  partially  offset by an  increase of $3.7
million,  or 108%,  in Enterworks  revenue for the year ended  December 31, 1998
compared to the same period of 1997.

     Cost of revenue  was 88.3% of revenue  for 1998,  as  compared to 86.1% for
1997.  The increase in cost of revenue as a  percentage  of revenue is primarily
attributable to unfavorable  changes in product mix and the under  absorption of
infrastructure costs. On a dollar basis, the decrease in cost of revenue for the
year is primarily attributable to the decreases in revenue.

     Gross  profit  decreased by $11.2  million or 31.6% from 1997 to 1998.  The
decrease is primarily  attributable to the revenue declines  discussed above, as
well  as the  unfavorable  changes  in  product  mix  and  under  absorption  of
infrastructure costs.

     Selling, general and administrative expenses ("SG&A") were $30.8 million in
1998 and $27.1 million in 1997. During 1998, the Company increased  expenditures
for Enterworks  research and development and sales and marketing by $5.1 million
and $1.2 million,  respectively,  as compared to the same 1997 period.  Research
and development  expense for 1998 included a net realizable  value adjustment of
$1.7 million to  capitalized  software  costs.  However,  these  increases  were
partially offset by reductions in other SG&A expenditures,  relating principally
to the consolidation of certain administrative support functions.

     Goodwill  amortization  expense decreased $303,000 to $589,000 for 1998, as
compared to $892,000 in 1997.  This  reduction is primarily due to a decrease in
the goodwill balance associated with the sale of the TIS division in early 1998.

     Telos sold  substantially all of the net assets of TIS in the first quarter
of 1998. The transaction  generated $14.7 million in cash proceeds and a gain of
$5.7 million.


<PAGE>

     Interest expense  decreased $1.0 million to $6.5 million in 1998, from $7.4
million in 1997.  This decrease is due  principally to a decrease in the average
balance of the Senior Credit Facility for most of 1998 compared to 1997, as well
as a reduction in the bank's base rate due to changing economic conditions.

     The income tax provision  was $1.1 million for 1998.  The tax provision was
primarily  attributable  to state income  taxes,  and  increases  in  allowances
relating to the  recoverability of deferred tax assets. An income tax benefit of
$1.3 million was recorded for 1997,  principally because the Company reduced its
valuation allowance relating to net operating loss carryforwards  expected to be
utilized as a result of the gain on the TIS sale.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's  capital  structure  consists of a revolving credit facility,
subordinated notes, and redeemable preferred stock and common stock.

     At December  31,  1999,  the Company  had an  outstanding  balance of $16.5
million on its $35 million Senior Credit Facility (the "Facility"). The Facility
matures on July 1, 2001 and is  collateralized  by a majority  of the  Company's
assets  including  inventory,  accounts  receivable  and the Company's  stock in
Enterworks,  Inc. The amount of borrowings  fluctuates  based on the  underlying
asset  borrowing  base. At December 31, 1999,  the Company,  under its borrowing
base formula, had $7.1 million of unused availability.  The Facility has various
covenants which may, among other things,  restrict the ability of the Company to
merge with another entity,  sell or transfer  certain assets,  pay dividends and
make other distributions beyond certain limitations.  The Facility also requires
the Company to meet certain leverage, net worth, interest coverage and operating
goals.  At December 31,  1999,  the Company was not in  compliance  with several
covenants  contained  in  the  Facility;  however,  the  bank  has  waived  this
non-compliance.  In addition,  the bank has amended the  covenants to conform to
the Company's 2000 budget expectations.

     The Company's  subordinated  notes are held principally by shareholders and
management,  and totaled $8.5  million at December  31,  1999.  These notes bear
interest at rates between 14% and 17% and become payable on April 1, 2001.

     The Company currently has two primary classes of redeemable preferred stock
- Senior  Redeemable  Preferred  Stock and Public  Preferred  Stock.  Each class
carries  cumulative  dividend rates of 12% to 14.125%.  At December 31, 1999 the
total carrying value of redeemable  preferred stock,  including  accumulated and
unpaid dividends,  was $43.0 million. The Company accrues dividends and provides
for accretion related to the redeemable  preferred stock.  Mandatory  redemption
for the Senior Redeemable  Preferred Stock including all dividends  payable,  is
required on  December  31,  2001,  subject to the legal  availability  of funds.
Mandatory  redemption  for the  Public  Preferred  Stock is  required  from 2005
through 2009, subject to the legal availability of funds.

     Cash  provided  by  operating  activities  was $11.2  million in 1999,  due
primarily  to a decrease in accounts  receivable  as a result of the sale of TFE
and the decline in sales from this year's fourth  quarter  compared to the prior
year's fourth quarter.  Cash provided by investing  activities was $12.7 million
in 1999,  reflecting  capital  expenditures  of $1.4  million  and  $800,000  in
continued  investments  in software  development  costs  related to  Enterworks,
offset by the  proceeds  from the sale of TFE of $10 million and the sale of the
Company's  stock in  Enterworks  for $4.7  million.  The Company  used cash from
financing  activities of $24.0 million in 1999,  reflecting  principally the net
payments on the Facility.

     In September 1999, the Company sold its TFE division for  approximately $10
million.  The  net  proceeds  from  the  sale  were  used  to pay  down  amounts
outstanding under the Facility.

     In  December  1999,  Enterworks  completed  a private  placement  financing
whereby the Company's  voting  interest in Enterworks was reduced to 34.8%. As a
result of this decrease in ownership, effective December 30, 1999 Enterworks has
been  deconsolidated  from the Company's  operating  results.  As a result,  the
Company will no longer be required to fund the continuing  investment needed for
Enterworks sales and marketing infrastructure and product development.
<PAGE>


CAPITAL EXPENDITURES

     The Company believes that its business is generally not capital  intensive.
Capital  expenditures  for property and equipment  were $1.4 million in 1999 and
$1.2 million in 1998, and $2.6 million in 1997. The Company  anticipates capital
expenditures of  approximately  $1.4 million in 2000;  however,  there can be no
assurance that this level of capital expenditures will occur.

INFLATION

     The rate of  inflation  has been  moderate  over the past five  years  and,
accordingly,  has not had a significant  impact on the Company.  The Company has
generally been able to pass through  increased costs to customers through higher
prices to the extent  permitted by  competitive  pressures.  The Company's  cost
reduction efforts have generally offset the effects of inflation, if any, on the
Company's performance.

YEAR 2000

     Year 2000 issues refer  generally to the  problems  that some  software may
have in determining the correct century for the year. For example, software with
date-sensitive  functions  that is not Year  2000  compliant  may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.

     The Company,  like most owners of computer software,  modified  significant
portions of its internal use software so that it would function  properly in the
year 2000. Accordingly, the Company has incurred internal staff costs as well as
consulting   and  other   expenses   related  to  software  and   infrastructure
enhancements  necessary  to  prepare  the  systems  for  the  year  2000.  Total
expenditures  for such costs were not  material  to the  Company's  consolidated
financial  statement  in 1998 or 1999.  The Company  completed  its internal use
software  compliance  efforts  prior to December 31,  1999.  There were no major
internal systems issues reported over the year 2000 transition.

     The Company queried its key suppliers and vendors to assess their Year 2000
readiness and was informed that software  licensed to the Company for resale was
compliant  for the Year 2000. No major vendor issues were reported over the Year
2000 transition.

     As is the case with other similarly situated computer companies,  if Telos'
current or future  customers  failed to achieve Year 2000  compliance of if they
diverted  technology  expenditures  to address  Year 2000  compliance  problems,
Telos'  business,  results of operations or financial  condition could have been
materially  adversely  affected.  For  example,  agencies  of the United  States
Government are principal  customers of the Company.  If such agencies experience
significant  Year  2000  system  failures,  under  terms of  typical  government
contracts,  the Company's  performance and/or receipt of payments due would have
been delayed or contracts could be terminated for convenience,  which could have
a material  adverse effect on the Company.  If similar failures were experienced
by other customers or potential  customers of the Company,  this could also have
had a  material  adverse  impact on the  Company.  To the best of the  Company's
knowledge, none of its major customers experienced significant Year 2000 issues.

     Because  the  Company   experienced  no  major  year  2000-related   issues
internally or externally over the year 2000 transition, it does not believe that
it will incur material costs or experience material  disruptions in its business
associated  with the year  2000.  However,  there can be no  assurance  that the
Company's or its suppliers'  current product offerings do not contain undetected
errors or defects  associated  with year 2000 date  functions.  These could give
rise to  increased  customer  satisfaction  costs  related  to year  2000 and to
litigation  over year 2000  compliance  issues.  In addition,  the Company could
experience a shift in revenue to the later quarters of 2000 as customers wrap up
issues in their IT  environments  and begin  spending  more  proactively  on new
projects.


<PAGE>


RECENT ACCOUNTING PRONOUNCEMENTS

     In March 1999, the Company adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal  Use."  This  standard  requires  companies  to  capitalize  qualifying
computer software costs which incurred during the application  development stage
and  amortize  them  over the  software's  estimated  useful  life.  SOP 98-1 is
effective for fiscal years  beginning  after  December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on the Company's results of operations.

     In June 1998,  the FASB  issued  SFAS No. 133,  "Accounting  or  Derivative
Instruments  and  Hedging  Activities."  SFAS  133  establishes  accounting  and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133, as amended by
SFAS 137,  "Accounting  for  Derivative  Instruments  and Hedging  Activities  -
Deferral of the effective  date of FASB  Statement No. 133, an amendment of FASB
Statement No. 133",  is effective for all quarters of the Company's  year ending
December 31, 2001.  The Company  currently  does not engage or plan to engage in
the use of  derivative  instruments,  and  does  not  expect  SFAS 133 to have a
material impact on the results of operations.

     The Securities and Exchange Commission issued Staff Accounting Bulletin 101
"Revenue Recognition in Financial  Statements" ("SAB 101") in December 1999. The
Company  will  continue  to  evaluate  the  impact  of SAB  101 as new  business
developments occur.

FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K contains  forward-looking  statements.  For
this  purpose,  any  statements  contained  herein  that are not  statements  of
historical fact may be deemed to be forward-looking statements. Without limiting
the  foregoing,  the words  "believes,"  "anticipates,"  "plans,"  "expects" and
similar expressions are intended to identify forward-looking  statements.  There
are a number of important  factors that could cause the Company's actual results
to differ materially from those indicated by such forwarding-looking statements.
These  factors  include,  without  limitation,  those set forth  below under the
caption "Certain Factors That May Affect Future Results."

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

     The following important factors,  among others,  could cause actual results
to differ materially from those indicated by forward-looking  statements made in
this Annual Report on Form 10-K and presented  elsewhere by management from time
to time.

     A number of  uncertainties  exist that could  affect the  Company's  future
operating results, including,  without limitation,  general economic conditions,
the timing and approval of the federal government's fiscal year budget, business
growth through obtaining new business and, once obtained,  the Company's ability
to successfully  perform at a profit,  the Company's ability to convert contract
backlog to  revenue,  the  Company's  ability  to secure  adequate  capital  and
financing to support its business,  the success of the  Company's  investment in
Enterworks,  and the risk of the federal government  terminating  contracts with
the Company.  While the Company has not experienced  contract  terminations with
the federal government, the federal government can terminate at its convenience.
Should this occur, the Company's operating results could be adversely impacted.

     As a high percentage of the Company's revenue is derived from business with
the federal  government,  the  Company's  operating  results  could be adversely
impacted  should the federal  government  not approve and  implement  its annual
budget in a timely fashion.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations.

     The  Company is exposed to  interest  rate  volatility  with  regard to its
variable rate debt obligations  under its Senior Credit Facility.  This facility
bears interest at 1.00%,  subject to certain  adjustments,  over the bank's base
rate.  The  weighted  average  interest  rate in 1999 was 9.89%.  This  facility
expires  on July 1, 2001 and has an  outstanding  balance  of $16.5  million  at
December 31, 1999.

     The Company's  other long-term debt at December 31, 1999 consists of Senior
Subordinated  Notes B and C which bear  interest at fixed rates ranging from 14%
to 17%. The Senior  Subordinated  Notes mature as to principal in the  aggregate
amount of $8,537,000 on April 1, 2001. The Company has no cash flow exposure due
to rate changes for its Senior Subordinated Notes.

<PAGE>


ITEM 8.                         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S>                                                                                                       <C>
                                                                                                          PAGE
Report of Independent Accountants ........................................................................16

Consolidated Statements of Operations for the Years Ended

   December 31, 1999, December 31, 1998, and December 31, 1997............................................17

Consolidated Balance Sheets as of December 31, 1999 and

   December 31, 1998......................................................................................18-19

Consolidated Statements of Cash Flows for the Years Ended

   December 31, 1999, December 31, 1998, and December 31, 1997............................................20

Consolidated Statements of Changes In Stockholders' Investment (Deficit)
   for the Years Ended December 31, 1999, December 31, 1998,  and December 31, 1997.......................21

Notes to Consolidated Financial Statements................................................................22-39

</TABLE>

                               INDEX TO SCHEDULES

     All schedules are omitted  because they are not  applicable or the required
information  is  included  in the  consolidated  financial  statements  or notes
thereto.

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS

  To the Board of Directors and Stockholders
    of Telos Corporation

     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related  consolidated  statements  of  operations,  of changes in  stockholders'
investment (deficit) and of cash flows present fairly, in all material respects,
the financial position of Telos Corporation and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended  December 31, 1999,  in  conformity  with
accounting  principles  generally accepted in the United States. These financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
auditing standards generally accepted in the United States which 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,   assessing  the  accounting  principles  used  and
significant  estimates made by management,  and evaluating the overall financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for the opinion expressed above.


  /s/ PRICEWATERHOUSECOOPERS LLP


  McLean, VA
  March 30, 2000


<PAGE>
<TABLE>
<CAPTION>


                                                           TELOS CORPORATION AND SUBSIDIARIES
                                                          CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                 (AMOUNTS IN THOUSANDS)

                                                                  YEAR ENDED DECEMBER 31,
                                                         -------------------------------------------------
                                                         1999                  1998                   1997
                                                         ----                  ----                   ----

<S>                                                   <C>                     <C>                   <C>
Sales

    Enterworks, Inc.                                  $     --                $  7,073              $  3,398
    Systems and Support Services                        93,538                  98,277               121,052
    Products                                            77,826                 101,736               129,337
                                                        ------                 -------               -------

                                                       171,364                 207,086               253,787
                                                       -------                 -------               -------
Costs and expenses

    Cost of Enterworks, Inc.                                --                   5,531                 3,530
    Cost of Systems and Support Services                77,380                  84,231               100,438
    Cost of Products                                    73,836                  93,153               114,462
    Selling, general and administrative expenses        17,459                  30,842                27,054
    Goodwill Amortization                                  489                     589                   892
                                                       -------                 -------               -------
                                                       169,164                 214,346               246,376
                                                       -------                 -------               -------

Operating income (loss)                                  2,200                  (7,260)                7,411

Other income (expenses)
    Non-operating income (expense)                          67                      64                   124
    Gain on sale of assets                               4,731                   5,683                    --
    Equity in net losses of Enterworks                 (18,765)                     --                    --
    Interest Expense                                    (6,065)                 (6,555)               (7,455)
                                                       -------                   -----                 -----
(Loss) income before income taxes                      (17,832)                 (8,068)                   80
 Benefit(provision) for Income Taxes                     7,853                  (1,103)                1,332
                                                         -----                  ------                 -----

(Loss) Income before extraordinary item                 (9,979)                 (9,171)                1,412
Gain from early debt retirement and sale of stock
  (net of income tax provision of $5,322)                8,015                      --                    --
                                                         -----                   -----                 -----
Net (Loss) Income                                      $(1,964)               $ (9,171)              $ 1,412
                                                       =======                ========               =======
</TABLE>















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


<PAGE>



                                           TELOS CORPORATION AND SUBSIDIARIES
                                              CONSOLIDATED BALANCE SHEETS
                                                 (AMOUNTS IN THOUSANDS)
                                                        ASSETS
<TABLE>
<CAPTION>

                                                                                 DECEMBER 31,
                                                                       -------------------------------
                                                                       1999                       1998
                                                                       ----                       ----
<S>                                                                   <C>                       <C>
Current assets
    Cash and cash equivalents
      (includes restricted cash of $54 and $160 at
       December 31, 1999 and 1998, respectively )                      $   315                  $    408
    Accounts receivable, net                                            25,030                    56,783
    Receivable from Enterworks                                           2,000                        --
    Inventories, net                                                     4,779                     8,662
    Deferred income taxes                                                4,802                     4,164
    Prepaid income taxes                                                    --                       220
    Other Current Assets                                                    83                       487
                                                                        ------                   -------

      Total Current Assets                                              37,009                    70,724
                                                                        ------                   -------
Property and equipment
    Land and building                                                       --                       346
    Furniture and equipment                                             18,924                    21,677
    Leasehold improvements                                               2,631                     2,683
    Property and equipment
      Under Capital Leases                                              13,774                    13,774
                                                                        ------                    ------
                                                                        35,329                    38,480
Accumulated Depreciation And Amortization                              (23,093)                  (24,159)
                                                                       -------                   -------

                                                                        12,236                    14,321
                                                                        ------                    ------

Goodwill, net                                                            4,284                     6,896
Investment in Enterworks                                                    --                        --
Deferred income taxes                                                    2,930                       442
Other Assets                                                               427                     2,868
                                                                        ------                   -------

                                                                       $56,886                  $ 95,251
                                                                       =======                   =======
</TABLE>





















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

<PAGE>


                               TELOS CORPORATION AND SUBSIDIARIES
                                 CONSOLIDATED BALANCE SHEETS
                            (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
                       LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK,
                             AND STOCKHOLDERS' INVESTMENT (DEFICIT)

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                    ---------------------------
                                                                                    1999                   1998
                                                                                    ----                   ----
<S>                                                                                <C>                  <C>
Current liabilities
   Accounts payable                                                                $13,792              $ 25,206
   Accrued compensation and benefits                                                 7,645                 7,400
   Unearned warranty revenue                                                         5,183                 1,349
   Current portion, capital lease obligations                                          370                   379
   Other Current Liabilities                                                         3,051                 3,117
                                                                                    ------                ------

      Total current liabilities                                                     30,041                37,451

Senior credit facility                                                              16,508                36,159
Senior subordinated notes                                                            8,537                18,492
Capital Lease Obligations                                                           11,362                11,710
                                                                                    ------                ------
     Total Liabilities                                                              66,448               103,812
                                                                                    ------               -------

Commitments and contingencies (Note 9)

Senior mandatorily redeemable preferred stock                                        6,054                 5,631
Mandatorily Redeemable Convertible Preferred Stock                                  36,975                31,729
                                                                                    ------                ------
                                                                                    43,029                37,360
                                                                                    ------                ------
Stockholders' investment
   Class A common stock, no par value, 50,000,000 shares authorized,  21,241,980
    and 21,238,980 shares issued and outstanding at 1999 and 1998, respectively         65                    65
   Class B common stock, no par value, 50,000,000 shares authorized, 4,037,628
   shares issued and outstanding                                                        13                    13
   Capital in excess of par                                                             --                 2,116
   Accumulated Deficit                                                             (52,669)              (48,115)
                                                                                   --------             ---------

   Total Stockholders' Investment (Deficit)                                        (52,591)              (45,921)
                                                                                   --------             ---------

                                                                                   $56,886             $  95,251
                                                                                   =======               =======



</TABLE>







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


<PAGE>


                                   TELOS CORPORATION AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                                   -----------------------
                                                                                 1999         1998         1997
                                                                                 ----         ----         ----
<S>                                                                             <C>         <C>           <C>
Operating activities:
    Net (loss) income                                                           $(1,964)    $ (9,171)     $ 1,412
    Adjustments to reconcile net income
      to cash used in operating activities:
      Depreciation and amortization                                               4,133        4,266        4,098
      Loss on disposal of fixed assets                                               --           --          715
      Goodwill amortization                                                         489          589          892
      Amortization of debt issuance costs                                           243          243          243
      Accretion of subordinated notes                                               412          181          143
      Provision for inventory obsolescence                                          600        1,254        2,150
      Provision for doubtful accounts receivable                                    400           39          490
      Gain on sale of assets                                                     (4,731)      (5,683)          --
      Gain on sale of fixed assets                                                  (80)          --           --
      Gain on sale of Enterworks stock and note conversion                       (8,015)          --           --
      Write off of debt issuance costs                                               72           --           --
      Incentive bonus accrual                                                     1,500           --           --
      Provision for net realizable value of other assets                             --        1,743          887
      Deferred income tax (benefit) provision                                    (8,159)         434       (1,719)
      Changes in assets and liabilities
       Decrease (increase) in accounts receivable                                20,141       (2,329)      (6,913)
       Decrease in inventories                                                    2,494        2,826        2,186
       Increase in other assets                                                    (116)         (76)         795
       Increase (decrease) in accounts payable and other Liabilities              3,762        3,031      (20,559)
                                                                                 ------       ------      --------

         Cash Provided by (Used In) Operating Activities                         11,181       (2,653)     (15,180)
                                                                                 ------       -------      -------

Investing activities:
    Proceeds from sale of assets                                                 10,000       14,675            --
    Proceeds from sale of fixed assets                                              221           --            --
    Proceeds from sale of Enterworks stock                                        5,000           --            --
    Payment of offering costs                                                      (303)          --            --
    Purchase of property and equipment                                           (1,389)      (1,250)      (2,589)
    Investment in Other Assets                                                     (800)      (2,040)      (3,083)
                                                                                 -------      -------      -------

         Cash Provided by (Used In) Investing Activities                         12,729       11,385       (5,672)
                                                                                 ------       ------       -------
Financing activities:
    (Payments) proceeds from Senior Credit Facility                             (19,651)      (3,786)      24,526
     Proceeds from debt issuance                                                     --        1,800           --
    (Decrease) increase in book overdrafts                                       (3,998)       1,641       (4,838)
    Repayment of long-term debt                                                      --           --         (651)
    Retirement of Class B redeemable preferred stock                                 --       (6,500)          --
    Repurchase of 410,000 shares of redeemable preferred stock                       --       (1,640)          --
    Proceeds from issuance of common stock upon exercise of Company stock options     3           --           --
    Payments Under Capital Lease Obligations                                       (357)        (426)        (379)
                                                                                 -------      -------      -------
         Cash (used in) provided by  financing
         Activities                                                             (24,003)     ( 8,911)      18,658
                                                                                --------     --------      ------

    Decrease in cash and cash equivalents                                           (93)        (179)      (2,194)
    Cash and Cash Equivalents At Beginning of the Year                              408          587        2,781
                                                                                -------        ------       -----

    Cash and Cash Equivalents At End of Year                                    $   315      $   408       $  587
                                                                                 ======        ======       =====

Supplemental disclosures of cash flow information:

Cash paid during the year for:

    Interest                                                                      5,409      $ 5,228       $6,872
                                                                                  =====      =======       ======
    Income Taxes                                                                $   272        1,088       $   92
                                                                                  =====      =======       ======
</TABLE>
<PAGE>

                       TELOS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                                  ------------------------------
                                                                                  1999          1998        1997
                                                                                  ----          ----        ----
<S>                                                                              <C>             <C>           <C>
Supplemental schedule of non-cash investing activities:

    Equity in Enterworks issuance of common stock warrants                          100           --           --
    Contribution of Enterworks common stock                                         211           --           --
    Forgiveness of Enterworks payable                                            20,445           --           --
    Exchange of Enterworks stock for forgiveness of
      Enterworks payable                                                          4,000           --           --
    Equity in Enterworks conversion of subordinated notes                         1,140           --           --
    Reduction of investment in Enterworks                                        27,386           --           --

</TABLE>







































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


<PAGE>



                       TELOS CORPORATION AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (DEFICIT)
                             (AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                              Total
                                                      Class A      Class B     Capital                     Stockholders'
                                                      Common       Common     In Excess     Accumulated     Investment
                                                       Stock        Stock      of Par         Deficit        (Deficit)
                                                      -------      -------    ---------     -----------    ------------

<S>                                                  <C>        <C>          <C>          <C>               <C>
Balance December 31, 1996                            $   65     $   13       $  4,048     $(37,356)         $(33,230)
Senior redeemable preferred stock
 dividend                                                --         --           (379)          --              (379)
Class B redeemable preferred
 stock dividend                                          --         --           (948)          --              (948)
Redeemable preferred stock dividend                      --         --         (2,721)      (1,594)           (4,315)
Redeemable preferred stock accretion                     --         --             --       (1,406)           (1,406)
Net Income for the Year                                  --         --             --        1,412             1,412
                                                         --         --         ------       ------            ------

Balance December 31, 1997                                65         13             --      (38,944)          (38,866)

Senior redeemable preferred stock
 dividend                                                --         --           (423)          --              (423)
Class B redeemable preferred
 stock dividend                                          --         --           (347)          --              (347)
Redeemable preferred stock dividend                      --         --         (4,068)          --            (4,068)
Redeemable preferred stock accretion                     --         --         (1,527)          --            (1,527)
Gain on retirement of Class B redeemable
  preferred stock                                        --         --          5,883           --             5,883
Repurchase of 410,000 shares of redeemable
  preferred stock                                        --         --          2,178           --             2,178
Issuance of Telos common stock warrants                                           420                            420
Net Loss for the Year                                    --         --             --       (9,171)           (9,171)
                                                         --         --         ------     ---------         ---------

Balance December 31, 1998                                65         13          2,116      (48,115)          (45,921)

Senior redeemable preferred

 stock dividend                                          --         --           (423)          --              (423)
Redeemable preferred stock dividend                      --         --         (1,693)      (2,132)           (3,825)
Redeemable preferred stock accretion                     --         --             --       (1,424)           (1,424)
Equity in Enterworks conversion of
  subordinated notes                                     --         --             --        1,140             1,140
Issuance of common stock upon exercise
  of Company stock options                               --         --             --            3                 3
Non-cash stock-based compensation                        --         --             --           12                12
Deconsolidation of Enterworks accounts                   --         --             --       27,197            27,197
Reduction of investment in Enterworks                    --         --             --      (27,388)          (27,388)
Net Loss for the Year                                    --         --             --       (1,964)           (1,964)
                                                         --         --         ------     ---------         ---------

Balance December 31, 1999                              $ 65       $ 13        $    --     $(52,669)         $(52,591)
                                                       ====       ====        =======     =========         =========


</TABLE>

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


<PAGE>


                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND ORGANIZATION

          Telos Corporation  ("Telos" or "the Company") delivers e-Solutions for
  Connected   Enterprises(TM).   Telos'  complete   e-business   solutions  help
  organizations become more customer intimate,  realize operational  advantages,
  and establish  market  leadership.  Telos leverages the Internet and Web-based
  strategies to link complex environments,  encompassing people,  processes, and
  technologies.

          Telos'  clients,  spanning  both  government  agencies and  commercial
  enterprises,  are preparing to meet the demands of the new, connected economy.
  To  address  the  business   problems   related  to  logistics,   supply-chain
  management,  and Web-based  commerce,  Telos e-Solutions  include order status
  tracking,  asset visibility,  patient record access,  security, motor pool and
  aircraft   maintenance,   and   financial   reconciliation.   Telos   utilizes
  fixed-price/fixed-time solutions to control costs and increase productivity.

          The Company,  founded in 1968, is  incorporated  under the laws of the
State of Maryland.

  PRINCIPLES OF CONSOLIDATION

     The accompanying  consolidated financial statements include the accounts of
Telos  Corporation  and  its  wholly  owned   subsidiaries,   Telos  Corporation
(California), and Telos International Corporation. The accounts of the Company's
investment in Enterworks,  Inc.,  ("Enterworks")  have been deconsolidated as of
December 30, 1999, and therefore have been removed from the consolidated balance
sheet and  statement  of  changes  in  stockholders  equity.  The  statement  of
operations  includes the results of Enterworks  Inc. as "Equity in Net Losses of
Enterworks"  in  accordance  with  APB 18  (Note  2).  Significant  intercompany
transactions have been eliminated.

  USE OF ESTIMATES

         The  preparation of financial  statements in conformity  with generally
  accepted  accounting  principles  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.   Significant   estimates  and  assumptions  used  in  the
  preparation  of  the  Company's   consolidated  financial  statements  include
  contract  percentage  of  completion   methodology,   allowance  for  accounts
  receivable,  allowance for inventory obsolescence,  valuation of goodwill, the
  valuation  allowance for deferred tax assets,  employee benefits and estimated
  useful lives of goodwill,  property and equipment and other noncurrent assets,
  including software  development costs.  Actual results could differ from those
  estimates.

  REVENUE RECOGNITION

         The majority of the Company's  sales are made directly or indirectly to
  the federal  government.  A substantial  portion of the Company's revenues are
  derived from time and materials and cost reimbursement contracts,  under which
  revenue is recognized  as services are  performed and costs are incurred.  The
  Company generally recognizes product revenue as products are shipped, although
  certain  revenue  recognition  practices  are dependent  upon contract  terms.
  Revenue  for  maintenance   contracts  is  recognized  as  such  services  are
  performed. The Company records loss provisions for its contracts, if required,
  at the time such losses are identified.


<PAGE>

                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Revenue from the licensing of software is recognized in accordance with
  American  Institute  of  Certified  Public  Accountants  (AICPA)  Statement of
  Position  ("SOP")97-2 and  98-4,"Software  Revenue  Recognition".  In December
  1998, the AICPA issued SOP 98-9,  "Modification of SOP 97-2,  Software Revenue
  Recognition, with Respect to Certain Transactions".  SOP 98-9 requires revenue
  to be recognized  using the "residual  method" if certain  conditions are met.
  This approach results in contract  discounts being applied to the license with
  no such allocation to deferred support  elements.  The Company has adopted the
  provisions of SOP 98-9 for the year ended  December 31, 1999.  The adoption of
  SOP 98-9 did not have a  significant  effect  on the  Company's  results  from
  operations.  Revenue  generated from warranty service  contracts is recognized
  ratably over the warranty service period.

  CASH AND CASH EQUIVALENTS

         The Company  considers all highly liquid  investments  with an original
  maturity  of  three  months  or  less  at the  date  of  purchase  to be  cash
  equivalents.  The  Company's  cash  management  program  utilizes zero balance
  accounts.  Accordingly,  all book overdraft balances have been reclassified to
  accounts payable.

  INVENTORIES

         Inventories  are  stated at the  lower of cost or  market,  cost  being
  determined  primarily on the first-in,  first-out  method.  Substantially  all
  inventories consist of purchased hardware and component computer parts used in
  connection  with  system  integration   services  performed  by  the  Company.
  Inventories  also include spare parts of $478,000 and $729,000 at December 31,
  1999 and  1998,  respectively,  which  are  utilized  to  support  maintenance
  contracts.  Spare parts  inventory is amortized on a straight  line basis over
  five years. An allowance for obsolete, slow-moving or non-salable inventory is
  provided for all other  inventory.  This  allowance is based on the  Company's
  overall  obsolescence  experience  and  its  assessment  of  future  inventory
  requirements.

         At December  31, 1999 and 1998,  the  Company's  allowance  for product
  inventory was $1,992,000 and $3,074,000,  respectively.  The components of the
  allowance for inventory obsolescence are set forth below (in thousands):
<TABLE>
<CAPTION>

                                                                                  Additions
                                                                   Balance,       Charged to                       Balance,
                                                                  Beginning        Costs and                         End
                                                                   Of Year         Expense         Deductions(1)   of Year
                                                                   -------         -------         -------------   -------
<S>                                                                <C>             <C>                <C>           <C>
Year Ended December 31, 1999                                       $ 3,074         $   600            $  1,682      $ 1,992

Year Ended December 31, 1998                                       $ 3,915         $ 1,090            $  1,931      $ 3,074

Year Ended December 31, 1997                                       $ 2,357         $ 2,150            $    592      $ 3,915

<FN>
(1) Inventories written off or transferred to fixed assets.
</FN>
</TABLE>

  PROPERTY AND EQUIPMENT

         Property and equipment is recorded at cost. Depreciation is provided on
  the  straight-line  method at rates based on the estimated useful lives of the
  individual assets or classes of assets as follows:

         Buildings                                                   20   Years
         Machinery and equipment                                    3-7   Years
         Office furniture and fixtures                              5-7   Years
         Leasehold improvements                                    Life of Lease

         Leased property  meeting certain criteria is capitalized at the present
  value of the related  minimum  lease  payments.  Amortization  of property and
  equipment  under capital leases is computed on the  straight-line  method over
  the term of the related lease.


<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Upon sale or  retirement of property and  equipment,  the costs and related
accumulated  depreciation are eliminated from the accounts, and any gain or loss
on such  disposition is reflected in the statement of  operations.  Expenditures
for repairs and maintenance are charged to operations as incurred.

     The  Company's  policy on  internal  use  software  is in  accordance  with
Statement of Position 98-1 ("SOP 98-1"),  "Accounting  for the Costs of Computer
Software  Developed  or  Obtained  for  Internal  Use." This  standard  requires
companies to capitalize  qualifying  computer  software costs which are incurred
during the application  development  stage and amortize them over the software's
estimated useful life.

     Depreciation  and  amortization  expense related to property and equipment,
including   property  and  equipment  under  capital  leases,   was  $2,314,000,
$2,460,000 and $2,630,000 for the years ended December 31, 1999,  1998 and 1997,
respectively.

GOODWILL
     Goodwill  arose  principally  from the  acquisition  of  Telos  Corporation
(California)  in 1992 and has been assigned a useful life of twenty  years.  The
useful life considered a number of factors  including the Company's  maintenance
of  long-term   significant   customer   relationships  for  periods  of  up  to
twenty-seven years and its strong positions in the marketplace.

     The  Company  assesses  the  potential  impairment  and  recoverability  of
goodwill on an annual basis and more frequently if factors  dictate.  Management
forecasts  are used to evaluate  the  recovery of goodwill  through  determining
whether amortization of goodwill can be recovered through projected undiscounted
future cash flows. If an impairment of goodwill is indicated,  the impairment is
measured  based  on  projected  discounted  cash  flows  using a  discount  rate
reflecting the Company's cost of funds. In addition,  the Company may assess the
net carrying amount of goodwill using internal and/or independent  valuations of
the Company.

     Accumulated  amortization  of goodwill  at  December  31, 1999 and 1998 was
$9,444,000 and $8,955,000 respectively.

OTHER ASSETS

     Until the  deconsolidation  of  Enterworks  on December  30, 1999 (Note 2),
other noncurrent assets consist principally of capitalized  software development
costs and debt  issuance  costs.  The balance as of December  31, 1999  consists
mostly of refundable deposits.

     With regard to the capitalized  software development cost balances included
in the  accounts  for most of the year,  the Company  expenses  all research and
development  costs  incurred in connection  with software  development  projects
until such software achieves technological feasibility,  determined based on the
achievement of a working model.  Costs thereafter are  capitalized.  The Company
amortizes such capitalized costs on a product-by-product  basis over the greater
of the amount computed using an estimated product life of two years or the ratio
that current gross revenues bears to the total of current and anticipated future
gross revenues.  The Company  periodically  evaluates the realizability of these
capitalized costs through  consideration of anticipated revenue and gross margin
as compared to current revenue and gross margin.  At the time a determination is
made that  capitalized  amounts are not recoverable  based on the estimated cash
flows  to  be  generated  from  the  applicable  software  product,  a  loss  is
recognized.

     Unamortized  software and product  costs at December 31, 1999 and 1998 were
-0- and $1.9 million,  respectively.  Amortization expense associated with these
capitalized  software  and  product  costs  was  $1,646,000,   $2,044,000,   and
$1,128,000 in 1999, 1998 and 1997,  respectively.  Additionally,  $1,743,000 and
$887,000  were written off as net  realizable  value  adjustments  in the fourth
quarter of 1998 and in the fourth quarter of 1997, respectively.

     Debt issuance costs are amortized over the term of the underlying financial
instrument,  which  amortization  method does not differ  significantly from the
effective  interest method. Due to the retirement of $7.6 million of Series B, C
and D subordinated  notes in December 1999 (Note 5), $72,000 in debt issue costs
were written off in 1999. Unamortized costs amounted to $110,000 and $425,000 at
December 31, 1999 and 1998, respectively.

INCOME TAXES

     The  Company  accounts  for  income  taxes  under  Statement  of  Financial
Accounting  Standards (SFAS) No. 109,  "Accounting for Income Taxes". Under this
asset and liability  method,  deferred tax assets and liabilities are recognized
for the estimated  future tax  consequences of temporary  differences and income
tax  credits.  Deferred  tax assets and  liabilities  are  measured  by applying
enacted  statutory  tax rates that are  applicable  to the future years in which
deferred tax assets or liabilities are expected to be settled or realized to the
differences  between the financial  statement carrying amounts and the tax bases
of existing  assets and  liabilities.  Any change in tax rates on  deferred  tax
assets and  liabilities  is  recognized in net income in the period in which the
tax rate change is  enacted.  The Company  provides a valuation  allowance  that
reduces  deferred tax assets when it is "more likely than not" that deferred tax
assets will not be realized.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACCOUNTING FOR STOCK BASED COMPENSATION

     The Company accounts for stock-based compensation using the intrinsic value
method  provided  by  Accounting   Principles  Board  ("APB")  Opinion  No.  25,
"Accounting for Stock Issued to Employees."  Under APB 25,  compensation cost is
measured as the excess, if any, of the deemed fair market value of the Company's
common stock at the date of grant over the exercise price of the option granted.
Compensation  cost for stock  options,  if any, is  recognized  over the vesting
period. The Company provides additional pro forma disclosures are made as if the
fair value  measurement  provisions of SFAS No. 123 had been used in determining
compensation expense (See Note 7).

RESEARCH AND DEVELOPMENT

     The  Company  charges  all  research  and  development  costs to expense as
incurred,  until,  as in the  case of  software,  technological  feasibility  is
reached after which time such costs are capitalized. During 1999, 1998 and 1997,
the Company incurred $7.2 million, $6.1 million and $1.0 million in research and
development costs, respectively.

EARNINGS PER SHARE

     In February 1997, the Financial  Accounting  Standards  Board (FASB) issued
SFAS No. 128,  "Earnings per Share." This  Statement  establishes  standards for
computing and presenting  earnings per share (EPS). As the Company does not have
publicly  held common stock or potential  common  stock,  this  Statement is not
applicable  and,  accordingly,  no EPS  data is  reported  for any of the  years
presented.

COMPREHENSIVE INCOME

     Comprehensive  income  includes  changes in equity  (net  assets)  during a
period  from  non-owner  sources.   The  Company  has  no  comprehensive  income
components other than its net loss.

FINANCIAL INSTRUMENTS

     The Company uses various methods and assumptions to estimate the fair value
of its financial instruments. Due to their short-term nature, the carrying value
of cash and cash equivalents,  accounts receivable, accounts payable and accrued
expenses  approximates  fair value. The fair value of long-term debt is based on
the discounted cash flows for similar term borrowings based on market prices for
the same or similar issues.  The Company has not estimated the fair value of its
subordinated  debt or its redeemable  preferred stock. The Company does not deem
such estimation practicable due to the unique features of these instruments.

     Fair  value  estimates  are made at a  specific  point  in  time,  based on
relevant  market  information.  These  estimates  are  subjective  in nature and
involve  matters of judgment and therefore  cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


RECLASSIFICATIONS

     Certain  reclassifications  have been  made to the 1998 and 1997  financial
statements to conform to the current period presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

     In March 1999, the Company adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal  Use."  This  standard  requires  companies  to  capitalize  qualifying
computer software costs which incurred during the application  development stage
and  amortize  them  over the  software's  estimated  useful  life.  SOP 98-1 is
effective for fiscal years  beginning  after  December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on the Company's results of operations.

     In June 1998,  the FASB  issued  SFAS No. 133,  "Accounting  or  Derivative
Instruments  and  Hedging  Activities."  SFAS  133  establishes  accounting  and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133, as amended by
SFAS 137,  "Accounting  for  Derivative  Instruments  and Hedging  Activities  -
Deferral of the effective  date of FASB  Statement No. 133, an amendment of FASB
Statement No. 133",  is effective for all quarters of the Company's  year ending
December 31, 2001.  The Company  currently  does not engage or plan to engage in
the use of  derivative  instruments,  and  does  not  expect  SFAS 133 to have a
material impact on the results of operations.

     The Securities and Exchange Commission issued Staff Accounting Bulletin 101
"Revenue Recognition in Financial  Statements" ("SAB 101") in December 1999. The
Company  will  continue  to  evaluate  the  impact  of SAB  101 as new  business
developments occur.

NOTE 2.  DECONSOLIDATION OF ENTERWORKS, INC. SUBSIDIARY

     On December 30, 1999,  Enterworks,  Inc.  ("Enterworks"),  a majority-owned
subsidiary of the Company, completed a private placement of 21,739,127 shares of
Series A Convertible Preferred Stock ("Preferred Stock") at a price of $1.15 per
share.  The sale  generated  gross  proceeds of  $25,000,000.  In addition,  the
Company entered into a series of concurrent  transactions  pursuant to which the
Company's voting interest in Enterworks was reduced to approximately  34.8%. The
concurrent transactions were as follows:

1.   The Company converted approximately $7.6 million of its Senior Subordinated
     Notes,  Series B, C and D held by investors,  plus the accrued interest and
     the waiver of prepayment  premium  associated with these notes, into shares
     of Enterworks'  Common Stock  currently owned by the Company at an exchange
     ratio of one share of  Enterworks'  Common  Stock for each $1.00  principal
     amount of notes payable.  These  subordinated  notes had a maturity date of
     October 1, 2000.

2.   Enterworks  purchased 5,000,000 shares of Enterworks' Common Stock owned by
     the  Company at a price of $1.00 per share.  This amount was reduced by 20%
     of the Agent's fee, the  Company's  pro rata share of the proceeds from the
     transaction.  The net amount received was $4.7 million.  This  transaction,
     together with the one described above,  resulted in an extraordinary  gain,
     net of tax of $5.3  million,  of $8.0  million,  which is  included  in the
     Company's statement of operations for the year ended December 31, 1999.

3.   Enterworks'  payable to the Company,  which was approximately $24.4 million
     at December 30, 1999, was cancelled in its entirety  before the issuance of
     Series A Preferred  Stock.  The  forgiveness  of the payable  increased the
     Company's  investment in Enterworks.  Funding required to cover Enterworks'
     working  capital  needs from  November  30, 1999 to the date of closing was
     funded  by  the  Company  and  will  be  repaid  through  collections  from
     Enterworks'  trade  accounts  receivable.  This funding  approximated  $2.0
     million.  This forgiveness of intercompany  debt is deemed by management to
     be a normal occurrence of a capital raising transaction.

4.   Enterworks  issued  4,000,000  shares of Enterworks'  Common Stock to Telos
     concurrent  with the issuance of Series A Preferred  Stock.  This  issuance
     increased the Company's investment in Enterworks as it increased the number
     of shares the Company owned in Enterworks.

5.   Enterworks issued a warrant to acquire 350,000 shares of Enterworks' Common
     Stock to  Telos'  primary  lender,  Bank of  America,  in  connection  with
     obtaining the necessary approvals for this offering.  The exercise price of
     the warrant equaled $1.15 per share, the same per share price of the Series
     A Preferred Stock.  This warrant was recorded at its fair market value as a
     charge to interest  expense and a reduction to the Company's  investment in
     Enterworks  as it  increased  the  number of shares  the  Company  owned in
     Enterworks.

6.   Telos  contributed  210,912  shares  of  Enterworks'  Common Stock owned by
     Telos to the Enterworks  Treasury for the  subsequent  grant of warrants to
     the Agent,  Deutsche Bank Alex.  Brown.  This issuance of warrants was also
     part of the Agent's fee. This  contribution  of shares was also a charge to
     interest expense and a reduction to the Company's investment in Enterworks.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     As a result of the  reduction  of the  Company's  ownership  percentage  in
Enterworks  the Company has changed its method of accounting  for its Enterworks
subsidiary from the consolidation method to the equity method.  Pursuant to this
change the revenues,  costs and expenses of  Enterworks  have been excluded from
their respective captions in the Company's consolidated statement of operations,
and the  Company's  interest  in the  losses of  Enterworks  have been  reported
separately as "Equity in Net Losses of  Enterworks."  Additionally,  the assets,
liabilities,  and equity of Enterworks  will be excluded  from their  respective
consolidated   balance  sheet   captions  and  the  Company  will  establish  an
"Investment  in Enterworks"  account in accordance  with  Accounting  Principles
Board PB 18. As of December 30, 1999,  the balance is zero in the  Investment in
Enterworks account.

     The  results of  operations  of  Enterworks  included in the "Equity in Net
Losses in Enterworks" caption are comprised of the following:
<TABLE>
<CAPTION>
                  <S>                                     <C>

                  Sales                                   $ 11,079
                  Cost of sales                             (6,795)
                  Selling, general and
                   administrative expenses                 (21,695)
                  Interest expense                          (1,354)
                                                           --------
                  Loss before income taxes                $(18,765)
                                                           ========
</TABLE>

NOTE 3.SALE OF ASSETS

     On September 29, 1999, the Company sold  substantially all of the assets of
its computer  maintenance and service business,  Telos Field  Engineering,  Inc.
("TFE"), to TFE Technology Holdings, LLC ("TFE Holdings"),  an affiliate of Carr
& Company, for $10 million. As a result of this sale, the Company has recorded a
gain of $4.7 million in its  consolidated  statement of operations  for the year
ended  December  31,  1999.  This gain  included a write-off  of $2.1 million of
goodwill allocated to TFE operations.  The Company and TFE Holdings entered into
a one-year corporate services agreement on the date of the sale. Under the terms
of the Agreement,  Telos will continue to provide certain administrative support
functions to TFE Holdings,  including but not limited to finance and  accounting
and human resources, in return for a monthly payment.

     In February 1998, Telos sold  substantially all of the net assets of one of
its support services  divisions,  Telos  Information  Systems ("TIS"),  to NYMA,
Inc.,  a subsidiary  of Federal Data  Corporation  of  Bethesda,  Maryland,  for
approximately  $14.7 million in cash. In connection  with this sale, the Company
has recorded a gain of $5.7 million in its consolidated  statement of income for
the year ended December 31, 1998,  which included a write-off of $4.9 million of
goodwill allocated to TIS operations.

<PAGE>

                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  NOTE 4.      REVENUE AND ACCOUNTS RECEIVABLE

       Revenue  resulting from contracts and subcontracts  with federal,  state,
  and local  governments  accounted for 94.1%,  94.9% and 96.1% of  consolidated
  revenue  in 1999,  1998  and  1997,  respectively.  As the  Company's  primary
  customer is the federal government,  the Company has a concentration of credit
  risk associated with its accounts  receivable.  However,  the Company does not
  believe the likelihood of loss arising from such concentration is significant.
  The Company performs ongoing credit evaluations of its customers and generally
  does  not  require  collateral  from  its  customers.  The  Company  maintains
  allowances for potential losses.

       The components of accounts receivable are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,

                                                                                 1999               1998
                                                                                 ----               ----
    <S>                                                                         <C>                <C>
    Billed Accounts Receivable                                                  $22,592            $ 48,222
                                                                                 ------              ------
    Amounts billable upon acceptance by customer                                  2,841               1,422
    Amounts Currently Billable                                                    2,427               7,878
                                                                                 ------             -------

    Total Unbilled Accounts Receivable                                            5,268               9,300
                                                                                 ------             -------

    Allowance for Doubtful Accounts                                                (830)               (739)
                                                                                 -------             ------
                                                                                $27,030             $56,783
                                                                                 ======              ======

</TABLE>

     The  components of the allowance for doubtful  accounts are set forth below
(in thousands):

<TABLE>
<CAPTION>
                                                                    Additions
                                        Balance,                    Charged to                           Balance,
                                        Beginning                   Costs and                            End of
                                         of Year                     Expense          Deductions(1)       Year
                                         -------                     -------          ----------          ----
<S>                                     <C>                           <C>              <C>               <C>
Year ended December 31, 1999            $  739                        $  400           $ (309)           $  830
Year ended December 31, 1998               964                            39             (264)              739
Year ended December 31, 1997               925                           490             (451)              964


<FN>
1.   Accounts receivable written-off
</FN>
</TABLE>

  NOTE 5.DEBT OBLIGATIONS

  SENIOR REVOLVING CREDIT FACILITY

     At December 31, 1999, the Company has a $35 million Senior Revolving Credit
Facility (the  "Facility")  with a bank which expires on July 1, 2001 and has an
outstanding  balance  of  $16.5  million.  Borrowings  under  the  facility  are
collateralized  by  a  majority  of  the  Company's  assets  including  accounts
receivable,  inventory, and the remaining Enterworks stock owned by the Company.
The lien the bank  held on the sold  stock in  Enterworks,  Inc.  as well as the
accounts  receivable balance of Enterworks was released in order to complete the
Enterworks  transaction and subsequent  deconsolidation  (Note 2). The amount of
the available  borrowings  fluctuates  based on the underlying  asset  borrowing
base.  The facility  requires  payment of a fee of .25% of the unused portion of
the  Facility.  The  Facility  bears  interest  at  1.00%,  subject  to  certain
adjustments, over the bank's base rate, which was 9.5% at December 31, 1999.

     The weighted average interest rate on the outstanding  borrowings under the
Facility was 9.89% for 1999  compared with 9.95% for 1998. At December 31, 1999,
the Company had approximately $7.1 million available under the Facility.

     The Facility has various covenants which may, among other things,  restrict
the  ability of the  Company  to merge with  another  entity,  sell or  transfer
certain  assets,  pay  dividends  and make other  distributions  beyond  certain
limitations.  The Facility also  requires the Company to meet certain  leverage,
net worth,  interest  coverage and operating  goals.  At December 31, 1999,  the
Company was not in compliance with several covenants  contained in the Facility;
however,  the bank has waived such  non-compliance.  In  addition,  the bank has
amended the covenants to conform to the Company's 2000 budget expectations.

     The  carrying  value  of  the  Facility  at  December  31,  1999  and  1998
approximates fair value.


<PAGE>

                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SENIOR SUBORDINATED NOTES

     In 1995 the Company issued Senior  Subordinated  Notes ("Notes") to certain
shareholders.  The Notes are classified as either Series B or Series C. Series B
Notes are  collateralized  by fixed  assets of the  Company.  Series C Notes are
unsecured. Both the Series B and Series C Notes have a maturity date of April 1,
2001 and have interest rates ranging from 14% to 17%. Interest is paid quarterly
on  January 1,  April 1, July 1, and  October 1 of each  year.  The Notes can be
prepaid at the  Company's  option.  Additionally,  these Notes have a cumulative
payment  premium of 13.5% per annum  payable  only upon  certain  circumstances.
These  circumstances  include an initial public offering of the Company's common
stock or a significant refinancing,  to the extent that net proceeds from either
of the above events are received and are  sufficient to pay the premium.  Due to
the contingent  nature of the premium  payment,  the associated  premium expense
will only be recorded  after the occurrence of a triggering  event.  At December
31, 1999,  the prepayment  premium that would be due upon a triggering  event is
$6.3 million.

     In conjunction with the Enterworks private placement offering (See Note 2),
the Company retired  approximately  $1.0 million of Series B Notes, $4.8 million
of Series C Notes,  and $1.8 million of Series D Notes in exchange for shares of
Enterworks'  common stock owned by the Company at an exchange ratio of one share
of Enterworks' common stock for each $1.00 principal amount of notes payable. In
addition to the  retirement of these notes,  accrued  interest of  approximately
$300,000  was forgiven and the holders of these notes waived their rights to the
prepayment premium associated with these notes.

     The  balances of the Series B and Series C Notes were $5.5 million and $3.0
million, respectively, at December 31, 1999 compared to balances of $6.5 million
and $7.9 million, respectively, at December 31, 1998.

     In November 1998, the Company issued additional Senior  Subordinated  Notes
to certain  shareholders  which are  classified  as Series D. The Series D Notes
total $1.8 million and were unsecured. The Series D Notes had a maturity date of
October 1, 2000 and bear interest at 14% per annum.  Interest was paid quarterly
on January 1, April 1, July 1, and October 1 of each year.  The notes could have
been prepaid at the  Company's  option.  These Notes  contained the same payment
premium provisions as the Series B and Series C Notes (see above). In connection
with the debt, the Company issued  1,500,000  warrants to purchase shares of the
Company's Class A Common Stock.  The warrants have an exercise price of $.01 and
an  exercise  period of 22  months.  The  Company  has  assigned  a value to the
warrants of $420,000  which has been included in capital in excess of par. These
notes were retired in conjunction  with the Enterworks  private  placement (Note
2), making the outstanding  carrying  balance zero at December 31, 1999 compared
to $1.4 million at December 31, 1998.

ENTERWORKS SUBORDINATED NOTES

     During 1996, Enterworks completed a private financing whereby $3,278,000 of
8%  subordinated  notes  payable were issued.  Approximately  $2,278,000  of the
senior  subordinated  notes were  payable to certain  numbers of Telos' Board of
Directors,  management and certain Telos  stockholders.  The subordinated  notes
payable had a five-year  maturity.  Interest  was paid  quarterly  on January 1,
April 1, July 1, and October 1 of each year,  commencing  on January 1, 1998. In
connection with the financing,  Enterworks issued 2,048,725  detachable warrants
to purchase  shares of Enterworks  common  stock.  The warrants have an exercise
price of $1.00,  were  immediately  exercisable  and  expire in July  2006.  The
estimated  fair value of the  warrants  of $922,000  was  recorded to capital in
excess of par.  Interest  expense in the  accompanying  statements of operations
includes $142,000,  $167,000,  and $555,000  (including  $359,000 related to the
acceleration  of accretion at the time of  repayment) in 1997,  1998,  and 1999,
respectively,  for accretion of the  difference  between the carrying  value and
face value of these notes payable.

     In connection with Enterworks' December 1999 issuance of Series A Preferred
Stock (Note 2), $572,000 of subordinated  notes payable were paid and $2,706,000
were converted into Enterworks' Common Stock.


<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6.   REDEEMABLE PREFERRED STOCK

SENIOR REDEEMABLE PREFERRED STOCK

     The components of the senior redeemable  preferred stock are Series A-1 and
Series  A-2,  each with $.01 par  value and 1,250 and 1,750  shares  authorized,
issued and outstanding, respectively. The Series A-1 and Series A-2 each carry a
cumulative  dividend  rate of 14.125%  per annum of their  liquidation  value of
$1,000  per  share.  The  dividends  are  payable  semi-annually  on June 30 and
December 31 of each year. The  liquidation  preference of the preferred stock is
the face amount of the Series A-1 and A-2 Stock  ($1,000  per  share),  plus all
accrued  and unpaid  dividends.  The  Company is  required  to redeem all of the
outstanding  shares of the stock on  December  31,  2001,  subject  to the legal
availability  of funds.  Mandatory  redemptions  are  required  from excess cash
flows,  as defined in the stock  agreements.  The Series A-1 and A-2  redeemable
preferred stock is senior to all other present and future equity of the Company.
The  Series  A-1 is senior to the  Series  A-2.  The  Company  has not  declared
dividends  on its senior  redeemable  preferred  stock  since its  issuance.  At
December 31, 1999 and 1998 undeclared,  unpaid dividends  relating to Series A-1
and  A-2  redeemable   preferred   stock  totaled   $3,054,000  and  $2,631,000,
respectively,  and have been  accrued and are included in the Series A-1 and A-2
redeemable preferred stock balances.

12% CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED STOCK

     A maximum of 6,000,000  shares of 12% Cumulative  Exchangeable  Mandatorily
Redeemable  Preferred  Stock,  par value $.01 per share, has been authorized for
issuance.

     The  Company   initially   issued   2,858,723   shares  of  12%  Cumulative
Exchangeable  Mandatorily  Redeemable  Preferred  Stock (the  "Public  Preferred
Stock")  pursuant to the acquisition of the Company during fiscal year 1990. The
Public Preferred Stock was recorded at fair value on the date of original issue,
November  21,  1989,  and the Company is making  periodic  accretions  under the
interest  method of the excess of the redemption  value over the recorded value.
Accretion  for the years  ended  December  31, 1999 and 1998 was  1,424,000  and
$1,528,000,  respectively. The Company declared stock dividends totaling 736,863
shares in 1990 and 1991.

     In  November  1998,  the  Company  retired  410,000  shares  of the  Public
Preferred Stock held by certain shareholders.  The Company repurchased the stock
at $4.00 per share. The carrying value of these shares was determined to be $3.8
million,  and the $2.2 million excess of the carrying  amount of these shares of
Public Preferred Stock over the redemption price of $1.6 million was recorded as
an increase in capital in excess of par; there was no impact on income from this
transaction.

     The Public  Preferred  Stock has a 20 year maturity;  however,  the Company
must redeem, out of funds legally  available,  20% of the Public Preferred Stock
on the 16th, 17th, 18th and 19th anniversaries of November 21, 1989, leaving 20%
to be redeemed at  maturity.  On any dividend  payment  date after  November 21,
1991, the Company may exchange the Public  Preferred Stock, in whole or in part,
for  12%  Junior   Subordinated   Debentures  that  are  redeemable  upon  terms
substantially  similar to the Public  Preferred  Stock and  subordinated  to all
indebtedness for borrowed money and like obligations of the Company.

     The Public Preferred Stock accrues a semi-annual dividend at an annual rate
of 12% ($1.20) per share, based on the liquidation  preference of $10 per share,
and is fully  cumulative.  Through November 21, 1995, the Company had the option
to pay  dividends  in  additional  shares  of  Preferred  Stock in lieu of cash.
Following  November  21, 1995,  dividend are only payable in cash.  Dividends in
additional  shares of the Preferred  Stock are paid at the rate of 6% of a share
of the  Preferred  Stock  for  each  $.60 of such  dividends  not  paid in cash.
Dividends are payable by the Company, provided the Company has legally available
funds  under  Maryland  law,  when and if  declared  by the Board of  Directors,
commencing  June 1, 1990,  and on each six month  anniversary  thereof.  For the
years 1992 through 1994 and for the dividend  payable June 1, 1995,  the Company
has accrued undeclared  dividends in additional shares of preferred stock. These
accrued  dividends  are  valued at  $3,950,000.  Had the  Company  accrued  such
dividends on a cash basis, the total amount accrued would have been $15,101,000.
For the cash  dividends  payable since December 1, 1995, the Company has accrued
$18,677,000.

     The  Company  has  not  declared  or  paid  dividends  since  1991,  due to
restrictions  and  ambiquities  relating to the payment of  dividends  contained
within its charter,  its working capital facility agreement,  and under Maryland
law.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7.  STOCKHOLDERS' INVESTMENT AND EMPLOYEE BENEFIT PLANS

COMMON STOCK

     The relative  rights,  preferences,  and  limitations of the Class A common
stock and the Class B common stock are in all respects identical. The holders of
the common stock have one vote for each share of common  stock held.  Subject to
the prior  rights of the  Public  Preferred  Stock or any series of the Series A
redeemable  preferred stock, holders of Class A and the Class B common stock are
entitled to receive such dividends as may be declared.

STOCK WARRANTS

     In 1994, Toxford  Corporation  deposited $3 million with the Company's bank
to provide the Company with increased  borrowing  capability  under its Facility
(see Note 5). In exchange,  Toxford  Corporation  was issued  500,000  shares of
Class A common stock for which the Company recorded  additional interest expense
of $410,000.  The Company also granted Toxford  Corporation  warrants to acquire
7,228,916  shares of the Company's  Class A common stock at a purchase  price of
$.83 per share which  approximated  the estimated  market value of the Company's
common stock at the issuance date. In November  1998,  840,000 of these warrants
were  transferred to certain other  shareholders of the Company.  The warrant is
fully exercisable and has a term of ten years from the date of issue.

STOCK OPTIONS

     The Company has granted stock  options to certain  employees of the Company
under four plans. The Long-Term Incentive  Compensation Plan was adopted in 1990
("1990 Stock Option Plan") and had option grants under it through 1993. In 1993,
stock option plan agreements were reached with certain  employees.  In 1996, the
Board of Directors approved and the shareholders  ratified the 1996 Stock Option
Plan ("1996 Stock Option Plan").

     The Company  generally  grants  options under its  respective  plans at the
estimated  fair  value at the date of grant.  Fair  value is  determined  by the
members of the option committee based upon all information available to it.

1990 STOCK OPTION PLAN

     Under the terms of the 1990  Stock  Option  Plan,  2,168,215  shares of the
Company's  Class A common stock are available for issuance  under options to key
employees,  including officers and directors. The option price determined by the
Board of  Directors  was not less than the fair market  value at the date of the
grant  and the  options  are  generally  exercisable  over a  four-year  period.
Additional information as to these options is as follows:
<TABLE>
<CAPTION>
                                                                      STOCK OPTION ACTIVITY
                                                         Numbers of Shares            Weighted Average
                                                         ---------------------------------------------

                                                             (000'S)                  EXERCISE PRICE
                                                             ---------------------------------------
  <S>                                                         <C>                          <C>
  Outstanding at December 31, 1996                              585                        $1.42

    Granted                                                      --                           --
    Exercised                                                    --                           --
    Canceled                                                    (55)                        1.42
                                                                ---                         ----
  Outstanding at December 31, 1997                              530                        $1.42

    Granted                                                   1,495                         1.07
    Exercised                                                    --                           --
    Canceled                                                    (85)                        1.42
                                                              ------                        ----
  Outstanding at December 31, 1998                            1,940                       $ 1.27

    Granted                                                     418                         1.35
    Exercised                                                    --                           --
    Canceled                                                   (640)                        1.12
                                                              ------                        ----
  Outstanding At December 31, 1999                            1,718                        $1.22
                                                              =====                        =====
</TABLE>
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1996 STOCK OPTION PLAN

     The 1996 Stock Option Plan allows for the award of up to  6,644,974  shares
of Class A common stock at an exercise price of not lower than fair market value
at the date of grant.  Vesting of the stock  options for key  employees is based
both upon the  passage of time and  certain key events  occurring  including  an
initial public  offering or a change in control.  Vesting for options granted to
employees  is based upon the passage of time,  generally  four years.  The stock
options  may be  exercised  over  a ten  year  period  subject  to  the  vesting
requirements. Additional information as to these options follows:
<TABLE>
<CAPTION>

                                                                    STOCK OPTION ACTIVITY
                                                          Number of Shares             Weighted Average
                                                         ---------------------------------------------
                                                               (000'S)                  EXERCISE PRICE
                                                              ---------------------------------------

  <S>                                                         <C>                          <C>
  Outstanding at December 31, 1996                            3,738                        $0.95

    Granted                                                     772                         1.01
    Exercised                                                    --                           --
    Canceled                                                   (259)                        0.97
                                                              ------                        ----
  Outstanding at December 31, 1997                            4,251                        $0.96

    Granted                                                   1,447                         1.07
    Exercised                                                    --                           --
    Canceled                                                   (143)                        0.98
                                                              ------                        ----
  Outstanding at December 31, 1998                            5,555                        $0.99

    Granted                                                     353                         1.35
    Exercised                                                    (3)                        0.95
    Canceled                                                   (901)                        1.01
                                                              ------                        ----
  Outstanding At December 31, 1999                            5,004                        $1.01
                                                              =====                        =====


</TABLE>
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OTHER OPTION PLANS

         In 1993,  stock option plan agreements were reached to provide Mr. John
  Wood,  CEO and  President,  and Mr. Joseph  Beninati,  former  Chairman,  with
  options to each purchase up to 700,459 shares of the Company's  Class A common
  stock from the Company at $0.50 per share.  Under the terms of the agreements,
  350,230 shares vested  immediately  and the remainder  vested ratably over the
  next twelve months. The Company recorded compensation expense related to these
  options based upon the difference between the exercise price and the estimated
  fair value of $0.82 per share at the measurement date of the stock option. Mr.
  Beninati's agreement was canceled in 1996 and the shares now available will be
  administered  under the same terms as the 1996 Stock Option  Plan.  Additional
  information as to these options follows:

<TABLE>
<CAPTION>
                                                                    STOCK OPTION ACTIVITY
                                                         Number of Shares             Weighted Average
                                                         ---------------------------------------------

                                                              (000'S)                  EXERCISE PRICE
                                                              ---------------------------------------
  <S>                                                         <C>                            <C>
  Outstanding at December 31, 1996                            1,401                          $0.50

    Granted                                                     653                           1.01
    Exercised                                                    --                             --
    Canceled                                                   (700)                          0.50
                                                              -----                           ----
  Outstanding at December 31, 1997                            1,354                          $0.75

    Granted                                                      --                             --
    Exercised                                                    --                             --
    Canceled                                                     --                             --
                                                                 --                             --
  Outstanding at December 31, 1998                            1,354                          $0.75

    Granted                                                      --                             --
    Exercised                                                    --                             --
    Canceled                                                   (103)                          1.01
                                                               -----                          ----
  Outstanding At December 31, 1999                            1,251                          $0.72
                                                              =====                          =====
</TABLE>


     Mr. Wood has the option to cancel the 1993 stock options discussed above or
receive an equal number of options  under the 1996 plan at an exercise  price of
$0.95 per share.  Additionally,  the effect on the 1996 stock  option plan as of
December  31,  1999 would be to  increase  the number of shares  outstanding  to
5,704,365 with a weighted average exercise price of $1.00 per share.


<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following table summarizes  information about stock options outstanding
and exercisable at December 31, 1999:

<TABLE>
<CAPTION>
                                                          OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                                                          -------------------               -------------------
                                                            Weighted
                                                            Average       Weighted                     Weighted
                            Range of        Number         Remaining       Average        Number        Average
                            Exercise      Outstanding      Contractual     Exercise     Exercisable     Exercise
                             Prices         (000'S)       Life in Years     Price         (000'S)        Price
                             ------         -------       -------------     -----         -------        -----
  <S>                   <C>                  <C>            <C>             <C>            <C>         <C>

  1990 Stock                 $1.07             918          8.4 years       $1.07            368         $1.07
  Option Plan                $1.35             408          9.7 years       $1.35             81         $1.35
                             $1.40              18          8.6 years       $1.07              7         $1.07
                             $1.42             374          1.0 years       $1.42            374         $1.42
                             -----             ---          ---------       -----            ---         -----

                        $1.07 - $1.42        1,718          7.1 years       $1.22            830         $1.26
                        =============        =====          =========        ====            ===         =====

  Other Stock
  Option Plan                $0.50             701          4.0 years       $0.50            701         $0.50
                             $1.01             550          7.1 years       $1.01            330         $1.01
                             -----             ---          ---------       -----            ---         -----
                         $0.50 -$1.01        1,251          5.4 years       $0.72          1,031         $0.66
                         ============        =====          =========       =====          =====         =====

  1996 Stock
  Option Plan                $0.95           3,016          6.4 years       $0.95          1,592         $0.95
                             $0.97              88          6.6 years       $0.97             70         $0.97
                             $1.01             469          7.2 years       $1.01            248         $1.01
                             $1.07           1,046          8.4 years       $1.07            361         $1.07
                             $1.35             315          9.5 years       $1.35             86         $1.35
                             $1.40              70          8.7 years       $1.40             61         $1.40
                             -----            ----          ---------       -----           ----         -----
                         $0.95 - $1.40       5,004          7.1 years       $1.01          2,418         $1.00
                         =============       =====          =========       =====          =====         =====
</TABLE>

     The  weighted-average  fair value of options  granted  under the 1990 Stock
Option Plan,  the Other Stock Option Plan,  and the 1996 Stock Option Plan,  was
$0.28, $0, and $0.25, respectively,  in 1999 and $0.26, $0, and $0.25 per share,
respectively,  in 1998. Had the Company determined  compensation cost consistent
with SFAS No. 123 methodology,  net (loss) income would have been  ($2,743,000),
($9,666,000),  and $1,073,000 in 1999, 1998 and 1997, respectively.  Significant
assumptions  used in determining the fair value of each option grant at the date
of grant were as follows:
<TABLE>
<CAPTION>
                                               1990 Stock                        Other Stock
                                               Option Plan                       Option Plan
                                        -------------------------        -------------------------------
                                        1999      1998       1997        1999         1998          1997
                                        ----      ----       ----        ----         ----          ----
  <S>                                   <C>        <C>        <C>        <C>           <C>          <C>
  Expected dividend yield               0.0%       0.0%       0.0%       0.0%          0.0%         0.0%
  Expected stock price volatility       0.0%       0.0%       0.0%       0.0%          0.0%         0.0%
  Risk free interest rate               5.82%      5.54%       --         --            --          6.28%
  Expected life of options              4.0yrs     5.3yrs      --         --            --          4.0yrs

                                                 1996 Stock
                                                 Option Plan
                                        -------------------------
                                        1999      1998       1997
                                        ----      ----       ----
  Expected dividend yield               0.0%       0.0%         0.0%
  Expected stock price volatility       0.0%       0.0%         0.0%
  Risk free interest rate               5.60%      5.54%        6.28%
  Expected life of options              3.6yrs     4.8yrs       5.5yrs
</TABLE>

     Because  the pro forma  disclosures  under SFAS No. 123 only apply to stock
options  granted in or after 1995, pro forma net income for 1997,  1998 and 1999
is not necessarily indicative of future periods.

TELOS SHARED SAVINGS PLAN

     The Company  sponsors a defined  contribution  employee  savings  plan (the
"Plan")  under which  substantially  all  full-time  employees  are  eligible to
participate. The Company matches one-half of voluntary participant contributions
to the  Plan  up to a  maximum  Company  contribution  of 3% of a  participant's
salary.  Total Company  contributions to this Plan for 1999, 1998, and 1997 were
$1,080,000, $835,000, and $1,335,000, respectively.

<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  NOTE 8.     INCOME TAXES

         The  provision  (benefit)for  income taxes  includes the  following (in
thousands):

<TABLE>
<CAPTION>
                                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------
                                                             1999               1998               1997
                                                             ----               ----               ----
  <S>                                                     <C>                 <C>                 <C>
  Current provision (benefit)
     Federal                                              $    --             $    --             $    --
     State                                                    306                 669                 387
                                                              ---                ----                 ---

        Total Current                                         306                 669                 387
                                                              ---                ----                 ---

  Deferred provision (benefit)
     Federal                                               (6,946)                568              (1,464)
     State                                                 (1,213)              ( 134)               (255)
                                                          --------              ------              -----

        Total Deferred                                     (8,159)                434              (1,719)
                                                           -------              ------             -------

        Total Provision (Benefit)                         $(7,853)            $ 1,103             $(1,332)
                                                            ======              ======              =====
</TABLE>

        The  provision   (benefit)for   income  taxes  varies  from  the  amount
  determined by applying the federal  income tax statutory rate to the income or
  loss before  income  taxes.  The  reconciliation  of these  differences  is as
  follows:
<TABLE>
<CAPTION>

                                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                                 -----------------------------------
                                                            1999                  1998              1997
                                                            ----                  ----              ----
  <S>                                                      <C>                   <C>              <C>
  Computed expected income tax provision (benefit)         (34.0)%               (34.0)%          34.0%
  Goodwill amortization                                      0.9                   2.4           379.6
  State income taxes, net of
     federal income tax benefit                             (2.6)                 (1.8)            5.9
  Change in valuation allowance
     for deferred tax assets                               (12.9)                 24.9        (2,214.0)
  Meals and entertainment                                    0.5                   1.1           111.8
  Sale of division/other                                     4.1                  20.9            17.2
                                                             ---                  ----           -----
                                                           (44.0)%                13.5%       (1,665.5)%
                                                           ======                 =====        =======

</TABLE>
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The tax  effects of  temporary  differences  that give rise to  significant
  portions of the deferred tax assets and deferred tax  liabilities  at December
  31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                          DECEMBER 31,
                                                                                    -------------------------
                                                                                     1999                1998
                                                                                     ----                ----
  <S>                                                                             <C>                 <C>
  Deferred tax assets:
      Accounts receivable, principally due
        to allowance for doubtful accounts                                        $  161              $  153
      Allowance for inventory obsolescence and
        amortization                                                                 946               1,377
      Accrued liabilities not currently
        deductible                                                                 1,842                 794
      Accrued compensation                                                         1,786               1,562
      Property and equipment, principally due
        to differences in depreciation methods                                       895                 396
      Net operating loss carryforwards                                             2,174               5,660
      Alternative minimum tax credit carryforward                                    703                 703
                                                                                   -----               -----
            Total gross deferred tax assets                                        8,507              10,645
            Less valuation allowance                                                (572)             (4,987)
                                                                                    -----            --------
            Net deferred tax assets                                                7,935               5,658
                                                                                   -----               -----
  Deferred tax liabilities:
      Unbilled accounts receivable, deferred for tax purposes                       (203)               (317)
      Software development costs                                                      --                (735)
                                                                                  ------               ------
            Total deferred tax liabilities                                          (203)             (1,052)
                                                                                  -------             -------
            Net deferred tax assets                                               $7,732              $4,606
                                                                                  ======              ======
</TABLE>
<TABLE>
<CAPTION>
The components of the valuation allowance are as follows (in thousands):

                                                          Balance at            Additions                      Balance at
                                                          Beginning of          Charged to                       End of
                                                            Period              Expenses        Deductions       Period
                                                            ------              --------        ----------       ------
<S>                                                       <C>                  <C>             <C>               <C>
December 31, 1999                                         $ 4,987              $      --       $(4,415)(1)       $  572
December 31, 1998                                           2,974                  2,013            --            4,987
December 31, 1997                                           4,702                     --        (1,728)           2,974

<FN>
(1)  Included $2,115 attributable to Enterworks
</FN>
</TABLE>

     The net change in the valuation  allowance was a decrease of $2,300,000 for
1999 and an increase  of  $2,013,000  for 1998.  The  decrease in the  valuation
allowance for 1999 is attributable  to management's  view that it is more likely
than not that the deferred tax assets will be realized with  forecasted  taxable
income which justifies the recognition of the net deferred tax assets  recorded.
The above  deferred  tax assets and  liabilities  were  adjusted  to reflect the
deconsolidation of Enterworks from Telos on December 30, 1999.

     At December 31, 1999,  for federal  income tax purposes the Company had net
operating loss  carryforwards  of $4,012,000  available to offset future regular
taxable income.  These net operating loss  carryforwards  expire in 2011 through
2015.  Additionally,  $2,439,000 of  alternative  minimum tax net operating loss
carryforwards are available to offset future alternative minimum taxable income.
These alternative  minimum tax net operating loss carryforwards also expire from
2011 through 2015. In addition,  the Company has $703,000 of alternative minimum
tax  credits  available  to be carried  forward  indefinitely  to reduce  future
regular tax liabilities.


<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.   COMMITMENTS AND CONTINGENCIES

LEASES

     The  Company  leases  office  space  and  equipment  under   non-cancelable
operating  and  capital  leases with  various  expiration  dates,  some of which
contain renewal options.

     On March 1, 1996, the Company  entered into a twenty year capital lease for
a building that serves as its corporate headquarters.  The Company has accounted
for this transaction as a capital lease and has accordingly  recorded assets and
a corresponding liability of approximately $12.3 million. Under the terms of the
lease,  the  landlord  furnished  the Company  with $1.3  million to fund tenant
improvements and other building costs.

     The  following  is a schedule  by years of future  minimum  payments  under
capital leases together with the present value of the net minimum lease payments
as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>

                                                    PROPERTY        EQUIPMENT        TOTAL
         <S>                                       <C>               <C>          <C>

         2000                                      $  1,543          $ 113        $  1,656
         2001                                         1,543             54           1,597
         2002                                         1,543             --           1,543
         2003                                         1,543             --           1,543
         2004                                         1,543             --           1,543
         Remainder                                   17,362             --          17,362
                                                     ------             --          ------

         Total minimum obligations                   25,077            167          25,244
         Less amounts representing interest         (13,470)           (42)        (13,512)
                                                    -------            ---         -------


         Net present value of minimum obligations    11,607            125          11,732
         Less current portion                          (270)          (100)           (370)
                                                     -------          -----         -------

         Long term capital lease
             obligations at
             December 31, 1999                      $11,337        $    25         $11,362
                                                     ======            ===          ======
</TABLE>

     Accumulated amortization for property and equipment under capital leases at
December 31, 1999 and 1998 is $2,787,000 and $2,019,000, respectively.

     Future minimum lease payments for all  non-cancelable  operating  leases at
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
<S>                                <C>
2000                               $ 1,653
2001                                   860
2002                                   615
2003                                   602
2004                                   128
Remainder                               --
                                     -----
Total Minimum Lease Payments       $ 3,858
                                   =======
</TABLE>

     Net rent expense  charged to operations  for 1999,  1998,  and 1997 totaled
$2,000,000, $2,001,000, and $2,545,000, respectively.

LEGAL

     The Company is a party to various  lawsuits  arising in the ordinary course
of  business.  In the opinion of  management,  while the  results of  litigation
cannot be predicted with  certainty,  the final outcome of such matters will not
have a material adverse effect on the Company's  consolidated financial position
or results of operations.

<PAGE>

                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information  concerning  certain  relationships  and  related  transactions
between the Company and certain of its current and former officers and directors
is set forth below.

Mr. Joseph P. Beninati  served as Chairman of the Board for the majority of 1994
before  resigning  January 5,  1995.  The  Company  paid Mr.  Beninati  $165,000
annually  subject to a three-year  employment  agreement  that began in 1995 and
terminated  January 8, 1998.  Mr.  Beninati  resigned from the Board in 1996 and
received his final payment in 1998.

Mr.  John R.  Porter,  the owner of a majority of the  Company's  Class A Common
Stock, has a consulting agreement with the Company whereby he is compensated for
consulting  services provided to the Company in the areas of marketing,  product
development,  strategic  planning and finance as  requested by the Company.  Mr.
Porter was paid $200,000 by the Company in 1999, 1998, and 1997 pursuant to this
agreement,  which amounts were determined by negotiation between the Company and
Mr. Porter.

Mr. Norman Byers, a director of the Company, had a consulting agreement with the
Company  to  help  the  Company   expand  its  business   operations   into  the
international  marketplace.  Under this agreement,  Mr. Byers received $10,500 a
month  for his  services.  Mr.  Byers was  compensated  $125,000,  $130,000  and
$128,000 for 1998, 1997 and 1996,  respectively.  This consulting  agreement was
terminated in the fourth quarter of 1998.

Mr. Mark Hester,  former  Executive  Vice  President and former Chief  Operating
Officer of the Company,  has a consulting  agreement with the Company to provide
strategic advice concerning the Company's hardware services division. Under this
agreement,  Mr. Hester received  $206,000 for his services during 1999 and 2000,
and was  eligible  for a bonus under  certain  circumstances,  at the  Company's
discretion.  Under this  agreement  Mr.  Hester will receive a bonus of $135,000
payable in installments during 2000 and 2001.

NOTE 11.  REPORTABLE BUSINESS SEGMENTS

     The  Company  adopted  SFAS No.  131,  "Disclosures  About  Segments  of an
Enterprise and Related  Information",  in 1998 which changes the way the Company
reports information about its operating  segments.  The information for 1998 and
1997 has been restated from the prior year's presentation in order to conform to
the 1999 presentation.

         The Company has three reportable segments:

     Systems and Support  Services - provides  software  development and support
     services for software and hardware including technology  insertion,  system
     redesign  and  software  re-engineering.  This  segment  consists  of  four
     divisions - solutions,  services,  international,  and systems (systems was
     sold in February  1998 as  discussed in Note 2). The  principal  market for
     this segment is the Federal government and its agencies.

     Products  -  delivers  information  security,  enterprise  integration  and
     networking  infrastructure  solutions  to its  customers.  These  solutions
     include  providing  commercial  hardware,  software  and  services  to  its
     customers.  The  Products  group is  capable  of  staging,  installing  and
     deploying  large network  infrastructures  with  virtually no disruption to
     customer's ongoing operations. The principal market for this segment is the
     Federal government and its agencies.

     Enterworks  - develops,  markets  and  supports a software  framework  that
     integrates  content and processes for companies  seeking to  participate in
     e-business.  They target operators and users of e-marketplaces and portals.
     E-marketplaces  and portals are  Web-based  destinations  where  employees,
     customers,  partners and suppliers can interact to obtain information about
     products and services,  and conduct business more  efficiently.  Enterworks
     product  enables  customers  to build or join  e-marketplaces  and  portals
     rapidly,  add new content and e-business  participants easily, and automate
     the end-to-end processes required for e-business interaction.

     Enterworks'  products  are  designed  to meet the  business  and  technical
     challenges  faced by operators and users of  e-marketplaces  and portals by
     delivering integrated,  real-time content and automating business processes
     that bring together  employees,  customers,  partners and suppliers.  These
     products offer numerous competitive  advantages over traditional  solutions
     by combining  both content and process  integration,  and by guiding people
     through e-business interactions.

     The accounting  policies of the  reportable  segments are the same as those
described in Note 1. The Company  evaluates  the  performance  of its  operating
segments based on revenue, gross profit and income before goodwill amortization,
income taxes, non-recurring items and interest income or expense.

     Summarized  financial  information   concerning  the  Company's  reportable
segments is shown in the following table. The "other" column includes  corporate
related items.

     Enterworks,  Inc. is an equity investment of the Company as of December 30,
1999 (Note 2) and has been  deconsolidated  as of that date.  The  corresponding
assets and liabilities have been removed from the consolidated  balance sheet as
of December 31, 1999.
<TABLE>
<CAPTION>

                                          Systems and
                                        Support Services      Products       Enterworks     Other (1)       Total
                                        ----------------      --------       ----------     ---------       -----
  <S>    <C>                              <C>                 <C>          <C>            <C>              <C>
         1999
  External Revenues                       $ 93,538            $ 77,826     $      --      $    --          $171,364
  Intersegment Revenues                        404                  --            --           --               404
  Gross Profit                              16,158               3,990            --           --            20,148
  Segment profit (loss)(3)                   4,731              (2,042)           --           --             2,689
  Total assets                              29,623                 361            --       26,902            56,886
  Capital Expenditures                         195                  13           780          401             1,389
  Depreciation &
    Amortization(2)                       $    773            $    318     $   2,210      $ 1,321          $  4,622

         1998

  External Revenues                       $ 98,277            $101,736     $   7,073      $    --          $207,086
  Intersegment Revenues                        970               2,622             1           --             3,593
  Gross Profit                              14,046               8,583         1,542           --            24,171
  Segment profit (loss)(3)                   4,849                  14       (11,534)          --            (6,671)
  Total assets                              45,340              24,206         6,119       19,586            95,251
  Capital Expenditures                         179                  49           587          435             1,250
  Depreciation &
    Amortization(2)                       $    557            $    479     $   2,332      $ 1,487          $  4,855

         1997

  External Revenues                       $121,052            $129,337     $   3,398      $    --         $ 253,787
  Intersegment Revenues                        667               1,387             4           --             2,058
  Gross Profit                              20,614              14,875          (132)          --            35,357
  Segment profit (loss)(3)                  10,229               3,977        (5,903)          --             8,303
  Total assets                              55,834              24,323         6,374       23,187           109,718
  Capital Expenditures                         330                 688           480        1,091             2,589
  Depreciation &
    Amortization(2)                       $    716            $    929     $   1,075      $ 2,270         $   4,990
<FN>

     (1) Corporate assets are principally property and equipment, cash and other
assets.
     (2) Depreciation and amortization includes amounts relating to property and
equipment, goodwill, deferred software costs and spare parts inventory.

     (3)  Segment  profit  (loss)  represents  operating  income  (loss)  before
goodwill amortization.
</FN>
</TABLE>

         The  Company  does not have  material  international  revenues,  profit
  (loss),  assets  or  capital  expenditures.  The  Company's  business  is  not
  concentrated in a specific  geographical  area within the United States, as it
  has 11 separate facilities located in 4 states.


<PAGE>



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

               None


<PAGE>



  PART III

  ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

     The following is certain biographical  information concerning the directors
and executive  officers of the Company.  The term of each of the directors to be
elected  at the  Annual  Meeting  continues  until the next  annual  meeting  of
shareholders  and until his successor is elected and qualified,  except that the
directorships  held  by the  Class  D  Directors  will  terminate  whenever  all
accumulated dividends on the Exchangeable Preferred Stock have been paid.

Dr. Fred Charles Ikle, Chairman of the Board

     Dr.  Ikle (age 75) was  elected  to the  Company's  Board of  Directors  on
January 31, 1994 and was elected  Chairman of the Board in January  1995.  He is
Chairman  of  Conservation  Management  Corporation  and is a  member  of the US
Advisory Board for Zurich Financial  Services Group. Dr. Ikle is also a Director
of the National  Endowment  for  Democracy  and a  Distinguished  Scholar at the
Center for Strategic & International Studies. From 1981 to 1988, Dr. Ikle served
as Under Secretary of Defense for Policy.

John B. Wood, Executive Chairman of the Board

     Mr. Wood (age 36) was elected to  Executive  Chairman of the Board on March
8, 2000. Mr. Wood also serves as Chairman of Enterworks  and as Chief  Executive
Officer  of  Enterworks.  Previously,  Mr.  Wood  was the  President  and  Chief
Executive Officer of the Company. Mr. Wood was appointed Chief Operating Officer
on October 8,1993 after serving as Executive Vice President from May of 1992. He
was  elected to the Board of  Directors  on May 13,  1992.  Prior to joining the
Company,  Mr. Wood founded a boutique investment banking firm. Mr. Wood has a BA
in Finance and Computer Science from Georgetown University.

David S. Aldrich, President, Chief Executive Officer, and Director

     Mr.  Aldrich (age 40) was elected to the  positions of President  and Chief
Executive  Officer on March 8, 2000. He was elected to the Board of Directors on
February 8, 2000. He was appointed to the position of Chief Operating Officer of
the Company in January  1999.  He joined the Company in  September  1996 as Vice
President,  Corporate Development and Strategy. Prior to joining the Company, he
was a partner in the Financial  Advisory  Services Group - Corporate  Finance at
Coopers & Lybrand L.L.P.  Prior to joining Coopers & Lybrand L.L.P. in 1991, Mr.
Aldrich was Senior Vice  President at Dean Witter  Capital  Corp.,  the merchant
banking arm of Dean Witter Reynolds, Inc.

Dr. Stephen D. Bryen, Director

     Dr. Stephen Bryen (age 57) was elected to the Company's  Board of Directors
on January 31, 1994.  He currently  serves as a Director in Jefferson  Partners,
L.L.C., a strategic management consulting and merchant banking firm with offices
in  Washington,  D.C. and New York,  and as Senior Vice President of L-3 Network
Security,  LLC in Denver,  Colorado.  Dr. Bryen currently serves on the board of
C-MAC  Industries in  Mechanicsburgh,  Pennsylvania  and is the senior technical
advisor to  Hollinger  Digital  Corporation  in New York.  From 1981 to 1988 Dr.
Bryen served as the Deputy Under  Secretary of Defense for Trade Security Policy
and as the Director of the Defense Technology Security Administration,  which he
founded.

Norman P. Byers, Director

     Mr.  Byers (age 52) was  elected to the Board of  Directors  on January 31,
1994. He is Chief Operating Officer of Carpe Diem, Inc. in Vienna,  Virginia. He
has been president of Byers Consulting, a Fairfax County, Virginia international
business consulting firm since July 1996. Before that appointment, he had served
as  the   President  of   International   Strategies   Limited,   another  local
international  business consulting firm. From 1968 until his retirement in 1989,
Mr. Byers served in a variety of operational  and staff  positions in the United
States Air Force.
<PAGE>

Julio E. Heurtematte, Jr., Class D Director

     Mr. Heurtematte (age 63) was elected to the Company's Board of Directors on
July 31, 1998.  He has been a private  consultant  since 1989,  specializing  in
international  projects,  trade  and  investments.  From  1963 to 1989,  he held
various positions at the InterAmerican  Development Bank ("IAD"),  most recently
as the deputy Manager for Project Analysis.  From 1979 to 1989, Mr.  Heurtematte
was  also  a  member  of IAD  Bank's  Pension  Fund  Investment  Committee.  Mr.
Heurtematte  is also a member of the Board of  Directors  of Trans World  Gaming
Corporation.  Mr.  Huertematte  resigned  from the Board of Directors  effective
December 16, 1999.

Malcolm M. B. Sterrett, Class D Director

     Mr.  Sterrett  (age  57) is a  private  investor  and  was  elected  to the
Company's  Board  of  Directors  on July  31,  1998  as  part  of the  preferred
stockholder class. From 1989 to 1993, he was a partner at the law firm of Pepper
Hamilton & Scheetz in  Washington,  D.C. From 1988 to 1989, he served as General
Counsel to the U.S.  Department  of Health and Human  Services  and from 1982 to
1988 he was a Commissioner on the U.S.  Interstate  Commerce  Commission.  Prior
thereto,  he was Vice President and General Counsel to the United States Railway
Association  and  served  as Staff  Director  and  Counsel  to the  U.S.  Senate
Committee on Commerce, Science and Transportation. Mr. Sterrett is also a member
of the Board of Directors of Trans World Gaming Corporation.

John C. Boland, Class D Director

     Mr. Boland (age 52) was appointed to the Board of Directors on December 17,
1999 as a result  of Mr.  Huertematte's  resignation.  He has been  owner of the
general partner of Remnant Partners L.P., an investment partnership, since 1992.
From 1989 to 1995, he was the publisher of Bankruptcy  Values,  an institutional
research service.  Prior to entering the investment business,  Mr. Boland was an
editor  of  Barron's  Financial  Weekly  (from  1978 to  1983)  and a  freelance
financial writer.

William L. Prieur Brownley, Vice President and General Counsel

     Mr.  Brownley (age 43) joined the Company in April 1991 and is  responsible
for the management of the Company's  legal affairs.  For the five years prior to
joining the Company,  he served as Assistant General Counsel and then as General
Counsel at  Infotechnology  Inc., an investment  company whose holdings included
various companies in the communications industry.

Gerald D. Calhoun, Former  Vice  President, Human   Resources,  and  Corporate
Secretary, Telos Corporation and Enterworks, Inc.

     Mr. Calhoun (age 50) joined the Company as Vice President, Human Resources,
in August 1989.  Prior to joining the Company he served as:  Director,  Risk and
Financial  Management  of  BDM  International,  a  government  contractor  which
provides consulting services; Vice President, Human Resources of Halifax Corp.,a
government  contractor  providing  technical  services and third party  computer
maintenance; and Director for the U.S. Department of Labor, Employment Standards
Administration. Mr. Calhoun left the Company during 1999.

Robert W. Lewis, President, Enterworks, Inc.

     Mr. Lewis (age 38) has served as the President and Chief Operating  Officer
of  Enterworks,  Inc.  since its inception in 1996 and as director since January
2000.  Prior to joining  Enterworks,  he was an  employee  of the Company for 11
years. From 1991 to 1995, Mr. Lewis served in product  development,  operational
and  marketing  roles.  His  most  recent  position  was  Director  of  Business
Development.  Mr. Lewis has a BBA in Information  Technology  from James Madison
University and an MBA in Management and Marketing from George Mason  University.


Robert J. Marino,  Executive  Vice  President and Chief Sales and Marketing
Officer

     Mr. Marino (age 63) joined the Company in 1988 as Senior Vice  President of
Sales and  Marketing.  In 1990,  his  responsibilities  were expanded to include
Program  Management in addition to Sales and Marketing.  On January 1, 1994, Mr.
Marino was appointed to President of Telos Systems  Integration,  and on January
1, 1998, he was appointed to his current position.  Prior to joining the Company
in February 1988, Mr. Marino held the position of Senior Vice President of Sales
and Marketing with Centel Federal Systems and M/A-COM Information Systems,  both
of which are U.S. Government contractors.

Lorenzo Tellez, former Chief Financial Officer, Treasurer, and Vice President

     Mr. Tellez (age 42) was appointed Chief Financial Officer of the Company in
1993 and Treasurer in 1994.  He joined Telos  Corporation  (California)  in 1989
where he was  responsible for all financial and regulatory  functions.  Prior to
joining Telos  Corporation,  Mr.  Tellez served as a Senior  Manager with Arthur
Andersen & Company.  Mr. Tellez  resigned  from the position of Chief  Financial
Officer and Treasurer in 1999.

Thomas J. Ferrara, Vice President, Finance and Accounting and Treasurer

     Mr.  Ferrara (age 42) was elected Vice  President of Finance and Accounting
and  Treasurer on February 8, 2000. He joined the Company in 1994 as Director of
Pricing  and was  responsible  for all  pricing of major  contracts  and Company
forecasts.  Prior to joining Telos,  Mr. Ferrara was the Accounting  Manager for
Cordant, a privately held government contractor.

Andrea Ayoub, Vice President of Human Resources  and Corporate Secretary

     Ms.  Ayoub (age 35) was  appointed  Vice  President,  Human  Resources  and
Assistant  Corporate  Secretary  in late 1999.  She was  appointed  as Corporate
Secretary  in February  2000.  Ms.  Ayoub  joined  Telos in July,  1987  working
initially  in the  Marketing  department  and  moved  into the  Human  Resources
function  in 1988.  She has held  various  positions  within the Human  Resource
Department and has  progressively  assumed greater  management  responsibilities
over the years.


<PAGE>




     Each of the  directors  and  executive  officers of the Company is a United
States citizen.

<PAGE>


ITEM. 11.  EXECUTIVE COMPENSATION

     The following  table shows for the years ended December 31, 1999,  1998 and
1997,  the  cash  compensation  paid by the  Company  as well as  certain  other
compensation paid or accrued for those years, to the chief executive officer and
the four other most  highly  compensated  executive  officers  of the Company in
fiscal year 1999.
<TABLE>
<CAPTION>
                                                              SUMMARY COMPENSATION TABLE


                                                                          Long Term
  Name                                                                    Compensation (2)
  and                                           Annual Compensation       Awards
  Principal                                                               Options/            All Other
  Position                         Year         Salary      Bonus(1)      Sars(#)          Compensation(5)
  --------------------------------------------------------------------------------------------------------
  <S>                              <C>        <C>           <C>          <C>                   <C>
  John B. Wood                     1999       $348,574      $250,000     2,000,000(3)          $13,000(6)
  (Executive Chairman,             1998       $334,198      $     --            --             $13,500(6)
   Former President, Chief         1997       $299,998      $382,000            --             $36,750(6)
   Executive Officer)

  Lorenzo Tellez                   1999       $260,618      $     --            --             $ 5,000
  (Former V.P., Treasurer,         1998       $218,080      $     --       200,000(4)          $ 5,500
   Chief Financial Officer)        1997       $195,000      $150,000       150,000(4)          $28,750

  David Aldrich                    1999       $205,119      $250,000       200,000(3)          $    --
  (President, Chief Executive      1998       $173,850      $     --       210,000(4)          $ 2,333
  Officer)                         1997       $150,010      $150,000       300,000(4)          $ 6,000

  Robert J. Marino                 1999       $206,003      $100,000       200,000(3)          $ 5,000
 (Chief Sales and Marketing        1998       $204,734      $     --       362,000(4)          $ 5,500
  Officer and Executive V.P.)      1997       $195,000      $ 76,000            --             $10,750

  William L.P. Brownley            1999       $170,997      $100,000       200,000(3)          $ 4,275
  (V.P. General Counsel)           1998       $166,961      $     --       135,000(4)          $ 5,380
                                   1997       $150,010      $ 85,000            --             $ 9,167

<FN>

     (1)  1997 amounts  include  bonuses  relating to the TIS sale  completed in
          1998.
     (2)  There are no restricted  stock awards or payouts pursuant to long-term
          investment plans.
     (3)  Options granted in 1999 are in Enterworks, Inc., common stock.
     (4)  Options  granted in 1998 and 1997 are in the Company's  Class A common
          stock.
     (5)  All other compensation represents Company contributions made on behalf
          of the executive  officers to the Telos Shared  Savings  Plan,  and in
          1998  and  1997  the  amounts  also  include   automobile  and  living
          allowances.
     (6)  Included in these  amounts for 1999,  1998 and 1997 are $8,000 in each
          of these three years for director's fees paid.
</FN>
</TABLE>

<PAGE>



  STOCK OPTION GRANTS

         The Summary Table of Options/SAR  Grants in the Last Fiscal Year is set
forth below for the stock option grants in 1999.
<TABLE>
<CAPTION>

                                       Number of        % of                                 Potential Realizable
                                       Securities       Total                                  Value At Assumed
                                       Underlying     Options/    Exercise                  Rates of Stock Price
  Name and Principal                  Options/sars      Sars      or Base    Expiration      Appreciation for
      Position                         Granted(1)      Granted    Price        Date            Option Term
      ---------------------------------------------------------------------------------------------------------
  <S>                                 <C>                <C>        <C>      <C>           <C>          <C>
                                                                                              5%          10%
                                                                                            ------      -----
  John B. Wood
  (Executive Chairman, Former
   President, Chief Executive
   Officer)                           2,000,000          22.7%      $0.77    Aug. 2009     $968,498     $2,454,363

  Lorenzo Tellez
  (Former V.P., Treasurer,
   Chief Financial Officer)                  --             --        --          --             --             --

  David Aldrich
  (President, Chief
    Executive Officer)                  200,000           2.3%      $0.77    Aug. 2009     $ 96,850     $  245,436

  Robert J. Marino
  (Chief Sales and Marketing
   Officer and Executive V.P.)          200,000           2.3%      $0.77    Aug. 2009     $ 96,950     $  245,436

  William L.P. Brownley
  (V.P., General Counsel)               200,000           2.3%      $0.77    Aug. 2009     $ 96,950     $  245,436
<FN>

     (1)  Options granted to any of the named executive officers in 1999 were in
          the common stock of Enterworks, Inc.
</FN>
</TABLE>

<PAGE>


  MANAGEMENT STOCK OPTIONS

         The following table shows,  as to the individuals  named in the Summary
  Compensation  table,  the number of shares acquired during such period through
  the exercise of options,  and the number of shares subject to and value of all
  unexercised options held as of December 31, 1999.
<TABLE>
<CAPTION>

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR

                          AND FY-END OPTION/SAR VALUES


                                                                     Number of
                                                                     Securities             Value of
                                                                     Underlying             Unexercised
                                                                     Unexercised            In-the-Money
                                                                     Options/SARs           Options/SARs
                                                                     at FY-End(1)           at FY-End (2)
                               Shares Acquired         Value         Exercisable/           Exercisable/
  Name                           On Exercise         Realized        Unexercisable          Unexercisable
  -------------------------------------------------------------------------------------------------------
  <S>                                 <C>                 <C>       <C>                       <C>
  John B. Wood
  (Executive Chairman,
   former President,
   Chief Executive Officer)           --                  --        3,739,225/978,766         $1,499,696/$391,506

  Lorenzo Tellez
  (Former V.P., Treasurer,
   Chief Financial Officer)(3)        --                  --          352,500/330,000         $  147,600/$120,000

  David Aldrich
  (President, Chief
   Executive Officer)                 --                  --          653,500/256,500         $   303,780/$79,020

  Robert J. Marino
  (Chief Sales and Marketing
   Officer and Executive V.P.)        --                  --          689,450/417,750         $  177,944/$132,966

  William L.P. Brownley               --                  --          387,250/142,750         $   138,430/$46,570
  (V.P., General Counsel)

<FN>


     1.   These aggregate  amounts include  exercisable  options to purchase the
          common  stock of  Enterworks,  Inc. for  2,060,000  shares held by Mr.
          Wood,  32,500 shares held by Mr.  Tellez,  400,000  shares held by Mr.
          Aldrich, and 245,000 shares held by Mr. Marino and 265,000 shares held
          by Mr. Brownley, respectively.

     2.   These  aggregate  values  include  values for  exercisable  options to
          purchase  the common  stock of  Enterworks,  Inc. of $512,800  for Mr.
          Wood,  $28,600 for Mr. Tellez,  $222,000 for Mr. Aldrich,  $85,600 for
          Mr. Marino and $103,200 for Mr. Brownley,  respectively. All remaining
          amounts  included  in these  values  reflect  the value of  options to
          purchase  the Class A Common  Stock of the  Company.  These values are
          based upon an  estimated  fair market  value at  December  31, 1999 of
          $1.35 per share for the  Company's  Class A Common Stock and $1.00 per
          share for the common  stock of  Enterworks,  Inc.  These  values  were
          derived from  valuations  performed by an independent  third party for
          the trustees of the Telos Shared Savings Plan, a defined  contribution
          employee savings plan in which  substantially all full-time  employees
          are eligible to participate.

     3.   As of March 3, 2000,  Mr. Tellez chose not to exercise his options and
          therefore these options reverted back to their respective plans.
</FN>
</TABLE>


<PAGE>


COMPENSATION OF DIRECTORS

     During the fiscal year ended  December 31, 1999,  employee  directors  were
paid a fee of $2,000 for each Board  meeting  attended.  Outside  directors  Mr.
Byers and Dr.  Bryen  were paid an  annual  fee of  $25,000  each,  and  further
compensated  at a rate of $750 for  each  meeting  attended  in  excess  of four
meetings a year.  Outside  directors Mr.  Heurtematte  and Mr.  Sterrett  earned
annual fees of $4,000 each, and were eligible for further compensation at a rate
of $750 for each  meeting  attended  in  excess  of four  meetings  a year.  The
Chairman of the Board,  Dr. Ikle,  is paid $25,000  quarterly for his service on
the Board.  In addition,  Mr. Byers receives $5,000 per annum for his service as
Proxy  Chairman.  The  compensation  paid to Mr.  Byers  and Dr.  Bryen  is paid
pursuant to a proxy agreement between the Company,  the Defense Security Service
and certain of the Company  shareholders.  During the fiscal year ended December
31, 1999,  Dr. Ikle received  15,000  options,  Mr. Bryen and Mr. Byers received
5,000 options each, Mr.  Sterrett  received 2,500 options and John Wood received
2,000,000  options.  All options  granted to Directors were in Enterworks,  Inc.
common stock.

EMPLOYMENT CONTRACTS

     As of December 31, 1999, the Company was a party to agreements with certain
of its  executive  officers.  Mr. David S.  Aldrich,  Vice  President  and Chief
Operating  Officer,  Mr.  William L. P.  Brownley,  Vice  President  and General
Counsel,  Mr. Robert J. Marino,  Chief Sales and Marketing Officer, and Mr. John
B.  Wood,  Director,  President  and Chief  Executive  Officer,  currently  have
employment  agreements  with the Company.  The agreements are for one year terms
and  provide  for a  payment  of two  years'  base  salary  then  in  effect  if
involuntarily terminated or if the agreements are not extended.

     Accordingly,  Messrs.  Aldrich,  Brownley,  Marino,  and Wood would receive
annually, given their present salary levels, $205,000,  $171,000,  $206,000, and
$350,000, respectively, for a two year period.

     In addition to base salary, the executives are eligible for a bonus and for
the grant of stock  options  under the  agreements.  The  amount of the bonus is
determined  by  reference  to the amount,  if any, of earnings  before taxes and
goodwill  amortization  of the Company for the year or at the Board of Directors
and Chief Executive  Officer's  discretion.  Each year the Company  renegotiates
these employment contracts as part of the yearly review process. Accordingly, in
2000, the Company expects to review the contracts described above.

<PAGE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




<TABLE>
<CAPTION>



        Title of Class           Name and Address of Beneficial Owner        Amount and Nature of        Percent of
                                                                          Beneficial Ownership as of        Class
                                                                                March 01, 2000
--------------------------------------------------------------------------------------------------------------------
<S>                             <C>                                      <C>                              <C>
Class A Common Stock            John R. C. Porter                        22,190,718 shares(A)             80.31%
                                79 Mount Street
                                London W1Y 5HJ England

Class A Common Stock            C3, Inc. 401(k) Plan and Telos            3,658,536 shares                17.22%
                                Corporation Savings Plan
                                c/o C3, Inc.
                                19886 Ashburn Road
                                Ashburn, VA 20147

Class A Common Stock            F & C Enterprise Trust PLC                1,533,405 shares(B)              6.73%
                                Berkeley Square House, Berkeley Square
                                London W1X 5PA England

Class B Common Stock            F&C Nominees Limited                      3,143,358 shares (C)            77.85%
                                Berkeley Square House, Berkeley Square
                                London W1X 5PA England

Class B Common Stock            North Atlantic Smaller Companies            815,700 shares                20.20%
                                Investment Trust PLC
                                10 Park Place
                                London SW1A 1LP England

Class A Common Stock            David S. Aldrich                            321,892 shares (D)             1.49%
Class A Common Stock            William L. P. Brownley                      139,342 shares (D)             0.65%
Class A Common Stock            Robert J. Marino                            603,535 shares (D)             2.78%
Class A Common Stock            Lorenzo Tellez                              525,268 shares (D)             2.43%
Class A Common Stock            John B. Wood                              1,724,391 shares (D)             7.52%
Class A Common Stock            All Officers and Directors as a Group     3,602,156 shares (E)            14.76%
                                (10 persons)
12% Cumulative Exchangeable     John C. Boland                               76,500 shares (F)             2.40%
Redeemable Preferred Stock      28 Allegheny Avenue, Ste 505
                                Towson, MD  21204
12% Cumulative Exchangeable     Value Partners, Ltd.                        714,317 shares (G)            22.42%
Redeemable Preferred Stock      2200 Ross Avenue, Suite 4660
                                Dallas, TX 75201
                                Fisher Ewing Partners
                                2200 Ross Avenue, Suite 4660
                                Dallas, TX 75201
12% Cumulative Exchangeable     Wynnefield Partners Small Cap Value, L.P.   228,500 shares (H)             7.17%
Redeemable Preferred Stock      One Penn Plaza, Suite 4720
                                New York, NY  10119
                                Channel Partnership II, L.P.
                                One Penn Plaza, Suite 4720
                                New York, NY  10119
                                Wynnefield SmallCap Value
                                Offshore Fund, Ltd.
                                One Penn Plaza, Suite 4720
                                New York, NY  10119

12% Cumulative Exchangeable     Magten Asset Management Corp.               197,105 shares                6.19%
Redeemable Preferred Stock      35 East 21st Street
                                New York, NY 10010
<FN>

     (A)  Mr. Porter's holdings include 6,388,916 shares of Class A Common Stock
          purchasable upon exercise of a warrant.
     (B)  The  common  stock  holdings  of  F&C  Enterprise  Trust  PLC  include
          1,533,405 shares of Class A Common Stock  purchasable upon exercise of
          a warrant.
     (C)  F&C Nominees Limited  responded to the Company's request for the names
          and addresses of the beneficial owners of the Company's Class B Common
          Stock  held  by  F&C  Nominees  Limited  by  providing  the  following
          information:  FACET - 1,681,959  shares,  FACET L.P. - 420,490 shares,
          Hare & Co. (Mills) - 371,021 shares, and Drayton - 669,888 shares. F&C
          Nominees Limited did not provide to the Company the addresses of these
          beneficial owners.
     (D)  The common stock holdings of Messrs. Aldrich, Brownley, Marino, Tellez
          and Wood include -0-; 10,994;  20,283; 22,828 and 36,774 shares of the
          Company's  Class  A  Common  Stock,   respectively,   held  for  their
          beneficial  interest by the C3, Inc. 401(k) Plan and Telos Corporation
          Savings Plan. Messrs. Aldrich,  Brownley, Marino, Tellez and Wood hold
          options to acquire 313,500;  122,250;  461,200; 350,000; and 1,679,225
          shares  of the  Company's  Class  A  Common  Stock,  respectively,  in
          addition to their  current  common  stock  holdings.  These shares are
          purchasable upon exercise of the options and are exercisable within 60
          days of March 1, 2000.
     (E)  The common stock holdings of the Company's officers and directors as a
          group include  136,257  shares of the  Company's  Class A Common Stock
          held for their  beneficial  interest by the C3,  Inc.  401(k) Plan and
          Telos Corporation  Savings Plan. Under the Company's stock option plan
          and certain stock option  agreements,  all officers and directors as a
          group hold options to acquire 3,168,525 shares of Class A Common Stock
          exercisable within 60 days of March 1, 2000.
     (F)  John C. Boland holds 30,000 shares of the 12% cumulative  exchangeable
          redeemable  preferred stock. In addition,  he is the manager and owner
          of the general partner of Remnant Partners LP which  beneficially owns
          46,500 shares of the 12% cumulative  exchangeable redeemable preferred
          stock of the Company.
     (G)  Value  Partners  Ltd.  ("VP") and Fisher Ewing  Partners  ("FEP") have
          filed jointly a Schedule 13D under which they  disclosed that they may
          act as a "group" within the meaning of Section 13(d) of the Securities
          Exchange Act. Each of the reporting  persons  disclosed that it may be
          deemed to  beneficially  own the  aggregate  of 714,317  shares of the
          Exchangeable  Preferred Stock held of record by the reporting  persons
          collectively.  According  to an Amendment to the Schedule 13D filed on
          May 10,  1996,  each of FEP and Timothy G. Ewing and Richard W. Fisher
          may be deemed  to have the sole  power to vote and to  dispose  of the
          shares  of the  Exchangeable  Preferred  Stock  held of  record by the
          reporting persons collectively.
     (H)  Wynnefield   Partners  SmallCap  Value,   L.P.,   ("WPSCV"),   Channel
          Partnership II, L.P.  ("CP"),  and Wynnefield  SmallCap Value Offshore
          Fund,  Ltd.  ("WSCVOF")  have jointly filed a Schedule 13D under which
          they disclosed they may act as a "group" within the meaning of Section
          13(d) of the  Securities  Exchange Act. Each of the reporting  persons
          disclosed that it may be deemed to  beneficially  own the aggregate of
          228,500 shares of the  Exchangeable  Preferred Stock held of record by
          the  reporting  persons  collectively.  According to the Schedule 13D,
          Nelson Obus and Joshua  Landes,  by virtue of their  status as general
          partners of WPSCV, Mr. Obus as general partner of CP and Messrs.  Obus
          and Landes, as officers of WSCVOF's investment manager, have the power
          to vote or to direct the vote and the power to  dispose  and to direct
          the disposition of the shares of Exchangeable Preferred Stock owned by
          WPSCV, CP and WSCVOF, respectively.
</FN>
</TABLE>

<PAGE>


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information  concerning  certain  relationships  and  related  transactions
between the Company and certain of its current and former officers and directors
is set forth below.

     Mr. Joseph P. Beninati  served as Chairman of the Board for the majority of
1994 before  resigning  January 5, 1995. The Company paid Mr. Beninati  $165,000
annually  subject to a three-year  employment  agreement  that began in 1995 and
terminated  January 8, 1998.  Mr.  Beninati  resigned from the Board in 1996 and
received his final payment in 1998.

     Mr. John R. Porter, the owner of a majority of the Company's Class A Common
Stock, has a consulting agreement with the Company whereby he is compensated for
consulting  services provided to the Company in the areas of marketing,  product
development,  strategic  planning and finance as  requested by the Company.  Mr.
Porter was paid $200,000 by the Company in 1999,  1998 and 1997 pursuant to this
agreement,  which amounts were determined by negotiation between the Company and
Mr. Porter.

     Mr. Norman  Byers,  a director of the Company,  had a consulting  agreement
with the Company to help the Company  expand its  business  operations  into the
international  marketplace.  Under this agreement,  Mr. Byers received $10,500 a
month  for his  services.  Mr.  Byers was  compensated  $125,000,  $130,000  and
$128,000 for 1998, 1997 and 1996,  respectively.  This consulting  agreement was
terminated in the fourth quarter of 1998.

     Mr. Mark Hester, former Executive Vice President and former Chief Operating
Officer of the Company,  has a consulting  agreement with the Company to provide
strategic advice concerning the Company's hardware services division. Under this
agreement,  Mr. Hester received  $206,000 for his services during 1999 and 2000,
and was  eligible  for a bonus under  certain  circumstances,  at the  Company's
discretion.  Under this  agreement  Mr.  Hester will receive a bonus of $135,000
payable in installments during 2000 and 2001.

<PAGE>



                                     PART IV

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

(a)    1.     Financial Statements

              All financial statements of the registrant as set forth under Item
8 of this report on Form 10-K.

(a)    2.     Financial Statement Schedules

              All schedules are omitted  because they are not  applicable or the
              required  information  is included in the  consolidated  financial
              statements or notes thereto.

(a)    3.     Exhibits:

         Exhibits  marked  with  (1*)  are  incorporated  by  reference  to  the
Company's Registration Statement No. 2-84171 filed June 2, 1983. Exhibits marked
with (3*) are  incorporated  by reference to the Company's  Form 10-K report for
the fiscal year ended March 31, 1987. Exhibits marked with (4*) are incorporated
by reference to the  Company's  Form 10-K report for the fiscal year ended March
31, 1989. The registrant  will furnish to  stockholders a copy of other exhibits
upon  payment of $.20 per page to cover the expense of  furnishing  such copies.
Requests  should be directed to the  attention  of Investor  Relations  at Telos
Corporation, 19886 Ashburn Road, Ashburn, Virginia 20147-2358.

2.6  Stock  Purchase  Agreement  dated as of January 14, 1992,  by and among C3,
     Inc., Telos Corporation and Contel Federal Systems,  Inc.  (Incorporated by
     reference to C3, Inc. Form 8-K filed January 29, 1992)

3.1  (1*) Articles of Amendment and Restatement of C3, Inc.

3.2  (1*) Articles of Amendment of C3, Inc. dated August 31, 1981.

3.3  (3*) Articles supplementary of C3, Inc. dated May 31, 1984.

3.4  (4*) Articles of Amendment of C3, Inc. dated August 18, 1988.

3.5  Articles of  Amendment  and  Restatement  Supplementary  to the Articles of
     Incorporation dated August 3, 1990.  (Incorporated by reference to C3, Inc.
     10-Q for the quarter ended June 30, 1990)

3.6  Restated Bylaws of C3, Inc. (Incorporated by reference to C3, Inc. 10-Q for
     the quarter ended December 31, 1990)

3.7  Articles of Amendment of C3, Inc. dated April 13, 1995

4.1  Form of Indenture  between the  Registrant  and Bankers Trust  Company,  as
     Trustee,  relating  to the 12%  Junior  Subordinated  Debentures  Due 2009.
     (Incorporated  herein by reference to C3's  Registration  Statement on Form
     S-4 filed October 20, 1989)

4.3  Form of the terms of the 12% Cumulative  Exchangeable  Redeemable Preferred
     Stock  of  the  Registrant.  (Incorporated  herein  by  reference  to  C3's
     Registration Statement on Form S-4 filed October 20, 1989)

4.4  Shareholders  Agreement  dated as of August 3, 1990 by and among C3,  Inc.;
     Union de Banques Suisses  (Luxembourg),  S.A.; C3 Investors,  L.P.; Anthony
     Craig, together with the investors; the Class A holders; MIM Limited; Knoll
     and Associates, Inc.; Murray Enterprises PLC; Electra Development Holdings;
     and Hartley  Limited.  (Incorporated  by reference to C3, Inc. 10-Q for the
     quarter ended June 30, 1990)


<PAGE>


4.5  Articles  of  Amendment  and  Restatement  of the  Company,  filed with the
     Secretary  of  State  of  the  State  of  Maryland  on  January  14,  1992.
     (Incorporated by reference to C3, Inc. Form 8-K filed January 29, 1992)

10.20Revolving  and  Reducing  Senior  Facility  Credit  Agreement  dated  as of
     January 14, 1992, among C3, Inc., Telos  Corporation and NationsBank,  N.A.
     (Incorporated by reference to C3, Inc. Form 8-K filed January 29, 1992)

10.31September 27, 1993  Settlement  Agreement among John R.C.  Porter,  Toxford
     Corporation,  Cantrade Nominees Ltd., Cantrade Trust Company (Cayman) Ltd.,
     Cantrade Trustee, AG, Fred Knoll,  Cottonwood Holdings,  C3 Investors L.P.,
     C3, Inc., Telos Corporation,  Joseph P. Beninati, John B. Wood and Beninati
     & Wood, Inc.  (Incorporated by reference to C3, Inc. Form 8-K filed October
     18, 1993)

10.32September 27, 1993 Stock Purchase and Sale Agreement  between Mr. John R.C.
     Porter and C3 Investors,  L.P.  (Incorporated by reference to C3, Inc. Form
     8-K filed October 18, 1993)

10.33September 27, 1993 Stock Purchase and Sale Agreement  between Mr. John R.C.
     Porter and  Cottonwood  Holdings,  Inc.(Incorporated  by  reference  to C3,
     Inc.Form 8-K filed October 18, 1993)

10.34September 27, 1993 Note Interest  Purchase and Sale Agreement among Mr.John
     R.C.Porter,  Cottonwood and C3, Inc. (Incorporated by reference to C3, Inc.
     Form 8-K filed October 18, 1993)

10.35October 8, 1993 Promissory  Note in the amount of $8,438,000  issued by Mr.
     John R.C. Porter in favor of C3 Investors,  L.P. (Incorporated by reference
     to C3, Inc. Form 8-K filed October 18, 1993)

10.36October 8, 1993 Promissory  Note in the amount of $1,562,000  issued by Mr.
     John R. C. Porter in favor of Cottonwood  Holdings,  Inc.  (Incorporated by
     reference to C3, Inc.Form 8-K filed October 18, 1993)

10.37September 27, 1993 Collateral  Agency,  Security and Pledge Agreement among
     Mr. John R.C. Porter, Mr. Fred Knoll,  Cottonwood  Holdings,  C3 Investors,
     L.P., C3, Inc., Telos Corporation,  Toxford Corporation,  Cantrade Nominees
     Limited,  Mr.Robert M. Ercole and Mr. Frank S. Jones, Jr.  (Incorporated by
     reference to C3, Inc. Form 8-K filed October 18, 1993)

10.38September 27, 1993  Standstill  Agreement among Mr. John R.C.  Porter,  Mr.
     Fred Knoll, Mr. Alfredo Frohlich and C3, Inc. (Incorporated by reference to
     C3, Inc. Form 8-K filed October 18, 1993)

10.39September  27, 1993 Mutual  Release  among Mr. John R.C.  Porter,  Mr. Fred
     Knoll,   Cottonwood   Holdings,   C3  Investors,   L.P.,  C3,  Inc.,  Telos
     Corporation, Mr. Joseph P. Beninati, Mr. John B. Wood, and Beninati & Wood,
     Inc.  (Incorporated  by  reference to C3, Inc.  Form 8-K filed  October 18,
     1993)

10.40September 27, 1993 Consulting  Agreement among Mr. Fred Knoll, C3, Inc. and
     Telos  Corporation.  (Incorporated  by reference to C3, Inc. Form 8-K filed
     October 18, 1993)

10.43Amendment to Revolving  and Reducing  Senior  Credit  Facility  dated as of
     December 31, 1993 among C3, Inc., Telos Corporation and NationsBank, N.A.

10.44Amendment to Revolving  and Reducing  Senior  Credit  Facility  dated as of
     April 11, 1994 among C3, Inc., Telos Corporation and NationsBank, N.A.
<PAGE>


10.45Amendment to Revolving  and Reducing  Senior  Credit  Facility  dated as of
     June 8, 1994 among C3, Inc., Telos Corporation and NationsBank, N.A.

10.46Amendment to Revolving  and Reducing  Senior  Credit  Facility  dated as of
     October 7, 1994 among C3,Inc., Telos Corporation and NationsBank, N.A.

10.47October 7, 1994 Letter Agreement among C3, Inc., Toxford  Corporation,  and
     NationsBank, N.A. regarding cash collateral held on behalf of the Company.

10.48October 25, 1994 General  Release and Settlement  memorandum  among Sapiens
     International   Corporation   N.V.,   Sapiens   International   Corporation
     B.V.,Sapiens U.S.A., Inc., C3, Inc. and Telos Corporation.

10.49Amendment to Revolving  and Reducing  Senior  Credit  Facility  dated as of
     January 5,1995 among C3, Inc., Telos Corporation and NationsBank, N.A.

10.50Amendment to Revolving  and Reducing  Senior  Credit  Facility  dated as of
     January 12,1995 among C3, Inc.,Telos Corporation and NationsBank, N.A.

10.51Waiver and  Amendment to  Revolving  and Reducing  Senior  Credit  Facility
     dated  as  of  April  17,  1995  among  C3,  Inc.,  Telos  Corporation  and
     NationsBank, N.A.

10.58Series  B  Senior  Subordinated  Secured  Note due  October  1,  2000 as of
     October 13, 1995 between Telos  Corporation  (Maryland) and Drayton English
     and International Investment Trust

10.59Series  B  Senior  Subordinated  Secured  Note due  October  1,  2000 as of
     October 13, 1995  between  Telos  Corporation  (Maryland)  and J. O. Hambro
     Investment Management, Ltd.

10.60Series  B  Senior  Subordinated  Secured  Note due  October  1,  2000 as of
     October 13, 1995 between Telos  Corporation  (Maryland)  and North Atlantic
     Smaller Companies Investment Trust, PLC

10.61Series  B  Senior  Subordinated  Secured  Note due  October  1,  2000 as of
     October 13, 1995 between  Telos  Corporation  (Maryland)  and Mr. John R.C.
     Porter

10.62Series  B  Senior  Subordinated  Secured  Note due  October  1,  2000 as of
     October 13, 1995 between Telos Corporation (Maryland) and Sir Leslie Porter

10.63Series  B  Senior  Subordinated  Secured  Note due  October  1,  2000 as of
     October  13,  1995  between  Telos   Corporation   (Maryland)   and  Second
     Consolidated Trust, PLC

10.64Series  B  Senior  Subordinated  Secured  Note due  October  1,  2000 as of
     October 13, 1995 between Telos Corporation (Maryland) and Toxford Corp.

10.65Series C Senior  Subordinated  Unsecured  Note due  October  1,  2000 as of
     October 13, 1995 between Telos  Corporation  (Maryland) and Drayton English
     and International Investment Trust

10.66Series C Senior  Subordinated  Unsecured  Note due  October  1,  2000 as of
     October 13, 1995  between  Telos  Corporation  (Maryland)  and J.O.  Hambro
     Investment Management, Ltd.

10.67Series C Senior  Subordinated  Unsecured  Note due  October  1,  2000 as of
     October 13, 1995 between Telos  Corporation  (Maryland)  and North Atlantic
     Smaller Companies Investment Trust, PLC

10.68Series C Senior  Subordinated  Unsecured  Note due  October  1,  2000 as of
     October 13, 1995 between  Telos  Corporation  (Maryland)  and Mr. John R.C.
     Porter

10.69Series C Senior  Subordinated  Unsecured  Note due  October  1,  2000 as of
     October 13, 1995 between Telos Corporation (Maryland) and Sir Leslie Porter

10.70Series C Senior  Subordinated  Unsecured  Note due  October  1,  2000 as of
     October  13,  1995  between  Telos   Corporation   (Maryland)   and  Second
     Consolidated Trust, PLC

10.71Series C Senior  Subordinated  Unsecured  Note due  October  1,  2000 as of
     October 13, 1995 between Telos Corporation (Maryland) and Toxford Corp.

10.72Amendment to Revolving  and Reducing  Senior  Credit  Facility  dated as of
     August 4, 1995 Telos Corporation (Maryland), Telos Corporation (California)
     and NationsBank N.A.

10.73Amendment to Revolving  and Reducing  Senior  Credit  Facility  dated as of
     October  13,  1995  Telos   Corporation   (Maryland),   Telos   Corporation
     (California) and NationsBank N.A.

10.74 1996 Stock Option Plan

10.76Sixteenth  Amendment  to Credit  Facility  and Tenth  Amended and  Restated
     Promissory Note

10.77 Enterworks, Inc. 1996 Stock Option Plan

10.78 Form of Series A Senior Subordinated Unsecured Note

10.79 Form of Enterworks, Inc., inc. Capital Stock Purchase Series A Warrant

10.80 Asset Purchase Agreement

10.81 Amendment No. 1 to Asset Purchase Agreement

10.82Amended  and  Restated  Credit  Agreement  between  Telos  Corporation,   a
     Maryland  corporation;  Telos Corporation,  a California  corporation;  and
     NationsBank, N.A. dated as of July 1, 1997

10.83 Asset Purchase Agreement

10.84 Interim Agreement

10.85Share   Purchase   Agreement   between   Telos   Corporation,   a  Maryland
     corporation,  formerly  named  and  known as C3,  Inc.  and  Union  Bank of
     Switzerland, dated May 7, 1998

10.86Series D Senior  Subordinated  Unsecured  Note due  October  1,  2000 as of
     November  20, 1998 between  Telos  Corporation  (Maryland)  and Foreign and
     Colonial Enterprise Trust PLC

10.87Series D Senior  Subordinated  Unsecured  Note due  October  1,  2000 as of
     November  20, 1998 between  Telos  Corporation  (Maryland)  and Foreign and
     Colonial Enterprise Trust LP

10.88Common  Stock  Purchase   Series  D  Warrant   between  Telos   Corporation
     (Maryland) and Foreign and Colonial Enterprise Trust PLC


10.89Common Stock Purchase Series D Warrant between Telos Corporation  (Maryland
     and Foreign and Colonial Enterprise Trust LP

10.90 Form of Stock Purchase Agreement

10.91Asset  Purchase  Agreement,  dated as of September  29, 1999 between  Telos
     Corporation  (Maryland),   Telos  Corporation  (California),   Telos  Field
     Engineering, Inc. and TFE Technology Holdings, Inc.

10.92 Letter to Bank of America concerning Enterworks private placement

10.93 Form of Enterworks Subdebt conversion letter

10.94 Form of Telos Subdebt conversion letter

10.95 Listing of Subdebt conversion parties

10.96 Transaction agreement between Telos and Enterworks

      21                 Schedule of Subsidiaries.

      27                 Financial Data Schedule

(b)    Reports on Form 8-K

       None


<PAGE>


                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  Telos  Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                TELOS CORPORATION

                              BY: DAVID S. ALDRICH
                              --------------------
                                  President and
                             Chief Executive Officer

                              DATE: MARCH 30, 2000


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following  persons on behalf of Telos  Corporation and in
the capacities and on the date indicated.
<TABLE>
<CAPTION>

     SIGNATURE                                      TITLE                                          DATE
-----------------                              ------------------                             --------------
<S>                                             <C>                                           <C>

/S/  John B. Wood                               Executive Chairman of                           March 30, 2000
-----------------                               the Board of Directors
John B. Wood



/S/  Fred Charles Ikle                          Chairman of the                                 March 30, 2000
----------------------                          Board of Directors
Fred Charles Ikle



/S/ Stephen D. Bryen                            Director                                        March 30, 2000
----------------------
Stephen D. Bryen



/S/  Norman P. Byers                            Director                                        March 30, 2000
----------------------
Norman P. Byers



/S/ Malcolm M.B. Sterrett
-------------------------
Malcolm M.B. Sterrett                           Director                                        March 30, 2000


                                                Director                                        March 30, 2000
----------------------
John C. Boland



/S/ David S. Aldrich                            President, Chief Executive                      March 30, 2000
--------------------                            Officer (Principal Executive Officer)
David S. Aldrich



/S/  Thomas J. Ferrara                          Vice President, Finance & Acct.                 March 30, 2000
----------------------                          (Principal Financial Officer
Thomas J. Ferrara                               & Principal Accounting Officer)


</TABLE>
<PAGE>
                               Telos Corporation
                                 Exhibit Index

<TABLE>
<CAPTION>


Exhibit
Number                        Exibit Name                             Page
------                        -----------                             ----
<S>                           <C>                                     <C>
10.91                         Asset Purchase Agreement, dated
                              September 29, 1999 between Telos
                              Corporation (Maryland), Telos
                              Corporation (California), Telos
                              Field Engineering, Inc. and TFE
                              Technology Holdings, Inc.

10.92                         Letter to Bank of America concerning
                              Enterworks private placement

10.93                         Form of Enterworks Subdebt conversion
                              letter

10.94                         Form of Telos Subdebt conversion
                              letter

10.95                         Listing of Subdebt conversion parties

10.95                         Transaction agreement between Telos
                              and Enterworks
</TABLE>