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, 2000


              [ ]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, 2001,  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):   59
                                                     ------

<PAGE>


PART 1

Item 1.       Business

History and Introduction

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

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

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

     On July 28, 2000,  the Company  completed the formation of a joint venture,
TelosOK, wherein the Company contributed its Ft. Sill based operation to a newly
created  entity in return for 50%  ownership  in TelosOK  and  consideration  of
approximately   $9.0  million  (See  Note  2  to  the   consolidated   financial
statements).


Reportable Operating Segments

     During 2000,  the Company  provided its business  solutions  through  three
operating  segments:  Systems and Support Services,  the Products Group, and its
Xacta subsidiary.






<PAGE>


Systems and Support Services

     The  Company's   Systems  and  Support  Services  Group  provides  software
development and support services including technology insertion, system redesign
and software re-engineering.  Key customers of this group include: the U.S. Army
at Ft.  Monmouth  in Red Bank,  New  Jersey;  and the U.S.  Army at Ft.  Sill in
Lawton, Oklahoma.

     Over  the past  three  years,  Telos  has been a  significant  provider  of
software   engineering   services  to  the  U.S.  Army.  At  Ft.   Monmouth  for
approximately 17 years, the Company has supported approximately 80 tactical land
and  satellite   communications   systems  for  the   Communications-Electronics
Command's  Research,  Development,  and  Engineering  Center.  During 2000,  the
Company's  Ft.  Monmouth  operation  achieved  a  software  development  quality
assurance rating of Level 3 based on the Software Engineering  Institute's (SEI)
Capability Maturity Model for Software (CMM).

     At Ft. Sill for  approximately  25 years, the Company has developed 93 fire
support  systems and 177 major systems  upgrades,  totaling more than 11 million
lines of code using nine different  computer-programming languages for CECOM SEC
Fire Support Software Engineering. During 2000, the Company's Ft. Sill operation
received the 2000 James S. Cogswell award for outstanding  participation  in the
Department of Defense National  Industrial  Security Program for the second time
in three years.  Also,  during 2000,  the Company  announced  the formation of a
joint venture,  TelosOK,  wherein the Company contributed its Ft. Sill operation
to  a  newly  created  entity  in  return  for  50%  ownership  in  TelosOK  and
consideration  of  approximately  $9  million  (See  Note 2 to the  consolidated
financial statements).

     For 2000, the Systems and Support Services Group generated revenue of $48.4
million, or 33.3%, of the Company's reported  consolidated revenue. The Ft. Sill
operation  was  included in the results of this Group until its  deconsolidation
from  the  Company's  results  in  July  2000  (see  Note 2 to the  Consolidated
Financial  Statements).  The TFE and TIS divisions  were part of the Systems and
Support  Services  Group prior to their  respective  sales in 1999 and 1998 (see
Note 4 to the Consolidated Financial Statements).

Products Group

     The Company's  Products Group 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.  The  Products  Group
consists of a number of functional areas including  procurement,  manufacturing,
integration and testing,  quality assurance,  installation,  hotline support and
warranty support. Key customers of this group are the U.S. Army, U.S. Navy, U.S.
Air Force,  Federal Courts,  FAA and Defense  Agencies.  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 these traditional Telos customers and services,  the Company
has information  security,  data integration,  advance  messaging,  and wireless
network and enterprise  management  practices which generate higher margins than
the traditional business and represent a growing component of this segment.

     For 2000, the Products Group had revenues of $83.7  million,  or 57.6%,  of
the Company's reported consolidated revenues.

Xacta Corporation

     Formerly  the  e-solutions   division  of  Telos  Corporation,   Xacta  was
established  in March 2000,  and is a wholly owned  subsidiary  of Telos.  Xacta
develops products that help  organizations  manage their information  technology
risk and optimize  critical  business  processes.  The Company's  first product,
Xacta Web C&A, was released in August  2000,  and remains the only  commercially
available  software  application  to automate the  federally  mandated  security
certification and accreditation process for government IT systems.

     The  software,   which  is  sold  on  a  subscription   basis,   simplifies
certification and accreditation and reduces its costs by guiding users through a
step-by-step  process to determine  vulnerability  levels and assess network and
system  configuration  compliance  with industry best practices and national and
international security regulations,  policies, and standards.  More importantly,
because  Xacta  Web  C&A  is  automated  and  database-driven,   it  enforces  a
consistent,  repeatable  C&A process and enables  organizations  to identify and
address  vulnerabilities  across multiple systems. In fact, Xacta Web C&A brings
such unique capabilities to the security/information assurance arena, that Xacta
has two patents pending for the technology.

     In  addition  to Xacta  Web C&A,  Xacta  also  offers  enterprise  security
consulting services on a time-and-materials or fixed-price basis. In 2000, Xacta
products and services  were sold through the  Company's  Products  group,  which
holds  non-exclusive  distribution rights for Xacta offerings within the federal
government.  For 2000,  revenues  totaled $13.2 million or 9.1% of the Company's
consolidated revenue.

Revenue by Major Market and Significant Customers

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

                                            Percentage of total consolidated revenue for
                                            ---------------------------------------------
                                                   2000                  1999                  1998
                                                   ----                  ----                  ----
<S>                                              <C>                    <C>                   <C>
Federal government                                96.2%                  92.8%                 92.9%
Commercial                                         3.8                    5.9                   5.1
State and local governments                         --                    1.3                   2.0
                                                  ----                    ---                  ----
         Total                                   100.0%                 100.0%                100.0%
                                                 ======                 ======                ======
</TABLE>

     Total  consolidated  revenue  derived from the federal  government for 2000
includes 59.9% of revenue from  contracts  with the United States Army,  6.3% of
revenue from contracts with the United States Navy,  16.2% of revenue with other
Department of Defense customers,  and 10.4% 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 which compete with the Company are computer  services
firms,  applications  software  companies and consulting  firms,  as well as the
computer  service  arms of  computer  manufacturing  companies  and  defense and
aerospace firms.  Thousands of firms fall into these categories.  As the Company
becomes more focused on network-enabled  enterprise  computing,  the competition
shifts to include  companies that perform  enterprise  integration for large and
complex information technology environments. In addition, the internal staffs of
client   organizations,   non-profit   federal  contract  research  centers  and
universities are competitors of the Company.

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

Employees

     The Company  employed 648 persons as of December  31,  2000,  down from 833
people  at  December  31,  1999.  The  decline  was   principally   due  to  the
deconsolidation  of the Ft. Sill  operation.  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,  247 provide Systems and Support Services,
162  provide  Systems  Integration  (Products)  Services,  and 112  work for the
Company's Xacta  subsidiary.  An additional 127 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, 2000 and 1999,  the Company had total backlog from existing
contracts of approximately $124.4 million and $242.2 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 decline in total
backlog is primarily  attributable to the  deconsolidation  of the Company's Ft.
Sill  contract  in  July  2000  (see  Note  2  to  the  Consolidated   Financial
Statements).

     Approximately  $43 million and $45 million of the total was funded  backlog
at December 31, 2000 and 1999, 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 2000

     During 2000, the Company continued in its efforts to transition to a higher
growth, more profitable mix of commerce solutions and away from lower growth and
less profitable business areas. In the System and Solutions Group, these efforts
resulted in the creation of TelosOK, a public-private  partnership combining the
resources of the Company's Ft. Sill  operation and a group of local  partners to
further Telos' mission in the U.S. Army Fire Support,  specifically,  and across
the southwest United States in general.  In addition,  the Systems and Solutions
Group has  created  opportunities  for Xacta in its  customer  base,  CECOM,  to
provide high margin, high value-add  information assurance and security services
and solutions.

     In the  Products  Group,  efforts  continue  regarding  expanding  contract
offerings  across the Company's  customer base and including  high margin,  high
value-add products and services on various contract vehicles. These products and
services  include  wireless LAN capability in support of flight line maintenance
operations,  certification  and accreditation of network systems for information
assurance,  advanced  messaging  for  secure  transmission  of  information  and
information and process integration.

     Xacta is the Company's  newly formed  subsidiary,  focusing on  information
assurance and  information  security  products and services  offerings.  Xacta's
traditional  services  offerings  were offered  primarily on a time and material
basis  in  the  past.  During  2000,  Xacta  began  offering  firm  fixed  price
alternatives to its  traditional  time and material  offerings,  capitalizing on
efficiencies  and  methodologies  established  as a  result  of  experience.  In
addition, Xacta launched its Xacta Web C&A product in 2000. Xacta Web C&A is the
only  commercially  available  software  application  to automate the  federally
mandated  security  certification  and  accreditation  process for government IT
systems.

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 35,214 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, 2002
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 9 separate  facilities  located in 4 states,  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

     During the fourth  quarter of 2000, no matters were  submitted to a vote of
security holders.

<PAGE>


PART II

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

     No public market exists for the Company's  Class A or Class B Common Stock.
As of March 1, 2001, there were 86 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,
                                        --------------------------------------------------------------------------
                                            2000            1999             1998          1997              1996
                                            ----            ----             ----          ----              ----

                                                                    (amounts in thousands)
<S>                                       <C>             <C>             <C>            <C>               <C>
Sales (1)                                 $145,310        $171,364        $207,086       $253,787          $188,895
(Loss) income  from
  continuing operations                     (1,794)         (9,979)         (9,171)         1,412            (9,816)
Discontinued operations:
   Income from discontinued
   Operations                                   --              --              --             --               500
   Gain on sale of
   Consulting Services                          --              --              --             --            11,524
(Loss)income  before extraordinary items    (1,794)         (9,979)         (9,171)         1,412             2,208
Extraordinary items(2)                          --           8,015              --             --                --
Net (loss) income                           (1,794)         (1,964)         (9,171)         1,412             2,208

                                                                      FINANCIAL CONDITION
                                                                       As of December 31,
                                            ------------------------------------------------------------------------
                                            2000            1999             1998          1997               1996
                                            ----            ----             ----          ----               ----

                                                                   (amounts in thousands)

Total assets (1)                          $ 77,090        $ 56,886        $ 95,251       $109,718          $110,064
Long-term debt (3)                          32,846          25,045          54,651         56,875            32,857
Capital lease obligations,long-term (4)     11,030          11,362          11,710         12,085            12,537
Senior redeemable preferred stock (5)        6,480           6,054           5,631          5,207             4,828
Class B redeemable preferred stock              --              --              --         12,035            11,087
Redeemable preferred stock (5)              42,352          36,975          31,729         29,951            24,230
<FN>

     (1)  See Notes 2,3 and 4 to the Consolidated Financial Statements in Item 8
          regarding the contribution of Ft. Sill assets, the  deconsolidation of
          Enterworks and the sales of TFE and TIS.
     (2)  See  Note  3 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  6 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  10 to  the  Consolidated  Financial  Statements  in  Item 8
          regarding the capital lease obligations of the Company.
     (5)  See  Note  7 to  the  Consolidated  Financial  Statements  in  Item  8
          regarding redeemable preferred stock of the Company.

</FN>
</TABLE>

<PAGE>


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

General

     During 2000, the Company continued in its efforts to transition to a higher
growth, more profitable mix of commerce solutions and away from lower growth and
less profitable  business areas. In the System and Support Services Group, these
efforts  resulted in the  creation of TelosOK,  a joint  venture  combining  the
resources of the Company's Ft. Sill  operation and a group of local  partners to
further Telos' mission in the U.S. Army Fire Support,  specifically,  and across
the  southwest  United States in general.  In addition,  the Systems and Support
Services Group has created  opportunities for Xacta in its customer base, CECOM,
for Xacta to provide high  margin,  high  value-add  information  assurance  and
security services and solutions.

     In the  Products  Group,  efforts  continue  regarding  expanding  contract
offerings  across the Company's  customer base and including  high margin,  high
value-add products and services on various contract vehicles. These products and
services  include  wireless LAN capability in support of flight line maintenance
operations,  certification  and accreditation of network systems for information
assurance,  advanced  messaging  for  secure  transmission  of  information  and
information and process integration.

     Xacta is the Company's  newly formed  subsidiary,  focusing on  information
assurance and  information  security  products and services  offerings.  Xacta's
traditional  services  offerings were offered  primarily on a time and materials
basis  in  the  past.  During  2000,  Xacta  began  offering  firm  fixed  price
alternatives to its  traditional  time and material  offerings,  capitalizing on
efficiencies  and  methodologies  established  as a  result  of  experience.  In
addition, Xacta launched its Xacta Web C&A product in 2000. Xacta Web C&A is the
only  commercially  available  software  application  to automate the  federally
mandated  security  certification  and  accreditation  process for government IT
systems.

     During   2000,   the   Company   experienced   decreases   in  revenue  and
profitability.  Revenue decreased $26.1 million,  or 15.2%, as compared to 1999.
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 income for 2000 was $1.2
million,  as compared to an operating income 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.

     During 1999, the Company's revenue and profitability  decreased as compared
to 1998.  Revenue  decreased  $35.7  million,  or  17.2%,  primarily  due to the
expiration of the Products Segment's SMCII Contract in April 1999 and the timing
of the  subsequent  startup period on IS-1.  Operating  profit for 1999 was $2.2
million,  as compared to an  operating  loss of $7.3  million in 1998.  The 1999
operating profit excludes the results from operations of Enterworks,  due to its
deconsolidation  in  December  1999.  Exclusive  of  Enterworks,  the  Company's
earnings before  interest and taxes for 1999 were $2.2 million  compared to $4.3
million for 1998.  This decline was  principally due to the decline in operating
profit of the Products Segment of $2.0 million from 1998 to 1999.

<PAGE>


Revenue by Contract Type

     Approximately   96.2%  of  the  Company's   total  revenues  in  2000  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 2000, revenue by contract type was as
follows: time and materials, 40.0%; firm fixed price, 59.2%; fixed monthly rate,
0.1%; and other,  0.7%.  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,
                                                     2000                  1999                  1998
                                                     ----                  ----                  ----

                                                                (dollar amounts in thousands)
<S>                                          <C>        <C>        <C>         <C>         <C>        <C>
Sales                                        $145,310   100.0%     $171,364    100.0%      $207,086   100.0%
Cost of sales                                 124,028    85.4       151,216     88.2        182,915    88.3
Selling, general and administrative expenses   19,796    13.6        17,459     10.2         30,842    14.9
Goodwill amortization                             312     0.2           489      0.3            589     0.3
                                               ------     ---       -------     -----       -------    ----
Operating income (loss)                         1,174     0.8         2,200      1.3         (7,260)   (3.5)
Interest expense                               (4,777)   (3.3)       (6,065)    (3.5)        (6,555)   (3.1)
Gain on sale of assets                             --      --         4,731      2.8          5,683     2.7
Equity in net losses of Enterworks                 --      --       (18,765)   (11.0)           --       --
Equity in earnings of TelosOK                   2,328     1.6            --       --            --       --
Other income                                       98     0.1            67       --            64       --
                                                -----    ----         -----      ---          ----     ----
Loss before taxes                              (1,177)   (0.8)      (17,832)   (10.4)        (8,068)   (3.9)
Income tax (provision)benefit                    (617)   (0.4)        7,853      4.6         (1,103)   (0.5)
                                               -------   -----       ------      ---         -------   -----
Loss before extraordinary item                 (1,794)   (1.2)       (9,979)    (5.8)        (9,171)   (4.4)
Extraordinary Item                                 --      --        8,015       4.7             --      --
                                                -----   -----      -------       ---          ------    ---

Net loss                                      $(1,794)   (1.2)%   $ (1,964)     (1.1)%     $ (9,171)   (4.4)%
                                               =======   =====    =========     ======       =======   ======

</TABLE>

<PAGE>


Financial Data by Operating Segment
     The Company has three reportable  operating  segments:  Systems and Support
Services,  Products,  and  Xacta.  Enterworks,  Inc.  was  deconsolidated  as of
December 30, 1999 and  therefore  will not be reflected as a segment in the year
2000 and 1999.

     Sales,  gross  profit and gross  margin by market  segment  for the periods
designated below are as follows:

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                          2000                  1999                   1998
                                                         ---------------------------------------------------
                                                                   (dollar amounts in thousands)
<S>                                                    <C>                    <C>                   <C>
Revenue:
    Systems and Support Services                       $  48,429              $  77,701             $  92,315
    Products                                              83,688                 85,726               103,086
    Xacta                                                 13,193                  7,937                 4,612
    Enterworks                                                --                     --                 7,073
                                                          ------                -------               -------
      Total                                            $ 145,310              $ 171,364             $ 207,086
                                                       =========              =========             =========


Gross Profit:
    Systems and Support Services                       $   5,278              $  11,768             $  12,384
    Products                                              13,313                  6,440                 8,909
    Xacta                                                  2,691                  1,940                 1,336
    Enterworks                                                --                     --                 1,542
                                                          ------                -------               -------
      Total                                            $  21,282              $  20,148             $  24,171
                                                         =======              =========               =======

Gross Margin:
    Systems and Support Services                           10.9%                  15.1%                 13.4%
    Products                                               15.9%                   7.5%                  8.6%
    Xacta                                                  20.4%                  24.4%                 29.0%
    Enterworks                                               --                     --                  21.8%
      Total                                                14.6%                  11.8%                 11.7%

</TABLE>

Results of Operations

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 $2.0 million decrease in Products' sales and a $29.3 million
decrease in Systems and Support Services sales,  partially offset by an increase
of $5.3 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.



<PAGE>


     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 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 3 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 have
been made in fiscal  2000  related  to the  Enterworks  investment  because  the
balance of the Company's investment in Enterworks is $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 Telos OK,  LLC were  presented  in one line item  "Equity in net
earnings of Telos OK" due to the joint  venture  agreement  signed July 28, 2000
(See Note 2). 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
cumulatively  was  still  negative.   Therefore,  under  APB  18  the  Company's
investment balance in TelosOK is $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 2). 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 3 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.

Years ended December 31, 1999 and 1998

     Revenue for 1999 was $171.4 million, a $35.7 million or 17.2% decrease from
1998.  Approximately  $17.4  million of this  decrease was  attributable  to the
Products  Group,  which  experienced  a decline in revenue  primarily due to the
expiration of the Small Multi User Computer II ("SMCII") contract in April 1999.
The SMCII contract contributed revenue of approximately $44.1 million in 1998 as
compared to $8.8 million in 1999. In addition,  the Systems and Support Services
Group  experienced  a $14.6  million  decrease  in  revenue  for the year  ended
December  31, 1999 as compared to the same  period in 1998.  This  decrease  was
primarily due to the sale of TIS in February 1998. TIS contributed  $4.0 million
of revenue in 1998 prior to its sale. In addition,  revenue declined in part due
to the  deconsolidation  of Enterworks  to an "Equity in Enterworks  net losses"
presentation.

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

     Gross  profit  decreased to $20.1  million for the year ended  December 31,
1999   compared  to  $24.2   million  for  the  same  1998  period  due  to  the
aforementioned  deconsolidation of Enterworks and decline in sales volume. Gross
margins were 11.8% for 1999 as compared to 11.7% for 1998.

     Selling,   general,  and  administrative   expense  ("SG&A")  decreased  by
approximately  $13.4  million  or 43.4%,  to $17.5  million  for the year  ended
December  31, 1999 from $30.8  million in the  comparable  period of 1998.  This
decrease  is due  primarily  to the  deconsolidation  of  Enterworks.  SG&A as a
percentage of revenues  decreased to 10.2% for 1999 from 14.9% in the comparable
1998 period.

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

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

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

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

     In order to present the statement of operations in accordance  with APB 18,
the revenues,  cost of sales,  selling general and  administrative  and interest
expenses  for  Enterworks  Inc.  were  presented in one line item "Equity in net
losses in Enterworks" due to the  deconsolidation  of Enterworks on December 30,
1999. (See Note 3 to the consolidated financial  statements).  The equity in net
losses in Enterworks for 1999 was $18.8 million.

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

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

     On  December  30,  1999 the  Company  entered  into a number of  concurrent
transactions  with its noteholders and its Enterworks  subsidiary (See Note 3 of
Consolidated   Financial   Statements).   The  two  most   noteworthy  of  these
transactions affecting Telos were as follows:

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

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


     These two transactions  resulted in an  extraordinary  gain, net of tax, of
$8.0 million,  and was 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, and redeemable preferred stock and common stock.

     At December  31,  2000,  the Company  had an  outstanding  balance of $25.5
million on its $35 million Senior Credit Facility (the "Facility"). The Facility
matures on March 1, 2002 and is  collateralized  by a majority of the  Company's
assets  including  inventory,  accounts  receivable  and the Company's  stock in
Enterworks,  Inc. The amount of borrowings  fluctuates  based on the  underlying
asset borrowing base. The Facility has various  covenants which may, among other
things,  restrict the ability of the Company to merge with another entity,  sell
or transfer certain assets,  pay dividends and make other  distributions  beyond
certain  limitations.  The  Facility  also  requires the Company to meet certain
leverage, net worth, interest coverage and operating goals. The bank has amended
the covenants to conform to the Company's 2001 budget expectations.

     The  Company's   subordinated   notes  are  held   principally   by  common
shareholders  and totaled $8.5  million at December  31, 2000.  These notes bear
interest at rates between 14% and 17%, and  approximately  $1.2 million of these
notes  become  payable on April 1, 2001,  with the balance  maturing on April 1,
2002.

     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, 2000 the
total carrying amount of redeemable preferred stock,  including  accumulated and
unpaid dividends was $48.8 million.  The Company accrues  dividends and provides
for accretion related to the redeemable  preferred stock.  Mandatory  redemption
for 821.4  shares of the Senior  Redeemable  Preferred  Stock  plus all  accrued
dividends  on those  shares  is due  December  31,  2001,  subject  to the legal
availability of funds.  The remaining  Senior  Redeemable  Preferred  shares and
their  accumulated  dividends  are  payable  by the  Company  on April 1,  2002.
Mandatory  redemption  for the  Public  Preferred  Stock is  required  from 2005
through 2009, subject to the legal availability of funds.

     Cash used in operating  activities was $14.7 million in 2000, due primarily
to an increase in accounts receivable attributable to the increase in sales from
this year's fourth  quarter  compared to the prior year's fourth  quarter.  Cash
provided by investing  activities was $4.3 million in 2000,  reflecting  capital
expenditures  of $1.7  million  in 2000,  offset  by $6.0  million  of  proceeds
received from the contribution of the Ft. Sill assets.  The Company was provided
cash from financing activities of $10.4 million in 2000, reflecting  principally
borrowings on the Facility.

     In July 2000,  the  Company  entered  into a  subscription  agreement  with
certain  investors  which  provided  for the  formation  of an Oklahoma  limited
liability company named Telos OK, LLC. The Company contributed all of the assets
of its  DSTATS  and Ft.  Sill  businesses  to  Telos  OK.  In  return  for  this
contribution,  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 Telos OK. The Company has guaranteed $2 million of a $4 million
loan granted to Telos OK by a bank.

  Capital Expenditures

     The Company believes that its business is generally not capital  intensive.
Capital  expenditures  for property and equipment  were $1.7 million in 2000 and
$1.4 million in 1999, and $1.2 million in 1998. The Company  anticipates capital
expenditures of  approximately  $1.7 million in 2001;  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

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

     In June  2000,  the FASB  issued  SFAS No.  138,  "Accounting  for  Certain
Derivative  Instruments  and Certain Hedging  Activities"  which amends SFA 133.
SFAS 138 amends SFAS 133 to 1) expand the scope of the "normal  sales and normal
purchases"  exception;  2) introduce the benchmark rate as an interest rate that
may be hedged; 3) permit a recognized  foreign currency  denominated asset to be
hedged and; 4) allow certain intercompany  derivatives that are offset net to be
designated as hedging  instruments.  The Company does not anticipate SFAS 138 to
have a material impact on its financial statements.

     On September 29, 2000, FASB Statement No. 140 ("FAS 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.

     FAS 140  significantly  changes the  collateral  recognition  guidance  for
secured borrowings and related collateral disclosure  requirements.  The Company
does not  anticipate  FAS 140  will  have a  material  impact  on the  Company's
consolidated financial statements.

  Forward-Looking Statements

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

  Certain Factors That May Affect Future Results

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

     A number of  uncertainties  exist that could  affect the  Company's  future
operating results,  including,  without limitation,  general economic conditions
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
the Company's access to ongoing development,  product support and viable channel
partner relationships with Enterworks.

     While in the past the Company  has not  experienced  contract  terminations
with the  federal  government,  the  federal  government  can  terminate  at its
convenience.  Should  this  occur,  the  Company's  operating  results  could be
adversely  impacted.  The Company's U.S. Army contract at Ft. Monmouth is up for
re-bid, which, if unsuccessful, could adversely impact the Company's revenue. It
should  also be  noted  that  with  the  change  of  administration  and its key
government  personnel,  related policy  changes and detailed  program-by-program
review at each agency of the federal  government,  especially  the Department of
Defense, the Company's high percentage of revenue derived from business with the
federal government could be adversely impacted.

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

  Item 7a. Quantitative and Qualitative Disclosures About Market Risk

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

     The  Company is exposed to  interest  rate  volatility  with  regard to its
variable rate debt obligations  under its Senior Credit Facility.  This facility
bears  interest at 1.5%,  subject to certain  adjustments,  over the bank's base
rate.  The weighted  average  interest  rate in 2000 was 10.07%.  This  facility
expires  on March 1, 2002 and has an  outstanding  balance  of $25.5  million at
December 31, 2000.

     The Company's  other long-term debt at December 31, 2000 consists of Senior
Subordinated  Notes B and C which bear  interest at fixed rates ranging from 14%
to 17%. Of the $8.5 million  Senior  Subordinated  Notes balance at December 31,
2000,  $1.2 million of this  principal  amount matures on April 1, 2001, and the
remaining  $7.3  million in  principal  becomes  payable  on April 1, 2002.  The
Company  has  no  cash  flow  exposure  due  to  rate  changes  for  its  Senior
Subordinated Notes.


<PAGE>


  Item 8.  Financial Statements and Supplementary Data

<TABLE>
<CAPTION>

                                            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<S>                                                                                                        <C>
                                                                                                           Page

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

  Consolidated Statements of Operations for the Years Ended
   December 31, 2000, December 31, 1999, and December 31, 1998.............................................17

  Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999................................18-19

  Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2000, December 31, 1999, and December 31, 1998............................................20-21

  Consolidated Statements of Changes In Stockholders' Investment (Deficit)
    for the Years Ended December 31, 2000, December 31, 1999,
    and December 31, 1998..................................................................................22

  Notes to Consolidated Financial Statements...............................................................23-43


                                                    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.
</TABLE>


<PAGE>


                        Report of Independent Accountants


  To the Board of Directors and Stockholders
    of Telos Corporation:


In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of operations,  of changes in stockholders'  investment
(deficit)  and of cash flows  present  fairly,  in all  material  respects,  the
financial  position of Telos  Corporation  and its  subsidiaries at December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended  December 31, 2000,  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 the opinion expressed above.



  /s/ PRICEWATERHOUSECOOPERS LLP


  McLean, VA
  April 2, 2001, except for Note 6 and Note 7, as to
  which the date is April 13, 2001




<PAGE>

<TABLE>
<CAPTION>

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


                                                                    Year Ended December 31,
                                                       -----------------------------------------------------
                                                         2000                  1999                   1998
                                                         ----                  ----                   ----

<S>                                                 <C>                      <C>                   <C>
Sales
    Systems and Support Services                    $   48,429               $  77,701             $  92,315
    Products                                            83,688                  85,726               103,086
    Xacta                                               13,193                   7,937                 4,612
    Enterworks                                              --                      --                 7,073
                                                         -----                  ------                 -----

                                                       145,310                 171,364               207,086
                                                       -------                 -------               -------

Costs and expenses
    Cost of Systems and
      Support Services                                  43,151                  65,933                79,931
    Cost of Products                                    70,375                  79,286                94,177
    Cost of Xacta                                       10,502                   5,997                 3,276
    Cost of Enterworks                                      --                      --                 5,531
    Selling, general and
      administrative expenses                           19,796                  17,459                30,842
    Goodwill amortization                                  312                     489                   589
                                                           ---                     ---                   ---

                                                       144,136                 169,164               214,346
                                                       -------                 -------               -------


Operating income (loss)                                  1,174                   2,200                (7,260)

Other income (expenses)
    Non-operating income                                    98                      67                    64
    Gain on sale of assets                                  --                   4,731                 5,683
    Equity in net losses of Enterworks                      --                 (18,765)                   --
    Equity in earnings of Telos OK                       2,328                      --                    --
    Interest expense                                    (4,777)                 (6,065)               (6,555)
                                                        ------                  ------                ------


Loss before income taxes                                (1,177)                (17,832)               (8,068)
(Provision) benefit for income taxes                      (617)                  7,853                (1,103)
                                                          ----                   -----                ------

Loss before extraordinary item                          (1,794)                 (9,979)               (9,171)
Gain from early debt retirement and
   sale of stock (net of income tax
      provision of $5,322)                                  --                   8,015                    --
                                                         -----                   -----                 -----

Net loss                                              $ (1,794)              $  (1,964)             $ (9,171)
                                                      ========               =========              ========


</TABLE>
  The accompanying notes are an integral part of these consolidated financial
  statements.


<PAGE>

<TABLE>
<CAPTION>

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

                                                         ASSETS


                                                                                 December 31,
                                                                       --------------------------------
                                                                       2000                       1999
                                                                       ----                       ----
<S>                                                                    <C>                      <C>
Current assets
    Cash and cash equivalents (includes restricted cash
      of $54 at December 31, 2000 and 1999)                            $   286                  $    315
    Accounts receivable, net                                            45,682                    25,030
    Receivable from Enterworks                                              --                     2,000
    Inventories, net                                                     7,045                     4,779
    Deferred income taxes                                                3,256                     4,802
    Other current assets                                                   404                        83
                                                                        ------                    ------

      Total current assets                                              56,673                    37,009
                                                                        ------                    ------

Property and equipment
    Furniture and equipment                                              7,201                    18,924
    Leasehold improvements                                                 675                     2,631
    Property and equipment
      under capital leases                                              13,774                    13,774
                                                                        ------                    ------
                                                                        21,650                    35,329
Accumulated depreciation
      and amortization                                                  (9,331)                  (23,093)
                                                                        -------                  --------

                                                                        12,319                    12,236
                                                                        ------                    ------

Goodwill, net                                                            2,749                     4,284
Investment in Enterworks                                                    --                        --
Investment in Telos OK                                                      --                        --
Deferred income taxes                                                    4,603                     2,930
Other assets                                                               746                       427
                                                                        ------                    ------

                                                                       $77,090                   $56,886
                                                                       =======                   =======




</TABLE>













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

<PAGE>
<TABLE>
<CAPTION>

                                     TELOS CORPORATION AND SUBSIDIARIES
                                        CONSOLIDATED BALANCE SHEETS
                                    (amounts in thousands, except share data)

                              LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK,
                                    AND STOCKHOLDERS' INVESTMENT (DEFICIT)



                                                                                           December 31,

                                                                                      ---------------------
                                                                                     2000                   1999
                                                                                     ----                   ----
<S>                                                                                <C>                   <C>
Current liabilities
   Accounts payable                                                                $19,049               $13,792
   Accrued compensation and benefits                                                 7,178                 7,645
   Unearned warranty revenue                                                         8,609                 5,183
   Current portion, capital lease obligations                                          344                   370
   Senior subordinated notes                                                         1,151                    --
   Other current liabilities                                                         2,094                 3,051
                                                                                    ------                ------

      Total current liabilities                                                     38,425                30,041

Senior credit facility                                                              25,460                16,508
Senior subordinated notes                                                            7,386                 8,537
Capital lease obligations                                                           11,030                11,362
                                                                                    ------                ------

    Total liabilities                                                               82,301                66,448
                                                                                    ------                ------

Commitments and contingencies (Note 10)

Senior mandatorily redeemable preferred stock                                        6,480                 6,054
Mandatorily redeemable exchangeable preferred stock                                 42,352                36,975
                                                                                    ------                ------
                                                                                    48,832                43,029
                                                                                    ------                ------
Stockholders' (deficit) investment
   Class A common stock, no par value, 50,000,000 shares authorized, 21,171,202
     and 21,241,980 shares issued and outstanding at 2000 and 1999, 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                                                             (56,839)              (52,669)
                                                                                   --------              --------

   Total stockholders' investment (deficit)                                        (54,043)              (52,591)
                                                                                   --------              --------

                                                                                   $77,090               $56,886
                                                                                   =======               =======




</TABLE>













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


<PAGE>


                             TELOS CORPORATION AND SUBSIDIARIES
                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (amounts in thousands)
<TABLE>
<CAPTION>

                                                                                      Year Ended December 31,
                                                                                      -----------------------
                                                                                 2000          1999          1998
                                                                                 ----          ----          ----
<S>                                                                             <C>          <C>         <C>
Operating Activities:
Net loss                                                                        $(1,794)     $(1,964)    $ (9,171)
    Adjustments to reconcile net loss
      to cash (used in) provided by operating activities:
      Depreciation and amortization                                               1,706        4,133        4,266
      Goodwill amortization                                                         312          489          589
      Amortization of debt issuance costs                                           182          243          243
      Accretion of subordinated notes                                                --          412          181
      Provision for inventory obsolescence                                           50          600        1,254
      Provision for doubtful accounts receivable                                  1,213          400           39
      Gain on sale of assets                                                         --       (4,731)      (5,683)
      Gain on sale of fixed assets                                                   --          (80)          --
      Gain on sale of Enterworks stock and note conversion                           --       (8,015)          --
      Write off of debt issuance costs                                               --           72           --
      Incentive bonus accrual                                                        --        1,500           --
      Reserve for termination agreements                                          1,186           --           --
      Provision for net realizable value of other assets                             --           --        1,743
      Deferred income tax (benefit) provision                                      (127)      (8,159)         434
      Changes in assets and liabilities
         (Increase) decrease in accounts receivable                             (21,208)      20,141       (2,329)
         (Increase) decrease in inventories                                      (2,481)       2,494        2,826
         Increase in other assets                                                  (805)        (116)         (76)
         Increase in accounts payable and other liabilities                       7,045        3,762        3,031
                                                                                  -----       ------       ------

         Cash (used in) provided by operating activities                        (14,721)      11,181       (2,653)
                                                                                --------      ------       -------

Investing activities:
    Proceeds from contribution of assets                                          6,000           --            --
    Proceeds from sale of assets                                                     --       10,000        14,675
    Proceeds from sale of fixed assets                                               --          221            --
    Proceeds from sale of Enterworks stock                                           --        5,000            --
    Payment of offering costs                                                        --         (303)           --
    Purchase of property and equipment                                           (1,691)      (1,389)      (1,250)
    Investment in other assets                                                       --         (800)      (2,040)
                                                                                 ------       -------      -------

         Cash provided by investing activities                                    4,309       12,729       11,385
                                                                                 ------       ------       ------
Financing activities:
    Proceeds from (payments of) Senior Credit Facility                            8,952      (19,651)      (3,786)
    Proceeds from debt issuance                                                      --           --        1,800
    Increase (decrease) in book overdrafts                                        1,789       (3,998)       1,641
    Retirement of Class B redeemable preferred stock                                 --           --       (6,500)
    Repurchase of 410,000 shares of redeemable preferred stock                       --           --       (1,640)
    Proceeds from issuance of common stock upon exercise of Company stock options    --            3           --
    Payments under capital lease obligations                                       (358)        (357)        (426)
                                                                                 -------      -------      -------
         Cash provided by (used in) financing
         Activities                                                              10,383      (24,003)     ( 8,911)
                                                                                 ------      --------     --------

    (Decrease)in cash and cash equivalents                                          (29)         (93)        (179)
    Cash and cash equivalents at beginning of the year                              315          408          587
                                                                                 ------      -------        ------

    Cash and cash equivalents at end of year                                     $  286      $   315      $   408
                                                                                 ======       ======        ======

</TABLE>

<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (amounts in thousands)
<TABLE>
<CAPTION>


                                                                                      Year Ended December 31,
                                                                                      -----------------------
                                                                                 2000         1999         1998
                                                                                 ----         ----         ----

Supplemental disclosures of cash flow information:
Cash paid during the year for:
<S>                                                                             <C>          <C>         <C>
    Interest                                                                    $3,396       $5,409      $ 5,228
                                                                                 =====        =====       ======
    Income taxes                                                                $  529       $  272      $ 1,088
                                                                                 =====        =====       ======


                       TELOS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (amounts in thousands)
                                                                                      Year Ended December 31,
                                                                                     -----------------------
                                                                                 2000          1999         1998
                                                                                 ----          ----         ----

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



</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.


<PAGE>

<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, 1997                          $ 65         $ 13     $     --       $(38,944)        $(38,866)

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

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

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




</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  integration  solutions and services to customers in the U.S. federal
government and industry.  Telos'  product and service  offerings span the entire
systems life cycle, including network and systems design,  software development,
systems  integration,  hardware  and software  maintenance,  and  solutions  for
emerging  needs  for  enterprise   network   infrastructure   management,   data
integration,  and information security. The Company is headquartered in Ashburn,
Virginia,  part  of  Northern  Virginia's  growing  region  of  high  technology
companies.  During 2000,  the Company  provided its business  solutions  through
three operating segments:  Systems and Support Services, the Products Group, and
its Xacta subsidiary.

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

     On July 28, 2000,  the Company  completed the formation of a joint venture,
TelosOK, wherein the Company contributed its Ft. Sill based operation to a newly
created  entity in return for 50%  ownership  in TelosOK  and  consideration  of
approximately   $9.0  million  (See  Note  2).

  Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
Telos  Corporation  and  its  wholly  owned   subsidiaries,   Telos  Corporation
(California),   Telos  International  Corporation,   ubIQuity.com,  inc.,  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'  investment  (deficit).
The statement of operations includes the results of Enterworks,  Inc. as "Equity
in Net Losses of Enterworks" in accordance with APB 18 (See Note 3). Significant
intercompany  transactions  have been  eliminated.  The  Company  also has a 50%
interest in TelosOK,  LLC,  which is  accounted  for under the equity  method of
accounting.

<PAGE>


  Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements,  and the reported amounts of revenues and
expenses during the reporting period. 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,
valuation  allowances for deferred tax assets,  employee  benefits and estimated
useful lives of goodwill,  property and equipment and other  noncurrent  assets,
including  software  development  costs.  Actual results could differ from those
estimates.

Revenue Recognition

     The majority of the Company's  sales are made directly or indirectly to the
federal government.  A substantial portion of the Company's revenues are derived
from time and materials contracts, under which revenue is recognized as services
are  performed  and costs are  incurred.  For fixed price  contracts  revenue is
recognized in accordance with American Institute of Certified Public Accountants
(AICPA)  Statement  of Position  ("SOP") 81-1  "Accounting  for  Performance  of
Construction -Type and Certain  Production-Type  Contracts" using the percentage
of completion  method as costs are incurred.  The Company  generally  recognizes
product revenue as products are shipped,  although  certain revenue  recognition
practices are dependent upon contract terms.  Revenue for maintenance  contracts
is  recognized  over the term of the  arrangements.  The  Company  records  loss
provisions  for  its  contracts,  if  required,  at the  time  such  losses  are
identified.

     The Company has adopted the  provisions  of Staff  Accounting  Bulletin 101
"Revenue  Recognition  in Financial  Statements"  ("SAB 101") for 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 SOP 97-2
"Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2, Software
Revenue  Recognition,  with  Respect to Certain  Transactions"  when  persuasive
evidence of an arrangement  exists,  delivery has occured,  the fee is fixed and
determinable  and  collectibility  is probable.  SOP 98-9 requires revenue to be
recognized  using the  "residual  method" if certain  conditions  are met.  This
approach results in contract discounts being applied to the license with no such
allocation to deferred support elements.  The Company has adopted the provisions
of SOP 98-9 for the year ended  December 31, 1999.  The adoption of SOP 98-9 did
not have a material  effect on the Company's  results from  operations.  Revenue
generated from software  subscription  contracts is recognized  ratably over the
subscription period.

  Cash and Cash Equivalents

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

  Inventories

     Inventories  are  stated  at the  lower of cost or  market,  where  cost is
determined  primarily  on the  first-in,  first-out  method.  Substantially  all
inventories  consist of purchased  hardware and component computer parts used in
connection  with  system   integration   services   performed  by  the  Company.
Inventories  also  include  spare parts of $613,000 and $478,000 at December 31,
2000  and  1999,  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.


<PAGE>


     At  December  31,  2000 and  1999,  the  Company's  allowance  for  product
inventory was $1,777,000  and  $1,992,000,  respectively.  The components of the
allowance for inventory obsolescence are set forth below (in thousands):
<TABLE>
<CAPTION>

                                                                  Additions
                                                  Balance,        Charged to                           Balance,
                                                 Beginning        Costs and                             End
                                                   of Year         Expense       Deductions(1)         of Year
                                                   -------         -------       -------------         -------
<S>                                               <C>              <C>             <C>                 <C>
Year ended December 31, 2000                      $ 1,992          $    50         $   265             $ 1,777

Year Ended December 31, 1999                      $ 3,074          $   600         $ 1,682             $ 1,992

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

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

Property and Equipment

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

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


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

     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  $1,541,000,
$2,314,000 and $2,460,000 for the years ended December 31, 2000,  1999 and 1998,
respectively.

  Goodwill

     Goodwill  arose  principally  from the  acquisition  of  Telos  Corporation
(California)  in 1992 and has been assigned a useful life of twenty  years.  The
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.

     Accumulated  amortization  of goodwill  at  December  31, 2000 and 1999 was
$9,756,000 and $9,444,000 respectively.

  Other Assets

     Until the  deconsolidation of Enterworks on December 30, 1999 (See Note 3),
other   noncurrent   assets  consisted   principally  of  capitalized   software
development  costs and debt issuance costs.  The balance as of December 31, 2000
consists mostly of refundable  deposits and an immaterial  investment in a joint
venture.

     With regard to the capitalized  software development cost balances included
in the  accounts  for  most of 1999,  the  Company  expensed  all  research  and
development  costs  incurred in connection  with software  development  projects
until such software achieved technological feasibility,  determined based on the
achievement of a working model.  Costs thereafter were capitalized.  The Company
amortized such capitalized costs on a product-by-product  basis over the greater
of the amount computed using an estimated product life of two years or the ratio
that current gross revenues  would bear to the total of current and  anticipated
future gross revenues.  The Company periodically  evaluated the realizability of
these capitalized costs through  consideration of anticipated  revenue and gross
margin  as  compared  to  current  revenue  and  gross  margin.  At  the  time a
determination  was made that capitalized  amounts were not recoverable  based on
the estimated cash flows to be generated from the applicable software product, a
loss was recognized.

     There were no  unamortized  software and product costs at December 31, 2000
and 1999. Amortization expense associated with prior years' capitalized software
and product costs was $0,  $1,646,000,  and  $2,044,000 in 2000,  1999 and 1998,
respectively. Additionally, $1,743,000 was written off as a net realizable value
adjustment in the fourth quarter of 1998.

     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 (See Note 6),  $72,000 in debt issue
costs were written off in 1999. Unamortized costs amounted to $0 and $110,000 at
December 31, 2000 and 1999, respectively.

  Income Taxes

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

  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 8).

<PAGE>


     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 2000, 1999 and 1998,
the Company incurred approximately  $200,000,  $7.2 million, and $6.1 million in
research and  development  costs,  respectively.  The  significant  reduction in
research  and  development  from 1999 to 2000 is due to the  deconsolidation  of
Enterworks in December 1999.

  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 material  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 1999 and 1998  financial
statements to conform to the current period presentation.

  Recent Accounting Pronouncements

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

     In June  2000,  the FASB  issued  SFAS No.  138,  "Accounting  for  Certain
Derivative  Instruments and Certain Hedging  Activities"  which amends SFAS 133.
SFAS 138 amends SFAS 133 to 1) expand the scope of the "normal  sales and normal
purchases"  exception;  2) introduce the benchmark rate as an interest rate that
may be hedged; 3) permit a recognized  foreign currency  denominated asset to be
hedged and; 4) allow certain intercompany  derivatives that are offset net to be
designated as hedging  instruments.  The Company does not anticipate SFAS 138 to
have a material impact on its financial statements.

     On September 29, 2000, FASB Statement No. 140 ("FAS 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.

     FAS 140  significantly  changes the  collateral  recognition  guidance  for
secured borrowings and related collateral disclosure  requirements.  The Company
does not  anticipate  FAS 140  will  have a  material  impact  on the  Company's
consolidated financial statements.

  Note 2.     Contribution of Assets

     On July 28, 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 each have guaranteed a portion of the loan of TelosOK. The Company has
guaranteed $2 million and the Investors have guaranteed $1 million. In addition,
TelosOK entered into a $500,000 senior credit facility with the same bank, which
expires August 1, 2001. Borrowings under the facility, should there be 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 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.

     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 has all voting  rights of
     Telos OK and has the sole  right to elect the  directors  of  TelosOK.  The
     units in this class do not have redemptive rights.

     Class B - owns 40% of TelosOK.  The  Investors own all 2.9 million units of
     this  class.  This class does not have voting  rights,  but can request the
     redemption of all or a portion of the Class B units  outstanding  beginning
     one year after the closing date, subject to certain  restrictions.  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 agreement.

     Class C- owns 40% of  TelosOK.  The Company  owns all 2.9 million  units of
     this  class.  This  class  does not have  voting  rights,  and has the same
     redemptive rights as class B above, 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 have been redeemed, the Company will receive a warrant to
     purchase a number of Class C units equal to the amount of the Class B units
     redeemed at a price of $0.01 per unit.

     As  indicated  in  the  operating  agreement,  one of  the  Investors  will
initially  serve as Chairman of the Board and may  designate  a  Secretary,  and
David Aldrich,  President and CEO of the Company, and Thomas Ferrara,  Treasurer
and CFO of the  Company,  will  initially  serve in those  same  capacities  for
TelosOK.  The Company  has entered  into a  corporate  services  agreement  with
TelosOK  whereby  the  Company  will  provide  certain   administrative  support
functions to TelosOK,  including but not limited to finance and  accounting  and
human resources, in return for a monthly cash payment.


     As indicated  above,  the Company owns 50% of TelosOK,  and shares  control
over  TelosOK,  and  therefore  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 and DSTATS
businesses  have been excluded from their  respective  captions in the Company's
Consolidated Statement of Operations, and the net earnings from these businesses
have been  reported  separately  as "Equity in Net Earnings of Telos OK" for the
year ended  December 31,  2000.  The results of  operations  of the Ft. Sill and
DSTATS  businesses  included in the "Equity in Net Earnings of Telos OK" caption
are comprised of the following:
<TABLE>
<CAPTION>

                                (in thousands)
                               December 31, 2000
                                    Year
                                   ended
<S>                              <C>
Sales                            $ 13,339
Cost of Sales                     (11,011)
                                   ------
Gross Profit                     $  2,328
                                    =====
</TABLE>


     From July 28, 2000 through  December 31, 2000,  the Company's  share in the
cumulative  equity of  TelosOK  was still  negative.  Therefore,  the  Company's
investment balance in TelosOK is $0 at December 31, 2000.

Note 3.  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.

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

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

     Enterworks  has completed  another  round of private  financing in the year
2000 which has further diluted the Company's interest in Enterworks. At December
31, 2000, the Company owns 17,153,059  shares of Enterwork's  common stock which
equates to a beneficial ownership percentage of 29.6%.


<PAGE>


Note 4.  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.

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

  Note 5.      Revenue and Accounts Receivable

     Revenue resulting from contracts and subcontracts with federal,  state, and
local governments  accounted for 96.2%, 94.1% and 94.9% of consolidated  revenue
in 2000, 1999 and 1998,  respectively.  As the Company's primary customer is the
federal  government,  the Company has a concentration  of credit risk associated
with  its  accounts  receivable.  However,  the  Company  does not  believe  the
likelihood of loss arising from such  concentration is significant.  The Company
performs  ongoing  credit  evaluations  of its customers and generally  does not
require  collateral  from its customers.  The Company  maintains  allowances for
potential losses.

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

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                 --------------------------
                                                                                 2000                 1999
                                                                                 ----                 ----
    <S>                                                                         <C>                 <C>
    Billed accounts receivable                                                  $39,486             $22,592
                                                                                 ------              ------
    Amounts billable upon acceptance by customer                                  3,100               2,841
    Amounts currently billable                                                    4,931               2,427
                                                                                  -----              ------

    Total unbilled accounts receivable                                            8,031               5,268
                                                                                  -----              ------

    Allowance for doubtful accounts                                              (1,835)               (830)
                                                                                 -------             -------
                                                                                $45,682             $27,030
                                                                                 ======              ======

</TABLE>
<TABLE>
<CAPTION>
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
                                               -------        --------       -------------         -----------
  <S>                                           <C>         <C>                  <C>                <C>
  Year ended December 31, 2000                  $  830      $ 1,381              $ (376)            $ 1,835
  Year ended December 31, 1999                     739          400                (309)                830
  Year ended December 31, 1998                     964           39                (264)                739

<FN>

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


<PAGE>


  Note 6.Debt Obligations

  Senior Revolving Credit Facility

     At December 31, 2000, the Company has a $35 million Senior Revolving Credit
Facility (the  "Facility") with a bank which expires on March 1, 2002 and has an
outstanding  balance  of  $25.5  million.  Borrowings  under  the  facility  are
collateralized  by  a  majority  of  the  Company's  assets  including  accounts
receivable,  inventory, and the remaining Enterworks stock owned by the Company.
The amount of the available borrowings  fluctuates based on the underlying asset
borrowing base. The facility  requires  payment of a fee of 0.375% 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 9.50% at December 31, 2000.

     The weighted average interest rate on the outstanding  borrowings under the
Facility was 10.07% for 2000 compared with 9.89% for 1999. At December 31, 2000,
the Company had approximately $1.0 million available under the Facility.

     The Facility has various covenants which may, among other things,  restrict
the  ability of the  Company  to merge with  another  entity,  sell or  transfer
certain  assets,  pay  dividends  and make other  distributions  beyond  certain
limitations.  The Facility also  requires the Company to meet certain  leverage,
net worth,  interest  coverage  and  operating  goals.  The bank has amended the
covenants to conform to the Company's 2001 budget expectations.

     The  carrying  value  of  the  Facility  at  December  31,  2000  and  1999
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.  Of the $8.5 million in combined principal of the Series B and Series
C Notes at December 31, 2000, $1.2 million of Notes mature on April 1, 2001, and
the  remaining  $7.3  million  become  payable on April 1, 2002.  The Notes 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,
2000, the prepayment  premium that would be due upon a triggering  event is $8.4
million.

     In conjunction with the Enterworks private placement offering (See Note 3),
the Company retired  approximately  $1.0 million of Series B Notes, $4.8 million
of Series C Notes,  and $1.8 million of Series D Notes in exchange for shares of
Enterworks'  common stock owned by the Company at an exchange ratio of one share
of Enterworks' common stock for each $1.00 principal amount of notes payable. In
addition to the  retirement of these notes,  accrued  interest of  approximately
$300,000  was forgiven and the holders of these notes waived their rights to the
prepayment premium associated with these notes.

     The  balances of the Series B and Series C Notes were $5.5 million and $3.0
million, respectively, at December 31, 2000 and 1999, respectively.

<PAGE>


     In November 1998, the Company issued additional Senior  Subordinated  Notes
to certain  shareholders  which are  classified  as Series D. The Series D Notes
total $1.8 million and were unsecured. The Series D Notes had a maturity date of
October 1, 2000 and bear interest at 14% per annum.  Interest was paid quarterly
on January 1, April 1, July 1, and October 1 of each year.  The notes could have
been prepaid at the  Company's  option.  These Notes  contained the same payment
premium provisions as the Series B and Series C Notes (see above). In connection
with the debt, the Company issued  1,500,000  warrants to purchase shares of the
Company's Class A Common Stock.  The warrants have an exercise price of $.01 and
an  exercise  period of 22  months.  The  Company  has  assigned  a value to the
warrants of $420,000  which has been included in capital in excess of par. These
warrants  expired on October 1, 2000.  These notes were  retired in  conjunction
with the Enterworks private placement (Note 3), making the outstanding  carrying
balance zero at December 31, 2000 and 1999, respectively.

  Note 7.   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  821.4 of the
3,000 shares outstanding on December 31, 2001, subject to the legal availability
of funds. The remaining  2,178.6 shares and their accrued dividends are required
to be redeemed  on April 1, 2002,  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, 2000 and 1999  undeclared,
unpaid  dividends  relating  to Series A-1 and A-2  redeemable  preferred  stock
totaled $3,480,000 and $3,054,000,  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, 2000 and 1999 was  $1,555,000  and
$1,424,000,  respectively. The Company declared stock dividends totaling 736,863
shares in 1990 and 1991.

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

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


<PAGE>


     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
$22,500,000.

     The  Company  has  not  declared  or  paid  dividends  since  1991,  due to
restrictions and other conditions relating to the payment of dividends contained
within its charter,  its working capital facility agreement,  and under Maryland
law. The Company is satisfied  that the approach it has followed is  supportable
and reasonable.

  Note 8.  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 6). 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.
<PAGE>


     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  of the  Board of  Directors  based  upon all
information available to it.

  1990 Stock Option Plan

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

<TABLE>
<CAPTION>
                                                                     Stock Option Activity
                                                       -----------------------------------------------
                                                         Numbers of Shares            Weighted Average
                                                              (000's)                  Exercise Price
                                                       -----------------------------------------------
  <S>                                                         <C>                          <C>
  Outstanding at December 31, 1997                              530                        $1.42

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


    Granted                                                     418                         1.35
    Exercised                                                    --                           --
    Canceled                                                   (640)                        1.12
                                                              ------                        ----
  Outstanding at December 31, 1999                            1,718                       $ 1.22
                                                              -----                         ----

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

  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:
<TABLE>
<CAPTION>
                                                                    Stock Option Activity
                                                        -----------------------------------------------
                                                         Number of Shares             Weighted Average
                                                              (000's)                  Exercise Price
                                                        -----------------------------------------------
  <S>                                                         <C>                            <C>
  Outstanding at December 31, 1997                            1,354                          $0.75

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

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

    Granted                                                      --                             --
    Exercised                                                    --                             --
    Canceled                                                   (168)                          1.01
                                                              -----                           ----
  Outstanding at December 31, 2000                            1,083                         $ 0.68
                                                              -----                           ----
</TABLE>

     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,  2000 would be to  increase  the number of shares  outstanding  to
5,186,865 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:
<TABLE>
<CAPTION>

                                                                    Stock Option Activity
                                                       -----------------------------------------------
                                                         Number of Shares             Weighted Average
                                                              (000's)                  Exercise Price
                                                       -----------------------------------------------
  <S>                                                         <C>                          <C>
  Outstanding at December 31, 1997                            4,251                        $0.96

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

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

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

  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:
<TABLE>
<CAPTION>

                                                                     Stock Option Activity
                                                         Number of Shares             Weighted Average
                                                              (000's)                  Exercise Price
                                                       -----------------------------------------------
  <S>                                                         <C>                               <C>
  Outstanding at December 31, 1999                               --                                --

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


</TABLE>

<PAGE>


  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:

<TABLE>
<CAPTION>
                                                                    Stock Option Activity
                                                       -----------------------------------------------
                                                         Number of Shares             Weighted Average
                                                              (000's)                  Exercise Price
                                                       -----------------------------------------------
  <S>                                                         <C>                            <C>
  Outstanding at December 31, 1999                               --                             --

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

</TABLE>

     The following table summarizes  information about stock options outstanding
and exercisable at December 31, 2000:
<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>           <C>
  1990 Stock                 $1.07             940          7.4 years       $1.07            564         $1.07
  Option Plan                $1.35             349          9.3 years       $1.35            140         $1.35
                             $1.37             632          8.7 years       $1.37            608         $1.37
                             $1.40              19          7.6 years       $1.07             11         $1.07
                             $1.42              82          0.0 years       $1.42             82         $1.42
                             -----              --          ---------       -----             --         -----

                        $1.07 - $1.42        2,022          8.1 years       $1.23          1,405         $1.25
                        =============        =====          =========        ====          =====         =====

  1993 Stock
  Option Plan                $0.50             700          3.0 years       $0.50            700         $0.50
                             $1.01             383          6.1 years       $1.01            306         $1.01
                             -----             ---          ---------       -----            ---         -----
                        $0.50 -$1.01         1,083          4.1 years       $0.68          1,006         $0.66
                        ============        =====           =========       =====          =====         =====

  1996 Stock
  Option Plan                $0.95           2,606          5.4 years       $0.95          1,439         $0.95
                             $0.97              65          5.6 years       $0.97             65         $0.97
                             $1.01             469          6.2 years       $1.01            325         $1.01
                             $1.07             897          7.4 years       $1.07            443         $1.07
                             $1.35             379          8.9 years       $1.35            167         $1.35
                             $1.40              70          7.7 years       $1.40             64         $1.40
                             -----            ----          ---------       -----           ----         -----
                         $0.95 - $1.40       4,486          5.9 years       $1.02          2,503         $1.02
                         =============       =====          =========       =====          =====         =====


 2000 Telos Delaware
    Option Plan              $3.85           1,738          9.7 years       $3.85              0          $  -
                             =====           =====          =========       =====              =          ====


  2000 Xacta
  Option Plan                $0.75           1,208          9.7 years       $0.75              0          $  -
                             =====           =====          =========       =====              =          ====

</TABLE>


<PAGE>


     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
$0.16, $0, $0.31, $0.69, and $0.14, respectively,  in 2000 and $0.28, $0, $0.25,
$0, and $0, respectively,  in 1999. Had the Company determined compensation cost
consistent with SFAS No. 123 methodology, net loss would have been $(2,091,000),
($2,743,000),   and  ($9,666,000),   in  2000,  1999,  and  1998,  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 Option Plan             Other Stock Option Plan
                                          ----------------------             -----------------------


                                        2000      1999       1998        2000         1999           1998
  <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%      5.54%       --            --             --
  Expected life of options              2.09yrs    4.0yrs     5.3yrs      --            --             --

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


                                        2000      1999       1998        2000         1999         1998

  Expected dividend yield               0.0%     0.0%         0.0%       0.0%           --            --
  Expected stock price volatility       0.0%     0.0%         0.0%       0.0%           --            --
  Risk free interest rate               6.59%    5.60%        5.54%      6.01%          --            --
  Expected life of options              4.0yrs   3.6yrs       4.8yrs     3.3yrs         --            --


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

                                        2000      1999       1998

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

</TABLE>

     Because  the pro forma  disclosures  under SFAS No. 123 only apply to stock
options granted in or after 1995, pro forma net income for 1998,  1999, and 2000
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 2000, 1999, and 1998 were
$784,000, $1,080,000, and $835,000, respectively.



<PAGE>


  Note 9.  Income Taxes

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

<TABLE>
<CAPTION>
                                                                    For The Year Ended December 31,
                                                                 ----------------------------------
                                                              2000               1999               1998
                                                              ----               ----               ----
<S>                                                          <C>               <C>                <C>
Current provision (benefit)
     Federal                                                 $353              $   --             $    --
     State                                                    391                 306                 669
                                                              ---                 ---                ----

        Total current                                         744                 306                 669
                                                              ---                 ---                ----

  Deferred provision (benefit)
     Federal                                                 (105)             (6,946)                568
     State                                                    (22)             (1,213)              ( 134)
                                                              ----            --------              ------

        Total deferred                                       (127)             (8,159)                434
                                                             -----             -------              ------

        Total provision (benefit)                           $ 617             $(7,853)            $ 1,103
                                                              ===               ======              ======
</TABLE>

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

                                                               For the Year Ended December 31,
                                                           ------------------------------------------------
                                                            2000                  1999              1998
                                                            ----                  ----              ----
  <S>                                                       <C>                  <C>                <C>
  Computed expected income tax provision (benefit)          (34.0)%              (34.0)%            (34.0)%
  Goodwill amortization                                       9.0                  0.9                2.4
  State income taxes, net of federal income tax benefit      49.4                 (2.6)              (1.8)
  Change in valuation allowance for deferred tax assets     (28.7)               (12.9)              24.9
  Meals and entertainment                                     6.8                  0.5                1.1
  Recognition of deferred tax liabilities on contributions
    to TelosOK LLC                                           35.3                   --                 --
  Other                                                      14.6                  4.1               20.9
                                                             ----                  ---               ----
                                                             52.4%               (44.0)%             13.5%
                                                             =====               =======             =====
</TABLE>

     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                   -------------------------
                                                                                   2000                1999
                                                                                   ----                ----
<S>                                                                               <C>                 <C>
Deferred tax assets:
  Accounts receivable, principally due to allowance for doubtful accounts         $  704              $  161
  Allowance for inventory obsolescence and amortization                              734                 946
  Accrued liabilities not currently deductible                                     1,471               1,842
  Accrued compensation                                                             1,865               1,786
  Property and equipment, principally due to differences in depreciation methods     705                 895
  Basis difference in TelosOK LLC interest                                         1,780                  --
  Net operating loss carryforwards - state                                           234               2,174
  Alternative minimum tax credit carryforward                                        734                 703
                                                                                   -----               -----
            Total gross deferred tax assets                                        8,227               8,507
            Less valuation allowance                                                (234)               (572)
                                                                                   ------               -----
            Net deferred tax assets                                                7,993               7,935
                                                                                   -----               -----
  Deferred tax liabilities:
      Unbilled accounts receivable, deferred for tax purposes                       (134)               (203)
                                                                                   ------              ------
            Total deferred tax liabilities                                          (134)               (203)
                                                                                   ------             -------
            Net deferred tax assets                                               $7,859              $7,732
                                                                                  ======              ======
</TABLE>





       The components of the valuation allowance are as follows (in thousands):

<TABLE>
<CAPTION>


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

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

  December 31, 2000                       $  572            $   --            $   338          $   234
  December 31, 1999                        4,987                --             (4,415)(1)          572
  December 31, 1998                        2,974             2,013                 --            4,987
<FN>

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

     The net change in the  valuation  allowance  was a decrease of $338,000 for
2000 and a decrease  of  $2,300,000  for 1999.  The  decrease  in the  valuation
allowance for 1999 is attributable to forecasted taxable income, which justified
the  future  recognition  of the net  deferred  tax assets  recorded.  The above
deferred tax assets and liabilities were adjusted to reflect the deconsolidation
of Enterworks from Telos on December 30, 1999.

     At December 31,  2000,  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 $734,000 of
alternative minimum tax credits available to be carried forward  indefinitely to
reduce future regular tax liabilities.

  Note 10.              Commitments and Contingencies

  Leases

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

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

     The  following  is a schedule  by years of future  minimum  payments  under
capital leases together with the present value of the net minimum lease payments
as of December 31, 2000 (in thousands):
<TABLE>
<CAPTION>

                                                    Property        Equipment        Total
                                                    --------        ---------        -----
         <S>                                      <C>              <C>          <C>


         2001                                     $   1,543        $    54      $    1,597
         2002                                         1,543             --           1,543
         2003                                         1,543             --           1,543
         2004                                         1,543             --           1,543
         2005                                         1,543             --           1,543
         Remainder                                   15,819             --          15,819
                                                     ------          -----          ------

         Total minimum obligations                   23,534             54          23,588
         Less amounts representing
             interest                               (12,202)           (11)        (12,213)
                                                    --------           ----        --------

         Net present value of
             minimum obligations                     11,332             43          11,375
         Less current portion                          (302)           (43)           (345)
                                                    --------           ----        --------

         Long-term capital lease
             obligations at
             December 31, 2000                    $  11,030       $     --       $  11,030
                                                     ======         ======          ======
</TABLE>

     Accumulated amortization for property and equipment under capital leases at
December 31, 2000 and 1999 is $3,502,000 and  $2,787,000,  respectively.  Future
minimum lease payments for all  non-cancelable  operating leases at December 31,
2000 are as follows (in thousands):
<TABLE>
<CAPTION>

         <S>                                        <C>
         2001                                       $ 1,038
         2002                                         1,033
         2003                                         1,049
         2004                                           911
         2005                                           941
         Remainder                                      237
                                                       ----
         Total minimum lease payments               $ 5,209
                                                      =====
</TABLE>

     Net rent expense  charged to operations  for 2000,  1999,  and 1998 totaled
$1,300,000, $2,000,000, and $2,001,000, respectively.

  Legal

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

  Note 11.  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. Porter, the owner of a majority of the Company's Class A Common
Stock, has a consulting agreement with the Company whereby he is compensated for
consulting  services provided to the Company in the areas of marketing,  product
development,  strategic  planning and finance as  requested by the Company.  Mr.
Porter was paid $200,000 by the Company in 2000, 1999, and 1998 pursuant to this
agreement,  which amounts were determined by negotiation between the Company and
Mr. Porter.

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

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

     Mr. William L.P. Brownley, former Vice President and General Counsel of the
Company,  entered into an agreement with the Company whereby he 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 him with
medical and insurance benefits during that same period.



<PAGE>


  Note 12.  Reportable Business Segments

     The  Company  adopted  SFAS No.  131,  "Disclosures  About  Segments  of an
Enterprise and Related  Information",  in 1998 which changes the way the Company
reports information about its operating  segments.  The information for 1999 and
1998 has been restated from the prior year's presentation in order to conform to
the 2000 presentation.

         The Company has three reportable segments:

     Systems and Support  Services - provides  software  development and support
services  for  software  and hardware  including  technology  insertion,  system
redesign and software  re-engineering.  This segment consists of two divisions -
solutions  and  international.  The  principal  market  for this  segment is the
Federal government and its agencies.

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

     Xacta - offers innovative products which leverage its extensive  consulting
experience,  domain knowledge,  and best practices  implementation in enterprise
integration,  enterprise management, and enterprise security. Through these core
competencies  and  innovative  products,  Xacta helps manage the security of its
customers'  network  environments  through the integration of critical  business
content and processes.

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

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

     Enterworks,  Inc. is an equity investment of the Company as of December 31,
2000 (Note 3) 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>

<TABLE>
<CAPTION>

                                  Systems and
                               Support Services         Products    Xacta         Enterworks      Other(1)    Total
                               ----------------         --------    -----         ----------      --------    -----
  <S>                                <C>               <C>         <C>           <C>             <C>       <C>
        2000
  External Revenues                  $ 48,429          $ 83,688    $ 13,193      $     --       $    --    $145,310
  Intersegment Revenues              $     88          $    669    $     --      $     --       $    --    $    757
  Gross Profit                       $  5,278          $ 13,313    $  2,691      $     --       $    --    $ 21,282
  Segment profit (loss)(3)           $ (1,577)         $  4,944    $ (1,881)     $     --       $    --    $  1,486
  Total assets                       $ 10,324          $ 39,425    $  4,613      $     --       $22,728    $ 77,090
  Capital Expenditures               $    159          $    249    $    465      $     --       $   818    $  1,691
  Depreciation &
    Amortization(2)                  $    387          $    304    $    110      $     --       $ 1,217    $  2,018

        1999
  External Revenues                  $ 77,701          $ 85,726     $ 7,937      $     --       $    --    $171,364
  Intersegment Revenues              $    404          $     --     $    --      $     --       $    --    $    404
  Gross Profit                       $ 11,768          $  6,440     $ 1,940      $     --       $    --    $ 20,148
  Segment profit (loss)(3)           $  6,102          $ (2,263)    $(1,150)     $     --       $    --    $  2,689
  Total assets                       $  5,632          $ 22,930     $ 1,422      $     --       $26,902    $ 56,886
  Capital Expenditures               $     63          $     82     $    63      $    780       $   401    $  1,389
  Depreciation &
    Amortization(2)                  $    731          $    333     $    27      $  2,210       $ 1,321    $  4,622

        1998
  External Revenues                  $ 92,315          $103,086     $ 4,612      $  7,073       $    --    $207,086
  Intersegment Revenues              $    970          $  2,622          --      $      1       $    --    $  3,593
  Gross Profit                       $ 12,384          $  8,909     $ 1,336      $  1,542       $    --    $ 24,171
  Segment profit (loss)(3)           $  4,334          $     12     $   532      $(11,549)      $    --    $ (6,671)
  Total assets                       $ 20,653          $ 47,560     $ 1,333      $  6,119       $19,586    $ 95,251
  Capital Expenditures               $    135          $     62     $    31      $    587       $   435    $  1,250
  Depreciation &
    Amortization(2)                  $    545          $    483     $     8      $  2,332       $ 1,487    $  4,855

<FN>

     (1) Corporate assets are principally property and equipment, cash and other
assets.
     (2) Depreciation and amortization includes amounts relating to property and
equipment, goodwill, deferred software costs and spare parts inventory.
     (3)  Segment  profit  (loss)  represents  operating  income  (loss)  before
goodwill amortization.
</FN>
</TABLE>

     The Company does not have material international  revenues,  profit (loss),
assets or capital expenditures.  The Company's business is not concentrated in a
specific  geographical  area  within  the  United  States,  as it has 9 separate
facilities located in 4 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, Chairman of the Board

     Dr.  Ikle (age 76) was  elected  to the  Company's  Board of  Directors  on
January 31, 1994 and was elected  Chairman of the Board in January  1995.  He is
Chairman  of  Conservation  Management  Corporation  and is a  member  of the US
Advisory Board for Zurich Financial  Services Group. Dr. Ikle is also a Director
of the National  Endowment  for  Democracy  and a  Distinguished  Scholar at the
Center for Strategic & International Studies. From 1981 to 1988, Dr. Ikle served
as Under Secretary of Defense for Policy.

John B. Wood, Executive Chairman of the Board

     Mr. Wood (age 37) 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.

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

     Mr.  Aldrich (age 41) was elected to the  positions of President  and Chief
Executive  Officer on March 8, 2000. He was elected to the Board of Directors on
February 8, 2000. He was appointed to the position of Chief Operating Officer of
the Company in January  1999.  He joined the Company in  September  1996 as Vice
President,  Corporate Development and Strategy. Prior to joining the Company, he
was a partner in the Financial  Advisory  Services Group - Corporate  Finance at
Coopers & Lybrand L.L.P.  Prior to joining Coopers & Lybrand L.L.P. in 1991, Mr.
Aldrich was Senior Vice  President at Dean Witter  Capital  Corp.,  the merchant
banking arm of Dean Witter Reynolds, Inc.

Dr. Stephen D. Bryen, Director

     Dr. Stephen Bryen (age 58) was elected to the Company's  Board of Directors
on January 31, 1994.  He currently  serves as a Director in Jefferson  Partners,
L.L.C., a strategic management consulting and merchant-banking firm with offices
in  Washington,  D.C. and New York,  and as Senior Vice President of L-3 Network
Security,  LLC in Denver,  Colorado.  Dr. Bryen currently serves on the board of
C-MAC  Industries in  Mechanicsburgh,  Pennsylvania  and is the senior technical
advisor to  Hollinger  Digital  Corporation  in New York.  From 1981 to 1988 Dr.
Bryen served as the Deputy Under  Secretary of Defense for Trade Security Policy
and as the Director of the Defense Technology Security Administration,  which he
founded.

Norman P. Byers, Director

     Mr.  Byers (age 54) was  elected to the Board of  Directors  on January 31,
1994.  He is Vice  President  and  General  Manager of Foxhunt  Incorporated,  a
provider of contract and long-term  technical staffing and executive  recruiting
services in McLean,  Virginia.  Previously  Mr. Byers was  President  and CEO of
Virginia-based  Classwise  Inc., a distance  learning ISP.  Prior to his work at
Classwise,  Mr.  Byers  was COO of The  Carpe  Diem  Group,  President  of Telos
International Corporation, and managing partner of International Strategies Ltd.
From  1968  until his  retirement  in 1989,  Mr.  Byers  served in a variety  of
operational and staff positions in the United States Air Force.

Malcolm M. B. Sterrett, Class D Director

     Mr.  Sterrett  (age  58) is a  private  investor  and  was  elected  to the
Company's  Board  of  Directors  on July  31,  1998  as  part  of the  preferred
stockholder class. From 1989 to 1993, he was a partner at the law firm of Pepper
Hamilton & Scheetz in  Washington,  D.C. From 1988 to 1989, he served as General
Counsel to the U.S.  Department  of Health and Human  Services  and from 1982 to
1988 he was a Commissioner on the U.S.  Interstate  Commerce  Commission.  Prior
thereto,  he was Vice President and General Counsel to the United States Railway
Association  and  served  as Staff  Director  and  Counsel  to the  U.S.  Senate
Committee on Commerce, Science and Transportation. Mr. Sterrett is also a member
of the Board of Directors of Trans World Corporation.

John C. Boland, Class D Director

     Mr. Boland (age 53) was appointed to the Board of Directors on December 17,
1999 as a result  of Mr.  Huertematte's  resignation.  He has been  owner of the
general partner of Remnant Partners L.P., an investment partnership, since 1992.
From 1989 to 1995, he was the publisher of Bankruptcy  Values,  an institutional
research service.  Prior to entering the investment business,  Mr. Boland was an
editor  of  Barron's  Financial  Weekly  (from  1978 to  1983)  and a  freelance
financial writer.

William L. Prieur Brownley, Former Vice President and General Counsel

     Mr.  Brownley (age 44) joined the Company in April 1991 and was responsible
for the management of the Company's  legal affairs.  For the five years prior to
joining the Company,  he served as Assistant General Counsel and then as General
Counsel at  Infotechnology  Inc., an investment  company whose holdings included
various companies in the communications industry. Mr. Brownley resigned from the
Company in January 2001.

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

     Mr. Marino (age 64) 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.

Thomas J. Ferrara, Chief Financial Officer and Treasurer

     Mr. Ferrara (age 43) 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 37) 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.


<PAGE>


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

     Mr.  Flaherty  (age 55) 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 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, 2000,  1999 and
1998,  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 2000.

<TABLE>
<CAPTION>

                                                              SUMMARY COMPENSATION TABLE
                                                              --------------------------


                                                                              Long-term
  Name                                             Annual    Compensation     Compensation(1)
  and                                                                         Awards
  Principal                                                                   Options/             All Other
  Position                            Year         Salary         Bonus       SARs(#)            Compensation(5)
  --------------------------------------------------------------------------------------------------------------
  <S>                                  <C>        <C>           <C>          <C>                   <C>

  John B. Wood                         2000       $350,002(7)   $     --            --             $18,100(6)
  (Executive Chairman)                 1999       $348,574      $245,000     2,000,000(3)          $13,000(6)
                                       1998       $334,198      $     --            --             $13,500(6)


  David Aldrich                        2000       $332,894      $     --       250,000(2)          $18,100(6)
  (President, Chief Executive          1999       $205,119      $245,000       200,000(3)          $    --
  Officer)                             1998       $173,850      $     --       210,000(4)           $2,333


  Thomas J. Ferrara                    2000       $133,561      $     --       128,000(2)           $5,100
  (Chief Financial Officer,            1999        $98,435      $ 50,000        27,500(3)(4)        $2,953
   Treasurer)                          1998        $90,898      $     --        17,500(4)           $2,952



  Robert J. Marino                     2000       $211,706      $     --       292,900(2)           $5,100
  (Chief Sales and Marketing           1999       $206,003      $100,000       200,000(3)           $5,000
    Officer and Executive V.P.)        1998       $204,734      $     --       362,000(4)           $5,500


  William L.P. Brownley                2000       $192,653            --        20,000(2)           $4,816
  (Former V.P. General                 1999       $170,997      $100,000       200,000(3)           $4,275
    Counsel)                           1998       $166,961      $     --       135,000(4)           $5,380

<FN>

(1)      There are no restricted stock awards or payouts pursuant to long-term investment plans.
(2)      Options granted in 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 1999 and 1998 are in the Company's Class A common stock.
(5)      All other compensation represents Company contributions made on behalf of the executive officers to the Telos Shared
         Savings Plan, and in 1998 the amounts also include automobile and living allowances.
(6)      Included in these amounts are $13,000 in 2000, $8,000 in 1999 and 1998 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.

</FN>
</TABLE>



<PAGE>


  Stock Option Grants

         The Summary Table of Options/SAR Grants in the Last Fiscal Year is set
forth below for the stock option grants in 2000.

<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
  (Executive Chairman)                       --         --            --             --            --           --

  David Aldrich
  (President, Chief
    Executive Officer)                  250,000(1)     6.4%        $1.37       Oct. 2010     $215,396      $545,857

  Thomas J. Ferrara
  (Chief Financial Officer,              64,000(2)     1.6%        $3.85      Sept. 2010     $154,960      $392,698
    Treasurer)                           64,000(3)     1.6%        $0.75      Sept. 2010     $ 30,187      $ 76,500

  Robert J. Marino
  (Chief Sales and Marketing            164,900(1)(4)  4.2%        $1.37       Oct. 2010     $142,075      $360,047
   Officer and                           64,000(2)     1.6%        $3.85      Sept. 2010     $154,960      $392,698
    Executive V.P.)                      64,000(3)     1.6%        $0.75      Sept. 2010     $ 30,187      $ 76,500

  William L.P. Brownley
  (Former V.P.,
    General Counsel)                     20,000(1)(4)  0.5%        $1.37       Oct. 2010     $ 17,232      $ 43,669
<FN>

(1)      Options granted in 2000 were in the common stock of Telos.
(2)      Options granted in 2000 were in the common stock of Telos Delaware, Inc.
(3)      Options granted in 2000 were in the common stock of Xacta Corporation.
(4)      Options originally issued in 1990 and 1991 at an exercise price of
         $1.42 per share, were canceled and reissued on October 31, 2000. On
         that date, the market price of the stock was $1.37 per share.

</FN>
</TABLE>

<PAGE>


  Management Stock Options

     The  following  table  shows,  as to the  individuals  named in the Summary
Compensation table, the number of shares acquired during such period through the
exercise  of  options,  and the  number  of shares  subject  to and value of all
unexercised options held as of December 31, 2000.
<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)                --                --         3,739,225/978,766      $3,284,281/$411,082

  David Aldrich
  (President, Chief
    Executive Officer)                --                --           995,000/165,000         $679,900/$53,100

  Thomas J. Ferrara
  (V.P., Treasurer,
   Chief Financial
     Officer)                         --                --            33,500/147,000           $13,510/$1,740

  Robert J. Marino
  (Chief Sales and Marketing
   Officer and Executive V.P.)        --                --           717,600/472,300       $ 336,885/$118,365

  William L.P. Brownley               --                --           407,500/122,500        $ 371,800/$43,350
  (Former V.P., General Counsel)

<FN>

     1. These  aggregate  amounts  include  exercisable  options to purchase the
common stock of Enterworks,  Inc. for 2,060,000 shares held by Mr. Wood, 400,000
shares held by Mr.  Aldrich,  7,500 shares held by Mr.  Ferrara,  200,000 shares
held by Mr. Marino and 265,000 shares held by Mr. Brownley, respectively.

     2.  These  aggregate  values  include  values  for  exercisable  options to
purchase  the common  stock of  Enterworks,  Inc. of  $2,263,800  for Mr.  Wood,
$562,000 for Mr. Aldrich,  $8,100 for Mr.  Ferrara,  $216,000 for Mr. Marino and
$328,450 for Mr. Brownley, respectively. All remaining amounts included in these
values  reflect the value of options to purchase the Class A Common Stock of the
Company.  These values are based upon an estimated fair market value at December
31, 2000 of $1.37 per share for the Company's  Class A Common  Stock,  $1.85 per
share for the common stock of  Enterworks,  Inc.  These values were derived from
valuations performed by an independent third party for the trustees of the Telos
Shared  Savings  Plan,  a defined  contribution  employee  savings plan in which
substantially all full-time employees are eligible to participate.
</FN>

</TABLE>

<PAGE>


  Compensation of Directors

     During the fiscal year ended,  December 31, 2000,  employee  directors were
paid  fees in total  of  $13,000  each  for  Board  Meetings  attended.  Outside
directors  Mr.  Byers and Dr.  Bryen were paid an annual fee of $25,000 each and
further  compensated  $5,000 and $1,000 for meetings  attended in excess of four
per year.  Outside  director Mr.  Sterrett  earned annual fees of $7,000 and Mr.
Boland  waived  payment for Board  Activity in 2000.  Mr. Boland has asked to be
compensated in 2001 for his Board  membership in accordance with the annual fees
for outside  directors.  The Chairman of the Board,  Dr. Ikle receives  $100,000
annually for his services to the Board.  In addition,  Mr. Byers receives $5,000
for his services as Proxy Chairman.  The compensation  paid to Mr. Byers and Dr.
Bryen is paid  pursuant to a proxy  agreement  between the Company,  the Defense
Security Service and certain of the Company Shareholders.

     Effective  July  1,  2000,  the  Board  of  Directors   implemented  a  new
compensation structure for the Board in which the Chairman of the Board receives
$100,000  for his  services.  The plan  provides  payment of $25,000 per year to
Proxy Holders, $5,000 per year for Proxy Chairman, Directors fees of $10,000 per
year  with  no  additional   compensation  for  meetings  over  four  per  year.
Additionally, the structure provides Directors who serve on the Executive, Audit
or Compensation  Committees to receive annual options for 10,000 shares of Telos
Common Stock at market value.

  Employment Contracts

     As of December 31, 2000, 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, given
their present salary levels, $350,000, $218,000 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
bonus is determined by reference to the amount, if any, of earnings before taxes
and  goodwill  amortization  of the  Company  for the year  and at the  Board of
Directors  and Chief  Executive  Officer's  discretion.  Each year,  the Company
renegotiates  these  employment  contracts as part of the yearly review process.
Accordingly  in 2001,  the  Company  expects to review the  contracts  described
above.  In addition,  strategic  hires or promotions  may increase the number of
Executives who have these 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, 2001
<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                            663,534 shares (C)             3.04%
Class A Common Stock            William L. P. Brownley                      160,099 shares (C)             0.75%
Class A Common Stock            Robert J. Marino                            474,034 shares (C)             2.20%
Class A Common Stock            Thomas J. Ferrara                            34,819 shares (C)             0.16%
Class A Common Stock            John B. Wood                              1,724,860 shares (C)             7.55%
Class A Common Stock            All Officers and Directors as a Group     3,163,393 shares (D)            13.07%
                                (7 persons)

12% Cumulative Exchangeable     John C. Boland                               31,220 shares (E)             2.40%
Redeemable Preferred Stock      714 St. Johns Road
                                Baltimore, MD  21210-2134

12% Cumulative Exchangeable     Value Partners, Ltd.                        714,317 shares (F)            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 (G)            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

<FN>

     (A) Mr. 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, Brownley, Marino, Ferrara
and Wood include 142; 11,501;  20,382;  8,819 and 37,243 shares of the Company's
Class A Common Stock,  respectively,  held for their beneficial  interest by the
C3, Inc.  401(k)  Plan and Telos  Corporation  Savings  Plan.  Messrs.  Aldrich,
Brownley,  Marino,  Ferrara and Wood hold options to acquire  655,000;  142,500;
421,600;  26,000;  and 1,679,225  shares of the Company's  Class A Common Stock,
respectively,  in addition to their current common stock holdings.  These shares
are purchasable upon exercise of the options and are exercisable  within 60 days
of March 1, 2001.

     (D) The common stock holdings of the Company's  officers and directors as a
group include 78,134 shares of the Company's Class A Common Stock held for their
beneficial  interest by the C3, Inc. 401(k) Plan and Telos  Corporation  Savings
Plan. Under the Company's stock option plan and certain stock option agreements,
all officers and directors as a group hold options to acquire  3,030,325  shares
of Class A Common Stock exercisable within 60 days of March 1, 2001.

     (E) John C. Boland holds 30,000 shares of the 12%  cumulative  exchangeable
redeemable  preferred  stock.  In  addition,  he is the manager and owner of the
general  partner of Remnant  Partners  LP which  owns  46,500  shares of the 12%
cumulative  exchangeable  redeemable  preferred stock of the Company. Mr. Boland
has  filed on Form 3 with the  Commission  that he may be deemed to own 1,220 of
Remnant Partners LP's 46,500 shares.

     (F) Value Partners Ltd. ("VP") and Fisher Ewing Partners ("FEP") have filed
jointly a Schedule 13D under which they disclosed that they may act as a "group"
within the meaning of Section 13(d) of the Securities  Exchange Act. Each of the
reporting  persons  disclosed  that it may be  deemed  to  beneficially  own the
aggregate of 714,317 shares of the  Exchangeable  Preferred Stock held of record
by the reporting persons collectively. According to an Amendment to the Schedule
13D filed on May 10,  1996,  each of FEP and  Timothy  G.  Ewing and  Richard W.
Fisher may be deemed to have the sole power to vote and to dispose of the shares
of the  Exchangeable  Preferred  Stock held of record by the  reporting  persons
collectively.

     (G)  Wynnefield   Partners  SmallCap  Value,   L.P.,   ("WPSCV"),   Channel
Partnership II, L.P. ("CP"),  and Wynnefield  SmallCap Value Offshore Fund, Ltd.
("WSCVOF") have jointly filed a Schedule 13D under which they disclosed they may
act as a "group" within the meaning of Section 13(d) of the Securities  Exchange
Act.  Each  of  the  reporting  persons  disclosed  that  it may  be  deemed  to
beneficially own the aggregate of 228,500 shares of the  Exchangeable  Preferred
Stock held of record by the  reporting  persons  collectively.  According to the
Schedule  13D,  Nelson  Obus and  Joshua  Landes,  by virtue of their  status as
general  partners of WPSCV,  Mr. Obus as general partner of CP and Messrs.  Obus
and Landes, as officers of WSCVOF's investment  manager,  have the power to vote
or to direct the vote and the power to dispose and to direct the  disposition of
the  shares of  Exchangeable  Preferred  Stock  owned by WPSCV,  CP and  WSCVOF,
respectively.
</FN>
</TABLE>

<PAGE>


Item 13. Certain Relationships and Related Transactions

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

     Mr. John R. Porter, the owner of a majority of the Company's Class A Common
Stock, has a consulting agreement with the Company whereby he is compensated for
consulting  services provided to the Company in the areas of marketing,  product
development,  strategic  planning and finance as  requested by the Company.  Mr.
Porter was paid $200,000 by the Company in 2000, 1999, and 1998 pursuant to this
agreement,  which amounts were determined by negotiation between the Company and
Mr. Porter.

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

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

     Mr. William L.P. Brownley, former Vice President and General Counsel of the
Company,  entered into an agreement with the Company whereby he 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 him with
medical and insurance benefits during that same period.


<PAGE>


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)    1.     Financial Statements

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

(a)    2.     Financial Statement Schedules

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

(a)    3.     Exhibits:

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

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

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

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

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

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

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

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

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

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

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

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



<PAGE>


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

  10.20  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.

      27                 Financial Data Schedule

  (b)    Reports on Form 8-K

         None


<PAGE>


                                   SIGNATURES

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

                                TELOS CORPORATION

                                                           By:  David S. Aldrich
                                                                ----------------
                                                                   President and
                                                         Chief Executive Officer

                                                          Date:    April 2, 2001
                                                        ------------------------

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

<TABLE>
<CAPTION>

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


<S>                                          <C>                                              <C>

/s/  John B. Wood                            Executive Chairman of
-----------------                            the Board of Directors
John B. Wood                                                                                  April 16, 2001



/s/  Fred Charles Ikle                       Chairman of the                                  April 16, 2001
----------------------                       Board of Directors
Fred Charles Ikle



/s/ Stephen D. Bryen                         Director                                         April 16, 2001
----------------------
Stephen D. Bryen



/s/  Norman P. Byers                         Director                                         April 16, 2001
----------------------
Norman P. Byers



/s/ Malcolm M.B. Sterrett
-------------------------
Malcolm M.B. Sterrett                        Director                                         April 16, 2001



                                             Director                                         April 16, 2001
----------------------
John C. Boland



/s/ David S. Aldrich                         President, Chief Executive                       April 16, 2001
--------------------                         Officer (Principal Executive
David S. Aldrich                             Officer)




/s/  Thomas J. Ferrara                       Chief Financial Officer                          April 16, 2001
----------------------                       (Principal Financial Officer
Thomas J. Ferrara                            & Principal Accounting Officer)

</TABLE>