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, 1998


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

                             Commission file number: 1-8443

                                    TELOS CORPORATION
                     (Exact name of registrant as specified in its charter)

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

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

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

Securities registered pursuant to Section 12(b)of the Act:   NONE

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

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

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

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

     As of March 28,  1999,  the  registrant  had  21,238,980  shares of Class A
Common Stock,  no par value;  4,037,628  shares of Class B Common Stock,  no par
value; and 3,185,586 shares of 12% Cumulative  Exchangeable Redeemable Preferred
Stock, par value $.01 per share, outstanding.

Incorporation by Reference:  None
Number of pages in this report (excluding exhibits): 57


<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 headquarters is in Ashburn,
Virginia,  part of Northern Virginia's growing Netplex region of high technology
companies. There are approximately 60 other offices throughout the United States
and around the world.

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

     Over each of the past three years,  Telos has made significant  investments
in  the  development  of  software  and  service  solutions  to  facilitate  the
transition  of its  business  toward  a  larger  mix  of  fixed  price  commerce
solutions.  As part of this strategy,  the Company has  discontinued or divested
itself of those elements of its  traditional  business which were not consistent
with this  strategy.  In December  1996,  Telos sold Telos  Consulting  Services
("TCS"),  one of its contract labor  divisions,  for $31.6 million.  In February
1998,  Telos sold Telos  Information  Systems  ("TIS"),  another  contract labor
division, for $14.7 million.

Reportable Operating Segments

     During 1998,  the Company  provided its business  solutions  through  three
operating  segments: Systems and Support Services,  its Products Group,  and its
Enterworks subsidiary.

Systems and Support Services

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


<PAGE>


     For 1998, the Systems and Support Services Group generated revenue of $98.3
million, or 47.5%, of the Company's  consolidated  revenue. Both the TIS and TCS
divisions  were part of the Systems and  Support  Services  Group prior to their
respective sales in 1998 and 1996, respectively.

Products Group

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

     This operating segment also holds the largest network integration  contract
ever  awarded by the U.S.  federal  government.  The Small  Multi-user  Computer
("SMC-II") contract has a three-year term that commenced with award in September
1995,  and was extended  through April 1999.  The Products Group was awarded the
follow-on to the SMC II Contract,  Infrastructure Solutions 1, in February 1999.
For 1998, the Products Group had revenues of $101.7  million,  or 49.1%,  of the
Company's consolidated revenues.

Enterworks, Inc.

     Enterworks,  Inc. ("Enterworks") develops,  markets,  licenses and supports
Web-enabled  software  products that integrate data,  applications  and business
processes  throughout an enterprise.  The Company's  primary  product is Virtual
DB(TM),  which  delivers  single,  integrated  views  of data  across  multiple,
disparate databases and platforms.  These real-time views can easily be tailored
to a company's  business model, and the cleansed,  integrated data can be stored
in a data warehouse or forwarded to an enterprise software  application.  At the
end of 1998, the Company  released  Enterworks(TM)  Process  Manager ("EPM") for
Deployment, an innovative solution for reducing the cost, time and complexity of
implementing  enterprise  software packages.  The technology  underlying EPM for
Deployment  uses  intelligent  agents that interact with existing  databases and
business  applications to automate data exchange and coordinate the execution of
tasks across any system using proven "best practices" models.

     Enterworks'  advanced solutions are targeted at companies with complex data
environments  and a strong need to build  competitive  strengths  by  increasing
their speed, agility, and business  intelligence.  The Company focuses primarily
in government  markets,  manufacturing,  and  healthcare,  offering  specialized
consulting,  training and support  services as part of a total  solution for its
customers.

     For  1998,  Enterworks  had  revenues  of $7.1  million,  or  3.4%,  of the
Company's consolidated revenues.

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 
                                                   ------------------------------------------------- 
                                                   1998                  1997                 1996(1)
                                                   ----                  ----                 -------
<S>                                              <C>                    <C>                   <C>    
Federal government                                92.9%                  94.6%                 84.8%
Commercial                                         5.1                    3.9                  13.6
State and local governments                        2.0                    1.5                   1.6
                                                  ----                   ----                  ----
         Total                                   100.0%                 100.0%                100.0%
                                                 ======                 =====                 =====

<FN>
(1)  1996 major market revenue percentages exclude TCS revenues.  TCS was sold in 1996.
</FN>
</TABLE>


<PAGE>


     Total  consolidated  revenue  derived from the federal  government for 1998
includes 68.9% of revenue from  contracts with the Department of Defense,  21.7%
of revenue from contracts with other Departments of the federal government,  and
2.3% of revenue from subcontracts with U.S. government prime contractors.

Competition

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

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

Employees

     The Company  employed  1,155 persons as of December 31, 1998.  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,  807 provide Systems and Support Services,
105 are employed by Enterworks  and 105 provide  System  Integration  (Products)
Services.  An additional 138 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.

<PAGE>


     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, 1998 and 1997,  the Company had total backlog from existing
contracts of approximately $923.3 million and $1.0 billion,  respectively.  This
is the  maximum  value  of  additional  future  orders  for  systems,  products,
maintenance  and  other  support  services   presently   allowable  under  those
contracts,  including renewal options available on the contracts if exercised by
the client, over periods extending up to seven years. Included in the backlog at
December 31, 1998 is $786 million from the Company's SMC-II  contract,  which is
due to expire in April 1999 and is therefore  unlikely to be converted to orders
and  revenue  of this  magnitude  in 1999.  The  Company  has been  awarded  the
follow-on contract to SMC II,  Infrastructure  Solutions-1 ("IS1"), in the first
quarter of 1999.  This contract has a five year term with an award amount not to
exceed $380 million. The backlog totals at December 31, 1998 do not include this
award.  Approximately  $56  million  and $104  million  of the total was  funded
backlog at December 31, 1998 and 1997, respectively.

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

Overview of 1998

     During 1998,  Telos  continued to make  investments in order to execute its
strategy  of  transitioning  its  business  toward a larger  mix of fixed  price
commerce solutions.

     These  investments  included  the  continued   development  of  Enterworks'
enterprise   application   integration  software  solutions,   Virtual  Database
("Virtual  DB") and  Enterworks  Process  Manager  ("EPM").  Virtual  DB 3.0 was
released in March 1999, and EPM 1.0 was released in December  1998.  Enterworks'
revenue grew to $7.1 million in 1998, more than double 1997 revenue. The Company
expects  Enterworks  revenue to continue to increase in 1999 based on the status
of its  products  and its  continuing  investment  in its  sales  and  marketing
infrastructure to support those products.  However,  the Company does not expect
the Enterworks  business to be profitable until after 1999,  consistent with the
experience of comparable software companies at this stage of development.

     The  Company's  1998  investments  were also  focused on its higher  margin
information  assurance,  data  integration,   advanced  messaging  and  wireless
networking practices.  Revenue for these practices approximated $7.0 million for
1998,  which also  represents a more than doubling of 1997 revenue.  In December
1998, Telos announced a strategic  partnership with Tivoli Systems, a subsidiary
of IBM, whereby Telos plans to provide  professional  services to support Tivoli
Products.  This  enterprise  management  practice will be an additional  area of
emphasis for Telos in 1999 and beyond.  As with Enterworks,  the Company expects
total revenue for these practices will continue to grow in 1999 based in part on
its continuing investments in sales and marketing to support these practices.
<PAGE>

     The  Company's  1998  activities  also  focused on reducing or  eliminating
certain of its least profitable contracts. These reductions or eliminations were
principally  within the Products  Group,  although there were also some targeted
reductions  in the Systems  and  Support  Services  Group.  With these  business
reductions came decreases in related corporate  infrastructure costs,  including
sales, general and administrative ("SG&A") expenses. However, on a total company
basis, these cost reductions were more than offset by increases in SG&A costs to
support Enterworks and the other higher margin businesses noted above.

     In February 1998, Telos sold substantially all of the net assets of its TIS
division for $14.7 million in cash. In  connection  with this sale,  the Company
recorded a gain of $5.7 million in its consolidated  statement of operations for
1998.

     In May  1998,  the  Company  entered  into  an  agreement  with  one of its
shareholders,  Union de Banques Suisses (Luxembourg) S.A. ("UBS"), to retire all
of UBS's equity holdings in the Company.  These equity holdings  included all of
the 7,500 shares of the Company's Class B Preferred  Stock,  1,837,773 shares of
the  Company's  Class A Common Stock,  and  1,312,695 of the  Company's  Class A
Common Stock  warrants.  The $5.9 million  excess of the carrying  amount of the
Class B Redeemable  Preferred Stock over the redemption price was recorded as an
increase  in capital in excess of par;  there was no impact on income  from this
transaction.

     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.

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  leases  additional  space  for  regional  field  engineering,
contract  work sites,  training,  and sales  offices in 56  separate  facilities
located in 19 states and Europe under  various  leases,  which expire on various
dates through  February  2006. At December 31, 1998,  the Company also owned two
buildings in Amery,  Wisconsin.  One of these  buildings was sold in early 1999.
These facilities  principally support the Company's Systems and Support Services
operating segment.

Item 3.  Legal Proceedings

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

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

     During the fourth  quarter of 1998, 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, 1999, there were 85 holders of the Company's Class A Common Stock
and 3 holders of the Company's Class B Common Stock.

Item 6.   Selected Financial Data

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

                                                                        OPERATING RESULTS

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

                                            1998              1997            1996           1995         1994
                                            --------------------------------------------------------------------
                                                                      (amounts in thousands)
<S>                                        <C>             <C>             <C>            <C>           <C>    
Sales (5)                                  $207,086        $253,787        $188,895       $175,759      $150,676
(Loss) income  from
  continuing operations                      (9,171)          1,412          (9,816)           592       (11,838)
Discontinued Operations: (1)
   Income (loss) from
   discontinued operations                       --              --             500            423          (583)
   Gain on sale of
   Consulting Services                           --              --          11,524             --            --
(Loss) income  before
   extraordinary items                       (9,171)          1,412           2,208          1,015       (12,421)
Extraordinary items                              --              --              --             --          (196)

Net (loss) income                            (9,171)          1,412           2,208          1,015       (12,617)
</TABLE>
<TABLE>
<CAPTION>


                                                                    FINANCIAL CONDITION

                                                                     As of December 31,                              
                                            -------------------------------------------------------------------

                                              1998           1997            1996           1995           1994
                                            -------------------------------------------------------------------

                                                                (amounts in thousands)
<S>                                        <C>             <C>             <C>             <C>           <C>    
Total assets(5)                            $ 95,251        $109,718        $110,064        $94,492       $86,872
Long-term debt (2)                           54,651          56,875          32,857         47,316        40,414
Capital lease obligations,
   long-term (3)                             11,710          12,085          12,537             --            --
Senior redeemable
   preferred stock (4)                        5,631           5,207           4,828          4,494         4,192

Class B redeemable
   preferred stock (4)                           --          12,035          11,087         10,252         9,497
Redeemable preferred
   Stock (4)                                 31,729          29,951          24,230         18,647        14,263
<FN>
(1)   See Note 3 to the Consolidated Financial Statements in Item 8 regarding
      the sale of TCS.
(2)   See Note 5 to the  Consolidated  Financial  Statements in Item 8 regarding
      long-term  debt   obligations  of  the  Company.   Total   long-term  debt
      obligations  include  amounts  due under the Senior  Credit  Facility  and
      subordinated notes.
(3)   See Note 9 to the Consolidated Financial Statements in Item 8 regarding
      the capital lease obligations of the Company.
(4)   See Note 6 to the Consolidated Financial Statements in Item 8 regarding
      redeemable preferred stock of the Company.
(5)   See Note 2 to the Consolidated Financial Statements in Item 8 regarding
      the sale of TIS.
 </FN>
</TABLE>


<PAGE>

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

General

     Over the last three years, the Company has made significant  investments in
the development of software and hardware products, operational infrastructure to
support contracts awarded to the Company, and sales and marketing. The Company's
investments  in new  software  products  provide  the  Company  with an expanded
product line that, the Company believes, offers its customers unique value added
solutions for their computing and information  gathering analysis problems.  The
investment in software products is primarily  through  Enterworks and is focused
on the enterprise  application  integration market, through data integration and
information  processing  products.  Additionally,  the Company has established a
comprehensive  offering of products  and  services  on its GSA  schedule.  These
investments  have  enabled the Company to win most of its  significant  contract
rebids, and continue to provide significant new business opportunities.

     During   1998,   the   Company   experienced   decreases   in  revenue  and
profitability.  Revenue decreased $46.7 million,  or 18.4%, as compared to 1997.
Approximately  $39.5 million of this decrease was attributable to the expiration
of two  large  contracts  in  1997,  which  are  discussed  further  below,  and
approximately  $20.7  million  of the  decrease  was due to the  sale of the TIS
division in February  1998.  The operating  loss for 1998 was $7.3  million,  as
compared to operating  income of $7.4 million in 1997.  Operating  profitability
declined  principally  as a result of the decreases in revenue and the Company's
continued  investment  in  its  majority-owned  subsidiary,   Enterworks,   Inc.
Exclusive of Enterworks,  the Company's  earnings  before interest and taxes for
1998 was $4.2 million. Profitability was also impacted by unfavorable changes in
the  product  mix of the  Products  Group and the under  absorption  of  certain
infrastructure  costs.  These operating  losses were partially  offset by a $5.7
million gain on the sale of the TIS division in February 1998. 

     During 1997, the Company's revenue and profitability  increased as compared
to 1996. Revenue increased $64.9 million, or 34.4%, primarily due to three large
projects awarded in 1997 which are discussed further below. Operating income for
1997 was $7.4 million, as compared to an operating loss of $9.4 million in 1996.
Operating  profitability  improved  principally  as a result of the increases in
revenue,  as well as cost cutting measures  initiated in 1996 and continued into
1997, which included staff reductions and branch consolidation.

     The  year  ended  December  31,  1996  was  difficult  from an  operational
perspective  due to the federal  government  budget  impasse  early in the year.
However, during 1996 the Company continued to invest in its contract and support
services  infrastructure  to  accommodate a number of contracts  awarded in late
1995. The Company also moved to a larger  headquarters  and systems  integration
facility  in  1996,  which  resulted  in  increased  costs  associated  with the
relocation.

Revenue by Contract Type

     Approximately 95% of the Company's total revenues in 1998 were attributable
to  contracts  with  federal,  state,  and  local  governments,   including  93%
attributable  to the federal  government.  This represents a decrease of 2% from
1997 and relates primarily to the increase in commercial  revenue generated from
Enterworks,  Inc. in 1998. The Company's revenues are generated from a number of
contract  vehicles.  In general,  the Company believes its contract portfolio is
characterized  as having  low to  moderate  financial  risk as the  Company  has
limited  long-term fixed price development  contracts.  The Company's firm fixed
price  contracts  consist  principally of contracts for the purchase of computer
equipment  at  established  contract  prices or  contracts  for  maintenance  of
computer hardware.  A significant  portion of the Company's revenue is from time
and  material  and  cost  reimbursable  contracts,  which  generally  allow  the
pass-through  of  allowable  costs plus a profit  margin.  For 1998,  revenue by
contract  type was as follows:  time and  materials,  24.6%;  firm fixed  price,
56.8%;  cost  reimbursable,  13.7%;  fixed monthly rate, 4.7%; and other,  0.2%.
While the Company has not  experienced any  significant  recent  terminations or
renegotiations,  government  contracts may be terminated or  renegotiated at any
time at the convenience of the government.

<PAGE>

Statement of Operations Data

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

<TABLE>
<CAPTION>
                                                              Year Ended December 31, 
                                             -----------------------------------------------------------------------
                                                    1998                     1997                     1996          
                                             ------------------       -------------------      ---------------------

                                                            (dollar amounts in thousands)
<S>                                          <C>         <C>          <C>          <C>          <C>           <C>
Sales                                        $207,086    100.0%       $253,787     100.0%       $188,895      100.0%
Cost of sales                                 182,915     88.3         218,430      86.1         168,281       89.1
Selling, general and
   administrative expenses                     30,842     14.9          27,054      10.7          29,055       15.4
Goodwill amortization                             589      0.3             892       0.3           1,001        0.5
                                              -------     ----         -------     -----           -----       ----

   Operating (loss) income                     (7,260)    (3.5)          7,411       2.9          (9,442)      (5.0)
Interest expense                               (6,555)    (3.1)         (7,455)     (2.9)         (5,668)      (3.0)
Gain on Sale of Assets                          5,683      2.7              --        --              --         --
Other income (expense)                             64       --             124        --           ( 445)      (0.2)
                                                ------    ----          ------     -----          -------      ----
(Loss) income before taxes                     (8,068)    (3.9)             80        --         (15,555)      (8.2)
Income tax (provision) benefit                 (1,103)    (0.5)          1,332       0.6           5,739        3.0
                                               -------    -----          -----      ----          ------        ---

(Loss) income from
   continuing operations                       (9,171)    (4.4)          1,412       0.6          (9,816)      (5.2)
Discontinued Operations:
  Income from discontinued
 operations, net of tax                            --       --              --        --             500        0.2
  Gain on sale of TCS, net of tax                  --       --              --        --          11,524        6.1
                                                 ----     ----           -----       ----         ------        ---
Net (loss) income                            $ (9,171)    (4.4)%        $1,412       0.6%       $  2,208        1.1%
                                               =======    ======         =====       ===          ======        ===
</TABLE>

Financial Data by Operating Segment

     The Company has three  reportable  operating  segments:  Enterworks,  Inc.,
Systems and Support Services, and Products.

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

                                                                         Year Ended December 31,             
                                                           -----------------------------------------------------
                                                           1998                     1997                 1996         
                                                           -----------------------------------------------------
                                                             (dollar amounts in thousands)
<S>                                                        <C>                     <C>                  <C>                   
Revenue:
    Enterworks, Inc.                                       $  7,073                $  3,398             $  2,140
    Systems and Support Services                             98,277                 121,052              101,535
    Products                                                101,736                 129,337               85,220
                                                            -------                 -------              -------
      Total                                                $207,086                $253,787             $188,895
                                                            =======                 =======              =======

Gross Profit:
    Enterworks, Inc.                                       $  1,542                $   (132)            $    955
    Systems and Support Services                             14,046                  20,614               11,237
    Products                                                  8,583                  14,875                8,422
                                                             ------                  ------               ------
      Total                                                $ 24,171                $ 35,357             $ 20,614
                                                            =======                  ======              =======

Gross Margin:
    Enterworks, Inc.                                        21.8 %                    (3.9)%               44.6 %
    Systems and Support Services                            14.3 %                    17.0 %               11.1 %
    Products                                                 8.4 %                    11.5 %                9.9 %
      Total                                                 11.7 %                    13.9 %               10.9 %
</TABLE>

<PAGE>


Results of Operations

Years ended December 31, 1998 and 1997

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

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

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

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

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

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

     Interest  expense  decreased  $900,000 to $6.6  million in 1998,  from $7.5
million in 1997.  This decrease is due  principally to a decrease in the average
balance of the Senior Credit Facility for most of 1998 compared to 1997, as well
as a reduction in the bank's base rate due to changing economic conditions.

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

<PAGE>

Years ended December 31, 1997 and 1996

     Revenue  increased $64.9 million,  or 34.4%, from $188.9 million in 1996 to
$253.8  million in 1997.  This  increase was  attributable  both to the Products
Group which  reported an increase in sales of $44.1  million and the Systems and
Support Services Group with an increase in sales of $19.5 million.

     The increase in the Systems  Integration  Group's revenue was primarily due
to orders  under its  Joint  Recruiting  Information  Support  System  ("JRISS")
Blanket  Purchase  Agreement  ($15.1 million) as well as its U.S. Courts Systems
Data  Communication  Network contract ($10.6 million) which were both awarded in
1997. In general,  those 1996 contracts  that  continued  into 1997  experienced
reduced order  volume,  except for the Small  Multi-User  Computer II ("SMC-II")
contract  which had an increase in order  volume of $25.7  million  from 1996 to
1997.

     The  increase  in the  Systems  and  Support  Services  Group's  revenue is
primarily  attributable  to the effect of a Blanket  Purchase  Agreement won and
completed  in  1997  for  the  Immigration  and  Naturalization  Service  ($12.2
million).  The TIS division,  which held Jet  Propulsion  Laboratory  contracts,
experienced  an increase in revenue of $6.1  million in 1997,  compared to 1996.
Hardware support revenues remained consistent between 1997 and 1996.

     Cost of sales  increased by $50.1 million,  or 29.8%,  to $218.4 million in
1997 from $168.3 million in 1996. This increase is the result of increased sales
during the year, and changes in the revenue product mix. The Systems and Support
Services  Group  benefited  significantly  as a result of new contract  revenues
described above. The cost of labor required to support these new contracts, as a
percentage  of  revenue,  was much less  than to  support  traditional  services
contracts, on a per hour basis.  Additionally,  the Systems and Support Services
Group implemented a cost reduction program to reduce labor and material costs in
the hardware  support area. The Products  Group  benefited from the insertion of
new technology with lower cost  components as part of the solutions  provided in
its larger contracts.  However,  in the second half of 1997,  certain additional
reserves  for the  write-off of  inventory  of  approximately  $1.8 million were
recorded.

     Gross profit  increased by $14.8  million for the year to $35.4  million in
1997, from $20.6 million in 1996. The increase is primarily  attributable to the
changes in cost of sales discussed above and reflects the result of cost cutting
measures initiated in 1996 and continued in 1997, including staff reductions and
branch consolidation.

     Selling,  general and administrative (SG&A) expenses decreased for the year
by  approximately  $2.0 million,  from $29.1 million in 1996 to $27.1 million in
1997. A reduction in SG&A costs in 1997 resulted  from the Company's  relocation
to a new headquarters  facility.  The lease for the new facility is considered a
capital  lease  rather than the  previous  operating  lease.  The  Company  also
realized a reduction in facility and operating  costs as a result of the sale of
TCS in late 1996.  Additionally,  aggressive cost reduction programs implemented
in late 1996,  reduced bid and proposal and sales and marketing expenses as well
as other  discretionary  expenses  contributed to the decrease in SG&A expenses.
SG&A as a percentage of sales decreased to 10.7% for 1997 from 15.4% in 1996.

     Goodwill  amortization  expense  was  $892,000  for 1997  compared  to $1.0
million for 1996.  The reduction in goodwill  amortization  is  attributable  to
reductions in the goodwill  balance as a result of the sale of TCS which reduced
goodwill by approximately $6.9 million in 1996.

     The change  from an  operating  loss of $9.4  million in 1996 to  operating
income of $7.4 million in 1997 is a result of the  increases in gross profit and
the decreases in SG&A discussed above.

     Other  non-operating  income of $124,000 for 1997 is compared to an expense
of $445,000 in 1996. The income in 1997 is attributable to non-operating refunds
and other miscellaneous  charges.  The expense in 1996 was attributable to costs
required to settle a previous non-operating related lawsuit.

<PAGE>
     Interest expense increased  approximately  $1.8 million to $7.5 million for
1997,  as  compared  to $5.7  million in 1996.  The  increase is a result of the
significant  increase in the average  outstanding  balance of the Senior  Credit
Facility  for most of 1997,  as well as an  increase in  interest  recorded  for
capital lease  obligations  associated  with the mid-1996 move by the Company to
its new manufacturing and support facility in Ashburn, Virginia.

     The deferred tax benefit recognized for 1997 of $1.3 million represents the
reduction of the valuation allowance related to net operating loss carryforwards
which are  expected to be utilized to offset the taxable  gain of  approximately
$11 million were recognized related to the sale of TIS in February 1998.

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,  1998,  the Company  had an  outstanding  balance of $36.2
million on its $45 million Senior Credit Facility (the "Facility"). The Facility
matures on July 1, 2000 and is  collateralized  by certain assets of the Company
(primarily  inventory  and  accounts  receivable).   The  amount  of  borrowings
fluctuates based on the underlying asset borrowing base as well as the Company's
working  capital  requirements.  At December  31, 1998,  the Company,  under its
borrowing base formula,  had $6.7 million of unused  availability.  The Facility
has various covenants which may, among other things, restrict the ability of the
Company to merge with  another  entity,  sell or transfer  certain  assets,  pay
dividends and make other distributions beyond certain limitations.  The Facility
also requires the Company to meet certain leverage,  net worth interest coverage
and  operating  goals.  At December 31, 1998,  the Company was not in compliance
with several covenants contained in the Facility;  however,  the bank has waived
this non-compliance.  In addition, the bank has amended the covenants to conform
to the Company's 1999 budget expectations.

     The Company's  subordinated  notes are held principally by shareholders and
management,  and totaled  $18.5  million at December 31, 1998.  These notes bear
interest at rates between 8% and 17% and become payable in 2000 through 2001.

     The Company currently has two primary classes of redeemable preferred stock
- Senior  Redeemable  Preferred  Stock and Public  Preferred  Stock.  Each class
carries  cumulative  dividend rates of 12% to 14.125%.  At December 31, 1998 the
total carrying value of redeemable  preferred stock,  including  accumulated and
unpaid dividends,  was $37.4 million. The Company accrues dividends and provides
for accretion related to the redeemable  preferred stock.  Mandatory  redemption
for the Senior Redeemable  Preferred Stock including all dividends  payable,  is
required on  December  31,  2001,  subject to the legal  availability  of funds.
Mandatory  redemption  for the  Public  Preferred  Stock is  required  from 2005
through 2009, subject to the legal availability of funds.

     Cash used by operating  activities  was $2.7 million in 1998, due primarily
to the year's net loss and an  increase in  accounts  receivable  as a result of
sales growth in the fourth quarter  compared to the prior year's fourth quarter.
Cash  provided by investing  activities  was $11.4  million in 1998,  reflecting
capital  expenditures of $1.3 million and $2.0 million in continued  investments
in software development costs related to Enterworks, offset by the proceeds from
the  sale  of TIS of  $14.7  million.  The  Company  used  cash  from  financing
activities of $8.9 million in 1998,  reflecting  principally the payment of $6.5
million for the retirement of the UBS equity holdings, the repurchase of 410,000
shares of Redeemable  Preferred Stock for $1.6 million,  and net payments on the
Facility.

     In February 1998, the Company sold its TIS division for  approximately  $15
million.  The  net  proceeds  from  the  sale  were  used  to pay  down  amounts
outstanding under the Facility.

     In May 1998,  the Company  retired  all of the equity  holdings of Union de
Banques Suisses (Luxembourg) S.A. for $6.5 million, of which $5 million was paid
in cash in May 1998,  and the remaining  $1.5 million was funded by two separate
letters of credit.  UBS was paid $1.0 million in September  1998 using the first
letter of credit  secured by the Company's  lender and $500,000 in November 1998
using the second letter of credit.

     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 $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.

     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 are unsecured. The Series D Notes have a maturity date of
October 1, 2000 and bear interest at 14% per annum.  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.  These Notes contain 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.  The
amount  outstanding of the  subordinated  debt was  approximately  $1,396,000 at
December 31, 1998.
<PAGE>
     The accompanying  consolidated financial statements have been prepared on a
going  concern  basis,   which   contemplates  the  realization  of  assets  and
satisfaction  of  liabilities  in the normal  course of  business.  However,  as
reflected in the accompanying  financial statements,  the Company incurred a net
loss of $9.2  million in 1998.  This loss  included the effect of a $5.7 million
non-recurring gain from the sale of its TIS division.  In addition,  the Company
was not in  compliance  with several  covenants of its Senior  Credit  Facility,
although the lender has provided  waivers for the violations and has amended the
covenants to conform to the  Company's  1999 budget  expectations.  Based on its
budget,  the  Company  anticipates  a need  for  approximately  $10  million  of
additional  financing  for  1999.  These  factors,   including  the  uncertainty
surrounding  whether  and when the  additional  financing  will be  secured  and
whether the Company  will meet its budget  expectations  and bank  covenants  in
1999, indicate that the Company may be unable to continue as a going concern for
a  reasonable  period of time.  The  financial  statements  do not  include  any
adjustments  relating  to the  recoverability  of assets and  classification  of
liabilities  that might be necessary should the Company be unable to continue as
a going concern.  The Company's  continuation as a going concern is dependent on
its ability to obtain the additional financing required,  meet its 1999 budgeted
cash flow objectives, and comply with the terms of its Senior Credit Facility.

     The  Company  believes  that the  necessary  additional  financing  will be
secured through one or more of the following sources:  the sale of a division or
asset which is not critical to its strategic  goals;  additional  financing from
its lender;  or additional  equity  financing.  Alternatives are currently being
pursued under each of these sources; however, the required financing has not yet
been secured.  The Company  believes the required  funding will be arranged in a
timely manner that does not have a significant adverse impact on its operations.
However,  there  can be no  assurance  that the  Company  will be able to secure
financing  sufficient  for its  needs  and at terms  favorable  to the  Company.
Additionally,  there can be no assurance  that the Company will be successful in
meeting budget  expectations and bank covenants in 1999.  Failure by the Company
to obtain sufficient financing,  meet its budget expectations,  or meet its bank
covenants  may  have  a  material  adverse  effect  on the  Company's  financial
position,  results  of  operations  or  cash  flows.  See  also  Note  1 to  the
Consolidated Financial Statements.

Capital Expenditures

     The Company believes that its business is generally not capital  intensive.
Capital  expenditures  for property and equipment  were $1.2 million in 1998 and
$2.6 million in each of 1997 and 1996. The Company incurred capital expenditures
in 1996 as a result of moving to a new headquarters and integration facility. In
1996, the Company  entered into a twenty year lease for a building that provides
significantly  more  integration and warehouse  space.  The Company  anticipates
capital  expenditures of approximately $2.6 million in 1999, 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 offset the effects of inflation, if any, on the Company's
performance.


<PAGE>

Year 2000

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

     The  Company,   like  most  owners  of  computer  software,   is  modifying
significant  portions of its  internal  use  software  so that it will  function
properly in the Year 2000. Accordingly,  the Company has incurred and expects to
continue to incur  internal staff costs as well as consulting and other expenses
related to software  and  infrastructure  enhancements  necessary to prepare the
systems for the Year 2000.  Total  expenditures for such costs were not material
to the Company's  consolidated  financial statement in 1998 or 1999. The Company
expects to complete its internal use software  compliance  efforts  during 1999.
Maintenance,  modification costs and software purchased with the express purpose
of fixing the Year 2000 problem are expensed as incurred.

     The Company has queried its key  suppliers and vendors to assess their Year
2000  readiness and has been informed that software  licensed to the Company for
resale will be compliant by the Year 2000.  Therefore,  the Company is not aware
of any  problems  that  would have a material  adverse  impact on its  financial
position, results of operations or cash flows. However, the Company has no means
of ensuring compliance by its suppliers or vendors. If its suppliers and vendors
are not Year 2000  compliant,  there could be a material  adverse  effect on the
Company.

     As is the case with other similarly situated computer companies,  if Telos'
current or future  customers  fail to achieve  Year 2000  compliance  or if they
divert technology expenditures to address Year 2000 compliance problems,  Telos'
business,  results of  operations  or financial  condition  could be  materially
adversely  affected.  For example,  agencies of the United States Government are
principal customers of the Company. If such agencies experience significant Year
2000 system failures, under terms of typical government contracts, the Company's
performance  and/or receipt of payments due could be delayed or contracts  could
be terminated for convenience, which could have a material adverse effect on the
Company.  If similar  failures are  experienced by other  customers or potential
customers of the Company,  this could also have a material adverse impact on the
Company.

     Based on its internal review and the compliance  information  received from
its suppliers and vendors, the Company does not believe that there is a need for
a  contingency  plan for Year 2000  system  non-compliance.  Such a plan will be
developed  if the Company  becomes  aware of any Year 2000  non-compliance  that
would impact its critical  operations.  The cost of developing and  implementing
such a plan, if required,  may in itself be material.  

     Although  the  Company  does not  believe  that it will incur any  material
unanticipated  costs  or  experience   material   disruptions  in  its  business
associated with preparing its internal  systems for the Year 2000,  there can be
no  assurances  that the  Company  will  not  experience  serious  unanticipated
consequences  and/or material costs caused by undetermined  errors or defects in
the technology used in its systems,  which are composed of third party software,
third party  hardware  that  contains  embedded  software and the  Company's own
software products.  A worst case scenario could include:  (i) corruption of data
contained in the Company's internal  information  systems,  (ii)  interruptions,
delays or  terminations in the Company's  business with  government  agencies or
other  customers  associated  with their own Year 2000  problems,  and (iii) the
failure of  infrastructure  services  provided by government  agencies and other
third parties (e.g.,  electricity,  phone  service,  water  transport,  internet
services,  etc.). Any of these unexpected outcomes could have a material adverse
effect on the Company.

     Management  believes that computer systems and software created and sold by
the Company is compliant or will be compliant by the Year 2000. However, because
the Company is in the business of selling computer  systems,  the Company's risk
of being  subjected  to  lawsuits  relating  to Year 2000 issues is likely to be
greater than that of other  industries.  Computer systems may involve  different
hardware and software components from different manufacturers; therefore, it may
be difficult to determine  which component in a computer system may cause a Year
2000  issue.  As a result,  the Company may be  subjected  to Year 2000  related
lawsuits  independent  of  whether  its  products  and  services  are Year  2000
compliant. The outcomes of such lawsuits and the impact on the Company cannot be
determined at this time.

<PAGE>

Recent Accounting Pronouncements

     In March 1998,  the  American  Institute of  Certified  Public  Accountants
issued  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.  SOP 98-1 is  effective  for  fiscal  years
beginning  after  December 15, 1998.  The Company is  currently  evaluating  the
impact of SOP 98-1 on its financial statements and related disclosures.

     In November 1998, the American  Institute of Certified  Public  Accountants
issued  Statement  of Position  98-9 ("SOP  98-9"),  "Modification  of SOP 97-2,
"Software  Revenue  Recognition",  with  Respect to Certain  Transactions".  The
Company  is  currently  evaluating  the  impact  of SOP  98-9  on its  financial
statements and related disclosures.

Forward-Looking Statements

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

Certain Factors That May Affect Future Results

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

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

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

     The accompanying  consolidated financial statements have been prepared on a
going  concern  basis,   which   contemplates  the  realization  of  assets  and
satisfaction  of  liabilities  in the normal  course of  business.  However,  as
reflected in the accompanying  financial statements,  the Company incurred a net
loss of $9.2  million in 1998.  This loss  included the effect of a $5.7 million
non-recurring gain from the sale of its TIS division.  In addition,  the Company
was not in  compliance  with several  covenants of its Senior  Credit  Facility,
although the lender has provided  waivers for the violations and has amended the
covenants to conform to the  Company's  1999 budget  expectations.  Based on its
budget,  the  Company  anticipates  a need  for  approximately  $10  million  of
additional  financing  for  1999.  These  factors,   including  the  uncertainty
surrounding  whether  and when the  additional  financing  will be  secured  and
whether the Company  will meet its budget  expectations  and bank  covenants  in
1999, indicate that the Company may be unable to continue as a going concern for
a  reasonable  period of time.  The  financial  statements  do not  include  any
adjustments  relating  to the  recoverability  of assets and  classification  of
liabilities  that might be necessary should the Company be unable to continue as
a going concern.  The Company's  continuation as a going concern is dependent on
its ability to obtain the additional financing required,  meet its 1999 budgeted
cash flow objectives, and comply with the terms of its Senior Credit Facility.

     The  Company  believes  that the  necessary  additional  financing  will be
secured through one or more of the following sources:  the sale of a division or
asset which is not critical to its strategic  goals;  additional  financing from
its lender;  or additional  equity  financing.  Alternatives are currently being
pursued under each of these sources; however, the required financing has not yet
been secured.  The Company  believes the required  funding will be arranged in a
timely manner that does not have a significant adverse impact on its operations.
However,  there  can be no  assurance  that the  Company  will be able to secure
financing  sufficient  for its  needs  and at terms  favorable  to the  Company.
Additionally,  there can be no assurance  that the Company will be successful in
meeting budget  expectations and bank covenants in 1999.  Failure by the Company
to obtain sufficient financing,  meet its budget expectations,  or meet its bank
covenants  may  have  a  material  adverse  effect  on the  Company's  financial
position, results of operations or cash flows.
<PAGE>

Item 7a.     Quantitative and Qualitative Disclosures About Market Risk

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

     The  Company is exposed to  interest  rate  volatility  with  regard to its
variable rate debt obligations  under its Senior Credit Facility.  This facility
bears interest at 1.00%,  subject to certain  adjustments,  over the bank's base
rate.  The  weighted  average  interest  rate in 1998 was 9.95%.  This  facility
expires on July 1, 2000 and has outstanding balance of $36.2 million at December
31, 1998.

     The Company's  other long-term debt at December 31, 1998 consists of Senior
Subordinated  Notes B, C, and D which bear  interest at fixed rates ranging from
14% to  17%.  The  Senior  Subordinated  Notes  mature  as to  principal  in the
aggregate  amount of $16,173,000 on October 1, 2000.  Additionally,  the Company
has  subordinated  debt issued by their majority owned  subsidiary,  Enterworks,
which bears  interest at a fixed rate of 8%. The  Enterworks  Notes mature as to
principal in the aggregate  amount of $3,277,960 on January 1, 2000. The Company
has no cash flow  exposure  due to rate changes for its Senior  Subordinated  or
Enterworks Notes.
<PAGE>


Item 8.  Financial Statements and Supplementary Data

<TABLE>
<CAPTION>
                                              INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                                                           Page
<S>                                                                                                         <C>    
Report of Independent Accountants - PricewaterhouseCoopers LLP..............................................19

Consolidated Statements of Operations for the Years Ended
    December 31, 1998, December 31, 1997, and December 31, 1996.............................................20

Consolidated Balance Sheets as of December 31, 1998 and
    December 31, 1997.......................................................................................21-22

Consolidated Statements of Cash Flows for the Years Ended
    December 31, 1998, December 31, 1997, and December 31, 1996.............................................23

Consolidated Statements of Changes In Stockholders' Investment (Deficit)
    for the Years Ended December 31, 1998, December 31, 1997,
    and December 31, 1996...................................................................................24

Notes to Consolidated Financial Statements..................................................................25-43


                                                          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 cash flows and of changes in
stockholders' investment (deficit) present fairly, in all material respects, the
financial  position of Telos  Corporation  and its  subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended  December 31, 1998,  in  conformity  with
generally accepted  accounting  principles.  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  generally  accepted  auditing
standards 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.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered losses from
operations  and has not yet been able to obtain  sufficient  financing  for 1999
working capital  purposes.  These conditions raise  substantial  doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also described in Note 1. The consolidated  financial  statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty.

PRICEWATERHOUSECOOPERS LLP


McLean, VA
April 1, 1999




<PAGE>
<TABLE>
<CAPTION>


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



                                                                  Year Ended December 31,                     
                                                 -------------------------------------------------------------
                                                         1998                  1997                   1996     
                                                 -------------------------------------------------------------

<S>                                                   <C>                     <C>                  <C>                  
Sales
    Enterworks, Inc.                                  $  7,073                $  3,398             $   2,140
    Systems and Support Services                        98,277                 121,052               101,535
    Products                                           101,736                 129,337                85,220
                                                       -------                 -------               -------

                                                       207,086                 253,787               188,895
                                                       -------                 -------               -------

Costs and expenses
    Cost of Enterworks, Inc.                             5,531                   3,530                 1,185
    Cost of Systems and
      Support Services                                  84,231                 100,438                90,298
    Cost of Products                                    93,153                 114,462                76,798
    Selling, general and
      administrative expenses                           30,842                  27,054                29,055
    Goodwill amortization                                  589                     892                 1,001
                                                        ------                 -------               -------

                                                       214,346                 246,376               198,337
                                                       -------                 -------               -------

Operating (loss) income                                 (7,260)                  7,411                (9,442)

Other income (expenses)
    Non-operating income (expense)                          64                     124                  (445)
    Gain on sale of assets                               5,683                      --                    --
    Interest expense                                    (6,555)                 (7,455)               (5,668)
                                                        -------                 ------                 -----

(Loss) income before income taxes                       (8,068)                     80               (15,555)
(Provision) benefit for income taxes                    (1,103)                  1,332                 5,739
                                                       ---------                ------                ------

(Loss) income from continuing
    operations                                          (9,171)                  1,412                (9,816)

Discontinued operations:
 Income from discontinued
    operations (net of income tax
    provision of $566)                                      --                      --                   500

 Gain on sale of Consulting
    Services, (net of income tax
      provision of $6,327)                                  --                      --                11,524
                                                        ------                  ------                ------

Net (loss) income                                     $ (9,171)                $ 1,412               $ 2,208
                                                      =========                 ======                ======














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


<PAGE>
<TABLE>
<CAPTION>

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

                                               ASSETS




                                                      December 31,             
                                              ---------------------------------      
                                               1998                       1997
                                              ---------------------------------

<S>                                           <C>                       <C>                           
Current assets
    Cash and cash equivalents
      (includes restricted cash of
         $160 at December 31, 1998)           $   408                   $   587
    Accounts receivable, net                   56,783                    57,972
    Inventories, net                            8,662                    12,390
    Deferred income taxes                       4,164                     4,632
    Prepaid income taxes                          220                       268
    Other current assets                          487                       408
                                              -------                    ------

      Total current assets                     70,724                    76,257
                                              -------                    ------

Property and equipment
    Land and building                             346                       346
    Furniture and equipment                    21,677                    21,469
    Leasehold improvements                      2,683                     2,750
    Property and equipment
      under capital leases                     13,774                    13,774
                                               ------                    ------
                                               38,480                    38,339

    Accumulated depreciation
      and amortization                        (24,159)                  (22,609)
                                              --------                   ------

                                               14,321                    15,730
                                               ------                    ------

Goodwill, net                                   6,896                    12,466
Deferred income taxes                             442                       385
Other assets                                    2,868                     4,880
                                              -------                   -------
                                             $ 95,251                  $109,718
                                              =======                   =======













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

<PAGE>
<TABLE>
<CAPTION>

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

                                             LIABILITIES AND STOCKHOLDERS' INVESTMENT (DEFICIT)


                                                                                            December 31,     
                                                                                    ---------------------------
                                                                                    1998                   1997
                                                                                    ---------------------------
<S>                                                                               <C>                    <C>                  
Current liabilities
   Accounts payable                                                               $ 25,206               $16,912
   Accrued compensation and benefits                                                 7,400                 8,553          
   Unearned warranty revenue                                                         1,349                 1,135
   Current portion, capital lease obligations                                          379                   430
   Other current liabilities                                                         3,117                 5,401
                                                                                    ------                 -----

      Total current liabilities                                                     37,451                32,431

Senior credit facility                                                              36,159                39,945
Senior subordinated notes                                                           18,492                16,930
Capital lease obligations                                                           11,710                12,085
                                                                                   -------               -------
      Total liabilities                                                            103,812               101,391
                                                                                   -------               -------

Commitments and contingencies (Note 9)

Redeemable preferred stock
    Senior redeemable preferred stock                                                5,631                 5,207
    Class B redeemable preferred stock                                                  --                12,035
    Redeemable preferred stock                                                      31,729                29,951
                                                                                    ------                ------
                                                                                    37,360                47,193
                                                                                    ------                ------
Stockholders' investment
   Class A common stock, no par value, 
     50,000,000 shares authorized, 21,238,980 and 
     23,076,753 shares issued and outstanding at 
     1998 and 1997, respectively                                                        65                    65
   Class B common stock, no par value, 50,000,000 shares
    authorized, 4,037,628 shares issued and outstanding                                 13                    13
   Capital in excess of par                                                          2,116                    --
   Accumulated deficit                                                             (48,115)              (38,944)
                                                                                  ---------               ------

   Total stockholders' investment (deficit)                                        (45,921)              (38,866)
                                                                                  ---------               ------

                                                                                 $  95,251              $109,718
                                                                                   ========              =======





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



<PAGE>
<TABLE>
<CAPTION>


                                                  TELOS CORPORATION AND SUBSIDIARIES
                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                        (amounts in thousands)
                                                                                   Year Ended December 31,
                                                                                 ---------------------------------
                                                                                   1998        1997        1996
                                                                                 ---------------------------------

<S>                                                                             <C>          <C>          <C>    
Operating activities:
    Net (loss) income                                                           $(9,171)     $ 1,412      $ 2,208
    Adjustments to reconcile net income
      to cash used in operating activities:
      Depreciation and amortization                                               4,266        4,098        3,058
      Gain on sale of TCS                                                            --           --      (17,176)
      Loss on disposal of fixed assets                                               --          715           --
      Goodwill amortization                                                         589          892        1,418
      Amortization of debt issuance costs                                           243          243          243
      Accretion of subordinated notes                                               181          143           78
      Provision for inventory obsolescence                                        1,254        2,150        1,008
      Provision for doubtful accounts receivable                                     39          490          647
      Gain on sale of assets                                                     (5,683)          --           --
      Provision for net realizable value of other assets                          1,743          887           --
      Deferred income tax provision (benefit)                                       434       (1,719)         900
      Changes in assets and liabilities
         Increase in accounts receivable                                         (2,329)      (6,913)     (14,487)
         Decrease (increase) in inventories                                       2,826        2,186       (2,364)
         Decrease (increase) decrease in other assets                               (76)         795       (2,319)
         Increase (decrease) in accounts payable and
           other liabilities                                                      3,031      (20,559)      11,283
                                                                                 ------      --------      ------

         Cash used in operating activities                                       (2,653)     (15,180)     (15,503)
                                                                                 -------      -------      ------

Investing activities:
    Proceeds from sale of assets                                                 14,675           --           --
    Proceeds from sale of discontinued operations                                    --           --       31,579
    Purchase of property and equipment                                           (1,250)      (2,589)      (2,558)
    Investment in other assets                                                   (2,040)      (3,083)      (1,422)
                                                                                 -------      -------      -------

         Cash provided by (used in) investing activities                         11,385       (5,672)      27,599
                                                                                 ------       -------      ------

Financing activities:
    (Payments) proceeds from Senior Credit Facility                              (3,786)      24,526      (16,894)
    Proceeds from debt issuance                                                   1,800           --        3,278
    Increase (decrease) in book overdrafts                                        1,641       (4,838)       3,833
    Repayment of long-term debt                                                      --         (651)          --
    Retirement of Class B redeemable preferred stock                             (6,500)          --           --
    Repurchase of 410,000 shares of redeemable
      preferred stock                                                            (1,640)          --           --
    Payments under capital lease obligations                                       (426)        (379)        (267)     
                                                                                 -------      -------      -------
         Cash (used in) provided by  financing
         activities                                                             ( 8,911)      18,658      (10,050)
                                                                                --------      ------       ------

    (Decrease) increase in cash and cash equivalents                               (179)      (2,194)       2,046
    Cash and cash equivalents at beginning of the year                              587        2,781          735   
                                                                                  ------       -----        ----- 

    Cash and cash equivalents at end of year                                    $   408       $  587      $ 2,781
                                                                                  ======       =====       ======

Supplemental  disclosures  of cash flow  information:
  Cash paid during the year for:
    Interest                                                                    $ 5,228       $6,872      $ 5,760
                                                                                =======       ======       ======

    Income taxes                                                                  1,088       $   92      $   187
                                                                                =======       ======       ======
Supplemental schedule of non-cash investing activities:
    Assets under capital lease                                                  $    --       $  ---      $13,154
                                                                                =======       ======       ======


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



<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, 1995                                $65         $13       $7,669      $(37,356)     $(29,609)


Senior redeemable preferred stock dividend                --         --             --         (334)         (334)
Class B redeemable preferred stock dividend               --         --             --         (835)         (835)
Redeemable preferred stock dividend                       --         --         (3,272)      (1,039)       (4,311)
Redeemable preferred stock accretion                      --         --         (1,270)          --        (1,270)
Issuance of Enterworks common stock warrants              --         --            921           --           921
Net income for the year                                   --         --             --        2,208         2,208
                                                          --         --          -----       ------        ------

Balance December 31, 1996                                 65         13          4,048      (37,356)      (33,230)


Senior redeemable preferred stock dividend                --         --           (379)          --          (379)
Class B redeemable preferred stock dividend               --         --           (948)          --          (948)
Redeemable preferred stock dividend                       --         --         (2,721)      (1,594)       (4,315)
Redeemable preferred stock accretion                      --         --             --       (1,406)       (1,406)
Issuance of Net income for the year                       --         --             --        1,412         1,412
                                                          --         --         ------       ------        ------

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


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

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
























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



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

Note 1.       Summary of Significant Accounting Policies

Business and Organization

     Telos   Corporation   ("Telos"  or  "the  Company")   provides   enterprise
integration  services and solutions primarily to the U.S. federal government and
industry. In addition to its core competency of software development and systems
support services,  Telos delivers information security,  enterprise  integration
and networking  infrastructure  solutions to its customers. The Company, founded
in 1968, is incorporated under the laws of the State of Maryland.

     The accompanying  consolidated financial statements have been prepared on a
going  concern  basis,   which   contemplates  the  realization  of  assets  and
satisfaction  of  liabilities  in the normal  course of  business.  However,  as
reflected in the accompanying  financial statements,  the Company incurred a net
loss of $9.2  million in 1998.  This loss  included the effect of a $5.7 million
non-recurring gain from the sale of its TIS division.  In addition,  the Company
was not in  compliance  with several  covenants of its Senior  Credit  Facility,
although the lender has provided  waivers for the violations and has amended the
covenants to conform to the  Company's  1999 budget  expectations.  Based on its
budget,  the  Company  anticipates  a need  for  approximately  $10  million  of
additional  financing  for  1999.  These  factors,   including  the  uncertainty
surrounding  whether  and when the  additional  financing  will be  secured  and
whether the Company  will meet its budget  expectations  and bank  covenants  in
1999, indicate that the Company may be unable to continue as a going concern for
a  reasonable  period of time.  The  financial  statements  do not  include  any
adjustments  relating  to the  recoverability  of assets and  classification  of
liabilities  that might be necessary should the Company be unable to continue as
a going concern.  The Company's  continuation as a going concern is dependent on
its ability to obtain the additional financing required,  meet its 1999 budgeted
cash flow objectives, and comply with the terms of its Senior Credit Facility.

     The  Company  believes  that the  necessary  additional  financing  will be
secured through one or more of the following sources:  the sale of a division or
asset which is not critical to its strategic  goals;  additional  financing from
its lender;  or additional  equity  financing.  Alternatives are currently being
pursued under each of these sources; however, the required financing has not yet
been secured.  The Company  believes the required  funding will be arranged in a
timely manner that does not have a significant adverse impact on its operations.
However,  there  can be no  assurance  that the  Company  will be able to secure
financing  sufficient  for its  needs  and at terms  favorable  to the  Company.
Additionally,  there can be no assurance  that the Company will be successful in
meeting budget  expectations and bank covenants in 1999.  Failure by the Company
to obtain sufficient financing,  meet its budget expectations,  or meet its bank
covenants  may  have  a  material  adverse  effect  on the  Company's  financial
position, results of operations or cash flows.

Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
Telos   Corporation  and  its  wholly-owned   subsidiaries,   Telos  Corporation
(California),   Telos  Field   Engineering,   Inc.,   and  Telos   International
Corporation,  and its substantially owned subsidiary Enterworks, Inc., formerly,
enterWorks.com   ("Enterworks")  (collectively,   the  "Company").   Significant
intercompany transactions have been eliminated.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period.  Significant estimates and assumptions used in the preparation
of the Company's  consolidated  financial statements include contract percentage
of  completion  methodology,  allowance for accounts  receivable,  allowance for
inventory  obsolescence,  valuation of goodwill,  the  valuation  allowance  for
deferred tax assets,  employee  benefits and estimated useful lives of goodwill,
property  and  equipment  and  other  noncurrent   assets,   including  software
development costs. Actual results could differ from those estimates.
<PAGE>
                           TELOS CORPORATION AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

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

     Revenue from the licensing of software is  recognized  in  accordance  with
American Institute of Certified Public Accountants (AICPA) Statement of Position
97-2 (SOP 97-2),"Software  Revenue  Recognition",  whereby revenue is recognized
when a noncancelable revenue agreement is in force, the product has been shipped
and no significant  obligations remain.  Revenue generated from warranty service
contracts is recognized  ratably over the warranty  service period. 

Cash and Cash Equivalents

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


                         TELOS  CORPORATION  AND  SUBSIDIARIES 
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories

     Inventories  are  stated  at the  lower  of  cost  or  market,  cost  being
determined  primarily  on the  first-in,  first-out  method.  Substantially  all
inventories  consist of purchased  hardware and component computer parts used in
connection  with  system   integration   services   performed  by  the  Company.
Inventories  also include spare parts of $729,000 and $1,329,000 at December 31,
1998  and  1997,  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.  In addition to the product inventory  obsolescence  stated below,
the Company provided for $50,000 in spares  inventory  obsolescence and $114,000
in software inventory obsolescence.

     At  December  31,  1998 and  1997,  the  Company's  allowance  for  product
inventory  obsolescence  was  $3,074,000  and  $3,915,000,   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, 1998                      $ 3,915         $ 1,090            $  1,931             $ 3,074

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

Year Ended December 31, 1996                      $ 1,385         $ 1,008            $     36             $ 2,357

(1) Inventories written off.
</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.

     Depreciation  and  amortization  expense related to property and equipment,
including   property  and  equipment  under  capital  leases,   was  $2,460,000,
$2,630,000 and $2,255,000 for the years ended December 31, 1998,  1997 and 1996,
respectively.

Goodwill

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

<PAGE>


                        TELOS CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

     Accumulated  amortization  of goodwill  at  December  31, 1998 and 1997 was
$8,955,000 and $8,366,000, respectively.

Other Assets

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

     Unamortized  software and product  costs at December 31, 1998 and 1997 were
$1.9 million and $3.6 million,  respectively.  Amortization  expense  associated
with these capitalized software and product costs was $2,044,000, $1,128,000 and
$689,000 in 1998,  1997 and 1996,  respectively.  Additionally,  $1,743,000  and
$887,000  were written off as net  realizable  value  adjustments  in the fourth
quarter of 1998 and in the fourth quarter of 1997, respectively.
<PAGE>


                          TELOS CORPORATION AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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.  Unamortized costs amounted to $425,000 and $668,000
at December 31, 1998 and 1997, 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." Pro forma disclosures are made as if
the  fair  value  measurement  provisions  of  SFAS  No.  123 had  been  used in
determining compensation expense (See Note 7).

Research and Development

     The  Company  charges  all  research  and  development  costs to expense as
incurred,  until,  as in the  case of  software,  technological  feasibility  is
reached after which time such costs are capitalized. During 1998, 1997 and 1996,
the Company incurred $6.1 million, $1.0 million and $1.2 million in research and
development costs, respectively.

Earnings per Share

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

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 1997 and 1996  financial
statements to conform to the current period presentation.

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

Recent Accounting Pronouncements

     In March 1998,  the  American  Institute of  Certified  Public  Accountants
issued  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.  SOP 98-1 is  effective  for  fiscal  years
beginning  after  December 15, 1998.  The Company is  currently  evaluating  the
impact of SOP 98-1 on its financial statements and related disclosures.

     In November 1998, the American  Institute of Certified  Public  Accountants
issued  Statement  of Position  98-9 ("SOP  98-9"),  "Modification  of SOP 97-2,
"Software  Revenue  Recognition",  with  Respect to Certain  Transactions".  The
Company  is  currently  evaluating  the  impact  of SOP  98-9  on its  financial
statements and related disclosures.

Note 2.  Sale of Assets

     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 3.  Discontinued Operations

     On December 27, 1996, the Company sold  substantially  all of the assets of
its consulting  division,  Telos Consulting  Services (TCS), to COMSYS Technical
Services, Inc., a subsidiary of COREStaff, Inc. for approximately $31.6 million.
The resulting gain from the sale of TCS of $11.5 million included a write-off of
$6.9 million of goodwill allocated to the TCS operations.

     The sale of TCS has been treated as a discontinued  operation in accordance
with APB Opinion  Number 30 ("APB 30").  Pursuant to APB 30, the revenue,  costs
and expenses of TCS have been  excluded  from their  respective  captions in the
Company's  consolidated  statements of  operations  and the net results of these
operations  have been reported  separately as "Income  (loss) from  discontinued
operations." Included in the results of the discontinued operations is allocated
interest expense of $1.5 million for 1996.  Interest has been allocated based on
the net assets of the  discontinued  operations  in  relation  to the  Company's
consolidated  net  assets  plus  non-specific   debt.   Additionally,   goodwill
amortization  of  $418,000  for 1996 has been  included  in the  results  of the
discontinued operations. TCS had revenue of $33.1 million for 1996.

Note 4.  Revenue and Accounts Receivable

     Revenue resulting from contracts and subcontracts with federal,  state, and
local governments  accounted for 94.9%, 96.1% and 86.4% of consolidated  revenue
in 1998, 1997 and 1996,  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.
<TABLE>
<CAPTION>

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

                                                                                      December 31,         
                                                                                      ------------         
                                                                                 1998                1997
                                                                                 ----                ----
<S>                                                                             <C>                <C>                      
Billed accounts receivable                                                      $48,222            $ 48,207
                                                                                 ------              ------

    Amounts billable upon acceptance by customer                                  1,422               4,485
    Amounts currently billable                                                    7,878               6,244
                                                                                 ------              ------

    Total unbilled accounts receivable                                            9,300              10,729
                                                                                 ------              ------

    Allowance for doubtful accounts                                                (739)               (964)
                                                                                 ------              ------
                                                                                $56,783            $ 57,972
                                                                                 ======              ======
</TABLE>


     The provision for doubtful  accounts  receivable was $39,000,  $490,000 and
$647,000 for 1998, 1997 and 1996, respectively. Reductions to the allowance were
primarily due to write-offs of accounts receivable and other adjustments.
<PAGE>
                            TELOS CORPORATION AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5.  Debt Obligations

Senior Revolving Credit Facility

     At December 31, 1998, the Company has a $45 million Senior Revolving Credit
Facility (the  "Facility")  with a bank which expires on July 1, 2000 and has an
outstanding  balance  of  $36.2  million.  Borrowings  under  the  facility  are
collateralized by certain assets of the Company (primarily  accounts  receivable
and inventory),  and the amount of the available borrowings  fluctuates based on
the  underlying   asset  borrowing  base  and  the  Company's   working  capital
requirements.  The  agreement  requires  payment  of a fee of .25% of the unused
portion of the  Facility.  The  Facility  bears  interest  at 1.00%,  subject to
certain adjustments,  over the bank's base rate, which was 9.00% at December 31,
1998. The weighted average interest rate on the outstanding borrowings under the
Facility was 9.95% for 1998  compared with 9.44% for 1997. At December 31, 1998,
the Company had approximately $6.7 million available under the Facility.

     The Facility has various covenants which may, among other things,  restrict
the  ability of the  Company  to merge with  another  entity,  sell or  transfer
certain  assets,  pay  dividends  and make other  distributions  beyond  certain
limitations.  The Facility also  requires the Company to meet certain  leverage,
net worth, interest  coverage and  operating  goals.  At December 31, 1998,  the
Company was not in compliance with several covenants  contained in the Facility;
however,  the bank has waived this  non-compliance.  In  addition,  the bank has
amended the covenants to conform to the Company's 1999 budget expectations.

         The  carrying  value of the  Facility  at  December  31,  1998 and 1997
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,   which  total  $6.5  million  at  December   31,  1998  and  1997,   are
collateralized by fixed assets of the Company.  Series C Notes, which total $7.9
million at December  31,  1998 and 1997,  are  unsecured.  Both the Series B and
Series C Notes have a maturity date of October 1, 2000 and have  interest  rates
ranging from 14% to 17%.  Interest is paid quarterly on January 1, April 1, July
1, and October 1 of each year. The Notes can be prepaid at the Company's option.
Additionally,  these Notes have a cumulative  payment premium of 13.5% per annum
payable only upon certain circumstances.  These circumstances include an initial
public offering of the Company's common stock or a significant  refinancing,  to
the extent that net  proceeds  from either of the above  events are received and
are sufficient to pay the premium.  Due to the contingent  nature of the premium
payment,  the  associated  premium  expense  will  only be  recorded  after  the
occurrence of a triggering  event. At December 31, 1998, the prepayment  premium
that would be due upon a triggering event is $7,620,000.

     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 are unsecured. The Series D Notes have a maturity date of
October 1, 2000 and bear interest at 14% per annum.  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.  These Notes contain 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.  The
amount  outstanding of the  subordinated  debt was  approximately  $1,396,000 at
December 31, 1998.

Enterworks Subordinated Notes

     During 1996, the Company completed a private  financing whereby  $3,277,960
of 8% subordinated  debt of Enterworks was issued.  Investors  included  certain
members of the Board of Directors and management and certain shareholders of the
Company.  The  subordinated  debt has a five  year  maturity.  Interest  is paid
quarterly,  beginning  January 1 1998, on the first of January,  April, July and
October each year. In connection  with the debt,  the Company  issued  2,048,725
warrants to purchase  shares of Enterworks  common  stock.  The warrants have an
exercise  price of one dollar and an exercise  period of ten years.  The Company
has  assigned a value to the  warrants  of $921,926  which has been  included in
capital in excess of par. The amount  outstanding of this  subordinated debt was
approximately   $2,723,000  and  $2,557,000  at  December  31,  1998  and  1997,
respectively.


<PAGE>


                       TELOS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6.  Redeemable Preferred Stock

Senior Redeemable Preferred Stock

     The components of the senior redeemable  preferred stock are Series A-1 and
Series  A-2,  each with $.01 par  value and 1,250 and 1,750  shares  authorized,
issued  and  outstanding,  respectively.  The  Series A-1 and Series A-2 carry a
cumulative  per annum  dividend  rate of 14.125% per annum of their  liquidation
value of $1,000 per share.  The dividends are payable  semi-annually  on June 30
and December 31 of each year. The liquidation  preference of the preferred stock
is the face amount of the Series A-1 and A-2 Stock ($1,000 per share),  plus all
accrued  and unpaid  dividends.  The  Company is  required  to redeem all of the
outstanding  shares of the stock on  December  31,  2001,  subject  to the legal
availability  of funds.  Mandatory  redemptions  are  required  from excess cash
flows,  as defined in the stock  agreements.  The Series A-1 and A-2  redeemable
preferred stock is senior to all other present and future equity of the Company.
The  Series  A-1 is senior to the  Series  A-2.  The  Company  has not  declared
dividends  on its senior  redeemable  preferred  stock  since its  issuance.  At
December 31, 1998 and 1997 undeclared,  unpaid dividends  relating to Series A-1
and  A-2  redeemable   preferred   stock  totaled   $2,631,000  and  $2,207,000,
respectively,  and have been  accrued and are included in the Series A-1 and A-2
redeemable preferred stock balances.

Class B Redeemable Preferred Stock

     In May  1998  the  Company  entered  into  an  agreement,  with  one of its
shareholders,  Union de Banques Suisses  (Luxemborg) S.A. ("UBS"), to retire all
of UBS's equity holdings in the Company.  These equity holdings  included all of
the 7,500 shares of the  Company's  Class B Preferred  Stock with a  liquidation
preference  of  $1,000  per  share,  and  the  cumulative  unpaid  dividends  of
approximately  $4.8 million,  1,837,773  shares of the Company's  Class A Common
Stock,  and  1,312,695  of the  Company's  Class A Common  Stock  warrants.  The
purchase price to retire these  interests was $6.5 million,  of which $5 million
was paid in cash,  and the  remaining  $1.5  million was funded by two  separate
letters of credit secured by the Company's lender. UBS was paid these letters of
credit in the  amount of $1.0  million  in  September  1998 and in the amount of
$500,000 in November 1998.

     The $5.9 million  excess of the  carrying  amount of the Class B Redeemable
Preferred Stock over the redemption price was recorded as an increase in capital
in excess of par; there was no impact on income from this transaction.

<PAGE>


                     TELOS CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12% Cumulative Exchangeable Redeemable Preferred Stock

     A maximum of 6,000,000  shares of 12%  Cumulative  Exchangeable  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  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,  1998  and  1997  was  $1,528,000  and   $1,406,000,
respectively.  The Company  declared stock dividends  totaling 736,863 shares in
1990 and 1991.

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

     The Public Preferred Stock accrues a semi-annual dividend at an annual rate
of 12% ($1.20) per share, based on the liquidation  preference of $10 per share,
and is fully  cumulative.  Through November 21, 1995, the Company had the option
to pay  dividends  in  additional  shares  of  Preferred  Stock in lieu of cash.
Dividends in additional  shares of the  Preferred  Stock are paid at the rate of
0.06 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 $14,855,000.

     The  Company  has  not  declared  or  paid  dividends  since  1991,  due to
restrictions  and  ambiguities  relating to the payment of  dividends  contained
within its charter,  its working capital facility agreement,  and under Maryland
law.

     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 $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.
<PAGE>


                      TELOS CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7.  Stockholders' Investment and Employee Benefit Plans

Common Stock

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

Stock Warrants

     In 1992,  the  Company  issued  to the  holder  of the  Class B  Redeemable
Preferred  Stock a common stock  warrant to purchase up to  3,150,468  shares of
Class A common stock of the Company.  The stock warrant was valued at $1,109,000
and such  amount  was shown as an  increase  in  capital  in excess of par.  The
warrant was  initially  exercisable  to purchase up to  1,181,425  shares at any
time. The warrant  increased by 656,348 shares on June 30, 1993 and July 1, 1994
and by 656,347  shares on July 1, 1995.  Through  December 31,  1997,  1,837,773
shares of Class A Common Stock has been purchased  under the warrant.  The price
per share at which  shares  have been  purchased  and are  purchasable  upon the
exercise  of the  warrant  is  $.0025.  In May 1998,  the  Company  retired  the
remaining  1,312,695  Class A common  stock  warrants  held by the holder of the
Class B Redeemable preferred stock (See Note 6).

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

Stock Options

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

     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
Trustees  of the  Plan  or  management  based  on  third  party  appraisals  and
information with respect to the business operations.

<PAGE>


                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 of $1.42 and $1.07
per  share,  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             
                                                         ---------------------------------------------
                                                         Number of Shares             Weighted Average
                                                              (000's)                  Exercise Price 
                                                              -------                  --------------
<S>                                                           <C>                          <C>    
Outstanding at December 31, 1995                                598                        $1.42

    Granted                                                      --                           --
    Exercised                                                    --                           --
    Canceled                                                    (13)                        1.42
                                                              ------                       -----
Outstanding at December 31, 1996                                585                        $1.42

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

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


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, 1995                                 --                           --

    Granted                                                   3,767                         0.95
    Exercised                                                    --                           --
    Canceled                                                   ( 29)                        0.97
                                                              ------                        ----
Outstanding at December 31, 1996                              3,738                        $0.95

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

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




<PAGE>


                           TELOS CORPORATION AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Option Plans

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


                                                                   Stock Option Activity             
                                                         ---------------------------------------------
                                                         Number of Shares             Weighted Average
                                                              (000's)                  Exercise Price 
                                                              -------                  -------------- 
<S>                                                           <C>                            <C>    
Outstanding at December 31, 1995                              1,401                          $0.50

    Granted                                                      --                             --
    Exercised                                                    --                             --
    Canceled                                                     --                             --
                                                              -----                          -----
Outstanding at December 31, 1996                              1,401                          $0.50

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

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

</TABLE>

     John Wood has the option to cancel the 1993 stock options  discussed  above
or receive an equal number of options  under the 1996 plan at an exercise  price
of $0.95 per share. Additionally, the effect on the 1996 stock option plan as of
December  31,  1998 would be to  increase  the number of shares  outstanding  to
6,255,000 with a weighted average exercise price of $.98 per share.

1996 Enterworks Option Plan

     In 1996,  Enterworks  implemented  a stock  option plan that allows for the
award of up to  5,000,000  shares of 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.

<PAGE>


                             TELOS CORPORATION AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 1995                                 --                             --
    Granted                                                   2,744                          $0.22
    Exercised                                                    --                             --
    Canceled                                                    (15)                          0.12
                                                              -----                           ----
Outstanding at December 31, 1996                              2,729                           0.22

    Granted                                                     998                           0.77
    Exercised                                                  (163)                          0.12
    Canceled                                                   (462)                          0.39
                                                              -----                           ----

Outstanding at December 31, 1997                              3,102                          $0.38

    Granted                                                   1,814                           0.77
    Exercised                                                   (16)                          0.12
    Canceled                                                 (1,150)                          0.46
                                                              -----                          -----
Outstanding at December 31, 1998                              3,750                          $0.55
                                                             ======                          =====
</TABLE>


     The following table summarizes  information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>

                                                      Options Outstanding               Options Exercisable
                                                      -------------------               -------------------

                                                            Weighted
                                                            Average       Weighted                     Weighted
                            Range of        Number         Remaining       Average        Number        Average
                            Exercise      Outstanding      Contractual     Exercise     Exercisable     Exercise
                             Prices         (000's)       Life in Years     Price         (000's)        Price
                             ------         -------       -------------     -----         -------        -----
<S>                     <C>                  <C>            <C>             <C>            <C>           <C>
1990 Stock                   $1.07           1,495          9.4 years       $1.07            299         $1.07
  Option Plan                $1.42             445          2.0 years        1.42            445         $1.42
                              ----           -----          ---------        ----            ---         -----
                        $1.07 - $1.42        1,940          7.7 years       $1.27            744         $1.28
                        =============        =====          =========        ====            ===         =====

Other Stock
  Option Plan                $0.50             701          5.0 years       $0.50            700         $0.50
                             $1.07             653          8.1 years       $1.07            261         $1.07
                             -----             ---          ---------       -----            ---         -----
                         $0.50 -$1.07        1,354          6.5 years       $0.75            961         $0.65
                         ============        =====          =========       =====            ===         =====

1996 Stock
  Option Plan                 $.95           3,320          7.4 years       $0.95          1,712         $0.95
                              0.97             113          7.6 years        0.97             68          0.97
                              1.01             645          8.2 years        1.01            258          1.01
                              1.07           1,477          9.4 years        1.07            295          1.07
                              ----           -----          ---------        ----          -----          ----
                        $0.95 - $1.07        5,555          8.0 years       $0.99          2,333         $0.97
                        =============        =====          =========       =====          =====         =====

1996 Enterworks
   Option Plan               $0.12           1,309          7.5 years       $0.12            621         $0.12
                              0.77           2,441          9.1 years        0.77            300          0.77
                              ----           -----          ---------        ----            ---          ----
                        $0.12 - $0.77        3,750          8.6 years       $0.55            921         $0.33
                        =============        =====          =========       =====            ===         =====
</TABLE>


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

     The  weighted-average  fair value of options  granted  under the 1990 Stock
Option Plan,  the Other Stock Option Plan,  the 1996 Stock Option Plan,  and the
1996  Enterworks  Option  Plan  was  $0.26,  $0,  $0.25  and  $0.19  per  share,
respectively, in 1998 and $0, $0.23, $0.28 and $0.22 per share, respectively, in
1997. Had the Company determined  compensation cost consistent with SFAS No. 123
methodology,  net (loss)  income would have been  ($9,666,000),  $1,073,000  and
$2,100,000 in 1998, 1997 and 1996, respectively. Significant assumptions used in
determining  the fair  value of each  option  grant at the date of grant were as
follows:
<TABLE>
<CAPTION>

                                             1990 Stock                               Other Stock
                                             Option Plan                              Option Plan
                                        -------------------------        --------------------------------

                                        1998      1997       1996         1998        1997           1996
                                        --------------------------       --------------------------------
<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                 5.54%        --         --         --          6.28%          --
Expected life of options                5.3 yrs      --         --         --          4.0 yrs        --
</TABLE>
<TABLE>
<CAPTION>



                                             1996 Stock                             1996 Enterworks
                                             Option Plan                              Option Plan
                                        --------------------------        --------------------------------
                                        1998      1997       1996         1998        1997           1996
                                        --------------------------        --------------------------------
<S>                                     <C>       <C>          <C>        <C>           <C>          <C>
Expected dividend yield                 0.00%     0.00%        0.00%      0.00%         0.00%        0.00%
Expected stock price volatility         0.00%     0.00%        0.00%      0.00%         0.00%        0.00%
Risk free interest rate                 5.54%     6.28%        6.66%      5.18%         6.00%        6.73%
Expected life of options                4.8 yrs   5.5 yrs      6.0 yrs    5.2 yrs       5.5 yrs      6.0 yrs

</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 1996,  1997 and 1998
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 1998, 1997 and 1996 were
$835,000, $1,335,000, and $1,679,000, respectively.



<PAGE>


                      TELOS CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 8.       Income Taxes

     The  provision   (benefit)for  income  taxes  includes  the  following  (in
thousands):
<TABLE>
<CAPTION>


                                                                    For The Year Ended December 31,

                                                             ------------------------------------------
                                                             1998               1997               1996
                                                           -------            -------            --------
<S>                                                        <C>                <C>                <C>    
Current provision (benefit)
     Federal                                              $   --              $    --            $  (421)
     State                                                    669                 387                  --
                                                             ----                 ---                ----

        Total current                                         669                 387               (421)
                                                             ----                 ---               -----

Deferred provision (benefit)
     Federal                                                  568              (1,464)             (4,527)
     State                                                  ( 134)               (255)               (791)
                                                            ------              -----               ------

        Total deferred                                        434              (1,719)             (5,318)
                                                            ------             -------             -------

        Total provision (benefit)                         $ 1,103             $(1,332)           $ (5,739)
                                                            ======              ======              ======
</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,             
                                                            --------------------------------------------
                                                            1998                  1997              1996
                                                            -----             ---------             -------
<S>                                                        <C>                <C>                   <C>    
Computed expected income tax
     provision (benefit)                                   (34.0)%                34.0 %            (34.0)%
Goodwill amortization                                        2.4                 379.6                2.2
State income taxes, net of
     federal income tax benefit                             (1.8)                  5.9               (5.9)
Change in valuation allowance
     for deferred tax assets                                24.9              (2,214.0)               0.2
Meals and entertainment                                      1.1                 111.8                 --
Sale of division/other                                      20.9                  17.2                0.6
                                                            ----                 -----                ---
                                                            13.5 %            (1,665.5)%            (36.9)%
                                                            =====              =======               ====

</TABLE>

<PAGE>


                         TELOS CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                        December 31,        

                                                                                   ------------------------
                                                                                   1998                1997
                                                                                   -----              ------ 
<S>                                                                               <C>                 <C>    
Deferred tax assets:
      Accounts receivable, principally due
        to allowance for doubtful accounts                                        $  153              $  201
      Allowance for inventory obsolescence and
        amortization                                                               1,377               1,728
      Accrued liabilities not currently
        deductible                                                                   794                 999
      Accrued compensation                                                         1,562               2,190
      Deferred office rent and accrued
        sublease liabilities                                                          --                  25
      Property and equipment, principally due
        to differences in depreciation methods                                       396               1,165
      Net operating loss carryforwards                                             5,660               3,140
      Alternative minimum tax credit carryforward                                    703                 703
                                                                                   -----              ------
            Total gross deferred tax assets                                       10,645              10,151
            Less valuation allowance                                              (4,987)             (2,974)
                                                                                  ------              ------
            Net deferred tax assets                                                5,658               7,177
                                                                                  ------              ------
Deferred tax liabilities:
      Unbilled accounts receivable, deferred for tax purposes                       (317)               (800)
      Software development costs                                                    (735)             (1,360)
                                                                                   ------              -----
            Total deferred tax liabilities                                        (1,052)             (2,160)
                                                                                  -------              -----
            Net deferred tax assets                                               $4,606              $5,017
                                                                                  =======              =====
</TABLE>

     The net change in the valuation allowance was an increase of $2,013,000 for
1998 and a  decrease  of  $1,728,000  for 1997.  Included  in the  change in the
valuation  allowance  were decreases of  approximately  $23,000 and $187,000 for
1998 and 1997,  respectively,  related to the reversal of temporary  differences
acquired from Telos Corporation  (California).  The total tax benefits of future
deductible   temporary   differences  acquired  in  connection  with  the  Telos
Corporation  acquisition were $6,097,000 at January 14, 1992. As of December 31,
1998, all of the tax benefits acquired have reversed.

     At December 31, 1998,  for federal  income tax purposes the Company had net
operating loss  carryforwards of $12,741,000  available to offset future regular
taxable income.  These net operating loss  carryforwards  expire in 2011 through
2014.  Additionally,  $10,943,000 of alternative  minimum tax net operating loss
carryforwards are available to offset future alternative minimum taxable income.
These alternative  minimum tax net operating loss carryforwards also expire from
2011 to 2014. In addition,  the Company has $703,000 of alternative  minimum tax
credits  available to be carried  forward  indefinitely to reduce future regular
tax liabilities.

<PAGE>


                 TELOS CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9.     Commitments and Contingencies

Leases

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

     On March 1, 1996, the Company  entered into a twenty year capital lease for
a building that serves as its corporate headquarters.  The Company has accounted
for this transaction as a capital lease and has accordingly  recorded assets and
a corresponding liability of approximately $12.3 million. Under the terms of the
lease,  the  landlord  furnished  the Company  with $1.3  million to fund tenant
improvements  and  other  building  costs.  The  Company's  former  headquarters
facility was leased with a lease expiration date of March 31, 1997. In 1996, the
Company  recorded  $781,000  of  additional  expense  for  the  remaining  lease
obligation of its former headquarters facility.

     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, 1998 (in thousands):
<TABLE>
<CAPTION>


                                                  Property         Equipment        Total
                                                  --------         ---------        ------
         <S>                                        <C>              <C>           <C>    
         1999                                       $ 1,447          $ 140         $ 1,587
         2000                                         1,447            103           1,550
         2001                                         1,447             54           1,501
         2002                                         1,447             --           1,447
         2003                                         1,447             --           1,447
         Remainder                                   17,655             --          17,655
                                                     ------            ---          ------

         Total minimum obligations                   24,890            297          25,187
         Less amounts representing
             interest                               (13,033)           (65)        (13,098)
                                                    --------         ------        --------

         Net present value of
             minimum obligations                     11,857            232          12,089
         Less current portion                          (274)         ( 105)           (379)
                                                     -------          -----        --------

         Long term capital lease
             obligations at
             December 31, 1998                      $11,583           $127         $11,710
                                                     ======            ===          ======
</TABLE>

     Accumulated amortization for property and equipment under capital leases at
December 31, 1998 and 1997 is $2,019,000 and $1,196,000, respectively.

     Future minimum lease payments for all  non-cancelable  operating  leases at
December 31, 1998 are as follows (in thousands):
<TABLE>
         <S>                                         <C>


         1999                                        $2,369
         2000                                         1,543
         2001                                           590
         2002                                           304
         2003                                           248
         Remainder                                      677
                                                     ------

         Total minimum lease payments                $5,731
                                                     ======

</TABLE>


     Net rent expense  charged to operations  for 1998,  1997,  and 1996 totaled
$2,001,000, $2,545,000, and $4,556,000, respectively.

Legal

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

<PAGE>


                      TELOS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10.  Related Parties

     In 1996, the Company paid previously  accrued  advisory fees of $525,000 to
the firm  Beninati  and Wood,  Inc.  Mr.  John B. Wood became an employee of the
Company  in 1992 and  serves as  President  and Chief  Executive  Officer  and a
Director of the Company.  Mr. Joseph P. Beninati served as Chairman of the Board
for the majority of 1994 before resigning  January 5, 1995. The Company paid Mr.
Beninati  $165,000  annually  subject to a three year employment  agreement that
began in 1995.  Mr.  Beninati  resigned  from the Board in 1996 and received his
final payment in 1998.

     Mr. John R. Porter, a major  shareholder,  has a consulting  agreement with
the Company whereby he is compensated for specific  services.  Expense  recorded
pursuant to this agreement was $200,000 in both 1998 and 1997.

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

Note 11.  Reportable Business Segments

     The  Company  adopted  SFAS No.  131,  "Disclosures  About  Segments  of an
Enterprise and Related  Information",  in 1998 which changes the way the Company
reports information about its operating  segments.  The information for 1997 and
1996 has been restated from the prior year's presentation in order to conform to
the 1998 presentation.

         The Company has three reportable segments:

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

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

     Enterworks  - this  group  helps  companies  build  the fast  and  flexible
information  infrastructure  they need to  compete in a global  economy.  Though
web-enabled  integration  of disparate  data and  intelligent  business  process
flows, their software links employees,  customers and partners in ways that make
the  virtual  enterprise  a  reality.  Their  products  include  Virtual  DB and
Enterworks  Process Manager.  Enterworks'  advanced  solutions serve healthcare,
financial services, manufacturing and government customers worldwide.

     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.
<PAGE>


                            TELOS CORPORATION AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

     The Company has excluded TCS amounts from  external and internal  revenues,
and segment profit (loss) disclosures as this business was sold in December 1996
and has been treated as a disposal of a segment of a business under APB 30 (Note
3).
<TABLE>
<CAPTION>

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

<S>                                       <C>                 <C>          <C>            <C>            <C>    
      1998
External Revenues                         $ 98,277            $101,736     $   7,073      $    --        $ 207,086
Intersegment Revenues                     $    970            $  2,622     $       1      $    --        $   3,593
Gross profit                              $ 14,046            $  8,583     $   1,542      $    --        $  24,171
Segment profit (loss)(4)                  $  4,849            $     14     $ (11,534)     $    --        $  (6,671)
Total assets                              $ 45,340            $ 24,206     $   6,119      $19,586        $  95,251
Capital Expenditures                      $    179            $     49     $     587      $   435        $   1,250
Depreciation & Amortization(2)            $    557            $    479     $   2,332      $ 1,487        $   4,855

       1997
External Revenues                         $121,052            $129,337     $   3,398      $    --        $ 253,787
Intersegment Revenues                     $    667            $  1,387     $       4      $    --        $   2,058
Gross profit                              $ 20,614            $ 14,875     $  (  132)     $    --        $  35,357
Segment profit (loss)(4)                  $ 10,229            $  3,977     $  (5,903)     $    --        $   8,303
Total assets                              $ 55,834            $ 24,323     $   6,374      $23,187        $ 109,718
Capital Expenditures                      $    330            $    688     $     480      $ 1,091        $   2,589
Depreciation & Amortization(2)            $    716            $    929     $   1,075      $ 2,270        $   4,990

       1996
External Revenues                         $101,535            $ 85,220     $   2,140      $    --        $ 188,895
Intersegment Revenues                     $    946            $    968     $      69      $    --        $   1,983
Gross profit                              $ 11,237            $  8,422     $     955      $    --        $  20,614
Segment profit (loss)(4)                  $    593            $ (5,362)    $  (3,672)     $    --        $  (8,441)
Total assets                              $ 54,975            $ 27,885     $   3,284      $23,920        $ 110,064
Capital Expenditures(3)                   $    150            $  1,087     $     554      $   656        $   2,447
Depreciation & Amortization(2)            $  1,417            $    949     $     502      $ 1,126        $   3,994

<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.  
    The depreciation  and  amortization  disclosure above is net of TCS 
    depreciation and amortization of $482 for 1996.
(3) The 1996 capital expenditure  disclosure is net of TCS capital  expenditures
    of $111.
(4) 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 56  separate
facilities located in 19 states.

<PAGE>


Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

         None


<PAGE>


                                PART III

Item 10.       Directors and Executive Officers of the Registrant

Dr. Fred Charles Ikle, Chairman of the Board
--------------------------------------------

     Dr.  Ikle (age 74) 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   Director  of  the
Zurich-American Insurance Companies. 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.

Julio E. Heurtematte, Jr., Director
-----------------------------------

     Mr. Heurtematte (age 62) was elected to the Company's Board of Directors on
July 31, 1998.  He has been a private  consultant  since 1989,  specializing  in
international  projects,  trade  and  investments.  From  1963 to 1989,  he held
various positions at the InterAmerican  Development Bank ("IAD"),  most recently
as the deputy Manager for Project Analysis.  From 1979 to 1989, Mr.  Heurtematte
was  also  a  member  of IAD  Bank's  Pension  Fund  Investment  Committee.  Mr.
Heurtematte  is also a member of the Board of  Directors  of Trans World  Gaming
Corporation.

Malcolm M.B. Sterrett, Director
-------------------------------

     Mr.  Sterrett  (age  55) is a  private  investor  and  was  elected  to the
Company's  Board of  Directors  on July 31,  1998.  From 1989 to 1993,  he was a
partner at the law firm of Pepper  Hamilton & Scheetz in  Washington,  D.C. From
1988 to 1989, he served as General Counsel to the U.S.  Department of Health and
Human  Services  and  from  1982  to  1988  he was a  Commissioner  on the  U.S.
Interstate Commerce Commission. Prior thereto, he was Vice President and General
Counsel to the United States  Railway  Association  and served as Staff Director
and  Counsel  to  the  U.S.   Senate   Committee   on   Commerce,   Science  and
Transportation. Mr. Sterrett is also a member of the Board of Directors of Trans
World Gaming Corporation.

John B. Wood, Director, President and Chief Executive Officer 
------------------------------------------------------------- 

     Mr.  Wood (age 35) was elected  President  and Chief  Executive  Officer on
February 16, 1994. Mr. Wood was appointed Chief Operating  Officer on October 8,
1993 after serving as Executive  Vice President from May of 1992. He was elected
to the Board of  Directors  on May 13,  1992.  Mr.  Wood  joined the  Company on
February  13,  1992.  Prior to joining  the  Company,  Mr. Wood was a founder of
Beninati & Wood, Inc., an investment banking firm which had provided services to
the Company.

Dr. Stephen D. Bryen, Director
------------------------------

     Dr.  Stephen Bryen (56) was elected to the Company's  Board of Directors on
January 31,  1994.  He  currently  serves as a Director in  Jefferson  Partners,
L.L.C., a strategic management consulting and merchant banking firm with offices
in  Washington,  D.C.  and New York and as Senior Vice  President of L-3 Network
Security,  LLC, in Denver,  Colorado. Dr. Bryen currently serves on the board of
C-MAC  Industries in  Mechanicsburgh,  Pennsylvania  and is the senior technical
advisor to  Hollinger  Digital  Corporation  in New York.  From 1981 to 1988 Dr.
Bryen served as the Deputy Under  Secretary of Defense for Trade Security Policy
and as the Director of the Defense Technology Security Administration,  which he
founded.

Norman P. Byers, Director
-------------------------

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

<PAGE>


David S. Aldrich, Vice President, Chief Operating Officer
---------------------------------------------------------

     Mr.  Aldrich  (age  39)  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.  Mr.  Aldrich was  appointed  to the
position of Chief Operating Officer of the Company in January 1999.

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

     Mr.  Brownley (age 42) joined the Company in April 1991 and is  responsible
for the management of the Company's  legal affairs.  For the five years prior to
joining the Company,  he served as Assistant General Counsel and then as General
Counsel at  Infotechnology  Inc., an investment  company whose holdings included
various companies in the communications industry.

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

     Mr. Calhoun (age 49) joined the Company as Vice President, Human Resources,
in August 1989.  Prior to joining the Company he served as  Corporate  Director,
Risk  and  Financial  Management  of BDM  International  Corp.,  an  information
technology  consulting  services  company,  Vice  President,  Human Resources of
Halifax  Corp.  a  technical  services  company,  and as  Director  for the U.S.
Department of Labor, Employment Standards Administration.

     Mark W.  Hester,  former  Executive  Vice  President  and  Chief  Operating
Officer, Telos Corporation
--------------------------------------------------------------------------------

     Mr.  Hester (age 46) joined  Telos in 1979 and was  appointed  as Executive
Vice President and Chief  Operating  Officer in 1998. He was responsible for all
business activities at Telos. Previously, he has held progressive positions with
Telos as  President  of  Telos  Systems  Solutions,  President  of  Telos  Field
Engineering,  Regional  Manager of Operations,  and Vice President of Marketing.
Mr. Hester resigned from the position of Chief Operating Officer in 1999.

Robert W. Lewis, President, Enterworks, Inc.
--------------------------------------------

     Mr. Lewis (age 37) has served as the President of  Enterworks,  Inc.  since
its  inception  in  1996.  Mr.  Lewis'  prior  experience  has been  with  Telos
Corporation.  From 1991 to 1995,  he was  Director,  Business  Development  with
responsibility for major customer development and technology integration.

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

     Mr. Marino (age 62) 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  promoted  to  President  of  Telos  Systems  Integration.  With the
amalgamation of all Telos divisions, Mr. Marino was selected on January 1, 1998,
as Chief Sales & Marketing Officer reporting  directly to the CEO and is part of
the Office of the President.

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

     Mr. Tellez (age 41) was appointed Chief Financial Officer of the Company in
1993 and Treasurer in 1994.  He joined Telos  Corporation  (California)  in 1989
where he was  responsible for all financial and regulatory  functions.  Prior to
joining Telos  Corporation,  Mr.  Tellez served as a Senior  Manager with Arthur
Andersen & Company.

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


<PAGE>


Item. 12.  Executive Compensation

     Information is set forth in the Summary  Compensation Table included on the
following page with respect to all forms of compensation for service rendered in
all  capacities to the Company  during the fiscal years ended December 31, 1998,
1997, and 1996, of the Chief  Executive  Officer and four other most highly paid
executive officers during 1998.
<TABLE>
<CAPTION>

                                                    SUMMARY COMPENSATION TABLE


                                                                                           Long-Term Compensation (3)
                                                    Annual Compensation                     Awards        Payouts
                                                    -------------------                     ------        -------
Name                                                                            Other                        All
and                                                                            Annual                       Other
Principal                                                                       Compen-     Options/       Compen-
Position                               Year      Salary          Bonus(1)      sation(2)    SARs(#)(4)    sation (5)
--------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>           <C>            <C>         <C>              <C>
John B. Wood                           1998       $334,198      $     --       $ 8,500            --        $5,000
(President, Chief                      1997       $299,998      $382,000       $32,000            --        $4,750
Executive Officer)                     1996       $291,921      $     --       $23,000     2,017,531        $4,750


Mark W. Hester                         1998       $202,425      $     --       $   500       250,000        $5,000
(Former Executive V. P. and            1997       $174,990      $200,000       $ 6,000       150,000        $3,525
 Former Chief Operating Officer)       1996       $184,607        80,000       $ 6,000       185,000        $2,850


Lorenzo Tellez                         1998       $218,080      $     --       $   500       200,000        $5,000
(V.P., Treasurer, Chief                1997        195,000      $150,000       $24,000       150,000        $4,750
  Financial Officer)                   1996        188,269      $145,000       $15,000       465,000        $4,750


David Aldrich                          1998       $173,850      $     --       $ 1,250       210,000        $1,083
(V.P., Chief Operating Officer)        1997       $150,010      $150,000       $ 6,000       300,000            --
                                       1996       $ 45,580            --       $    --       200,000            --


Robert J. Marino                       1998       $204,734      $     --       $   500       362,000        $5,000
(Chief Sales and Marketing             1997       $195,000      $ 76,000       $ 6,000            --        $4,750
 Officer and Executive V.P.)           1996       $182,310      $ 90,000       $ 6,000       212,500        $4,750

<FN>

 (1) 1997 amounts  include  bonuses  relating to the TIS sale completed in 1998.
 (2) Other  annual  compensation  represents  automobile  and  living allowances
     provided  to  executives.  Additionally,  compensation  for  John  B.  Wood
     includes directors fees. 
 (3) There are  no  restricted  stock  awards or  payouts  pursuant to long-term
     investment plans.
 (4) Options  granted  are in  both  the  Company's common stock as  well  as in 
     Enterworks,  Inc., common stock. 
 (5) All other compensation represents Company contributions made on  behalf  of
     the executive officers to the Telos Shared Savings Plan.
</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 1998.

<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
(President, Chief Executive
  Officer)                                   --        --         --              --            --           --


Mark W. Hester
(Former Executive V.P. and
 Former Chief Operating
 Officer)                               250,000       8.5%      $1.07       May 2008       $168,229     $426,326               

Lorenzo Tellez
(V.P., Treasurer, Chief
  Financial Officer)                    200,000       6.8%      $1.07       May 2008       $134,583     $341,061

David Aldrich
(V.P., Chief Operating Officer)         210,000       7.1%      $1.07       May 2008       $141,313     $358,114

Robert J. Marino
(Chief Sales and Marketing
 Officer and Executive V.P.)            362,000      12.3%      $1.07       May 2008       $243,596     $617,320



</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, 1998.
<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              at FY-End (1)(2)

                               Shares Acquired         Value         Exercisable/           Exercisable/
Name                             on Exercise         Realized        Unexercisable          Unexercisable
----                             -----------         --------        -------------          -------------
<S>                                   <C>               <C>     <C>                       <C>                 
John B. Wood                          --                --      1,507,471/1,210,519       $924,615/494,887
(President, Chief Executive
 Officer)

Mark W. Hester                        --                --          169,000/416,000         62,400/141,350
(Former Executive V.P.
 and Former Chief
 Operating Officer)

Lorenzo Tellez                        --                --          271,000/544,000        107,400/201,850
(V.P., Treasurer,
  Chief Financial Officer)

David Aldrich                         --                --          212,000/498,000         94,360/196,440
(V.P., Chief Operating
 Officer)

Robert J. Marino                      --                --          372,550/534,350         75,857/178,703
(Chief Sales and Marketing
 Officer and Executive V.P.)
<FN>

(1) Based on an  estimated  fair market  value of the  Company's  Class A common
    stock of $1.35 per share at December  31, 1998. 
(2) Based on an estimated  fair market value of Enterworks common stock of $0.77
    per share at December 31, 1998.
</FN>
</TABLE>


<PAGE>


Compensation of Directors

     During the fiscal year ended  December 31, 1998,  employee  directors  were
paid a fee of $2,000 for each Board  meeting  attended.  Outside  directors  Mr.
Byers and Dr. Bryen were paid an annual fee of $25,000, and- further compensated
at a rate of $750 for each meeting in excess of four  meetings a year.  Chairman
of the Board, Dr. Ikle, is paid $25,000  quarterly for his service on the Board.
In  addition,  Mr.  Byers  receives  $5,000  per annum for his  service as Proxy
Chairman.  The compensation  paid to the outside directors is paid pursuant to a
proxy agreement between the Company, the Defense Security Service and certain of
the Company shareholders.  During the fiscal year ended December 31, 1998, other
than Mr. Wood, no directors of the Company were awarded options.

Employment Contracts

     The  Company  is a  party  to  agreements  with  certain  of its  executive
officers.  Mr. David Aldrich,  Vice President and Chief Operating  Officer,  Mr.
William  Brownley,  General  Counsel,  Mr. Gerald Calhoun,  Vice President Human
Resources and Corporate  Secretary Telos Corporation and Enterworks,  Mr. Robert
Marino,  Chief Sales and Marketing  Officer and Executive  Vice  President,  Mr.
Lorenzo Tellez,  Chief  Financial  Officer,  and Mr. John Wood,  Chief Executive
Officer,  have  agreements  with the Company  which provide for a payment of two
year's base salary then in effect if involuntarily  terminated.  At December 31,
1998, Mr. Aldrich,  Brownley,  Calhoun,  Marino, Tellez and Wood had base salary
levels of  $181,000,  $171,000,  $169,000,  $206,000,  $206,000,  $219,000,  and
$350,000,  respectively.  In  addition,  these  executive  officers'  agreements
provide for bonus payments should certain operating results be attained.

<PAGE>


Item 12.  Security Ownership of Certain Beneficial Owners and Management
<TABLE>
<CAPTION>

                                    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                (1)                             (2)                                (3)                      (4)
                                                                         Amount and Nature
                                     Name and Address                of Beneficial Ownership            Percent of
      Title of Class                of Beneficial Owner               as of March 1, 1999                  Class
      -------------------------------------------------------------------------------------------------------------
   <S>                              <C>                                     <C>                           <C>           
   Class A Common Stock             John Porter                             22,190,718 shares (A)         80.32%
                                    15 Berners St.
                                    London SW1W 9EA England

   Class A Common Stock             C3, Inc. 401(k) Plan and                 3,658,536 shares             17.23%
                                    Telos Corporation Savings Plan
                                    c/o C3, Inc.
                                    19886 Ashburn Road
                                    Ashburn, Virginia 20147

   Class B Common Stock             F&C Nominees Limited                      3,143,358 shares            77.85%
                                    11 Devonshire Square
                                    London EC 2M 4YR England

   Class B Common Stock             Hare & Company                             815,700 shares             20.20%
                                    C/o Bank of New York
                                    P.O. Box 11203
                                    New York, NY  10249

   Class A Common Stock             David Aldrich                              170,392 shares (B)          0.80%
   Class A Common Stock             Robert J. Marino                           493,352 shares (B)          2.28%
   Class A Common Stock             Mark W. Hester                             240,778 shares (B)          1.12%
   Class A Common Stock             Lorenzo Tellez                             412,440 shares (B)          1.92%
   Class A Common Stock             John B. Wood                             1,491,863 shares (C)          6.57%
   Class A Common Stock             All Officers and
                                    Directors As A Group
                                    (9 persons)                              3,124,616 shares (D)         13.03%

   12% Cumulative Exchangeable      Value Partners, Ltd.                       714,317 shares (E)         22.42%
   Redeemable Preferred Stock       2200 Ross Avenue, Ste 4660
                                    Dallas, TX  75201

   12% Cumulative Exchangeable      Fisher Ewing Partners                      714,317 shares (E)         22.42%
   Redeemable Preferred Stock       2200 Ross Avenue, Ste 4660
                                    Dallas, TX  75201


   12% Cumulative Exchangeable      Wynnefield Partners Small                  228,500 shares (F)         7.17%
   Redeemable Preferred Stock       Cap Value L.P.
                                    Channel Partnership II, L.P.
                                    Wynnefield Small Cap Value
                                    Offshore Fund, Ltd.
                                    One Penn Plaza, Suite 4720
                                    New York, NY  10119

   12% Cumulative Exchangeable      Magten Asset Management Corp.              221,200 shares             6.94%
   Redeemable Preferred Stock       35 East 21st Street
                                    New York, NY  10010
<FN>

(A)   Mr. Porter's  holdings  include 6,388,916  shares of Class A Common  Stock
      purchasable upon exercise of a warrant. 
(B)   Messrs. Aldrich, Marino,Hester,and Tellez hold options to acquire 162,000,
      371,300, 170,000, and 260,000 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 warrant and are exercisable within 
      60 days of March 1, 1999.
(C)   Mr.  Wood owns  8,392  shares  of  Common  Stock and he holds an option to
      acquire 1,483,471 shares of the Company's Class A Common Stock purchasable
      upon exercise of options 60 days from March 1, 1999.
(D)   Under the Company's stock option plan and certain stock option agreements,
      all  officers and  directors as a group hold options to acquire  2,737,971
      shares of Class A Common Stock  exercisable  within 60 days after March 1,
      1999.
(E)   Value  Partners  Ltd.  and Fisher  Ewing  Partners  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 Public  Preferred Stock held of
      record by the reporting persons collectively.
(F)   Wynnefield Partners Small Cap Value L.P., Channel Partnership II, L.P. and
      Wynnefield  Small Cap Value  Offshore  Fund,  Ltd.  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.
</FN>
</TABLE>

<PAGE>

Item 13.                 Certain Relationships and Related Transactions

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

     Mr. John R. Porter has a consulting  agreement with the Company  whereby he
will be compensated for specific  services.  Expense  recorded  pursuant to this
agreement was $200,000 for both 1998 and 1997.

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

<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.


<PAGE>


  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., 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

  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:     John B. Wood
                                                ----------------------------
                                                         President and
                                                     Chief Executive Officer

                                                     Date:    April 1, 1999
    
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/  Fred Charles Ikle                         Chairman of the                                April 1, 1999
----------------------                         Board of Directors
Fred Charles Ikle                               



/s/  John B. Wood                              President, Chief Executive
----------------------                         Officer & Director 
John B. Wood                                   (Principal Executive Officer)                  April 1, 1999




/s/  Stephen D. Bryen                          Director                                       April 1, 1999
------------------------
Stephen D. Bryen




/s/  Norman P. Byers                           Director                                       April 1, 1999
------------------------
 Norman P. Byers




/s/  Lorenzo Tellez                            Chief Financial Officer                        April 1, 1999
------------------------                       (Principal Financial Officer)
Lorenzo Tellez                                  & Principal Accounting Officer)




                                               Director                                       April 1, 1999
------------------------------
Julio E. Heurtematte, Jr.




                                               Director                                       April 1, 1999
--------------------------
Malcolm M.B. Sterrett
</TABLE>

<PAGE>


                              Telos Corporation
                                Exhibit Index


<TABLE>
<CAPTION>


 Exhibit
 Number                        Exhibit Name                           Page
 ------                        ------------                           ----
  <S>               <C>                                                <C>
  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
</TABLE>