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, 2001


              [ ]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 1, 2002, the registrant had 21,171,202 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): 60
                                                     --

<PAGE>


PART 1

Item 1.       Business

History and Introduction

     Founded in 1968,  Telos  Corporation  ("Telos" or the  "Company")  delivers
enterprise  security and integration  solutions and services to customers in the
U. S. Government and industry. During 2001, America and Telos' largest customer,
the U.S.  Government,  changed forever in terms of their need for an increase in
reliable and secure  information  and  communication.  Telos  solutions  address
critical needs in the areas of secure  wireless  networking,  secure  messaging,
secure  local  area  networks  ("LAN")  data  integration  and  enterprise  risk
management.

     Since 1996,  Telos has  identified and sold a number of business units that
were  not a part  of its  strategic  direction.  These  businesses  were:  Telos
Consulting Services, Telos Information Systems, and Telos Field Engineering.  In
1999,  Enterworks was separately funded and deconsolidated from Telos. Telos now
owns 23.1% of Enterworks.  In 2000, Telos  contributed the net assets of its Ft.
Sill operation to a new joint venture with outside investors, resulting in a 50%
ownership in TelosOK. These dispositions and ventures, as well as operating cash
flows, have enabled Telos to reduce corporate  indebtedness from a high of $56.9
million in 1997 to $20.6 million in 2001.

Reportable Operating Segments

     During 2001, Telos provided its business  solutions through three operating
segments:  the Products Group, Systems and Support Services Group (the "Services
Group"), and its wholly owned subsidiary, Xacta Corporation.

Products Group

     The Company's  Products Group delivers  solutions that combine  information
technology  products  and services to solve  customer  problems.  For 2001,  the
Products Group generated revenue of $96.3 million, up 9.7% from 2000. This Group
represents  56.6% of the  Company's  reported  consolidated  revenue  for  2001.
Customers of the Products Group include agencies of the U.S. Government such as:
military  services,  Defense  Agencies,  Treasury  Department,  U.S.  Courts and
others.

     Solutions   from  the  Products   Group   consist  of  a   combination   of
commercial-off-the-shelf   ("COTS")  products  from  major  original   equipment
manufacturers  ("OEMs"),  Telos  proprietary  products,  Telos and subcontractor
services and Telos proprietary practices.  For example, the Products Group sells
secure  wireless  networking  and  secure  messaging  solutions.  Telos'  secure
wireless networking  solutions allow customers to securely access databases from
non-networked  locations  so that they can  perform a variety  of tasks  safely.
Telos'  secure  messaging  solution is known as the Automated  Message  Handling
System  ("AMHS") and is a standard  within the  Department of Defense.  The AMHS
allows users to securely access, send, search, and profile message traffic.

Services Group

     The Company's Services Group provides  post-deployment  and post-production
software  and systems  development  and support  services  including  technology
insertion,  systems redesign and software  re-engineering.  The Services Group's
largest  customer is the U.S.  Army's  Communications  and  Electronics  Command
("CECOM").  The Services Group has  approximately  228  personnel.  Of all tasks
performed  by  this  Group,  96.9%  of the  tasks  performed  are on a time  and
materials basis with the remaining 3.1% being performed by  subcontractors  on a
fixed price basis.  For 2001,  the  Services  Group  generated  revenue of $60.4
million,  up 24.7%  from  2000.  The  Group  represents  35.5% of the  Company's
consolidated  revenue for 2001. The Services  Group's  principal  operations are
located at Fort Monmouth, NJ and Fort Sill, OK.

     Since,   1983,   the  Services   Group  at  Fort   Monmouth  has  supported
approximately 80 tactical land systems and satellite  communications systems for
CECOM's Research, Development and Engineering Center. During 2001, Telos and its
partners organized a joint venture and were awarded a contract with a ceiling of
approximately  $1.4 billion over 10 years.  The Services  Group at Fort Monmouth
achieved  a  software  development  assurance  of Level 3 based on the  Software
Engineering Institute's (SEI) capability maturity model for software (CMM).

     Since 1977,  the Services  Group at Ft. Sill has  developed 93 fire support
systems and 177 major systems  upgrades,  totaling more than 11 million lines of
code,  using nine  different  programming  languages  for CECOM's  Fire  Support
Software  Engineering  Center.  During  2000,  Telos  contributed  its Ft.  Sill
operation to a newly created  entity,  Telos-OK,  in return for a 50% ownership,
cash and other consideration.  During 2001, Telos-OK teamed with United Defense,
LP in support of the US Army's  Crusader  program  and with  Raytheon  on the US
Army's  Advanced  Field  Artillery  Tactical  Data  System  ("AFATDS")  program.
Telos-OK has achieved SEI CMM Level 4 for software development assurance.

     Results  from the  Services  Group at Ft.  Sill  were  included  in  Telos'
financial  results  until  its  deconsolidation  in July 2000 (see Note 3 to the
Consolidated Financial Statements).  Since that time, the Company remains as the
prime  contractor  on the Ft. Sill  contract  because the contract has yet to be
successfully novated by the government.  Therefore, in accordance with generally
accepted accounting principles of the United States of America, the revenues and
related expenses for this contract are included in their respective  captions in
the Company's financial  statements.  These "pass-through"  revenues and related
expenses  reported by the  Company  result in zero  profit to the  Company.  The
Company  anticipates  this contract to be novated in the first half of 2002. The
TFE  division  was part of the Systems and Support  Services  Group prior to its
sale in 1999 (See Note 5 to the Consolidated Financial Statements).

 Xacta Corporation

     Xacta develops enterprise risk management software to help organizations to
proactively  manage and monitor the security of their  network  environments  in
accordance with internationally  recognized industry and security standards. For
2001, Xacta generated  revenue of $13.6 million,  up 49.3% from 2000. This Group
represents 7.9% of the Company's  consolidated revenue for 2001. Xacta currently
sells its solutions to agencies of the U.S. Government as well as credit unions.

     Xacta has developed  and is selling two  products:  Xacta Web C&A and Xacta
Commerce Trust. Xacta Web C&A automates the rigorous and time-consuming  process
of  security   certification  and   accreditation.   Xacta  Web  C&A  simplifies
certification and accreditation by guiding users through a step-by-step  process
which determines the customer's information security posture and assesses system
and network configuration compliance with applicable regulations, standards, and
industry best practices and processes. With Xacta Commerce Trust,  organizations
are able to perform  holistic  security risk management on a continuous basis in
accordance  with   internationally   recognized   industry  standards  and  best
practices.

Revenue by Major Market and Significant Customers

Revenue by major market for the Company is as follows:

                               Percentage of total consolidated revenue for
                               ---------------------------------------------
                                         2001       2000        1999
                                         ----       ----        ----

Federal government                      97.7%       96.2%       92.8%
Commercial                               2.3         3.8         5.9
State and local governments               --          --         1.3
                                        ----        ----         ---
         Total                         100.0%      100.0%      100.0%
                                       ======      ======      ======

     Total  consolidated  revenue  derived from the federal  government for 2001
includes 58.7% of revenue from  contracts  with the United States Army,  6.9% of
revenue from  contracts  with the United States Air Force,  3.7% of revenue from
contracts with the United Sates Navy,  11.7% of revenue with other Department of
Defense customers, and 13.5% 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 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 that 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,  and system and network
integration  will enable it to compete  favorably in the information and network
technology market.

Employees

     The Company  employed 625 persons as of December 31, 2001. 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,  228 provide Systems and Support Services,
159  provide  Systems  Integration  (Products)  Services,  and 128  work for the
Company's Xacta  subsidiary.  An additional 110 employees  provide corporate and
business services functions.

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, 2001 and 2000,  the Company had total backlog from existing
contracts of approximately $830.0 million and $124.4 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.  The increase in total
backlog  is  primarily  attributable  to the dual award of the US Army CECOM SEC
contract to the Company's 50% owned joint venture,  ITel Solutions.  The Company
will be a subcontractor to this joint venture, and estimates upon the successful
award of competing task orders total backlog up to approximately $700 million.

     Approximately  $28 million and $43 million of the total was funded  backlog
at December 31, 2001 and 2000, 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 growth that the Company  continues  to  aggressively
pursue.

Overview of 2001

     During 2001,  the Company  continued to focus on its commitment to creating
unique,  value  added  solutions,  and  reducing  corporate  indebtedness.   The
following paragraphs illustrate several examples of how.

     The  Company's  Services  Group  created ITel  Solutions,  a joint  venture
between Telos and L3/Ilex. ITel Solutions was awarded a dual contract to provide
systems and  software  engineering  support to CECOM.  The award has a potential
value of  approximately  $1.4  billion  over 10 years.  Under  this  dual  award
contract, ITel Solutions will compete for the award of tasks under the contract.

     Telos has also  created  value added  solutions  through  its  wholly-owned
subsidiary,  Xacta. There has never been a stronger need for reliable and secure
communication.  Xacta  provides  solutions  to both  Government  and  commercial
customers  to  handle  certain  of these  critical  needs.  Specifically,  Xacta
solutions  help  organizations  proactively  manage and monitor the  security of
their  network  environments  in  accordance  with  internationally   recognized
information security and privacy standards, regulations, guidelines and industry
best practices.

     The Company's  Products Group  continues to better serve its customers with
innovative  product offerings,  and as a result has experienced  increased order
volume and  profitability in 2001. For example,  the Products Group sells secure
wireless  networking  and secure  messaging  solutions.  Telos' secure  wireless
networking   solutions  allow  customers  to  securely  access   databases  from
non-networked  locations  so that they can  perform a variety  of tasks  safely.
Telos'  secure  messaging  solution is known as the Automated  Message  Handling
System  ("AMHS") and is a standard  within the  Department of Defense.  The AMHS
allows users to securely access, send, search, and profile message traffic.

     The Company made significant strides in reducing corporate  indebtedness in
2001. The Company's term facility balance has been reduced by approximately  50%
from the 2000 balance due to cash  generation from  operations.  The Company was
able to retire one of its  Series C  Subordinated  Notes in 2001 and  negotiated
extensions  of all its Series B and Series C  Subordinated  Notes and its Senior
Redeemable Preferred Stock to May of 2003.

     The Company did not receive its anticipated  volume of orders at the end of
the federal  government year (the federal  government fiscal year ends September
30). In  addition,  the 2002  government  budget  approval  was also  delayed by
several  months.  These two issues caused the Company to experience a decline in
sales from the fourth quarter of 2001 compared to the fourth quarter of 2000.
<PAGE>
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.

     The Company  subleases 21,816 rentable square feet of space at its Ashburn,
Virginia  facility  to  its  affiliate,   Enterworks,  Inc.  for  its  corporate
headquarters and operating segments. This sublease will expire on March 31, 2003
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 5 separate  facilities located in California,  New
Jersey,  the District of Columbia and Europe under various leases,  which expire
on various dates through March of 2006.

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

     The Company's annual meeting of common shareholders was held on November 6,
2001.  The only matter set forth in the meeting was the  election of  directors.
The  shareholders  of the common  stock  necessary  to  constitute a quorum were
present either in person or  represented by proxy or attorney.  Dr. Fred Charles
Ikle, John B. Wood,  Norman P. Byers, Dr. Stephen D. Bryen, and David S. Aldrich
were elected to a term of  approximately  one year, a term to expire at the next
annual meeting of shareholders upon the election of their successors.  Effective
March 20, 2002, Dr. Bryen resigned as a proxy holder and Director.

     With regards to the holders of the 12%  Cumulative  Exchangeable  Preferred
Stock,  shareholders  of such stock  necessary  to  constitute a quorum were not
present and, therefore, the nominations of Malcolm M.B. Sterrett and Geoffrey B.
Baker were not considered.  Subsequent to the shareholders meeting, Malcolm M.B.
Sterrett, an incumbent director, appointed Geoffrey B. Baker to fill the term of
John C. Boland,  who resigned on October 2, 2001.  Mr.  Sterrett and Mr. Baker's
terms are for a period of one year, a term to expire at the next annual  meeting
of  shareholders  upon the election of their  successors.  Such  appointment was
consistent with Article Fifth (C)7(b)(vi) of the Company's Articles of Amendment
and Restatement.


<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, 2002, there were 84 holders of the Company's Class A Common Stock
and 4 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>
<CAPTION>

                                                          OPERATING RESULTS
                                                       Year Ended December 31,
                                                    ---------------------------
                                                       (amounts in thousands)
                                   2001      2000         1999        1998        1997
                                   ----      ----         ----        ----        ----
<S>                             <C>        <C>         <C>          <C>         <C>
Sales (1)                       $170,261   $145,310    $171,364     $207,086    $253,787
(Loss)income before
   extraordinary items              (671)    (1,794)     (9,979)      (9,171)      1,412
Extraordinary items(2)                --         --       8,015           --          --
Net (loss) income               $   (671)  $ (1,794)   $ (1,964)    $ (9,171)   $  1,412

                                                        FINANCIAL CONDITION
                                                         As of December 31,
                                                       ---------------------
                                   2001      2000         1999        1998        1997
                                   ----      ----         ----        ----        ----

                                                  (amounts in thousands)

Total assets (1)                $ 53,561   $ 77,090    $ 56,886     $ 95,251    $109,718
Long-term debt (3)                20,566     32,846      25,045       54,651      56,875
Capital lease obligations,
   long-term (4)                  10,722     11,030      11,362       11,710      12,085
Senior redeemable
   preferred stock (5)             6,903      6,480       6,054        5,631       5,207
Class B redeemable
   preferred stock                    --         --          --           --      12,035
Redeemable preferred
   Stock (5)                    $ 47,876   $ 42,352    $ 36,975    $  31,729    $ 29,951

(1)  See Notes 3, 4 & 5 to the  Consolidated  Financial  Statements in Item 8 regarding the  contribution  of Ft. Sill assets,  the
     deconsolidation of Enterworks and the sale of TFE.
(2)  See Note 4 to the  Consolidated  Financial  Statements in Item 8 regarding the  extraordinary  item relating to the concurrent
     transactions of the Enterworks private placement.
(3)  See Note 7 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.
(4)  See Note 11 to the Consolidated Financial Statements in Item 8 regarding the capital lease obligations of the Company.
(5)  See Note 8 to the Consolidated Financial Statements in Item 8 regarding redeemable preferred stock of the Company.
</TABLE>


<PAGE>


Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

General

     During 2001,  the Company  continued to focus on its commitment to creating
unique,  value  added  solutions,  and  reducing  corporate  indebtedness.   The
following paragraphs illustrate several examples of how.

     The  Company's  Services  Group  created ITel  Solutions,  a joint  venture
between Telos and L3/Ilex. ITel Solutions was awarded a dual contract to provide
systems and  software  engineering  support to CECOM.  The award has a potential
value of  approximately  $1.4  billion  over 10 years.  Under  this  dual  award
contract, ITel Solutions will compete for the award of tasks under the contract.

     Telos has also  created  value added  solutions  through  its  wholly-owned
subsidiary,  Xacta. There has never been a stronger need for reliable and secure
communication.  Xacta  provides  solutions  to both  Government  and  commercial
customers  to  handle  certain  of these  critical  needs.  Specifically,  Xacta
solutions  help  organizations  proactively  manage and monitor the  security of
their  network  environments  in  accordance  with  internationally   recognized
information security and privacy standards, regulations, guidelines and industry
best practices.

     The Company's  Products Group  continues to better serve its customers with
innovative  product offerings,  and as a result has experienced  increased order
volume and  profitability in 2001. For example,  the Products Group sells secure
wireless  networking  and secure  messaging  solutions.  Telos' secure  wireless
networking   solutions  allow  customers  to  securely  access   databases  from
non-networked  locations  so that they can  perform a variety  of tasks  safely.
Telos'  secure  messaging  solution is known as the Automated  Message  Handling
System  ("AMHS") and is a standard  within the  Department of Defense.  The AMHS
allows users to securely access, send, search, and profile message traffic.

     The Company made significant strides in reducing corporate  indebtedness in
2001. The Company's term facility balance has been reduced by approximately  50%
from the 2000 balance due to cash  generation from  operations.  The Company was
able to retire one of its  Series C  Subordinated  Notes in 2001 and  negotiated
extensions  of all its Series B and Series C  Subordinated  Notes and its Senior
Redeemable Preferred Stock to May of 2003.

     The Company did not receive its anticipated  volume of orders at the end of
the federal  government year (the federal  government fiscal year ends September
30). In  addition,  the 2002  government  budget  approval  was also  delayed by
several  months.  These two issues caused the Company to experience a decline in
sales from the fourth quarter of 2001 compared to the fourth quarter of 2000.

     During   2001,   the   Company   experienced   increases   in  revenue  and
profitability.  Revenue increased $25.0 million,  or 17.2%, as compared to 2000.
Approximately  $8.5 million of this increase was  attributable  to the Company's
Products Group, which experienced increased sales from its traditional contracts
with the  federal  government  such as the  Infrastructure  Solutions I ("IS-1")
contract,  the  Realtime  Automated  Personnel  Identification  System  Contract
("RAPIDS"), and the Company's contracts serving the US Courts ("US Courts"). The
increase  in sales was also  attributable  to the  pass-through  sales  from the
Company's  prime  relationship  on the Ft.  Sill  Contract,  which  resulted  in
increased  sales of $12.0 million.  This contract was  contributed to TelosOK in
July  2000,  however,  the  Company  remains as the prime  contractor  until the
contract is successfully novated by the government. The Company anticipates this
novation to occur in the first half of 2002. The Xacta Group also experienced an
increase  in  revenue of $4.5  million,  mostly  due to  increased  sales of its
information security products and solutions.  Operating income for 2001 was $2.3
million,   as  compared  to  an  operating  income  of  $1.2  million  in  2000.
Profitability  increased  principally as a result of increased sales volume from
all three Groups,  coupled with improved profits under the Company's traditional
businesses and its information  security  channel business in its Products Group
as well as increased margins in its Xacta subsidiary.

     During 2000, the Company's revenue and profitability  decreased as compared
to 1999. Revenue decreased $26.1 million, or 15.2%.  Approximately $24.3 million
of this  decrease  was  attributable  to the sale of TFE in 1999.  Approximately
$11.5 million of this decline is due to the effects of the 2000  deconsolidation
of  Ft.  Sill  operations,  which  presents  the  pre-transaction  results  from
operations of Ft. Sill in a single line item entitled "Equity in Net Earnings of
TelosOK".  Operating  profit  for 2000  was  $1.2  million,  as  compared  to an
operating  profit of $2.2  million  in 1999.  Operating  profitability  declined
principally  as a  result  of the sale of TFE in 1999 the  impact  of which  was
approximately $3.9 million, and the deconsolidation of Ft. Sill of approximately
$1.4 million, as well as employee costs related to certain severance  agreements
resulting in a $1.2 million charge to earnings in fiscal 2000.

     Approximately   97.7%  of  the  Company's   total  revenues  in  2001  were
attributable to contracts with 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  certification  and  accreditation  services  offerings.  The
Company's  time and  material  contracts  generally  allow the  pass-through  of
allowable costs plus a profit margin.  For 2001, revenue by contract type was as
follows: time and materials,  41.2%; firm fixed price, 58.3%; 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.

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,
                                                     -----------------------
                                         2001                  2000                 1999
                                         -----------------------------------------------

                                                 (dollar amounts in thousands)
<S>                              <C>        <C>       <C>          <C>        <C>        <C>
Sales                            $170,261   100.0%    $145,310     100.0%     $171,364   100.0%
Cost of sales                     143,041    84.0      124,028      85.4       151,216    88.2
Selling, general and
   administrative expenses         24,634    14.4       19,796      13.6        17,459    10.2
Goodwill amortization                 250     0.2          312       0.2           489     0.3
                                      ---     ---          ---       ---           ---     ---


Operating income                    2,336     1.4        1,174       0.8         2,200     1.3
Interest expense                   (4,073)   (2.4)      (4,777)     (3.3)       (6,065)   (3.5)
Gain on sale of assets                 --      --           --        --         4,731     2.8
Equity in net losses
  of Enterworks                        --      --           --        --       (18,765)  (11.0)
Equity in earnings of  TelosOK         --      --        2,328       1.6            --      --
Other income                           70      --           98       0.1            67      --
                                    -----     ---        -----      ----         ------    ----

Loss before taxes                  (1,667)   (1.0)      (1,177)     (0.8)      (17,832)  (10.4)
Income tax benefit (provision)        996     0.6         (617)     (0.4)        7,853     4.6
                                      ---     ---         ----      ----         -----     ---

Loss before extraordinary item       (671)   (0.4)      (1,794)     (1.2)       (9,979)   (5.8)
Extraordinary Item                     --      --           --        --         8,015     4.7
                                    -----     ---        -----      ----       -------     ---

Net loss                         $   (671)   (0.4)%   $ (1,794)     (1.2)%    $ (1,964)   (1.1)%
                                 ========    ====     ========      ====      ========    ====



</TABLE>

Financial Data by Operating Segment

     The Company has three reportable  operating  segments:  Systems and Support
Services,  Products,  and Xacta.  Sales, gross profit and gross margin by market
segment for the periods designated below are as follows:

                                              (dollar amounts in thousands)
                                                  Year Ended December 31,
                                                  -----------------------
                                            2001         2000           1999
                                            ----         ----           ----

Revenue:
    Systems and Support Services         $  60,402   $  48,429       $  77,701
    Products                                96,301      87,799          89,261
    Xacta                                   13,558       9,082           4,402
                                            ------      ------          ------

      Total                              $ 170,261   $ 145,310       $ 171,364
                                           =======     =======         =======
Gross Profit:
    Systems and Support Services         $   5,261   $   5,278       $  11,768
    Products                                17,027      13,474           7,169
    Xacta                                    4,932       2,530           1,211
                                            ------       -----           -----

      Total                              $  27,220   $  21,282       $  20,148
                                            ======     =======       =========

Gross Margin:
    Systems and Support Services               8.7%       10.9%           15.1%
    Products                                  17.7%       15.3%            8.0%
    Xacta                                     36.4%       27.9%           27.5%
      Total                                   16.0%       14.6%           11.8%


Results of Operations

     Sales increased $25.0 million or 17.2% to $170.3 million for the year ended
December 31,  2001,  from $145.3  million for the  comparable  2000 period.  The
increase for the period includes an $8.5 million increase in Products' sales, an
increase of $12.0 million in Systems and Support Services sales, and an increase
of $4.5 million in Xacta revenue.  This increase in the revenue is primarily due
to the increases in revenue from the Products  Group  traditional  businesses as
well as the pass-through sales contract as mentioned above. These increases were
enhanced by increased sales under the Information  Security product line of $4.5
million.

     Cost of sales was 84.0% of sales for the year ended December 31, 2001, as
compared to 85.4% for the same period in 2000. The reduction in cost of sales as
a percentage of sales is primarily attributable to increased profits realized on
Products Group traditional contracts, such as IS-1 and US Courts, and from
increased profits from sales of the Company's information security product line.

     Gross profit  increased $5.9 million in the period to $27.2 million in 2001
from $21.3  million  in 2000.  The gross  margin was 16.0% for the  twelve-month
period of 2001 as compared to 14.6% for the comparable period of 2000.

     Selling,   general,  and  administrative   expense  ("SG&A")  increased  by
approximately $4.8 million or 24.4%, to $24.6 million in the year ended December
31, 2001 from $19.8 million in the comparable period of 2000, which is primarily
attributable to the Company's increased  investment in the product  development,
sales  and  marketing  effort  for  Xacta.  The  increase  is  also  due  to  an
approximately   $600,000  one-time   write-off  of  an  investment  made  in  an
international  joint venture,  and a $1.8 million reserve  recorded  against the
Enterworks  notes  receivable  held by the Company (See Note 2 to the  Financial
Statements).  SG&A as a percentage of revenues for the twelve-month period ended
December 31, 2001  increased to 14.4% from 13.6%  compared to the same period in
2000.

     Goodwill   amortization  expense  decreased  $62,000  for  the  comparative
year-end  periods of 2001 and 2000.  The  reduction  is  exclusively  due to the
goodwill transfer associated with the TelosOK transaction.

     The  operating  income  of  the  Company   increased  by  $1.1  million  to
approximately $2.3 million in the year ended December 31, 2001 from an operating
income of $1.2 million in the comparable 2000 period.  The increase in operating
profit is mostly attributable to the increases in gross profit discussed above.

     In order to present the statement of operations in accordance  with APF 18,
the Company's  share of Enterworks,  Inc. was presented in one line item "Equity
in net  losses  in  Enterworks"  due to the  deconsolidation  of  Enterworks  on
December 30, 1999. (See Note 4 to the  consolidated  financial  statements).  In
2000  and  2001,  Enterworks  continued  to  recognize  losses,  accordingly  no
adjustments to earnings of the Company were made in fiscal 2000 and 2001 related
to the Enterworks  investment because the balance of the Company's investment in
Enterworks was $0.

     In order to present the statement of operations in accordance  with APB 18,
the  revenues  and  costs of sales for the Ft.  Sill  operation  contributed  to
TelosOK were  presented in one line item "Equity in Net Earnings of TelosOK" for
the year ended December 31, 2000 (See Note 3). For 2000,  Equity in Net Earnings
of TelosOK was approximately $2.3 million. The Company,  under APB 18, is unable
to recognize its pro rata share of the income  generated by TelosOK for 2001, as
the Company's capital account for TelosOK is negative.

     Interest expense decreased  approximately  $700,000 to $4.1 million in 2001
from approximately  $4.8 million in the comparable 2000 period.  These decreases
are primarily due to decreased debt levels and declining  interest rates in 2001
compared to 2000.

     The Company  recorded an income tax benefit for the year ended December 31,
2001 of $996,000. This tax benefit was principally due to the net loss generated
by the Company.  The Company's  net deferred tax assets  totaled $8.3 million at
December 31, 2001.  Failure to achieve  forecasted taxable income may affect the
ultimate  realization  of the net deferred tax assets.  Management  believes the
Company will generate taxable income in excess of operating losses sufficient in
amounts to realize the net deferred tax assets.  The Company  recorded an income
tax provision of  approximately  $600,000 for the year ended  December 31, 2000.
The provision  incurred was a result of the taxable gain generated from proceeds
received from the contribution of assets to TelosOK in July 2000 (see Note 3).

Years ended December 31, 2000 and 1999

     Sales decreased $26.1 million or 15.2% to $145.3 million for the year ended
December 31,  2000,  from $171.4  million for the  comparable  1999 period.  The
decrease includes a $1.5 million decrease in Products' sales and a $29.3 million
decrease in Systems and Support Services sales,  partially offset by an increase
of $4.7 million in Xacta  revenue.  This decrease in revenue is primarily due to
the loss of revenue from the TFE division, which was sold in September 1999. The
TFE division  generated  sales of $24.3  million for the Company  prior to being
sold.   The  decline  in  revenue  was  also  partially   attributable   to  the
deconsolidation  of Ft. Sill  revenue in 2000.  These  decreases  were  slightly
offset by increased sales under the Company's  information security product line
of $4.7 million.

     Cost of sales was 85.4% of sales for the year ended  December 31, 2000,  as
compared to 88.2% for the same period in 1999.  The decrease in cost of sales as
a percentage of sales is primarily  attributable to increased  profits  realized
under certain  Products  contracts  including but not limited to IS-1, ATWCS and
Rapids.  The  decline in cost of sales as a  percentage  of sales is also due to
increased  profits from the Company's  information  security product line in its
Xacta Group.

     Gross profit increased  approximately $1.1 million to $21.3 million in 2000
from $20.2 million in 1999. Gross margin was 14.6% for 2000 as compared to 11.8%
for the same period of 1999.  The increase in gross margin was  attributable  to
the cost of sales decreases explained above.

     Selling,   general,  and  administrative   expense  ("SG&A")  increased  by
approximately  $2.3  million  or  13.4%,  to $19.8  million  for the year  ended
December  31, 2000 from $17.5  million in the  comparable  period of 1999.  This
increase is due  primarily to the  Company's  increased  investment in its Xacta
group, as well as increased expenses related to two severance  agreements.  SG&A
as a percentage of revenues  increased to 13.6% for the year ended  December 31,
2000 from 10.2% in the comparable 1999 period.

     Goodwill  amortization  expense  decreased  approximately  $200,000 for the
comparative  twelve-month  period of 2000 from 1999.  This reduction is due to a
decrease in the goodwill balance from write-offs associated with the sale of TFE
in the third quarter 1999 and the asset  transfer from the Ft. Sill  transaction
in the third quarter of 2000.

     The  operating  income of the  Company  decreased  by $1.0  million to $1.2
million in the year ended  December 31, 2000 from $2.2 million in the comparable
1999  period.  The decrease in operating  profit is mostly  attributable  to the
increase in S,G & A discussed above.

     At the end of the third quarter 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, an affiliate of Carr &
Company,  for $10 million. As a result of this sale, The Company recorded a gain
of $4.7 million in its  consolidated  statement of operations for the year ended
December 31, 1999.

     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 4 to the consolidated financial  statements).  The equity in net
losses in Enterworks for 1999 was $18.8 million. In 2000,  Enterworks  continued
to recognize losses,  accordingly no adjustments to earnings of the Company were
made in fiscal 2000 related to the Enterworks  investment because the balance of
the Company's investment in Enterworks was $0.

     In order to present the statement of operations in accordance  with APB 18,
the  revenues  and  cost of  sales  for  the  Ft.  Sill  and  DSTATS  businesses
contributed  to TelosOK  presented  in one line item  "Equity in net earnings of
TelosOK" due to the joint venture  agreement  signed July 27, 2000 (See Note 3).
The  equity in net  earnings  of Telos OK was $2.3  million  for the year  ended
December  31,  2000.  From the  effective  date of the joint  venture  agreement
through  the end of 2000,  the  Company's  share in the  equity of  TelosOK  was
negative.  Therefore,  the  Company's  investment  balance in TelosOK  was $0 at
December 31, 2000.

     Interest expense decreased $1.3 million in the year ended December 31, 2000
to $4.8 million compared to $6.1 million in the same 1999 period.  This decrease
is due to the decreased debt levels in 2000.

     The income tax  provision  was  approximately  $600,000  for the year ended
December 31,  2000.  The  provision  incurred was mostly a result of the taxable
gain generated from proceeds received from the contribution of assets to TelosOK
in July 2000 which was treated as a partial sale of assets for tax purposes (see
Note 3). The  Company's  net  deferred tax assets total $7.8 million at December
31, 2000.  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.  The  Company
recorded an income tax benefit of $7.9  million for the year ended  December 31,
1999.  The tax benefit was a result of the net operating  losses of the Company,
partially offset by the gain generated from the sale of TFE.

     On  December  30,  1999 the  Company  entered  into a number of  concurrent
transactions  with its noteholders and its Enterworks  subsidiary (See Note 4 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 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 were included in the Company's statement of operations for
the year ended December 31, 1999.

Liquidity and Capital Resources

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

     At December  31,  2001,  the Company  had an  outstanding  balance of $12.4
million on its $20 million Senior Credit Facility (the "Facility"). The Facility
matures on January 15, 2003 and is collateralized by a majority of the Company's
assets including  inventory,  accounts receivable and the Company's stock in its
subsidiaries  and affiliates.  The amount of borrowings  fluctuates based on the
underlying asset borrowing base. 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 fixed charge coverage and operating goals. At December 31, 2001,
the  Company was not in  compliance  with  several  covenants  contained  in the
Facility, however, the bank has waived such non-compliance. The bank has amended
the covenants to conform to the Company's 2002 budget expectations.  The Company
is in the process of actively negotiating a replacement for the Facility.

     The  Company's   subordinated   notes  are  held   principally   by  common
shareholders  and totaled $8.2  million at December  31, 2001.  These notes bear
interest at rates between 14% and 17%, with all notes payable on May 23, 2003.

     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, 2001 the
total carrying amount of redeemable preferred stock,  including  accumulated and
unpaid dividends was $54.8 million.  The Company accrues  dividends and provides
for accretion related to the redeemable  preferred stock.  Mandatory  redemption
for all  shares  of the  Senior  Redeemable  Preferred  Stock  plus all  accrued
dividends on those shares is due May 23, 2003, 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 $13.8  million in 2001,  due
primarily to improved  cash  generation  from  operations,  and a decline in the
overall accounts  receivable  balance due to decreases in sales from this year's
fourth  quarter  compared  to the  prior  year's  fourth  quarter.  Cash used in
investing activities was $656,000 in 2001,  reflecting capital expenditures made
by the Company in 2001.  The Company used cash for  financing  activities in the
amount of $13.3 million in 2001,  reflecting  primarily  payments made to reduce
the balance of the Facility.

     In July 2000,  the  Company  entered  into a  subscription  agreement  with
certain  investors  that  provided  for the  formation  of an  Oklahoma  limited
liability company named Telos OK, LLC (See Note 3 to the Consolidated  Financial
Statements).  The Company owns 50% of this joint venture and has  guaranteed 50%
of the  outstanding  balance of a term loan TelosOK has with a bank. The balance
of this loan was $2.4 million at December 31, 2001.


<PAGE>


Capital Expenditures

     The Company believes that its business is generally not capital  intensive.
Capital  expenditures  for property and equipment  were  $656,000 in 2001,  $1.7
million  in 2000 and $1.4  million  in 1999.  The  Company  anticipates  capital
expenditures of  approximately  $1.3 million in 2002;  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.

Recent Accounting Pronouncements

     The  Company  currently  does not  engage  or plan to  engage in the use of
hedging or derivative  instruments.  Therefore,  the implementation of SFAS 133,
"Accounting  for Derivative  Instruments  and Hedging  Activities"  and SFAS 138
"Accounting for Certain Derivative  Instruments and Certain Hedging  Activities"
did not have a  material  impact on the  results  of  operations,  cashflows  or
financial position.

     On September 29, 2000, FASB Statement No. 140 ("SFAS 140")  "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishment of Liabilities",
was issued.  The new standard  replaces FASB Statement No. 125,  "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishment  of Liabilities"
and becomes  effective for transfers entered into after March 31, 2001. SFAS 140
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial assets and extinguishments of liabilities.  The implementation of SFAS
140 did not have a  material  impact  on the  Company's  consolidated  financial
statements.

     In June 2001, the Financial  Accounting  Standards Board ("FASB")  approved
Statements  of  Financial  Accounting  Standards  ("SFAS")  No.  141,  "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets".  SFAS No. 141
addresses  financial  accounting  and reporting for business  combinations.  All
business  combinations  in the scope of this  Statement  shall be accounted  for
using the purchase method of accounting.  The provisions of SFAS No.141 apply to
all  business   combinations   initiated  after  June  30,  2001,  and  business
combinations  accounted  for by the  purchase  method  for  which  the  date  of
acquisition  is July 1, 2001, or later.  Certain  transition  provisions of SFAS
No.141 apply to business  combinations for which the acquisition date was before
July 1, 2001, that were accounted for using the purchase method,  as of the date
SFAS No. 141 is initially applied in its entirety.  The adoption of SFAS No. 141
did not have a material effect on the Company's financial  position,  results of
operations or cash flows.

     SFAS No. 142  addresses  financial  accounting  and  reporting for acquired
goodwill and other  intangible  assets.  Implementation  of this  Statement will
require  the Company to cease  amortization  of goodwill  and  goodwill  will be
tested for impairment at least  annually at the reporting  unit level.  Goodwill
will be  tested  for  impairment  on an  interim  basis  if an event  occurs  or
circumstances  change that would "more likely than not" reduce the fair value of
a reporting unit below its carrying value. Intangible assets that are subject to
amortization  will be  reviewed  for  impairment  in  accordance  with  SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". The provisions of SFAS 142 are required to be applied  starting
with fiscal  years  beginning  after  December  15, 2001 and will  therefore  be
applied  for the year  ending  December  31,  2002.  As of January 1, 2002,  the
Company will no longer  amortize  goodwill to expense,  but will instead  review
goodwill  periodically  for impairment.  The adoption of SFAS 142 is expected to
reduce goodwill  amortization expense by $250,000 annually.  No material changes
to the  carrying  values of goodwill as a result of the adoption of SFAS 142 are
expected to be made.

     In September 2001, FASB Statement No. 143 (SFAS 143)  "Accounting for Asset
Retirement  Obligations" was issued.  SFAS 143 provides  guidance on the initial
measurement and subsequent accounting for obligations  associated with the sale,
abandonment,  or other type of  disposal  of  long-lived  tangible  assets.  The
Company  is  currently  evaluating  the  provisions  of SFAS  143,  but does not
anticipate  the  implementation  of SFAS 143 to have a  material  impact  on the
results of operations, cash flows or financial position.

     In October  2001,  FASB  Statement No. 144 (SFAS 144)  "Accounting  for the
Impairment  or Disposal of  Long-lived  Assets" was issued.  SFAS 144  addresses
financial  accounting and reporting for the impairment or disposal of long-lived
assets and this statement supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-lived  Assets and for  Long-lived  Assets to be Disposed Of".
The Company is currently  evaluating the impact and materiality thereof, if any,
of SFAS 144 on its financial statements and related disclosures.

  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  forward-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
which in the present  period of economic  downturn  may include,  and  adversely
affect,  the cost and continued  availability  of the Company to secure adequate
capital and  financing to support its business;  the impact of adverse  economic
conditions on the Company's customers and suppliers;  the ability to sell assets
or to obtain alternative sources of commercially  reasonable refinancing for the
Company's debt; or the ability to successfully restructure its debt obligations.
Additional  uncertainties  include  the  Company's  ability to convert  contract
backlog to revenue,  the success of the Company's  investment in Enterworks  and
Xacta and the  Company's  access to ongoing  development,  product  support  and
viable channel partner relationships with Enterworks and Xacta.

     While in the past the Company  has not  experienced  contract  terminations
with the U.S. Government,  the U.S. Government can terminate at its convenience.
Should such a  termination  occur,  the  Company's  operating  results  could be
adversely  impacted.  The increase in the Company's  total  backlog  (referenced
above) is primarily  attributable  to the dual award of the U.S.  Army CECOM SEC
contract to the Company's 50% owned joint venture,  ITel Solutions.  The Company
will be a  subcontractor  to this joint  venture,  and  estimates  that upon the
successful  award of each  competing task order,  its total backlog  relating to
such contract could be up to $700 million. Conversely, failure to be awarded the
majority of the competing task orders for such contract would  adversely  impact
the Company.

     It should also be noted that post September 11, 2001,  all U.S.  Government
programs, especially those pertaining to national security, have been subject to
review  and  reprioritization.  While the  Company  believes  its  products  and
services are well positioned to benefit from such post September 11 demands, the
magnitude of such events  certainly  serves to emphasize how the Company's  high
percentage  of revenue  derived from  business  with the U.S.  Government  could
alternatively be dramatically, swiftly and adversely impacted.

     In addition,  as a high percentage of the Company's revenue is derived from
business with the U.S. Government, the Company's operating results could also be
adversely impacted should the U.S. Government's annual budget not be approved in
a timely fashion.

     The Company has many patents and patents pending, trademarks and copyrights
and other valuable proprietary information, and the Company has taken reasonable
and prudent steps to so protect its  intellectual  property.  With regard to the
Company's  wholly owned  subsidiary,  Xacta,  whose  software  products  require
constant  monitoring  as it develops  future  releases  and  creates  additional
intellectual  property,  vigilant oversight of such intellectual property rights
is imperative. Similarly, the intellectual property associated with our wireless
division and our automated  message  handling system division  require  constant
oversight  with regard to the  development  and  protection of their  respective
intellectual  property.  Accordingly,  any event that brings into  question  the
Company's ownership of its intellectual  property could,  therefore,  materially
and adversely impact the Company.


<PAGE>


  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 1.5%,  subject to certain  adjustments,  over the bank's base
rate.  This rate will  escalate 25 basis  points every other month from April 1,
2002 until  expiration.  The weighted  average  interest rate in 2001 was 9.13%.
This  facility  expires on January  15, 2003 and has an  outstanding  balance of
$12.4 million at December 31, 2001.

     The Company's  other long-term debt at December 31, 2001 consists of Senior
Subordinated  Notes B and C which bear  interest at fixed rates ranging from 14%
to 17%. The Senior  Subordinated Notes principal balance at December 31, 2001 is
$8.2 million, and this principal amount matures on May 23, 2003. 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
                                                                            Page

  Report of Independent Accountants ..........................................16

  Consolidated Statements of Operations for the Years Ended
   December 31, 2001, December 31, 2000, and December 31, 1999................17

  Consolidated Balance Sheets as of December 31, 2001 and
   December 31, 2000.......................................................18-19

  Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2001, December 31, 2000, and December 31, 1999............20-21

  Consolidated Statements of Changes In Stockholders' Investment (Deficit)
    for the Years Ended December 31, 2001, December 31, 2000,
    and December 31, 1999.....................................................22

  Notes to Consolidated Financial Statements...............................23-45

                               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 cash flows and of changes in
stockholders' investment (deficit) present fairly, in all material respects, the
financial  position of Telos Corporation and its subsidiaries ("the Company") at
December 31, 2001 and 2000,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  2001,  in
conformity with accounting principles generally accepted in the United States of
America.  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 of
America  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 our opinion.

     As discussed in Note 7, the  Company's  Senior  Revolving  Credit  Facility
expires  on  January  15,  2003.  The  Company  is in the  process  of  actively
negotiating a replacement of the Senior Revolving Credit Facility.



  /s/ PRICEWATERHOUSECOOPERS LLP


  McLean, VA
  April 2, 2002, except for Note 7, as to which the date is April 4, 2002




<PAGE>


                       TELOS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             (amounts in thousands)


                                                   Year Ended December 31,
                                                   -----------------------

                                                2001        2000        1999
                                                ----        ----        ----

Sales
    Systems and Support Services              $60,402  $   48,429    $  77,701
    Products                                   96,301      87,799       89,261
    Xacta                                      13,558       9,082        4,402
                                               ------      ------       ------


                                              170,261     145,310      171,364
                                              -------     -------      -------
Costs and expenses
    Cost of Systems and
      Support Services                         55,141      43,151       65,933
    Cost of Products                           79,274      74,325       82,092
    Cost of Xacta                               8,626       6,552        3,191
    Selling, general and administrative
    expenses                                   24,634      19,796       17,459
    Goodwill amortization                         250         312          489
                                               ------      ------      -------
                                              167,925     144,136      169,164
                                              -------     -------      -------

Operating income                                2,336       1,174        2,200

Other income (expenses)
    Non-operating income                           70          98           67
    Gain on sale of assets                         --          --        4,731
    Equity in net losses of Enterworks             --          --      (18,765)
    Equity in earnings of TelosOK                  --       2,328           --
    Interest expense                           (4,073)     (4,777)      (6,065)
                                               -------     -------     --------

Loss before income taxes                       (1,667)     (1,177)     (17,832)
Benefit(provision) for income taxes               996        (617)       7,853
                                                -----      ------       ------
Loss before extraordinary item                   (671)     (1,794)      (9,979)
Gain from early debt retirement and
   sale of stock (net of income tax
      provision of $5,322)                         --          --        8,015
                                                -----      ------      -------

Net loss                                      $  (671)   $ (1,794)     $(1,964)
                                              ========   =========     ========













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


<PAGE>


                       TELOS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (amounts in thousands)

                                     ASSETS


                                                              December 31,
                                                              ------------

                                                           2001          2000
                                                           ----          ----

Current assets
    Cash and cash equivalents
      (includes restricted cash of $54 at December
      31, 2001 and 2000)                                 $   115      $   286
    Accounts receivable, net                              26,353       45,682
    Inventories, net                                       4,227        7,045
    Deferred income taxes                                  3,146        3,256
    Other current assets                                     540          404
                                                             ---       ------

      Total current assets                                34,381       56,673
                                                          ------       ------

Property and equipment
    Furniture and equipment                                7,835        7,201
    Leasehold improvements                                   389          675
    Property and equipment
      under capital leases                                13,774       13,774
                                                          ------       ------
                                                          21,998       21,650
Accumulated depreciation
      and amortization                                   (10,628)      (9,331)
                                                         --------      -------

                                                          11,370       12,319
                                                          ------       ------

Goodwill, net                                              2,499        2,749
Investment in  TelosOK                                        --           --
Deferred income taxes                                      5,143        4,603
Other assets                                                 168          746
                                                          ------       ------

                                                         $53,561      $77,090
                                                         =======      =======
















        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)

                                                             December 31,
                                                       ---------------------
                                                         2001          2000
                                                         ----          ----

Current liabilities
   Accounts payable                                     $10,603      $19,049
   Accrued compensation and benefits                      6,948        7,178
   Unearned warranty revenue                              8,710        8,609
   Current portion, capital lease obligations               337          344
   Senior subordinated notes                                 --        1,151
   Other current liabilities                              1,057        2,094
                                                          -----       ------

    Total current liabilities                            27,655       38,425

Senior credit facility                                   12,387       25,460
Senior subordinated notes                                 8,179        7,386
Capital lease obligations                                10,722       11,030
                                                         ------       ------
    Total liabilities                                    58,943       82,301
                                                         ------       ------


Commitments and contingencies (Note 11)

Senior mandatorily redeemable preferred stock             6,903        6,480
Mandatorily redeemable exchangeable
  preferred stock                                        47,876       42,352
                                                         ------       ------
                                                         54,779       48,832
                                                         ------       ------
Stockholders' investment
   Class A common stock, no par value, 50,000,000
     shares authorized, 21,171,202 shares issued and
     outstanding, 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                                  --        2,718
   Accumulated deficit                                  (60,239)     (56,839)
                                                        --------     --------

   Total stockholders' investment (deficit)             (60,161)     (54,043)
                                                        --------     --------

                                                        $53,561      $77,090
                                                        =======      =======
















        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,
                                                                   -----------------------
                                                               2001         2000         1999
                                                               ----         ----         ----
<S>                                                           <C>        <C>          <C>
Operating activities:
    Net loss                                                  $(671)     $(1,794)     $(1,964)
    Adjustments to reconcile net loss
      to cash provided by (used in) operating activities:
      Depreciation and amortization                           1,821        1,706        4,133
      Goodwill amortization                                     250          312          489
      Amortization of debt issuance costs                        --          182          243
      Accretion of subordinated notes                            --           --          412
      Provision for inventory obsolescence                      514           50          600
      Provision for doubtful accounts receivable                 --        1,213          400
      Gain on sale of assets                                     --           --       (4,731)
      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                                   320           --        1,500
      Reserve for termination agreements                         --        1,186           --
      Write off of international joint venture                  654           --           --
      Deferred income tax benefit                              (430)        (127)      (8,159)
      Changes in assets and liabilities
         Decrease (increase) in accounts receivable          19,329      (21,208)      20,141
         Decrease (increase) in inventories                   2,082       (2,481)       2,494
         Decrease (increase) in other assets                    294         (805)        (116)
         (Decrease) increase in accounts payable
         and other liabilities                              (10,402)       7,045        3,762
                                                            --------       -----       ------

        Cash provided by (used in) operating activities      13,761      (14,721)      11,181
                                                             ------      --------      ------

Investing activities:
    Proceeds from contribution of assets                         --        6,000           --
    Proceeds from sale of assets                                 --           --       10,000
    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                         (656)      (1,691)      (1,389)
    Investment in other assets                                   --           --         (800)
                                                              -----         ----       -------

        Cash (used in) provided by investing activities        (656)       4,309       12,729
                                                               ----        -----       ------

Financing activities:
    (Payments of)proceeds from Senior Credit Facility       (13,073)       8,952      (19,651)
     Repayment of Series C Subordinated Note                   (358)          --           --
    Increase (decrease) in book overdrafts                      470        1,789       (3,998)
    Proceeds from issuance of common stock upon
     exercise of Company stock options                           --           --            3
    Payments under capital lease obligations                   (315)        (358)        (357)
                                                             -------      -------      -------
        Cash (used in) provided by financing activities     (13,276)      10,383      (24,003)
                                                             -------      ------      --------

    Decrease in cash and cash equivalents                      (171)         (29)         (93)
    Cash and cash equivalents at beginning of the year          286          315          408
                                                             ------       ------      -------

        Cash and cash equivalents at end of year            $   115       $  286      $   315
                                                             ======       ======       ======

</TABLE>

<PAGE>



                                                        Year Ended December 31,
                                                        -----------------------
                                                         2001     2000     1999
                                                         ----     ----     ----

Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest                                            $2,605   $3,396   $5,409
                                                        ======    =====    =====
    Income taxes                                          $522   $  529   $  272
                                                          ====    =====    =====


                       TELOS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (amounts in thousands)


                                                         Year Ended December 31,
                                                         -----------------------
                                                        2001      2000      1999
                                                        ----      ----      ----

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


























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


<PAGE>

<TABLE>
<CAPTION>


                       TELOS CORPORATION AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (DEFICIT)
                             (amounts in thousands)

                                                                                                 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, 1998                   $ 65        $ 13        $ 2,116     $(48,115)       $(45,921)

Senior redeemable preferred
 stock dividend                               --          --           (423)          --            (423)
Redeemable preferred stock dividend           --          --         (1,693)      (2,130)         (3,823)
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)
                                            ----        ----        -------     ---------       ---------


Senior redeemable preferred
 stock dividend                               --          --           (424)          --            (424)
Deconsolidation of accounts                   --          --             --          517             517
Redeemable preferred stock dividend           --          --         (1,700)      (2,123)         (3,823)
Redeemable preferred stock accretion          --          --         (  785)      (  770)         (1,555)
Contribution of assets to TelosOK             --          --          5,627           --           5,627
Net loss for the year                         --          --             --       (1,794)         (1,794)
                                             ---         ---         ------     ---------       ---------

Balance December 31, 2000                   $ 65        $ 13        $ 2,718     $(56,839)       $(54,043)
                                            ----        ----        -------     ---------       ---------

Senior redeemable preferred
 stock dividend                               --          --           (423)          --            (423)
Redeemable preferred stock dividend           --          --         (2,295)      (1,527)         (3,822)
Redeemable preferred stock accretion          --          --             --       (1,702)         (1,702)
Contribution of assets to TelosOK             --          --             --          500             500
Net loss for the year                         --          --             --         (671)           (671)
                                            ----        ----          -----      --------        --------

Balance December 31, 2001                   $ 65        $ 13        $    --     $(60,239)       $(60,161)
                                            ====         ===          =====     =========       =========











</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

     Founded in 1968,  Telos  Corporation  ("Telos" or the  "Company")  delivers
enterprise  security and integration  solutions and services to customers in the
U. S. Government and industry. During 2001, America and Telos' largest customer,
the U.S.  Government,  changed forever in terms of their need for an increase in
reliable and secure  information  and  communication.  Telos  solutions  address
critical needs in the areas of secure  wireless  networking,  secure  messaging,
secure  local  area  networks  ("LAN")  data  integration  and  enterprise  risk
management.

     Since 1996,  Telos has  identified and sold a number of business units that
were  not a part  of its  strategic  direction.  These  businesses  were:  Telos
Consulting Services, Telos Information Systems, and Telos Field Engineering.  In
1999,  Enterworks was separately funded and deconsolidated from Telos. Telos now
owns 23.1% of Enterworks.  In 2000, Telos  contributed the net assets of its Ft.
Sill operation to a new joint venture with outside investors, resulting in a 50%
ownership in TelosOK. These dispositions and ventures, as well as operating cash
flows, have enabled Telos to reduce corporate  indebtedness from a high of $56.9
million in 1997 to $20.6 million in 2001.

     During 2001,  the Company  provided its business  solutions  through  three
operating segments:  Systems and Support Services Group, the Products Group, and
its Xacta subsidiary.


  Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
Telos  Corporation  and  its  wholly  owned   subsidiaries,   Telos  Corporation
(California),   ubIQuity.com,   Inc.,  Telos  International  Corporation,  Xacta
Corporation,  Telos.com,  inc.,  and Telos  Delaware,  Inc.  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 Company also
has a 50% interest in TelosOK, LLC, ("TelosOK") which is accounted for under the
equity method of accounting.  Significant  intercompany  transactions  have been
eliminated.

  Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements,  and the reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions used
in the preparation of the Company's  consolidated  financial  statements include
contract percentage-of-completion  methodology,  allowance for doubtful 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 is derived
from time and materials contracts, under which revenue is recognized as services
are  performed  and  costs are  incurred.  Revenue  from  fixed  price  services
contracts is generally recognized over the contract term using the percentage of
completion method. 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.

     The  Company  adopted  the  provisions  of Staff  Accounting  Bulletin  101
"Revenue Recognition in Financial  Statements" ("SAB 101") during the year ended
December 31, 2000. The adoption of SAB 101 did not have a material effect on the
Company's results from operations.

     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  SOP  98-9,   "Modification  of  SOP  97-2,   Software  Revenue
Recognition,  with  Respect to Certain  Transactions".  Revenue  generated  from
software  subscription  contracts is  recognized  ratably over the  subscription
period.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  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,  where  cost is
determined  primarily  on the  first-in,  first-out  method.  Substantially  all
inventories consist of purchased customer  off-the-shelf  hardware and software,
and component computer parts used in connection with system integration services
performed by the Company.  Inventories  also include spare parts of $794,000 and
$613,000 at  December  31, 2001 and 2000,  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,  2001 and  2000,  the  Company's  allowance  for  product
inventory  was $884,000 and  $1,777,000,  respectively.  The  components  of the
allowance for inventory obsolescence are set forth below (in thousands):

                                             Additions
                              Balance,       Charge to                  Balance,
                              Beginning      Costs and                     End
                              of Year        Expense     Deductions(1)  Of Year
                              -------        -------     -------------  -------

Year ended December 31, 2001  $ 1,777       $   514      $ (1,407)     $   884
Year Ended December 31, 2000  $ 1,992       $    50      $   (265)     $ 1,777
Year Ended December 31, 1999  $ 3,074       $   600      $ (1,682)     $ 1,992

(1) Inventories written off or transferred to fixed assets.

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.


     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  $1,598,000,
$1,541,000 and $2,314,000 for the years ended December 31, 2001,  2000 and 1999,
respectively.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  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.

     In June 2001, the Financial  Accounting  Standards Board ("FASB")  approved
Statements  of Financial  Accounting  Standard  ("SFAS") No. 142,  "Goodwill and
Other  Intangible  Assets".  SFAS No. 142  addresses  financial  accounting  and
reporting for acquired goodwill and other intangible  assets.  Implementation of
this  Statement will require the Company to cease  amortization  of goodwill and
goodwill will be tested for  impairment at least  annually at the reporting unit
level.  Goodwill  will be tested for  impairment on an interim basis if an event
occurs or circumstances change that would "more likely than not" reduce the fair
value of a reporting unit below its carrying value.  Intangible  assets that are
subject to amortization  will be reviewed for impairment in accordance with SFAS
121  "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
Assets to Be Disposed Of". The provisions of SFAS 142 are required to be applied
starting with fiscal years  beginning after December 15, 2001 and will therefore
be applied for the year ending  December  31, 2002.  As of January 1, 2002,  the
Company will no longer  amortize  goodwill to expense,  but will instead  review
goodwill  periodically  for impairment.  The adoption of SFAS 142 is expected to
reduce goodwill  amortization expense by $250,000 annually.  No material changes
to the  carrying  values of goodwill as a result of the adoption of SFAS 142 are
expected to be made.

     Accumulated  amortization  of goodwill  at  December  31, 2001 and 2000 was
$10,006,000 and $9,756,000 respectively.

  Other Assets

     Until the  deconsolidation  of  Enterworks  on December  30, 1999 (Note 4),
other   noncurrent   assets  consisted   principally  of  capitalized   software
development  costs and debt issuance costs.  The balance as of December 31, 2001
consists mostly of refundable deposits.

     There were no  unamortized  software and product costs at December 31, 2001
and 2000. Amortization expense associated with prior years' capitalized software
and  product  costs  was  $0,  $0  and  $1,646,000,  in  2001,  2000  and  1999,
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 7), $72,000 in debt issue costs
were written off in 1999.

     Since  1997,  one  of  the  Company's  wholly  owned  subsidiaries,   Telos
International  Corporation  ("TIC"),  has been a 50%  owner  of a joint  venture
between TIC and  Filinvest  Capital,  Inc.,  a Philippine  company.  The Company
accounted  for this joint  venture  under the  equity  method of  accounting  as
prescribed  by APB No. 18. The  investment in this joint venture was included in
the other  asset  balance  prior to 2001.  In the second  quarter  of 2001,  the
Company became uncertain as to whether  operations under the joint venture would
continue  as a  going  concern.  Therefore,  the  Company  determined  that  its
investment in Telos International-Filinvest,  Inc. was impaired, and reduced its
investment  balance in the joint  venture to zero.  The amount of the  write-off
totaled  $654,000,  and is included in the Selling,  General and  Administrative
caption in the statement of operations for the year ended December 31, 2001.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  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.

  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 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 has provided additional pro forma disclosures as if the fair
value  measurement  provisions  of SFAS  No.  123 had been  used in  determining
compensation expense (See Note 9).

     In April 2000, the FASB issued FASB  Interpretation  No. 44 "Accounting for
Certain Transactions Involving Stock Compensation; Interpretation of APB Opinion
No.25" ("FIN 44"). FIN 44 clarifies the application of APB 25 regarding  certain
key issues. It addresses various  interpretive  guidelines  including:  1) stock
compensation  granted to  non-employees  or to employees  who have changed their
employment  status;  2) modifications  made to a fixed stock option or award; 3)
share repurchase features and tax withholding  features; 4) and exchanges due to
business combinations.  The Company has applied FIN 44 to its stock option plans
as of July 1,  2000 and there has been no  material  impact to the  consolidated
financial statements from the adoption of this interpretation.

  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 2001, 2000 and 1999,
the Company  incurred  approximately  $925,000,  $200,000,  and $7.2  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.

  Reclassifications

     Certain  reclassifications  have been  made to the 2000 and 1999  financial
statements to conform to the current period presentation.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Recent Accounting Pronouncements

     The  Company  currently  does not  engage  or plan to  engage in the use of
hedging or derivative  instruments.  Therefore,  the implementation of SFAS 133,
"Accounting  for Derivative  Instruments  and Hedging  Activities"  and SFAS 138
"Accounting for Certain Derivative  Instruments and Certain Hedging  Activities"
did not have a  material  impact on the  results  of  operations,  cashflows  or
financial position.

     On September 29, 2000, FASB Statement No. 140 ("SFAS 140")  "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishment of Liabilities",
was issued.  The new standard  replaces FASB Statement No. 125,  "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishment  of Liabilities"
and becomes  effective for transfers entered into after March 31, 2001. SFAS 140
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial assets and extinguishments of liabilities.  The implementation of SFAS
140 did not have a  material  impact  on the  Company's  consolidated  financial
statements.

     In June 2001, the Financial  Accounting  Standards Board ("FASB")  approved
Statements  of  Financial  Accounting  Standards  ("SFAS")  No.  141,  "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets".  SFAS No. 141
addresses  financial  accounting  and reporting for business  combinations.  All
business  combinations  in the scope of this  Statement  shall be accounted  for
using the purchase method of accounting.  The provisions of SFAS No.141 apply to
all  business   combinations   initiated  after  June  30,  2001,  and  business
combinations  accounted  for by the  purchase  method  for  which  the  date  of
acquisition  is July 1, 2001, or later.  Certain  transition  provisions of SFAS
No.141 apply to business  combinations for which the acquisition date was before
July 1, 2001, that were accounted for using the purchase method,  as of the date
SFAS No. 141 is initially applied in its entirety.  The adoption of SFAS No. 141
did not have a material effect on the Company's financial  position,  results of
operations or cash flows.

     SFAS No. 142  addresses  financial  accounting  and  reporting for acquired
goodwill and other  intangible  assets.  Implementation  of this  Statement will
require  the Company to cease  amortization  of goodwill  and  goodwill  will be
tested for impairment at least  annually at the reporting  unit level.  Goodwill
will be  tested  for  impairment  on an  interim  basis  if an event  occurs  or
circumstances  change that would "more likely than not" reduce the fair value of
a reporting unit below its carrying value. Intangible assets that are subject to
amortization  will be  reviewed  for  impairment  in  accordance  with  SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". The provisions of SFAS 142 are required to be applied  starting
with fiscal  years  beginning  after  December  15, 2001 and will  therefore  be
applied  for the year  ending  December  31,  2002.  As of January 1, 2002,  the
Company will no longer  amortize  goodwill to expense,  but will instead  review
goodwill  periodically  for impairment.  The adoption of SFAS 142 is expected to
reduce goodwill  amortization expense by $250,000 annually.  No material changes
to the  carrying  values of goodwill as a result of the adoption of SFAS 142 are
expected to be made.

     In September 2001, FASB Statement No. 143 (SFAS 143)  "Accounting for Asset
Retirement  Obligations" was issued.  SFAS 143 provides  guidance on the initial
measurement and subsequent accounting for obligations  associated with the sale,
abandonment,  or other type of  disposal  of  long-lived  tangible  assets.  The
Company  is  currently  evaluating  the  provisions  of SFAS  143,  but does not
anticipate  the  implementation  of SFAS 143 to have a  material  impact  on the
results of operations, cash flows or financial position.

     In October  2001,  FASB  Statement No. 144 (SFAS 144)  "Accounting  for the
Impairment  or Disposal of  Long-lived  Assets" was issued.  SFAS 144  addresses
financial  accounting and reporting for the impairment or disposal of long-lived
assets and this statement supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-lived  Assets and for  Long-lived  Assets to be Disposed Of".
The Company is currently  evaluating the impact and materiality thereof, if any,
of SFAS 144 on its financial statements and related disclosures.

Note 2. Investment in Enterworks

     During  the  first  quarter  of 2001,  the  Company  and  Enterworks,  Inc.
("Enterworks")  entered into an agreement whereby the Company,  as a participant
in an additional  round of financing for Enterworks,  substituted  approximately
$530,000 of receivables  owed to the Company and in addition  funded  Enterworks
$470,000 of cash in three equal installments during the quarter. The receivables
included  rent owed to the Company,  services  performed by the Company  under a
service agreement  between the Company and Enterworks,  and expenses advanced by
the  Company on behalf of  Enterworks  for which the Company is  reimbursed.  In
return,  the Company  received four separate Demand 10%  Convertible  Promissory
Notes from Enterworks  totaling $1 million,  as well as warrants to purchase 2.5
million of  underlying  shares of  Enterworks  common  stock.  The  warrants  to
purchase  2.5  million  underlying  shares of  Enterworks  common  stock have an
exercise price of $0.01 per share and an exercise period of five years.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     During the second quarter of 2001, the Company and Enterworks  entered into
an agreement  whereby the Company,  as a participant  in an additional  round of
financing for Enterworks, committed an additional $800,000 which represented the
estimate of amounts owed to the Company for the period May through December 2001
for rent and services  performed by the Company  under a service  agreement.  In
return,  the Company received a $300,000 Demand 10% Convertible  Promissory Note
from Enterworks,  as well as a warrant to purchase 750,000 of underlying  shares
of Enterworks  common  stock.  The warrants to purchase the shares of Enterworks
common stock have an exercise price of $0.01 per share and an exercise period of
five years.

     During the third and fourth  quarters of 2001,  the Company  received  five
separate  Demand  10%  Convertible  Promissory  Notes from  Enterworks  totaling
$500,000,  as well as warrants to purchase  1,250,000  of  underlying  shares of
Enterworks  common  stock.  The  warrants to purchase  the shares of  Enterworks
common stock have an exercise price of $0.01 per share and an exercise period of
five years.

     During 2001, the Company's  ownership interest in Enterworks fell below 20%
and accordingly,  the Telos designated  voting  representation on the Enterworks
Board was relinquished.  However,  due to the receipt of the warrants  mentioned
above, at December 31, 2001 the Company's  ownership  interest became 23.1%, and
therefore the Company now accounts for its  investment  in Enterworks  under the
equity method of  accounting as prescribed by APB 18. Under this method,  and in
accordance with EITF 98-13 "Accounting by an Equity Method Investor for Investee
Losses when the Investor has Loans to and Investments in Other Securities of the
Investee",  the  Company  reduced the  carrying  amounts of the Notes to $-0- at
December 31, 2001, as the Company's share of the Enterworks  losses exceeded the
carrying value of the Notes.

Note 3.  Contribution of Assets

     On July 27, 2000, the Company  entered into a  subscription  agreement with
certain investors ("Investors"), which provided for the formation of an Oklahoma
Limited  Liability  Company  named  Telos  OK,  LLC  ("TelosOK").   The  Company
contributed  all  of the  assets  of  its  Digital  Systems  Test  and  Training
Simulators  ("DSTATS")  business  as well as its  Government  Contract  with the
Department of the Army at Ft. Sill  (hereafter  referred to as the Company's Ft.
Sill  operation) to TelosOK.  The net assets  contributed by the Company totaled
$373,000.  The  Investors  contributed  $3.0 million in cash to TelosOK,  and at
closing  TelosOK  borrowed  $4.0 million  cash from a bank.  The Company and the
Investors have each jointly and severally  guaranteed  the loan of TelosOK.  The
Company has  guaranteed  50% of the  outstanding  loan balance and the Investors
have  guaranteed  25%  of  the  outstanding  loan  balance.  This  loan  has  an
outstanding  balance of  approximately  $2.4 million at December  31,  2001.  In
addition,  TelosOK  entered into a $500,000 senior credit facility with the same
bank, which was  subsequently  increased to $750,000 on September 30, 2001, with
an expiration date of July 1, 2002.  Borrowings under the facility, if any, will
be collateralized by certain assets of TelosOK (primarily accounts  receivable).
The Company and the Investors have agreed to guarantee  this credit  facility in
the amount of $250,000 each of the current $750,000 when and if drawn.

     In  compliance  with the  subscription  agreement,  on the closing date the
following  consideration was given to the Company for its contribution of assets
to TelosOK:

     The Company  received $6 million in cash,  retained  $2.5  million in trade
receivables  of the Ft.  Sill and  DSTATS  businesses,  and  received a $500,000
receivable  from  TelosOK  for a  total  consideration  of $9  million  for  the
contribution of the net assets.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The Company and the Investors each own a 50% voting membership  interest in
TelosOK,  and have  signed  an  operating  agreement  which  provides  for three
subclasses  of  membership  units,  Classes A, B and C. The  ownership  of these
classes is as follows and can change upon Class B redemption:

     Class A - owns 20% of TelosOK. The Company and the Investors each own 50%
     of the 200,000 units of this class. This class possesses all voting rights
     of TelosOK and the sole right to elect the directors of TelosOK. The units
     in this class do not have redemption rights.

     Class B - owns 40% of TelosOK. The Investors own all 2.9 million units of
     this class. This class has no voting rights, but can, subject to certain
     restrictions, request the redemption of all or a portion of the Class B
     units outstanding one year after the closing date. Class B holders can
     redeem no more than 500,000 units per quarter at a price of $1.00 per unit,
     and such redemption can only be made from the excess cash flow of TelosOK
     as defined in the operating agreement.

     Class C- owns 40% of TelosOK. The Company owns all 2.9 million units of
     this class. This class has no voting rights, and has the same redemption
     rights as Class B, except that no right of redemption will exist until all
     Class B units have been redeemed. In addition, when any of the Class B
     units are redeemed, the Company will receive a warrant to purchase Class C
     units equal to the amount of the Class B units redeemed at a price of $0.01
     per unit.

     As provided for in the operating agreement,  one of the Investors,  Bill W.
Burgess,  serves  as  Chairman  of the  Board  and  John R.  Braught  serves  as
Secretary,  and David  Aldrich,  President  and CEO of the  Company,  and Thomas
Ferrara,  Treasurer and CFO of the Company,  serves in those same capacities for
TelosOK.  The Company  has entered  into a  corporate  services  agreement  with
TelosOK  whereby the Company has  contracted to provide  certain  administrative
support  functions  to  TelosOK,  including  but  not  limited  to  finance  and
accounting and human resources, in consideration for a monthly cash payment.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     As indicated above,  the Company owns 50% of TelosOK,  sharing control over
TelosOK,   and  accordingly  has  changed  its  method  of  accounting  for  the
contributed assets from the consolidation method to the equity method.  Pursuant
to this change,  the revenues,  costs and expenses  from the Ft. Sill  operation
have been excluded from their respective captions in the Company's  Consolidated
Statement of  Operations,  and the net  earnings  from the  operation  have been
reported  separately  as "Equity in Net  Earnings of TelosOK" for the year ended
December 31, 2000. The results of operations of the Ft. Sill operation  included
in the  "Equity  in Net  Earnings  of  TelosOK"  caption  are  comprised  of the
following:

                                           (in thousands)
                                         December 31, 2000

                                            Year ended
                                           ------------

                      Sales                   $13,339
                      Cost of Sales           (11,011)
                                             --------

                      Gross profit            $ 2,328
                                              =======

     From July 27, 2000 through  December  31,  2001,  the Company was unable to
recognize its pro rata share of the income  generated  from TelosOK  because the
Company's share of TelosOK 's capital accounts was negative.  Accordingly, under
the equity method of accounting  as  prescribed by Accounting  Principles  Board
Opinion 18, the Company's carrying value in TelosOK is $0 at December 31, 2001.

Note 4.  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 a  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.

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,  in 2000 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 APB 18. The recognition of
this net loss by the Company  reduced the carrying  value of its  investment  in
Enterworks to $0 in 1999. Enterworks continued to recognize losses during fiscal
2000, and in accordance with APB18 the Company has not recognized these losses.

     The  results of  operations  of  Enterworks  included in the "Equity in Net
Losses in Enterworks" caption for the year ended December 31, 1999 are comprised
of the following:



                  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)
                                                           ========

     Enterworks has completed rounds of private financing in 2000 and 2001 which
have further diluted the Company's interest in Enterworks. At December 31, 2001,
the  Company  owns  17,153,059  shares  of  Enterwork's  common  stock and holds
warrants to purchase 4,499,997 underlying common stock shares which equates to a
fully diluted ownership percentage of 23.1%.

     At December 31, 2001, the Company  accounts for this  investment  under the
equity method as prescribed by APB Opinon 18.

Note 5.  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 provided certain administrative support functions to TFE
Holdings,  including  but not  limited  to  finance  and  accounting  and  human
resources,  in return for a monthly  payment.  This  agreement was terminated in
2000.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6.  Revenue and Accounts Receivable

     Revenue resulting from contracts and subcontracts with federal,  state, and
local governments  accounted for 97.7%, 96.2%, and 94.1% of consolidated revenue
in 2001, 2000 and 1999,  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):

                                                        December 31,
                                                 ---------------------------
                                                    2001               2000
                                                    ----               ----

    Billed accounts receivable                    $20,953             $39,486
                                                  -------              ------

    Amounts currently billable and other            6,695               8,031
                                                    -----               -----

    Total unbilled accounts receivable              6,695               8,031
                                                    -----               -----

    Allowance for doubtful accounts                (1,295)             (1,835)
                                                   -------             -------
                                                  $26,353             $45,682
                                                  =======              ======

         The components of the allowance for doubtful accounts are set forth
below (in thousands):
                                Balance     Additions Charged
                                Beginning   to Costs and               Balance
                                Of Year     Expenses   Deductions(1) End of Year
                                -------     --------   ------------  -----------

  Year ended December 31, 2001   $1,835     $    7      $ (547)         $1,295
  Year ended December 31, 2000      830      1,381        (376)          1,835
  Year ended December 31, 1999      739        400        (309)            830

1. Accounts receivable written-off or reserve reversals.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Debt Obligations

  Senior Revolving Credit Facility

     At December 31, 2001, the Company has a $20 million Senior Revolving Credit
Facility (the  "Facility") with a bank which expires on January 15, 2003 and has
an  outstanding  balance of $12.4  million.  Borrowings  under the  facility are
collateralized  by  a  majority  of  the  Company's  assets  including  accounts
receivable,   inventory,  and  the  Company's  stock  in  its  subsidiaries  and
affiliates.  The  amount of the  available  borrowings  fluctuates  based on the
underlying  asset borrowing base. The facility  requires payment of a 0.375% fee
of the unused  portion of the  Facility.  The Facility  bears  interest at 1.5%,
subject to certain  adjustments,  over the bank's  base rate,  which was 6.5% at
December 31, 2001.  The interest  rate will escalate 25 basis points every other
month beginning April 1, 2002 until maturity. The weighted average interest rate
on the  outstanding  borrowings  under the Facility was 9.13% for 2001  compared
with 10.07% for 2000.

     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 fixed charge
coverage and  operating  goals.  At December  31,  2001,  the Company was not in
compliance with several covenants contained in the Facility,  however,  the bank
has waived such non-compliance. The bank has amended the covenants to conform to
the  Company's  2002  budget  expectations.  The  Company  is in the  process of
actively negotiating a replacement for the Facility.

     The  carrying  value  of  the  Facility  at  December  31,  2001  and  2000
approximates fair value.

  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.  The notes mature on May 23, 2003,  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, 2001, the prepayment  premium
that would be due upon a triggering event is $10.3 million.

     In April 2001, the Company  retired one of its series C subordinated  notes
with a principal amount of $358,000.

     In conjunction with the Enterworks private placement offering (See Note 4),
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 Notes were $5.5  million at December 31, 2001
and 2000. The balances of the Series C Notes were $2.6 million and $3.0 million,
respectively, at December 31, 2001 and 2000.

     In November 1998, the Company issued additional Senior  Subordinated  Notes
to certain  shareholders  which were  classified as Series D. The Series D Notes
totaled  $1.8  million and were  unsecured.  In  connection  with the debt,  the
Company  issued two  warrants  to  purchase a total of  1,500,000  shares of the
Company's  Class A Common Stock.  As previously  discussed,  the Warrants had an
exercise  price of $.01 and an  exercise  period of 22  months  and  expired  on
October  1,  2000.  The Series D Notes  were  retired  in  conjunction  with the
Enterworks private placement (Note 4) of 1999.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8.   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 shares and
accrued dividends outstanding on May 23, 2003, 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, 2001 and 2000
undeclared, unpaid dividends relating to Series A-1 and A-2 redeemable preferred
stock totaled $3,903,000 and $3,480,000, 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, 2001 and 2000 was  $1,701,000  and
$1,555,000,  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 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,  dividends 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
$26,323,000.

     Based upon the Company's interpretation of charter provisions pertaining to
restrictions  upon payment of dividends,  similar dividend payment  restrictions
contained in its Senior Credit  Facility,  and limitations  pursuant to Maryland
law,  the Company has not  declared or paid  dividends  on its public  preferred
stock since 1991.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9.  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 7). 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 five plans. The Long-Term Incentive  Compensation Plan was adopted in 1990
("1990 Stock Option Plan") and had option grants under it through 2000. 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").

     In 2000,  the Board of  Directors  of the  Company  approved  two new stock
option plans, one for Telos Delaware,  Inc. and one for Xacta Corporation,  both
wholly owned subsidiaries of the Company.

     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:

                                                Stock Option Activity
                                   ---------------------------------------------
                                   Numbers of Shares            Weighted Average
                                       (000's)                   Exercise Price
                                   ---------------------------------------------

  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
                                           -----                         ----

    Granted                                  632                         1.37
    Exercised                                 --                           --
    Canceled                                (328)                        1.42
                                           -----                         ----
  Outstanding at December 31, 2000         2,022                        $1.23
                                           -----                         ----

    Granted                                   --                           --
    Exercised                                 --                           --
    Canceled                                (377)                        1.19
                                           ------                        ----
  Outstanding at December 31, 2001         1,645                        $1.24
                                           -----                        -----
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  1993 Option Plan

     In 1993,  stock  option plan  agreements  were  reached to provide Mr. John
Wood, Executive Chairman, 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:

                                               Stock Option Activity
                                      ------------------------------------------
                                   Number of Shares             Weighted Average
                                        (000's)                  Exercise Price
                                  ----------------------------------------------

  Outstanding at December 31, 1998              1,354               $0.75

    Granted                                        --                  --
    Exercised                                      --                  --
    Canceled                                     (103)               1.01
                                                 -----               ----
  Outstanding at December 31, 1999              1,251               $0.72
                                                -----               -----

    Granted                                        --                  --
    Exercised                                      --                  --
    Canceled                                     (168)               1.01
                                                 -----               ----
  Outstanding at December 31, 2000              1,083               $0.68
                                                -----                ----
    Granted                                        --                  --
    Exercised                                      --                  --
    Canceled                                      (60)               1.01
                                                 -----               ----
  Outstanding at December 31, 2001              1,023               $0.66
                                                -----               -----

     Mr. Wood has the option to cancel the 1993 stock  options  discussed  above
and 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,  2001 would be to  increase  the number of shares  outstanding  to
4,725,690 with a weighted average exercise price of $1.01 per share.

  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:

                                                Stock Option Activity
                                 -----------------------------------------------
                                   Number of Shares             Weighted Average
                                       (000's)                   Exercise Price
                                  ----------------------------------------------

  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
                                          -----                      ----

    Granted                                 148                      1.35
    Exercised                                --                        --
    Canceled                               (666)                     1.03
                                           -----                     ----
  Outstanding at December 31, 2000        4,486                     $1.02
                                          -----                      ----

    Granted                                 150                      1.07
    Exercised                                --                        --
    Canceled                               (611)                     1.04
                                           -----                     ----
  Outstanding at December 31, 2001        4,025                     $1.02
                                          -----                     -----
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Telos Delaware Stock Incentive Plan

     During the third  quarter of 2000,  the Board of  Directors  of the Company
approved  a new stock  option  plan for Telos  Delaware,  Inc.,  a wholly  owned
subsidiary of the Company.  Certain key  executives and employees of the Company
are  eligible  to receive  stock  options  under the plan.  Under the plan,  the
Company may award up to 3,500,000  shares of common stock as either incentive or
non-qualified  stock options. An incentive option must have an exercise price of
not lower than fair market value on the date of grant.  A  non-qualified  option
will not have an exercise  price any lower than 85% of the fair market  value on
the date of grant. All options have a term of ten years and vest no less rapidly
than the rate of 20% per year for each of the first five years unless changed by
the option  committee of the Board of Directors.  Additional  information  as to
these options follows:

                                             Stock Option Activity
                                             ---------------------
                                  Number of Shares             Weighted Average
                                       (000's)                  Exercise Price
                                 -----------------------------------------------

  Outstanding at December 31, 1999           --                       --

    Granted                               1,826                    $3.85
    Exercised                                --                       --
    Canceled                                (88)                    3.85
                                            ----                    ----
  Outstanding at December 31, 2000        1,738                    $3.85
                                          -----                     ----

    Granted                                 811                     3.85
    Exercised                                --                       --
    Canceled                               (360)                    3.85
                                           ----                     ----
  Outstanding at December 31, 2001        2,189                    $3.85
                                          -----                    -----

  Xacta Stock Incentive Plan

     In the third quarter of 2000, Xacta Corporation,  a wholly owned subsidiary
of the Company, initiated a stock option plan under which up to 3,500,000 shares
of Xacta  common  stock may be  awarded to key  employees  and  associates.  The
options may be awarded as incentive or non-qualified,  have a term of ten years,
and vest no less  rapidly  than  the rate of 20% per year for each of the  first
five years unless changed by the option committee of the Board of Directors. The
exercise  price may not be less than the fair market  value on the date of grant
for an incentive  option,  or less than 85% of the fair market value on the date
of grant for a non-qualified  stock option.  Additional  information as to these
options follows:

                                              Stock Option Activity
                                -----------------------------------------------
                                   Number of Shares             Weighted Average
                                        (000's)                  Exercise Price
                                -----------------------------------------------

  Outstanding at December 31, 1999          --                      --

    Granted                              1,287                   $0.75
    Exercised                               --                      --
    Canceled                               (79)                   0.75
                                           ---                    ----
  Outstanding at December 31, 2000       1,208                   $0.75
                                         -----                   -----

    Granted                                930                    0.75
    Exercised                               --                      --
    Canceled                              (291)                   0.75
                                          ----                    ----
  Outstanding at December 31, 2001       1,847                   $0.75
                                         -----                   -----
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The following table summarizes information about stock options
outstanding and exercisable at December 31, 2001:
<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             704          6.4 years       $1.07            563         $1.07
  Option Plan                $1.35             326          8.3 years       $1.35            195         $1.35
                             $1.37             607          7.7 years       $1.37            589         $1.37
                             $1.40               8          6.7 years       $1.07              7         $1.07
                             -----             ---          ---------       -----            ---         -----

                        $1.07 - $1.40        1,645          7.5 years       $1.24          1,354         $1.24
                        =============        =====          =========        ====          =====         =====

  1993 Stock
  Option Plan                $0.50             700          2.0 years       $0.50            700         $0.50
                             $1.01             323          5.1 years       $1.01            323         $1.01
                             -----             ---          ---------       -----            ---         -----
                         $0.50 -$1.01        1,023          3.0 years       $0.66          1,023         $0.66
                         ============        =====          =========       =====          =====         =====

  1996 Stock
  Option Plan                $0.95           2,366          4.4 years       $0.95          1,304         $0.95
                             $0.97              54          4.6 years       $0.97             54         $0.97
                             $1.01             424          5.2 years       $1.01            340         $1.01
                             $1.07             776          7.9 years       $1.07            451         $1.07
                             $1.35             335          7.9 years       $1.35            204         $1.35
                             $1.40              70          6.7 years       $1.40             67         $1.40
                             -----            ----          ---------       -----           ----         -----
                         $0.95 - $1.40       4,025          4.7 years       $1.02          2,420         $1.03
                         =============       =====          =========       =====          =====         =====

 2000 Telos Delaware
    Option Plan              $3.85           2,189          8.9 years       $3.85            444        $ 3.85
                             =====           =====          =========       =====            ===        ======

  2000 Xacta
  Option Plan                $0.75           1,847          8.9 years       $0.75            308        $ 0.75
                             =====           =====          =========       =====            ===        ======
</TABLE>
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The  weighted-average  fair value of options  granted  under the 1990 Stock
Option Plan,  the 1993 Stock Option Plan,  the 1996 Stock Option Plan,  the 2000
Telos  Delaware  Stock Option Plan, and the 2000 Xacta Stock Option Plan was $0,
$0, $0.30, $0.50, and $0.10, respectively,  in 2001 and $0.16, $0, $0.31, $0.69,
and $0.14,  respectively,  in 2000. Had the Company determined compensation cost
consistent with SFAS No. 123 methodology, net loss would have been $(1,259,000),
$(2,091,000),   and  ($2,743,000)  in  2001,   2000,  and  1999,   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                    1993 Stock
                                                Option Plan                    Option Plan
                                                -----------                    -----------


                                        2001      2000       1999        2001      2000      1999
                                        ----      ----       ----        ----      ----      ----
  <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                --        5.91%      5.82%       --         --       --
  Expected life of options               --        2.09yrs    4.0yrs      --         --       --

                                             1996 Stock                       2000 Telos Delaware
                                             Option Plan                        Stock Option Plan
                                             -----------                        -----------------


                                        2001      2000       1999        2001      2000       1999
                                        ----      ----       ----        ----      ----       ----

  Expected dividend yield               0.0%       0.0%       0.0%       0.0%       0.0%        --
  Expected stock price volatility       0.0%       0.0%       0.0%       0.0%       0.0%        --
  Risk free interest rate               4.96%      6.59%      5.60%      4.70%      6.01%       --
  Expected life of options              6.6yrs     4.0yrs     3.6yrs     3.0yrs     3.3yrs      --
</TABLE>


                                             2000 Xacta Stock
                                               Option Plan
                                               -----------

                                        2001      2000       1999
                                        ----      ----       ----

  Expected dividend yield               0.0%      0.0%         --
  Expected stock price volatility       0.0%      0.0%         --
  Risk free interest rate               4.70%     6.52%        --
  Expected life of options              3.0yrs    3.3yrs       --


     Because  the pro forma  disclosures  under SFAS No. 123 only apply to stock
options granted in or after 1995, pro forma net income for 1999,  2000, and 2001
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 2001, 2000, and 1999 were
$707,000, $784,000, and $1,080,000, respectively.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10.  Income Taxes

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

                                        For The Year Ended December 31,
                                      ----------------------------------
                                         2001       2000         1999
                                         ----       ----         ----
  Current (benefit) provision
     Federal                           $ (156)      $ 353      $   --
     State                               (410)        391         306
                                         -----        ---         ---

        Total current                    (566)        744         306
                                         -----        ---         ---

  Deferred benefit
     Federal                             (105)       (105)     (6,946)
     State                               (325)        (22)     (1,213)
                                         -----       -----    --------

        Total deferred                   (430)       (127)     (8,159)
                                         -----       -----     -------

        Total (benefit) provision      $ (996)      $ 617     $(7,853)
                                         =====        ===       ======

     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:

                                             For the Year Ended December 31,
                                           ----------------------------------
                                              2001        2000       1999
                                              ----        ----       ----
  Computed expected income tax
     provision (benefit)                      (34.0)%    (34.0)%     (34.0)%
  Goodwill amortization                         5.1        9.0         0.9
  State income taxes, net of
     federal income tax benefit               (24.4)      49.4        (2.6)
  Change in valuation allowance
     for deferred tax assets                  (11.4)     (28.7)      (12.9)
  Meals and entertainment                       4.9        6.8         0.5
  Recognition of deferred tax liabilities
    On contributions to TelosOK LLC              --       35.3          --
  Sale of division/other                         --       14.6         4.1
                                               ----       ----        ----
                                              (59.8)%     52.4%      (44.0)%
                                              =======     =====      =======


<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,
2001 and 2000 are as follows (in thousands):

                                                                December 31,
                                                            --------------------
                                                               2001      2000
                                                               ----      ----
  Deferred tax assets:
      Accounts receivable, principally due
        to allowance for doubtful accounts                    $ 502     $ 704
      Allowance for inventory obsolescence and
        amortization                                            377       734
      Accrued liabilities not currently
        deductible                                            2,231     1,471
      Accrued compensation                                    1,517     1,865
      Property and equipment, principally due
        to differences in depreciation methods                  781       705
      Basis difference in TelosOK LLC interest                2,216     1,780
      Net operating loss carryforwards - state                  241       234
      Alternative minimum tax credit carryforward               853       734
                                                               ----     -----
            Total gross deferred tax assets                   8,718     8,227
            Less valuation allowance                            (44)     (234)
                                                               -----    ------
            Net deferred tax assets                           8,674     7,993
                                                             ------     -----
  Deferred tax liabilities:
      Unbilled accounts receivable, deferred for
        tax purposes                                           (385)     (134)
                                                              ------    ------
            Total deferred tax liabilities                     (385)     (134)
                                                              -----    ------
            Net deferred tax assets                          $8,289    $7,859
                                                             ======    ======
         The components of the valuation allowance are as follows:

                           Balance at     Additions                   Balance At
                           Beginning of   Charged to                  End of
                           Period         Expenses       Deductions   Period
                           ------         --------       ----------   ------


  December 31, 2001        $  234        $  --          $  (190)       $ 44
  December 31, 2000           572           --             (338)        234
  December 31, 1999         4,987           --           (4,415)(1)     572

(1) Included $2,115 attributable to Enterworks

     The net change in the  valuation  allowance  was a decrease of $190,000 and
$338,000  for  2001  and  2000,  respectively.  The  decrease  in the  valuation
allowance is  attributable  to forecasted  taxable  income,  which justified the
future recognition of the net deferred tax assets recorded.

     At December 31,  2001,  for federal  income tax purposes  there were no net
operating loss carryforwards  available to offset future taxable income. The net
operating  loss  carryforwards  for both  regular  and  alternative  minimum tax
purposes were fully  utilized in 2000. In addition,  the Company has $853,000 of
alternative minimum tax credits available to be carried forward  indefinitely to
reduce future regular tax liabilities.

Note 11. 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.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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, 2001 (in thousands):

                                        Property   Equipment       Total
                                        --------   ---------       -----

         2002                         $   1,543      $17          $1,560
         2003                             1,543       12           1,555
         2004                             1,543        3           1,546
         2005                             1,543       --           1,543
         2006                             1,543       --           1,543
         Remainder                       14,275       --          14,275
                                         ------       --          ------

         Total minimum obligations       21,990       32          22,022
         Less amounts representing
             interest                   (10,960)      (3)        (10,963)
                                        --------      ---        --------

         Net present value of
             minimum obligations         11,030       29          11,059
         Less current portion              (337)      --            (337)
                                           -----      --            -----

         Long-term capital lease
             obligations at
             December 31, 2001          $10,693      $29         $10,722
                                        =======      ===         =======

     Accumulated amortization for property and equipment under capital leases at
December 31, 2001 and 2000 is $4,215,000 and  $3,502,000,  respectively.  Future
minimum lease payments for all  non-cancelable  operating leases at December 31,
2001 are as follows (in thousands):

         2002                        $1,042
         2003                         1,049
         2004                           911
         2005                           941
         2006                           237
         Remainder                       --
                                      -----

  Total minimum lease payments      $ 4,180
                                    =======

     Net rent  expense  charged to  operations  for 2001,  2000,  1999,  totaled
$1,408,000, $1,300,000, and $2,000,000, respectively.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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,
results of operations or of cash flows.

Note 12.  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. John R. C.  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. John R. C.  Porter was paid  $260,000 by the Company in 2001,
2000,  and 1999 pursuant to this  agreement,  which  amounts were  determined by
negotiation between the Company and Mr. John R.C. Porter.

     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 received a bonus of $135,000 payable
in  installments  during 2000.  The Company  completed  payment to Mr. Hester in
2000.

     Mr. Gerald Calhoun,  former Vice President of Human Resources and Corporate
Secretary,  entered  into a settlement  agreement  with the Company to resolve a
dispute over Mr.  Calhoun's  employment  contract with the Company.  The Company
will pay Mr.  Calhoun 24 months of  severance  in  installments  from 2000 until
April 19, 2002.  Mr.  Calhoun will also receive  medical and insurance  benefits
through the Company  for the same  two-year  period.  Mr.  Calhoun's  payment of
salary and fringe benefits  amounts to approximately  $189,000 per annum.  Under
the  agreement,  the Company  extended the option term of Mr.  Calhoun's  vested
options until September 2001. These options have now expired.

     Mr. William L.P. Brownley, former Vice President and General Counsel of the
Company,  entered into an agreement with the Company  whereby Mr.  Brownley will
serve as an of counsel  attorney to the Company  from  December 31, 2000 through
March 31, 2003.  In return,  Mr.  Brownley  will be paid $220,000 per annum from
January 1, 2001  through  March 31,  2003.  The  Company  will also  continue to
provide Mr.  Brownley  with  medical  and  insurance  benefits  during that same
period.

     Mr. Lorenzo Tellez, former Vice President,  Treasurer,  and Chief Financial
Officer of the Company,  entered into a settlement agreement with the Company to
resolve a dispute on Mr.  Tellez's  employment  contract with the Company.  With
regard to the salary component of the contract,  the Company paid Mr. Tellez the
equivalent of 24 months of severance in  installments  during 2001.  The Company
continues to arbitrate the issue of Mr. Tellez's claim to a discretionary bonus.
Mr. Tellez also received medical and insurance  benefits through the Company for
the same two-year  period.  Mr.  Tellez's  payment of salary and fringe benefits
amounts to approximately  $243,000 per annum. The Company completed its payments
of the salary portion of the contract to Mr. Tellez on December 7, 2001.

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

Note 13.  Reportable Business Segments

     The  Company  adopted  SFAS No.  131,  "Disclosures  About  Segments  of an
Enterprise  and Related  Information",  in 1998 that changes the way the Company
reports information about its operating segments.  Certain businesses within the
Xacta segment in 2000 were transferred to the Products segment beginning January
2001. The  information for 2000 and 1999 has been restated from the prior year's
presentation in order to conform to the 2001 presentation.

         The Company has three reportable segments:

     Systems and Support Services - provides post-deployment and post-production
software  and systems  development  and support  services  including  technology
insertion,  system  redesign and software  re-engineering.  This Group's largest
customer is the U.S. Army's Communications and Electronics Command ("CECOM") and
has  significant  operations  at Ft.  Monmouth  in New  Jersey  and Ft.  Sill in
Oklahoma.  Tasks are performed on a time and materials basis and on a firm fixed
price basis.

     Products - delivers solutions that combine information  technology products
and  services  to  solve  customer  problems.   These  solutions  consist  of  a
combination  of  commercial-off-the-shelf  (COTS)  products from major  original
equipment   manufacturers  (OEM's),   Telos  proprietary  products,   Telos  and
subcontractor  services and Telos proprietary  practices.  Key customers of this
group include agencies of the US Government such as: military services,  Defense
Agencies,  Treasury  Department,  US Courts and others.  Significant  government
procurement vehicles for customers of the Products Group include: Infrastructure
Solutions  -  1   (government-wide);   GSA  schedule   (government-wide);   Data
Communications Network  Equipment/Software (US Courts); and Treasury Distributed
Processing Infrastructure (Treasury).

     In  addition to the above,  The  Product's  Group  includes  the  Company's
wireless  networking,  secure messaging  solutions and is a value added reseller
for Xacta's information security products into the federal government.

     Xacta - develops  enterprise risk management software to help organizations
to proactively manage and monitor the security of their network  environments in
accordance with information  security and privacy  standards.  The applications,
Xacta  Web  C&A  and  Xacta  Commerce  Trust,   leverage  information  assurance
technology and processes that Xacta has proven in the  government's  most secure
and demanding agencies,  departments, and branches (Defense,  Intelligence,  and
Treasury).  Xacta customers include agencies of the U.S. Government and a number
of commercial credit unions.

         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.

     The  Company's  investment in  Enterworks,  Inc. is accounted for under the
equity  method of  accounting  as of  December  31,  2001  (Note 4) and has been
deconsolidated  from the financial  statements of the Company since December 30,
1999.  The  corresponding  assets and  liabilities  have been  removed  from the
consolidated balance sheet since December 31, 1999.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                            Systems and
                            Support Services         Products         Xacta    Enterworks       Other(1)    Total
                            ----------------         --------         -----    ----------       --------    -----

  <S>                          <C>                   <C>             <C>        <C>             <C>       <C>
         2001
  External Revenues            $ 60,402              $ 96,301        $13,558    $   --         $    --    $170,261
  Intersegment Revenues           1,142                11,860             --        --              --      13,002
  Gross Profit                    5,261                17,027          4,932        --              --      27,220
  Segment profit (loss)(3)       (2,724)                7,472         (2,162)       --              --       2,586
  Total assets                    8,550                22,013          1,010        --          21,988      53,561
  Capital Expenditures              172                    38            242        --             204         656
  Depreciation &
    Amortization(2)            $    298              $    390        $   242    $   --         $ 1,141    $  2,071

         2000
  External Revenues            $ 48,429              $ 87,799        $ 9,082    $   --         $    --    $145,310
  Intersegment Revenues              88                   669             --        --              --         757
  Gross Profit                    5,278                13,474          2,530        --              --      21,282
  Segment profit (loss)(3)       (1,577)                3,488           (425)       --              --       1,486
  Total assets                   10,324                41,313          2,725        --          22,728      77,090
  Capital Expenditures              159                   354            360        --             818       1,691
  Depreciation &
    Amortization(2)            $    387              $    348        $    66    $   --         $ 1,217    $  2,018



         1999
  External Revenues            $ 77,701              $ 89,261        $ 4,402    $   --         $    --    $171,364
  Intersegment Revenues             404                    --             --        --              --         404
  Gross Profit                   11,768                 7,169          1,211        --              --      20,148
  Segment profit (loss)(3)        6,102                (3,088)          (325)       --              --       2,689
  Total assets                    5,632                23,951            401        --          26,902      56,886
  Capital Expenditures               63                   142              3       780             401       1,389
  Depreciation &
    Amortization(2)            $    731              $    352        $     8    $2,210         $ 1,321    $  4,622


(1)      Corporate assets are principally property and equipment, cash and other assets.
(2)      Depreciation and amortization includes amounts relating to property and equipment, goodwill, capital leases and spare parts
         inventory.
(3)      Segment profit (loss) represents operating income (loss) before goodwill amortization.
</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 5 separate
facilities located in various states, the District of Columbia and Europe.
<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, Former Chairman of the Board, Director

     Dr.  Ikle (age 77) 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 a Governor of the Smith
Richardson  Foundation.  Dr. Ikle is a  Distinguished  Scholar at the Center for
Strategic & International  Studies and a member of the Defense Policy Board that
advises the  Secretary of Defense.  He served as Under  Secretary of Defense for
Policy from  1981-1988,  and as Director of the US Arms Control and  Disarmament
Agency from 1973-1976.  Dr. Ikle resigned from the  Chairmanship of the Board on
March 26, 2002. He remains a proxy holder and director.

  John B. Wood, Executive Chairman of the Board

     Mr. Wood (age 38) has served as Executive Chairman of the Board since March
8, 2000. From January 1994 until March 8, 2000, Mr. Wood served as President and
Chief Executive Officer of the Company. Mr. Wood has also served as Chairman and
CEO of Enterworks since January 1996.  Between 1992 and 1994, Mr. Wood served as
Chief Operating Officer and as an Executive Vice President of the Company. Prior
to joining the Company, Mr. Wood founded a boutique  investment-banking  firm on
Wall Street. Mr. Wood has a BSBA in Finance and Computer Science from Georgetown
University. Mr. Wood also serves on the Board of Directors of two privately held
companies.

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

     Mr.  Aldrich (age 42) 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, Former Director

     Dr. Stephen Bryen (age 59) 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. Dr. Bryen resigned as a proxy holder and Director on March 20, 2002.

  Norman P. Byers, Director

     Mr.  Byers (55) was elected to the Board of  Directors on January 31, 1994.
He is the  chief  of  staff to a  Fairfax  County  Supervisor  and  directs  all
activities of a political staff serving 110,000 constituents.  In addition,  Mr.
Byers is a principal in Byers Consulting,  a firm specializing in management and
corporate  governance  consulting to information  technology firms. Mr. Byers is
also a  Director  of  ETI  Engineering  Incorporated,  Chantilly,  Virginia  and
Panalpina FMS Incorporated,  Sterling,  Virginia. From 1968 until his retirement
in 1989, Mr. Byers served in a variety of operational and staff positions in the
United States Air Force. Mr. Byers is also a proxy holder.


  Malcolm M. B. Sterrett, Class D Director

     Mr.  Sterrett  (age  59) is a  private  investor  and  was  elected  to the
Company's  Board of  Directors as a Class D Director 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 Corporation.
<PAGE>

  Geoffrey Baker, Class D Director

     Mr. Baker (age 53) was appointed as a Class D Director on November 6, 2001.
Mr.  Baker is a private  investor  and since  1983 has been a partner in Baker &
Donaldson,  a private  investment  firm.  Previously,  he served as  Legislative
Director to U.S.  Senator  Lowell P.  Weicker,  Jr.,  and as counsel to the U.S.
Senate Committee on Commerce, Science and Transportation. A graduate of Stanford
University and of the Georgetown  University Law Center, he has served on public
and private  corporate  boards and currently serves as Chairman of the Governing
Board of St. Albans School, Washington, D.C.

  John C. Boland, former Class D Director

     Mr. Boland (age 54) 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. Mr. Boland resigned as a Class D Director on October 2, 2001.

  Robert J. Marino, Executive Vice President of Sales and Marketing

     Mr. Marino (age 65) 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.  Mr. Marino was recognized in 1999 by
Federal Computer Week as one of the top 100 Executives from government, industry
and academia.

  Thomas J. Ferrara, Chief Financial Officer and Treasurer

     Mr. Ferrara (age 44) was appointed Chief  Financial  Officer of the Company
on September 14, 2000. He 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.

  Michelle Wertz, Vice President of Human Resources and Corporate Secretary

     Ms. Wertz (age 38) was appointed Vice President,  Human Resources for Telos
Corporation in July of 2000 and Corporate Secretary in September 2000. Ms. Wertz
joined Telos in May 1998 to revamp the Recruiting  and Retention  activities for
the company  leading to her position as Vice President,  Resource  Management in
December of 1999. Ms. Wertz'  previous Human  Resources  experience  from 1995 -
1998  includes  working for  America  Online,  IPR  Staffnet  and Total  Systems
Solutions to provide  technical  and  professional  staffing  solutions and best
practice recruiting strategies.

  Michael P. Flaherty, Executive Vice President, General Counsel and
    Chief Administrative Officer

     Mr.  Flaherty  (age 57) was appointed  Executive  Vice  President,  General
Counsel and Chief Administrative Officer January 3, 2001. Prior to joining Telos
Corporation  Mr.  Flaherty was of counsel in the law firm  O'Donnell & Schaeffer
and  Principal  Shareholder  and Chief  Executive  Officer of First  Continental
Financial  Group,  Inc. Mr. Flaherty has extensive  experience in all aspects of
civil litigation, serving as trial counsel for major corporations.

     Each of the proxy holders,  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, 2001,  2000 and
1999,  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 2001.
<TABLE>
<CAPTION>


                                          SUMMARY COMPENSATION TABLE

                                                                          Long-Term
                                                 Annual Compensation      Compensation
                                                                          Securities
      Name and                                                            underlying     All Other
Principal Position                    Year      Salary         Bonus      Options(1)   Compensation(5)
------------------------------------------------------------------------------------------------------
  <S>                                  <C>       <C>           <C>        <C>              <C>
  John B. Wood                         2001      $350,002(7)   $125,000     310,000(2)     $28,859(6)
  (Executive Chairman)                 2000      $350,002(7)   $     --            --      $18,100(6)
                                       1999      $348,574      $245,000   2,000,000(3)     $13,000(6)


  David S. Aldrich                     2001      $350,002      $125,000     310,000(2)     $34,784(6)
  (President, Chief Executive          2000      $332,894      $     --     250,000(2)     $18,100(6)
  Officer)                             1999      $205,119      $245,000     200,000(3)     $    --

  Thomas J. Ferrara                    2001      $160,205      $ 80,000          --        $ 6,771
   (Chief Financial Officer,           2000      $133,561      $     --     128,000(2)     $ 5,100
   Treasurer)                          1999      $ 98,435      $ 50,000      27,500(3)(4)  $ 2,953


  Robert J. Marino                     2001      $222,390      $ 76,000          --        $23,517
  ( Executive Vice President           2000      $211,706      $     --     292,900(2)     $ 5,100
    of Sales and Marketing)            1999      $206,003      $100,000     200,000(3)     $ 5,000


  Michael P. Flaherty                  2001      $300,018      $132,692     300,000(2)     $ 6,229
  (Exec. V.P., General                 2000            --            --      30,000(4)     $    --
    Counsel and Chief                  1999            --            --      76,667(3)(4)  $    --
  Administrative Officer)

(1) There are no restricted stock awards or payouts pursuant to long-term investment plans.
(2) Options granted in 2001 and 2000 are in Telos, Telos Delaware, and Xacta common stock.
(3) Options granted in 1999 are in Enterworks, Inc., common stock.
(4) Options granted in 2000 and 1999 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 life insurance premiums paid by the Company for the benefit of the executives.
(6) Included in these amounts are $10,000 in 2001, $13,000 in 2000 and $8,000 in 1999 for director's fees paid.
(7) The Company and its  affiliate,  Enterworks,  Inc., have an agreement  whereby  Enterworks,  Inc. reimburses
    the Company for $250,000 of Mr. Wood's annual salary.

</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 2001.
<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       Granted       Price        Date               Option Term
-------------------------------------------------------------------------------------------------------------------
                                                                                                 5%              10%
                                                                                                 --              ---
  <S>                               <C>               <C>        <C>         <C>               <C>           <C>

  John B. Wood                       10,000(1)         0.5%      $1.07       May 2011          $ 6,800         $17,100
  (Executive Chairman)              250,000(2)        13.2%       3.85       Jan.2011          602,500       1,535,000
                                    250,000(3)        13.2%       0.75       Jan.2011          120,000         300,000

  David S. Aldrich                   10,000(1)         0.5%      $1.07       May 2011          $ 6,800         $17,100
  (President, Chief                 250,000(2)        13.2%       3.85       Jan.2011          602,500       1,535,000
    Executive Officer)              250,000(3)        13.2%       0.75       Jan.2011          120,000         300,000

  Thomas J. Ferrara                      --             --          --             --               --              --
  (Chief Financial Officer,
    Treasurer)

  Robert J. Marino                       --             --          --             --               --              --
  (Executive Vice President
  of Sales and Marketing)

  Michael P. Flaherty               100,000(1)         5.3%      $1.07       May 2011         $ 68,000        $171,000
  (Exec.VP, General                 100,000(2)         5.3%       3.85       Jan.2011          241,000         614,000
   Counsel and                      100,000(3)         5.3%       0.75       Jan.2011           48,000         120,000
  Chief Administrative Officer)

(1)  Options granted in 2001 were in the common stock of Telos.
(2)  Options granted in 2001 were in the common stock of Telos Delaware, Inc.
(3)  Options granted in 2001 were in the common stock of Xacta Corporation.
</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, 2001.
<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)                --                  --       3,741,225/1,486,766         $516,714/$117,452

  David S. Aldrich
  (President, Chief
    Executive Officer)                --                  --       1,088,500/  581,500         $       18,000/$0

  Thomas J. Ferrara
  (V.P., Treasurer,
   Chief Financial
     Officer)                         --                  --          81,000/   99,500         $          750/$0

  Robert J. Marino
  (Executive Vice President
   of Sales and Marketing)            --                  --          814,000/ 375,900         $  15,075/$15,075

  Michael P. Flaherty                  --                 --          148,667/ 298,000         $            0/$0
  (Exec. V.P., General Counsel
   and Chief Administrative
   Officer)

1. These aggregate  amounts include  exercisable  options to purchase the common stock of Enterworks,  Inc. for 2,060,000  shares
   held by Mr. Wood,  400,000 shares held by Mr.  Aldrich,  7,500 shares held by Mr.  Ferrara,  200,000 shares held by Mr. Marino
   and 16,667 shares held by Mr. Flaherty, respectively.

2. These aggregate values include values for exercisable options to purchase the Class A Common Stock of the Company. These values a
   are based upon an estimated fair market value at December 31, 2001 of $1.07 per share for the Company's Class A Common Stock.
   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.

</TABLE>

<PAGE>


Compensation of Directors

     During the fiscal year ended  December 31, 2001,  employee  directors  were
paid  fees in total  of  $10,000  each  for  Board  Meetings  attended.  Outside
directors  and proxy  holders Mr. Byers and Dr. Bryen were paid an annual fee of
$35,000 each.  Outside  Class D directors Mr.  Sterrett and Mr. Boland were paid
annual fees of $10,000 and $7,500,  respectively  for 2001.  Mr.  Boland  waived
payment for Board  activity in 2000 and the first  quarter of 2001.  Mr.  Boland
resigned  from the Board of  Directors  on October 2, 2001.  The Chairman of the
Board,  Dr. Ikle received  $75,000  annually for his services as Chairman of the
Board and $25,000  for his  services as a proxy  holder and  director.  Dr. Ikle
resigned  as Chairman on March 26,  2002.  He will remain as a proxy  holder and
director.  In  addition,  Mr.  Byers  receives  $5,000 for his services as Proxy
Chairman.  The  compensation  paid to Mr. Byers,  Dr. Ikle and Dr. Bryen is paid
pursuant to a proxy agreement among the Company,  the Defense  Security  Service
and Mr. John R.C.  Porter.  Dr. Bryen resigned as a proxy holder and Director on
March 20, 2002.

     Effective March 27, 2002, the Board of Directors adopted a new compensation
structure  for the Board  annually  which  provides for the  following:  $25,000
annually for Proxy holder directors;  $25,000 annually for Class D Directors; $0
for employee directors and committee  participation;  $5,000 for the Chairman of
the  Board's  annual  retainer;  $5,000 for the Proxy  Board  Chairman's  annual
retainer;   $5,000  annually  for  the  Chairmen  of  the  Executive  and  Audit
Committees;  $2,000  annually  for the Chairmen of the  Compensation  and Option
Committees; $2,000 annually for membership in the Audit or Executive Committees;
and each director  other than employee  directors is entitled to receive  $1,250
for each meeting attended, up to four per year.

  Employment Contracts

     As of December 31, 2001, the Company was a party to agreements with certain
of its executive officers. Mr. David S. Aldrich,  Director,  President and Chief
Executive Officer, Mr. Robert Marino, Chief Sales and Marketing Officer, and Mr.
John Wood, Director and Executive Chairman,  currently have employment contracts
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,  Marino  and Wood  would  receive  annually
$350,000, $227,000 and $350,000 respectively, for a two-year period.

     In addition to base salary, the executives are eligible for a discretionary
bonus and for the grant of stock options under the agreements. The amount of the
discretionary  bonus is  determined  at the  Board of  Directors  and  Executive
Chairman's  discretion.  Each year,  the Company  renegotiates  such  employment
contracts as part of the yearly review process. Accordingly in 2002, the Company
expects to review the contracts described above. In addition, strategic hires or
promotions may increase the number of Executives who have Employment Contracts.



<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, 2002
-----------------------        ---------------------------------         -------------------------      -------------
<S>                             <C>                                      <C>                             <C>
Class A Common Stock            John R. C. Porter                        22,190,718 shares(A)            80.52%
                                79 Mount Street
                                London W1K 2SN England

Class A Common Stock            C3, Inc. 401(k) Plan and Telos            3,658,536 shares               17.28%
                                Corporation Savings Plan
                                c/o C3, Inc.
                                19886 Ashburn Road
                                Ashburn, VA 20147

Class B Common Stock            F&C Nominees Limited                      2,102,450 shares(B)            52.07%
                                Berkeley Square House, Berkeley Square
                                London W1X 5PA England

Class B Common Stock            Hare & Company                            1,186,720 shares               29.39%
                                c/o Bank of New York
                                P.O. Box 11203
                                New York, NY  10249

Class B Common Stock            Cudd & Company                              669,888 shares               16.59%
                                11th Floor, 4 New York Plaza
                                New York, NY  10004
Class A Common Stock            David S. Aldrich                            697,569 shares(C)             3.19%
Class A Common Stock            Michael P. Flaherty                         132,000 shares(C)             0.62%
Class A Common Stock            Robert J. Marino                            488,603 shares(C)             2.26%
Class A Common Stock            Thomas J. Ferrara                            43,080 shares(C)             0.20%
Class A Common Stock            John B. Wood                              1,727,710 shares(C)             7.56%
Class A Common Stock            Norman P. Byers                               2,000 shares                0.01%
Class A Common Stock            Stephen D. Bryen                              2,000 shares                0.01%
Class A Common Stock            Fred C. Ikle                                  2,000 shares                0.01%
Class A Common Stock            All Officers and Directors as a Group     3,095,306 shares(D)            12.81%
                                (9 persons)
12% Cumulative Exchangeable     Value Partners, Ltd.                        714,317 shares(E)            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(F)            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

(A)  Mr. John R. C. Porter's holdings include 6,388,916 shares of Class A Common
     Stock purchasable upon exercise of a warrant.

(B)  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. F&C Nominees Limited did
     not provide to the Company the addresses of these beneficial owners.

(C)  The common stock holdings of Messrs. Aldrich, Flaherty, Marino, Ferrara and
     Wood include 677; 0; 20,551; 9,580 and 38,093 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,
     Flaherty, Marino, Ferrara and Wood hold options to acquire 688,500;
     132,000; 446,000; 33,500; and 1,681,225 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, 2002.

(D)  The common stock holdings of the Company's officers and directors as a
     group include 69,245 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 2,987,225 shares of Class A Common Stock exercisable within 60 days
     of March 1, 2002.

(E)  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 might 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.

(F)  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
     might 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.

</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.  John R.C.  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.  John R.C.  Porter was paid  $260,000 by the Company in 2001,
2000,  and 1999 pursuant to this  agreement,  which  amounts were  determined by
negotiation between the Company and Mr. John R.C. Porter.

     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 received a bonus of $135,000 payable
in installments during 2000. The Company competed payment to Mr. Hester in 2000.

     Mr. Gerald Calhoun,  former Vice President of Human Resources and Corporate
Secretary,  entered  into a settlement  agreement  with the Company to resolve a
dispute over Mr.  Calhoun's  employment  contract with the Company.  The Company
will pay Mr.  Calhoun 24 months of  severance  in  installments  from 2000 until
April 19, 2002.  Mr.  Calhoun will also receive  medical and insurance  benefits
through the Company  for the same  two-year  period.  Mr.  Calhoun's  payment of
salary and fringe benefits  amounts to approximately  $189,000 per annum.  Under
the  agreement,  the Company  extended the option term of Mr.  Calhoun's  vested
options until September 2001. These options have now expired.

     Mr. William L.P. Brownley, former Vice President and General Counsel of the
Company,  entered into an agreement with the Company  whereby Mr.  Brownley will
serve as an of counsel  attorney to the Company  from  December 31, 2000 through
March 31, 2003.  In return,  Mr.  Brownley  will be paid $220,000 per annum from
January 1, 2001  through  March 31,  2003.  The  Company  will also  continue to
provide Mr.  Brownley  with  medical  and  insurance  benefits  during that same
period.

     Mr. Lorenzo Tellez, former Vice President,  Treasurer,  and Chief Financial
Officer of the Company,  entered into a settlement agreement with the Company to
resolve a dispute on Mr.  Tellez's  employment  contract with the Company.  With
regard to the salary component of the  contract,the  Company paid Mr. Tellez the
equivalent  of 24 months of severance in  installments  during 2001.  Mr. Tellez
also received  medical and insurance  benefits  through the Company for the same
two-year  period.  Mr. Tellez's payment of salary and fringe benefits amounts to
approximately  $243,000  per annum.  The Company  completed  its payments of the
salary portion of the contract to Mr. Tellez on December 7, 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.
<TABLE>
<CAPTION>
 <S>      <C>

 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)

 10.20   Revolving 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)

 10.31   September 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)

 10.32   September 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)

 10.33   September 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)

 10.34   September 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)

 10.35   October 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)

 10.36   October  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)

 10.37   September 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)

 10.38   September 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)

 10.39   September  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)

 10.40   September 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)

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

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


<PAGE>


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

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

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

 10.48   October 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.

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

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

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

 10.58   Series 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

 10.59   Series 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.

 10.60   Series 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

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

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

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

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

 10.65   Series 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

 10.66   Series 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.

 10.67   Series 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

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

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

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

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

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

 10.73   Amendment 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

 10.76   Sixteenth 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

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

 10.86   Series 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

 10.87   Series 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

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


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

 10.90   Form of Stock Purchase Agreement

 10.91   Asset  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.


(b)    Reports on Form 8-K

       None
</TABLE>


<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:/s/ David S. Aldrich
                                                        -----------------------
                                                                  President and
                                                         Chief Executive Officer

                                                          Date:    April 4, 2002
                                                           ---------------------

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.

     Signature                      Title                           Date
-----------------             ------------------             ------------------



/s/John B. Wood               Executive Chairman of            April 4, 2002
----------------               the Board of Directors
John B. Wood



/s/Fred Charles Ikle           Director                        April 4, 2002
---------------------
Fred Charles Ikle



/s/Norman P. Byers             Director                        April 4, 2002
------------------
Norman P. Byers



/s/ Malcolm M.B. Sterrett      Director                        April 4, 2002
-------------------------
Malcolm M.B. Sterrett



/s/ Geoffrey Baker             Director                        April 4, 2002
------------------
Geoffrey Baker



/s/ David S. Aldrich           President, Chief Executive      April 4, 2002
--------------------           Officer (Principal Executive
David S. Aldrich               Officer)




/s/ Thomas J. Ferrara          Chief Financial Officer         April 4, 2002
---------------------          (Principal Financial Officer
Thomas J. Ferrara               & Principal Accounting Officer)