<PAGE>
                                       



                       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, 1996


              [ ]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,  1997,  the  registrant  had  23,076,753  shares of Class A
Common Stock,  no par value;  4,037,628  shares of Class B Common Stock,  no par
value; and 3,595,586 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):   50


                                      
<PAGE>


                                     PART 1

Item 1.  Business

History and Introduction

         Founded in 1968, Telos Corporation  ("Telos" or the "Company") provides
information  and network  technology  products  and  services  primarily  to the
government and industry.  The Company's  offerings encompass the full life cycle
of computer services,  including  analysis,  system  specification,  evaluation,
hardware and software integration,  deployment, installation, training, hardware
maintenance and software sustainment.

         A  substantial  portion of the  Company's  revenues  are  generated  by
long-standing  customers.  For  example,  since 1976,  the Company has  provided
life-cycle  software  engineering  services for the U.S.  Army's  tactical  fire
support  systems.  The first  contract  award  from this  customer  was for $1.7
million of software services. Since 1976, the Company has generated $216 million
of revenue from this customer.

         Certain other long-term customers of the Company include the California
Institute of Technology's Jet Propulsion  Laboratory,  for which the Company has
designed,  developed and supported ground based telemetry and mission operations
systems  since 1975,  and the U.S.  Navy and Marines,  for which the Company has
provided ruggedized computer systems since 1988.

         The Company has further  enhanced  its ability to deliver  solutions to
its  customers'  information  requirements  by  providing  a number of  software
applications  that allow  organizations to integrate data from disparate systems
and to model the business  processes that move the information  (workflow).  The
Company   also   offers   proprietary   software   applications   that   support
Internet-based  electronic commerce,  military tactical, and simulation training
environments.

         Customers include organizations in numerous agencies of federal, state,
and  local  governments,   as  well  as  financial,   industrial,  and  services
industries. The Company provides its services primarily in the United States and
in a limited number of international markets.

Operating Groups

         For the majority of 1996,  the Company  provided  its services  through
three  operating  groups.  After  determining  that it was not  strategic to its
long-term  business  direction,  which is focused on network  infrastructure and
solutions,  the Company sold its  Consulting  Services  Division in late 1996 to
fund  operations  and to enhance  its  ability to invest in  strategic  business
segments.  While the remaining  groups operate on a substantially  decentralized
basis, they work together,  where appropriate,  to offer customers a broad range
of information and network technology  services.  The Company believes that this
cooperative  approach  enables the operating  groups to offer their  services in
specific market segments using their specialized expertise and market knowledge.
At the same time, the operating groups can draw on the market access,  technical
breadth and management  capability of the entire Telos organization.  The market
segments in which the  Company  operates  and the  operating  groups  performing
services within these areas are as follows:

              Systems and  Support  Services  Group  provides  cost  competitive
              network based solutions  including  hardware and software  support
              services  to federal,  state,  and local  governments,  as well as
              commercial entities.

              enterWorks,  a  wholly  owned  subsidiary,   develops,   markets,
              licenses,  and  supports  a set of  software  products  that allow
              customers  to  deploy   mission   critical   applications   in  an
              internet/intranet based environment.  enterWorks financial results
              are included as a part of the Systems and Support  Services  Group
              for financial reporting purposes.

<PAGE>

          Systems  Integration  Group  provides  computer  and  large  scale
          network  integration  services  to  customers;  computer  hardware
          integration and component manufacture; and installation, training,
          and  service  support  to  federal,  state,  and local  government
          clients.

          Consulting Services Group provided  computer  consulting  services
          and contract labor to support its  customers'  existing  information
          technology   capabilities.   Specific  tasks   included   concept
          formulation,    system    specification,    system    engineering
          design/development,  and  project  management.  The net assets of
          this Group were sold in December 1996.

Systems and Support Services

         The  Company's  Systems and Support  Services  Group  provides  turnkey
system  solutions,  maintains and extends the life of existing  systems  through
technology insertion, system redesign, and software reengineering;  and provides
"one stop" hardware services,  quality assurance,  configuration management, and
property  management.  In response to the  increasing  prevalence  of  customers
owning more than one type or brand of computer,  the Group's  hardware  services
area has specialized in servicing  third party computer  hardware and peripheral
equipment  manufactured by others,  including Sun  Microsystems,  DEC, IBM, Data
General, Hewlett-Packard, Wang, and TSI (previously known as C3) equipment.

         Telos Systems and Support  Services (i) is the largest provider of life
cycle  software  engineering  services to the U.S.  Army, and (ii) is one of the
largest providers of ground based technical services to the California Institute
of  Technology  Jet  Propulsion  Laboratory,  a Federally  Funded  Research  and
Development Center managed by the National Aeronautics and Space Administration.

         In  response  to the growth in network  based  computing,  the  Company
formed  enterWorks.com  ("enterWorks"),  a wholly owned subsidiary,  to develop,
market,  license, and support a set of software products that allow customers to
deploy mission critical applications in an internet/intranet  based environment.
enterWorks  innovative  technology enables a company to bridge from its existing
corporate  information  systems to network-centric  computing without disrupting
those  existing  systems,  thus rapidly  gaining the  benefits of deploying  its
applications as networked. enterWorks products provide the ability to assimilate
data from many different  sources (data  integration) and to model the processes
that will be used to move that information through the organization (workflow).

     For fiscal year 1996,  Systems and Support  Services  had  revenues of $104
million or 54.9% of the total Company's revenue.

Systems Integration

         The  Systems   Integration   Group  delivers  network  and  information
technology   solutions  to  customers   worldwide.   The  Group  performs  value
engineering   and   system   integration   activities   including   design   and
manufacturing,   engineering,  network  integration,  system  installation,  and
support services.  The group holds the largest network integration contract ever
awarded by the Federal government,  a three year contract awarded in 1995 valued
in excess of $900 million.  Additionally, the group is developing and installing
the  hardware  and  network  infrastructure  in support of the  Immigration  and
Naturalization Service (INS).

         Telos Systems  Integration  is a leading  implementer  and innovator of
enabling  technology  that  provides  customers  a  complete  solution  to their
requirements  from a single vendor.  In 1981, the group  implemented  one of the
first  client-server  architecture's  for the U.S.  Coast  Guard and as a system
integrator,  developed the Navy's flagship desktop tactical computer system, the
DTC-II.  Today,  the group is  focused  on  developing  and  bringing  to market
applications to support network-based computing.
<PAGE>

     For fiscal year 1996, Systems Integration  generated revenue of $85 million
or 45.1% of the Company's revenue.

Consulting Services

         Consulting services were provided by Telos Consulting Services ("TCS").
TCS delivered  consulting  expertise,  primarily on a contract  labor basis,  in
support of the client's own information  technology  capabilities.  In 1996, the
Company  determined that TCS, a staff augmentation  business,  was not a central
part of the Company's  core  strategy of providing  network  infrastructure  and
solutions.  Accordingly,  the net  assets of TCS were  sold to COMSYS  Technical
Services,  Inc.,  a  subsidiary  of  COREStaff,   Inc.,  in  December  1996  for
approximately  $31.6 million.  The financial  results of TCS and the gain on the
sale of TCS have been  presented  as a disposal  of a segment of business in the
financial results of the Company.


Revenues by Major Market and Significant Customers

Revenue by major market for the Company is:


<TABLE>
<CAPTION>

                                                     Percentage of total revenues for fiscal year
                                                     --------------------------------------------
                                                1996(1)                  1995                  1994
                                                -------                  ----                  ----
<S>                                               <C>                    <C>                   <C>    
                  
Federal government                                84.8%                  80.6%                 84.5%
Commercial                                        13.6                   15.2                  11.4
State and local governments                        1.6                    4.2                   4.1
                                                  ----                    ---                   ---
         Total                                   100.0%                 100.0%                100.0%
                                                 =====                  =====                 =====
<FN>
(1)   1996 major market revenue percentages exclude TCS revenue.
</FN>
</TABLE>

         Total Company  revenue at December 31, 1996  includes  50.0% of revenue
from contracts  with the Department of Defense,  17.6% of revenue from contracts
with  Department of Justice,  6.6% of revenue from the National  Aeronautics and
Space Administration  ("NASA"), and 10.5% 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.  Among the major
competitors  are AT&T,  Boeing Computer  Services Corp.,  Computer Data Systems,
Computer  Sciences  Corp.,  Electronic  Data  Systems  Corporation,   Scientific
Applications   International   Corporation,   GTE  Corp.  and  General  Electric
Corporation.   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 employs 1,374 persons as of December 31, 1996. The services
the  Company  provides  require  proficiency  in many  fields,  such as computer
science, mathematics, physics, engineering,  operations research, economics, and
business administration.
<PAGE>
         Of the total  Company  personnel,  1,032  provide  Systems  and Support
Services,  56 are employed by  enterWorks,  and 168 provide  System  Integration
Services.  An additional 118 employees  provide  corporate and business services
functions.

Backlog

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

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

         At December  31, 1996 and 1995,  the  Company  had total  backlog  from
existing contracts of $1.2 billion and $1.3 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,
1996 is $900 million from  Indefinite  Delivery,  Indefinite  Quantity  ("IDIQ")
contracts of which the SMC-II  contract  comprises  $876 million.  Approximately
$115 million and $65.6  million of the total was funded  backlog at December 31,
1996 and 1995, respectively.

         While backlog remains an important  measurement  criteria,  during 1996
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 is  aggressively
pursuing.

Overview of 1996

         The  Company  entered  1996 with the belief  that the year would  bring
enhanced  operating  and  performance  results  over  1995.  Its  backlog at the
beginning  of 1996 of $1.3  billion was the  highest in Company  history and its
focused diversification into the emerging Internet and international markets was
anticipated to bring additional  business  opportunities.  While the Company had
revenue  growth of 7.5% to $188.9  million from $175.8  million in 1995 from its
Systems  Integration  and Systems and Support  Services  Groups,  the  Company's
profitability  decreased  as  compared  to 1995.  The  primary  reasons  for the
decrease were: (1) The Federal  government  budget crisis in early 1996 resulted
in significantly  lower than anticipated sales on certain of the Company's large
computer equipment  contracts during the first half of 1996, and (2) The Company
experienced  reduced gross margins on certain  equipment and services  contracts
due to changes in product mix from 1995 as well as changes in  contract  pricing
and (3) The Company  incurred  increased  infrastructure  costs  associated with
supporting contracts awarded in late 1995.

         The Company did experience  increased order flow during the second half
of 1996, and while it believes its operational  performance in 1997 will improve
significantly  based on this order  flow,  there can be no  assurance  that such
order  flow will  continue.  In the  fourth  quarter  of 1996 the  Company  also

<PAGE>
     implemented a cost reduction plan to reduce infrastructure costs in certain
divisions.  The cost  reduction  plan  focused on  indirect  costs and  included
employee reductions.

         From an  international  perspective,  the  Company  was  successful  in
broadening  its business base through  contract wins in the  Philippines  and is
actively pursuing other opportunities in the Pacific Rim and Middle East.

         The Company has  continued  to invest in  enterWorks,  its wholly owned
subsidiary,  primarily  in product  development  and in the sales and  marketing
areas.  In 1996,  enterWorks  revenue  doubled and it succeeded in expanding its
commercial customer base.

         The Company,  along with other companies that contract with the Federal
government,  experienced a shift in the manner in which the government  procures
equipment and services in 1996.  This shift from long lead time  multi-year sole
source contracts to multiple awardee contracts and GSA Schedules has resulted in
the Company modifying its new business development efforts. The Company has been
successful  in this  area  with a  number  of  contract  wins  in  1996  and the
establishment of a comprehensive  GSA schedule.  However,  while the Company has
been  successful in obtaining new contract  vehicles,  there can be no assurance
that orders and revenue will result.

         In late 1996, the Company sold its Consulting  Services Group for $31.6
million.  The Company had determined  that this Group was not a core part of its
long term  business  strategy  and that the sale would  provide the Company with
additional  liquidity to fund  operations  and to invest in  strategic  business
areas.

Item 2.  Properties

         The Company leases  191,000  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.

         The Company leases  additional  space for regional  field  engineering,
contract  work sites,  training,  and sales  offices in 62  separate  facilities
located in 25 states, the District of Columbia, and Europe under various leases,
each of which expires on different  dates through  February,  2000.  The Company
also owns two  buildings and a warehouse in Amery,  Wisconsin.  One of these two
owned buildings is currently being leased to another company.

Item 3.  Legal Proceedings

         A description of certain legal matters follows:

Rosecliff, Inc., et al v. C3, Inc., et al. (94 CIV. 9104)

         This case was filed in  December,  1994 in the United  States  District
Court for the Southern District of New York. Rosecliff,  Inc. ("Rosecliff") is a
merchant   banking  group  with  whom  the  Company  had  been   negotiating  an
equity/subordinated debt private placement transaction. Upon termination of this
transaction,  Rosecliff  filed a suit  seeking  payment of its  expenses  and $1
million for the violation of the "no-shop"  provision in the  Agreement.  During
1996,  the Company  entered  into a  settlement  agreement  with  Rosecliff  and
recorded an additional $355,000 of non-operating expense based on the provisions
of the  settlement.  At December 31, 1996 all amounts  related to the settlement
were paid.

         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.

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

         During  the  fourth  quarter  of fiscal  year  1996,  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 B Common Stock. As
of March 1, 1997,  there were 84 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,
                                                                    -----------------------
                                             1996            1995           1994           1993           1992
                                             ----            ----           ----           ----           ----
                                             
                                                                    (amounts in thousands)
<S>                                        <C>             <C>             <C>            <C>           <C>    
Sales                                      $188,895        $175,759        $150,676       $187,285      $200,606

(Loss) income from
  Continuing operations                      (9,816)            592         (11,838)         1,250        (1,577)

Discontinued Operations: (1)
   Income (loss) from
   discontinued operations                      500             423            (583)          (702)       (1,038)
   Gain on sale of
   Consulting Services                       11,524              --              --             --            --

Income (loss) before
   extraordinary items                        2,208           1,015         (12,421)           548        (2,615)

Extraordinary items                              --              --            (196)            --         4,316

Net income (loss)                             2,208           1,015         (12,617)           548         1,701


                                                                       FINANCIAL CONDITION

                                                                       As of December 31
                                                                       -----------------
                                             1996              1995          1994             1993         1992
                                             ----              ----          ----             ----         ----
                                                                    (amounts in thousands)

Total assets                               $110,064         $94,492         $86,872        $84,796       $97,277

Debt (2)                                     32,857          47,316          40,414         30,790        40,710

Capital lease obligations,
   long-term (3)                             12,537              --              --             --            --

Senior redeemable
   preferred stock                            4,828           4,494           4,192          3,922         3,653

Class B redeemable
   preferred stock                           11,087          10,252           9,497          8,822         8,149

Redeemable preferred
   stock                                     24,230          18,647          14,263         11,417         9,951

<FN>
(1)  See Note 2 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
     debt   obligations  of  the  Company  at  December  31,  1996.  Total  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 leases of the Company.
</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  invested  significant
resources into sales and marketing, development of certain software and hardware
products,  and into contract and Company infrastructure to support the contracts
awarded to the Company. The Company's investment in the sales and marketing area
has resulted in the Company's  backlog  growing from $328.4  million at December
31, 1994 to approximately $1.2 billion at December 31, 1996.  Additionally,  the
Company has established a comprehensive offering of products and services on its
GSA Schedule  and has won a number of contracts in 1996 that provide  additional
growth opportunities. This investment has also allowed the Company to win all of
its significant contract rebids.

         The  Company's  investment  in new software  and  hardware  products is
providing  the Company with an expanded  product line that offers its  customers
unique value added solutions to their  computing and  information  gathering and
analysis  problems.  The  investment in software  products is primarily  through
enterWorks,  and is  focused  on data  integration  and  information  processing
(workflow).   Its  investment  in  hardware  products  is  through  its  Systems
Integration Group and is focused on portable and ruggedized computers.

         While 1996 was a difficult year from an operational  perspective due to
the Federal  government  budget impasse in early 1996, the Company  continued to
invest in contract and Company  infrastructure  to support a number of contracts
awarded in late 1995. This investment included  additional  personnel in program
and contract management and in sales and marketing.  The Company also moved to a
larger  headquarters and system  integration  facility in 1996 which resulted in
increased  rent expense and other costs  associated  with the move.  The Company
continually evaluates its cost structure and in the fourth quarter implemented a
cost reduction plan focused on indirect costs and personnel.

         Late in 1996 the Company sold the net assets of its consulting services
division  for $31.6  million.  See the  discussions  included in the "Results of
Operations" and "Liquidity and Capital Resources" sections below.

Revenue by Contract Type

         Approximately  86.4%  of the  Company's  total  revenues  in 1996  were
attributable to contracts with federal, state, and local governments,  including
84.8%  attributable  to the  Federal  government.  The  Company's  revenues  are
generated from various contract vehicles.  In general,  the Company believes its
contract  portfolio is characterized as having low to moderate financial risk as
the  Company has  minimal  long-term  fixed  price  development  contracts.  The
Company's firm fixed price contracts represent either 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 the year ended
December 31, 1996,  revenue by contract type was as follows:  time and material,
28.2%; firm fixed price,  45.1%; cost  reimbursable,  19.5%; fixed monthly rate,
6.7%; and other,  0.5%.  While the Company has not  experienced  any significant
recent terminations or renegotiations, government contracts may be terminated or
renegotiated at any time at the convenience of the government.
<PAGE>
Statement of Income Data

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


                                                                    Year Ended December 31
                                                                    ----------------------
                                                               
                                                     1996                     1995                     1994
                                                     ----                     ----                     ----
                                                                  (dollar amounts in thousands)
<S>                                          <C>         <C>          <C>          <C>          <C>        <C>
Sales                                        $188,895    100.0%       $175,759     100.0%       $150,676   100.0%

Cost of sales                                 168,281     89.1         145,522      82.8         127,218    84.4
Selling, general and
   administrative expenses                     29,055     15.4          23,262      13.2          25,321    16.8
Goodwill amortization                           1,001      0.5           1,950       1.1           2,701     1.8
                                               ------     ----           -----      ----          ------    ----

   Operating (loss) income                     (9,442)    (5.0)          5,025       2.9          (4,564)   (3.0)

Interest expense                               (5,668)    (3.0)         (4,385)     (2.5)         (3,029)   (2.0)
Other (expense) income                           (445)    (0.2)             27        --          (5,458)   (3.6)
                                               -------     ---           -----       ---           -----     ---
(Loss) income before taxes
   and minority interest                      (15,555)    (8.2)            667       0.4         (13,051)   (8.6)

Income tax (benefit) provision                 (5,739)    (3.0)             75        --          (1,213)   (0.8)
                                              -------      ---             ---       ----          -----     ---
(Loss) income from
   continuing operations                       (9,816)    (5.2)            592        0.4        (11,838)   (7.8)
Discontinued Operations:
  Income from discontinued
 operations                                       500      0.2             423        0.2           (583)   (0.4)
  Gain on sale of TCS                          11,524      6.1              --         --             --      --
Extraordinary item                                 --       --              --         --           (196)   (0.1)
                                                -----      ---           -----        ---         -------    ---
Net income (loss)                              $2,208      1.1%         $1,015        0.6%      $(12,617)   (8.3)%
                                                =====      ===           =====        ===         ======     ===
</TABLE>

Financial Data By Market Segment

     With the sale of its Consulting Services Group, the Company operates in
two market  segments:  systems and support  services  (the  "Systems and Support
Services  Group"),  which  consists of  enterWorks  and  software  and  hardware
services; and the Systems Integration Group.

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

                                                                            Year Ended December 31
                                                                            ----------------------
                                                                
                                                           1996                   1995                  1994
                                                           ----                   ----                  ----
                                                       
                                                                       (dollar amounts in thousands)
<S>                                                     <C>                      <C>                   <C>    
Sales:
    Systems and Support Services                        $103,675                 $105,801              $111,357
    Systems Integration                                   85,220                   69,958                39,319
                                                         -------                  -------               -------
      Total                                             $188,895                 $175,759              $150,676
                                                         =======                  =======               =======

Gross Profit:
    Systems and Support Services                          12,192                  $15,122               $16,783
    Systems Integration                                    8,422                   15,115                 6,675
                                                          ------                   ------                ------
      Total                                              $20,614                  $30,237               $23,458
                                                          ======                   ======                ======

Gross Margin:

    Systems and Support Services                            11.8%                    14.3%                 15.1%
    Systems Integration                                      9.9%                    21.6%                 17.0%
      Total                                                 10.9%                    17.2%                 15.6%
</TABLE>
<PAGE>
Results of Operations

Years ended December 31, 1996 and 1995

         Sales increased  $13.1 million,  or 7.5%, from $175.8 million to $188.9
million for the year ended December 31, 1996 as compared to 1995.  This increase
was primarily  attributable to the Systems  Integration Group, which reported an
increase in sales of $15.3  million for the year.  This increase was offset by a
decline in sales in the Systems and Support  Services  Group of $2.2 million for
the year.

         The  increase in the  Systems  Integration  Group's  revenue was due to
increased  order  volume  during the second  half of 1996.  Increased  orders in
systems  integration  were due to the Small  Multi-user  Computer II  ("SMC-II")
contract,  as well as increased  sales under the GSA Schedule and other contract
vehicles.

         The  revenue  decline in the  Systems  and  Support  Services  Group is
primarily  due to a decrease in hardware  support  revenue of $5.3  million from
1995 to 1996. This decline is a result of the continued migration from mainframe
to network  based  computing  as the  servers and  desktop  computers  generally
provide  lower  maintenance  revenue.  Additionally,  the hardware  support area
continues to experience a shift from fixed price  contracts to time and material
contracts  which produce less  predictable  revenue  streams.  This decrease was
offset by increases  in  enterWorks  revenue of $800,000  and  software  support
revenue  of $2.3  million  from  1995  to  1996.  The  enterWorks  increase  was
attributable  to  expanded  sales and  marketing  efforts  of the  subsidiaries'
products and related consulting. The software support revenue increase is due to
increased services under certain of the Company's large labor contracts.

         Based on the Company's  backlog  position and  increased  order flow in
late 1996, 1997 should present significant  opportunities for revenue growth and
improved operational  performance.  However, there can be no assurance that such
performance improvement will occur.

         Cost of sales  increased by $22.8 million,  or 15.6%, to $168.3 million
in 1996,  from  $145.5  million  in 1995.  This  increase  is the  result of the
increase  in sales for the  period,  changes in the  revenue  product  mix,  and
increases in contract infrastructure costs. Revenue, particularly within Systems
Integration,  for 1996 included  certain  higher cost  equipment and software as
compared to 1995. This mix change was a result of new contracts, such as SMC-II,
having  increased  sales of older  technology  equipment  where the  Company has
higher costs as well as increased sales of new products developed by the Company
that had higher manufacturing costs than anticipated.  Additionally,  within the
Systems and Support Services Group, the Company experienced  increased labor and
material costs in the hardware support area. Cost of sales also increased due to
higher allocated rent expense in 1996 as a result of the move to a new facility.

         Gross profit  decreased by $9.6 million for the year to $20.6  million,
from $30.2 million in the comparable 1995 period.  The decrease in the period is
primarily  attributable  to the cost of sales  increases  discussed  above.  The
Company has recently undertaken a number of cost-cutting  measures such as staff
reduction and branch consolidation to increase its profitability.  The Company's
gross margin was 10.9% for the year ended December 31, 1996 as compared to 17.2%
for the comparable period of 1995. The Company  believes,  although there can be
no assurance, that its gross margin should improve in 1997.

         Selling, general, and administrative expense ("SG&A") increased for the
year by approximately $5.8 million,  to $29.1 million in 1996 from $23.3 million
in 1995 for the  comparable  period.  These  increases  were primarily due to an
increase in sales and marketing  investment in 1996 as compared to 1995, as well
as an increased  investment  in  infrastructure  for contracts won in late 1995.
Also, in 1996, based on a review of its operations and requirements, the Company
had certain  adjustments  which  increased  SG&A by $1.6  million in the area of
accounts  receivable,  loss  contracts  and other  reserves.  This  coupled with
certain 1995  adjustments,  which  reduced SG&A by $1.7 million in such areas as
employee benefits and certain closure reserves, led to the increase in SG&A. For
1997,  the Company  believes  that SG&A will  decrease from 1996 due to indirect
cost  reductions  resulting  from its cost  reduction  efforts,  the sale of its
Consulting Services Group, and the absence of the one-time adjustments described
above.  However,  there can be no assurance  that SG&A  expense will be less in
1997.  SG&A as a  percentage  of sales  increased  to 15.4%  for the year  ended
December 31, 1996 from 13.2% in the comparable 1995 period.
<PAGE>


         Goodwill  amortization  expense  was $1.0  million  for the year  ended
December 31, 1996 compared to $2.0 million for the period ended December,  1995.
The reduction in goodwill  amortization  is  attributable  to adjustments in the
goodwill  balance as a result of realization of acquired tax benefits  resulting
from the 1992 acquisition of Telos Corporation  (California).  Also, it declined
due to the  completion  of the goodwill  amortization  associated  with the 1989
leveraged buy out of the Company.

         Operating (loss) income decreased by $14.4 million to $(9.4) million in
the year from $5.0  million  in the  comparable  1995  period as a result of the
aforementioned decreases in gross profit and the increase in SG&A in 1996.

         Other  non-operating  expense was  approximately  $445,000 for the year
ended December 31, 1996 compared to approximately $27,000 of other non-operating
income in the comparable 1995 period. The expense in 1996 was attributable to an
additional  reserve to fully  record the  provision  for the  settlement  of the
Rosecliff case (see Item 3).

         Interest expense increased approximately $1,283,000 to $5.7 million for
the year  ended  December  31,  1996 from $4.4  million in the  comparable  1995
period.  The  variance is a result of the  increase  in the average  outstanding
balance of the senior credit facility for most of 1996, as well as the effect of
the  subordinated  debt issued in 1995 being  outstanding  for the entire  year.
Also,  as the  Company is  accounting  for its new  building  lease as a capital
lease,  $600,000 of the increased  interest expense relates to the building.
The Company  believes  its  interest  expense in 1997 will be less than the 1996
levels given its reduced senior credit facility balance and its anticipated 1997
operating performance.  However, there can be no assurance that the reduction in
interest expense will occur.

         For the year 1996, the Company had a combined  Federal and state income
tax  provision  of  $1,154,000   including   both   continuing   operations  and
discontinued  operations.  The Company,  using SFAS 109 allocation  methodology,
recorded a benefit in continuing  operations of $5.7 million. For the comparable
period, the Company had a tax provision of $75,000.

         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  and $6.3 million of
income tax expense.

     The sale of Telos  Consulting  Services 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 income 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  $1,475,000,   $1,106,000  and
$1,028,000 for 1996, 1995, and 1994,  respectively.  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,  $420,000  and  $477,000  for  1996,  1995 and 1994,
respectively, has been included in the results of the discontinued operations.

Years ended December 31, 1995 and 1994

         Sales increased $25.1 million,  or 16.6%, from $150.7 million to $175.8
million  for the year  ended  December  31,  1995 as  compared  to the same 1994
period.  This increase was  primarily  attributable  to the Systems  Integration
Group,  which reported an increase in sales of $30.6 million for the year.  This
increase  was offset by a decline in sales in the Systems  and Support  Services
Group of $5.6 million for the year.

         The increase in the Systems Integration Group is due to increased order
volume during the second half of 1995.  Increased orders in systems  integration
were due to the INS contract, as well as increased sales in other business lines
of the division.
<PAGE>
         In the Systems and Support  Services  Group,  software  services  sales
experienced  a decline of $3.8  million for the year ended  December 31, 1995 as
compared  to the same  period  in 1994.  These  decreases  in sales  were due to
declines in contract activity on existing contracts as well as certain contracts
not being renewed during 1995.

         The revenue  decline in this Group is also due to the hardware  support
division.  The  decline in revenue in this  division is  primarily  due to lower
warranty revenue resulting from the low 1994 system  integration  sales, lack of
follow-on maintenance contracts after the end of the warranty period for certain
of the TSI  equipment  previously  sold and  delayed  starts on  certain  of the
Group's recent contract  awards.  In addition,  the Hardware support division is
experiencing  a shift in its business as its  customers  migrate from  mainframe
computing to distributed  processing  through  personal  computers and networks.
Generally,  maintenance services for distributed processing equipment generate a
lower revenue  stream as billing rates for  maintaining  personal  computers are
lower.

         Cost of sales  increased by $18.3 million,  or 14.4%, to $145.5 million
in 1995,  from  $127.2  million  in 1994.  This  increase  is the  result of the
increase in sales for the period.

     Gross profit increased by $6.8 million for the year to $30.2 million,  from
$23.4  million in the  comparable  1994  period.  The  increase in the period is
primarily  attributable to the higher sales volume  previously  discussed within
the Systems  Integration Group. These increases were offset by declines in gross
profit for the Systems and Support  Services  Group,  attributable  primarily to
start-up costs  associated  with recent  contract awards as well as lower profit
margins  associated with  maintaining  distributed  processing  equipment.  Also
negatively  impacting  profit margins of the Group is the  investment  currently
being  made  in  certain   international   offices  to  support  the   Company's
international  efforts. The Group implemented a number of cost-cutting  measures
such as staff reduction and branch  consolidation to increase its profitability.
The  Company's  gross  margin was 17.2% for the year ended  December 31, 1995 as
compared to 15.6% for the comparable period of 1994.

         Selling, general, and administrative expense ("SG&A") decreased for the
year by approximately $2.0 million,  to $23.3 million in 1995 from $25.3 million
in 1994 for the comparable period. These decreases were primarily due to reduced
expenses  associated with research and development  initiatives,  lower contract
rebid  efforts in 1995 as  compared  to 1994,  and  reduced  expenses in certain
administrative  cost areas.  Also, in 1995,  based on a review of its operations
and  requirements,  the Company had certain  one-time  adjustments to previously
recorded  reserves  which reduced SG&A by $1.7 million in such areas as employee
benefits and certain closure  reserves.  SG&A as a percentage of sales decreased
to 13.2% for the year ended December 31, 1995 from 16.8% in the comparable  1994
period.

         Goodwill  amortization  expense  was $2.0  million  for the year  ended
December 31, 1995 compared to $2.7 million for the period ended December,  1994.
The reduction in goodwill  amortization is attributable to the completion of the
amortization  of the  goodwill  created  by the  1989  leveraged  buyout  of the
Company.  The Company  continues to amortize the goodwill balance which resulted
from the acquisition of Telos Corporation (California).

         Operating  income  (loss)  increased by $9.6 million to $5.0 million in
the year from ($4.6)  million in the  comparable  1994 period as a result of the
aforementioned increases in sales and gross profit.

         Other non-operating income was approximately $27,000 for the year ended
December 31, 1995 compared to approximately $5.5 million of other  non-operating
expense in the  comparable  1994 period.  The $5.5  million  expense in 1994 was
attributable  to costs  incurred  from  attempts to  recapitalize  the Company's
balance sheet and refinance the Company's  existing debt. It was also due to the
write-off of the  remaining  asset value of a software  license  purchased  from
Sapien's International.  (See the transaction costs section in Note 5 as well as
the discussion of Sapiens International in Note 8 to the consolidated  financial
statements.)

         Interest expense increased  approximately  $1.4 million to $4.4 million
for the year ended  December 31, 1995 from $3.0 million in the  comparable  1994
period.  The  variance is a result of the  increase  in the average  outstanding
balance of the senior credit  facility and related  interest rate, as well as an
increase  in the  outstanding  balance  of the  subordinated  debt  and  related
interest rate.


         The Company had an income tax  provision  of $75,000 for the year ended
December 31, 1995 primarily due to state income taxes. For the comparable period
of 1994, the Company had a tax benefit of $1.2 million.
                                
<PAGE>

Liquidity And Capital Resources

         For most of 1996, the Company experienced  constrained liquidity.  This
lack of liquidity was caused by the Company's  operating  performance in 1996 as
well as the Company's continued  investment in enterWorks and in other strategic
initiatives.  The  disappointing  operating  performance  was in part due to the
Federal  government  budget  impasse  and shut down that  occurred in early 1996
which  resulted  in lower than  anticipated  order  levels on certain  equipment
contracts that  negatively  impacted the Company for the first half of 1996. The
Company also experienced lower gross margins on certain existing  contracts as a
result of changes in product mix and in customer buying  patterns.  Coupled with
the above, the Company invested in contract support infrastructure for contracts
awarded  in late  1995  as well as  sales,  marketing  and  product  development
activities at enterWorks.  The Company also incurred  additional  facility costs
with the relocation of the Company's headquarters in 1996.

         The Company  responded to its liquidity  constraints by implementing an
aggressive  cash  management  program which reduced  discretionary  spending and
obtained  extended  payment terms from certain of the Company's  suppliers.  The
Company also  instituted a cost  reduction  program during the fourth quarter of
1996  focused on  reducing  indirect  spending  and  headcount.  The Company has
reduced  indirect  spending in late 1996 and in early 1997 although there can be
no assurance that such cost savings can continue throughout 1997.

         The  Company  also   completed  a  private   financing  of   enterWorks
subordinated debt in the third quarter of 1996. From its inception,  the Company
had internally funded its enterWorks  investment of approximately  $5.1 million.
The proceeds of the debt offering,  which brought in $3.2 million,  was used for
working capital requirements of the Company.

         Also,  late in the  fourth  quarter  of  1996,  the  Company  sold  its
Consulting  Services Group ("TCS") to COMSYS Technical  Service,  a wholly owned
subsidiary  of COREStaff for $31.6  million.  The decision to sell TCS was based
upon the  determination  that TCS was not core to the long term  strategy of the
Company as well as recognizing the need to improve the Company's liquidity.  The
proceeds from the sale are being used for working  capital  requirements  and to
fund  other  business  areas and  investments.  The  Company  believes  that the
proceeds from the TCS sale have alleviated the short-term liquidity constraints.
However,  there can be no assurances  that the improved  liquidity will continue
throughout 1997.

         For the year ended  December 31, 1996,  the Company used  approximately
$15.5  million of cash in operating  activities.  This use of cash in operations
was primarily a result of the operating  performance as well as increases in the
accounts  receivable and inventory balances after adjustment for non-cash items.
With the sale of TCS, the Company generated $27.6 million of cash from investing
activities. From a financing perspective, the Company used the cash generated by
the TCS sale to reduce the senior  credit  facility.  The Company also  received
$3.2 million from the issuance of enterWorks subordinated debt.

         At December 31, 1996, the Company had an  outstanding  balance of $15.4
million  on  its  $45  million   senior   credit   facility.   The  Facility  is
collateralized  by  certain  assets  of the  Company  (primarily  inventory  and
accounts  receivable)  and the  amount  of  borrowings  fluctuates  based on the
underlying  asset  borrowing  base  as  well as the  Company's  working  capital
requirements.  At December  31,  1996,  the Company,  under its  borrowing  base
formula, had $24 million of unused availability. The facility expires on July 1,
2000.  Subsequent  to December  31,  1996,  the  Company's  bank entered into an
agreement with the Company to refinance its $45 million  Facility and extend the
maturity  date to July 1, 2000.  Other terms and  conditions of the Facility are
similar to the Company's previous Facility.

         The Company continually evaluates its financing requirements to support
its business  base and  anticipated  growth.  The Company  anticipates  that its
current  Facility  will be  adequate  for  1997.  However,  should  faster  than
anticipated  growth occur,  the Company  believes that an expanded senior credit
facility would be required through a multi-bank syndication arrangement.
<PAGE>

         The  Company is  actively  reviewing  its  financing  requirements  for
enterWorks.  While  enterWorks  issued $3.2  million of  subordinated  debt with
warrants  in 1996,  the  Company  is  continuing  to fund the  on-going  product
development, sales and marketing, and business activities of its subsidiary. The
Company will continue to evaluate the necessity of bringing  external capital to
fully exploit this emerging market and to build the enterWorks business.

         The Company has a net  deferred  tax asset of $3.1  million at December
31,  1996.  Management  believes  that the asset is fully  realizable  given the
Company's  existing  backlog,  projected future taxable income and potential tax
planning strategies existing at December 31, 1996.


Capital Expenditures

         The  Company  believes  that its  business  is  generally  not  capital
intensive.  However,  the Company did have higher property,  plant and equipment
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 and that will
result in  significant  cost  savings to the Company as it provides  for reduced
monthly  lease  payments  compared  to the costs  incurred  under the  Company's
previous leasing arrangement. The Company, as a part of the lease, received $1.3
million in cash from the landlord  for tenant  improvements  and other  building
costs. At December 31, 1996, $231,000 of these funds remain and has been treated
as restricted cash.

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.

Forward-Looking Statements

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

Certain Factors That May Affect Future Results

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

         A number of uncertainties exist that could affect the Company's future
operating results, including,  without limitation,  general economic conditions,
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  continued  business  growth,  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.
<PAGE>

         While the Company  believes it has  adequate  financing  to support its
revenue base anticipated for 1997, the Company's growth depends upon its ability
to obtain  additional  capital and financing  sources.  The Company  continually
reviews the requirements for additional financing.  However, no assurance can be
made on whether such financing, if necessary,  can be obtained, or if available,
that it will be available on acceptable terms.


<PAGE>

Item 8.  Financial Statements and Supplementary Data
<TABLE>
<CAPTION>


                                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<S>                                                                                                       <C>   
Telos Corporation and Subsidiaries:                                                                       Page

Report of Independent Accountants - Coopers & Lybrand L.L.P...............................................17

Consolidated Statements of Income for the Years Ended
 December 31, 1996, December 31, 1995, and December 31, 1994..............................................18

Consolidated Balance Sheets as of December 31, 1996 and
    December 31, 1995.....................................................................................19-20

Consolidated Statements of Cash Flows for the Years Ended
    December 31, 1996, December 31, 1995, and December 31, 1994...........................................21

Consolidated Statements of Stockholders' Investment (Deficit)
    for the Years Ended December 31, 1996, December 31, 1995,
    and December 31, 1994.................................................................................22

Notes to Consolidated Financial Statements................................................................23-37
</TABLE>


                               INDEX TO SCHEDULES

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



                        Report of Independent Accountants






To the Board of Directors and Stockholders
  of Telos Corporation



We  have  audited  the  accompanying   consolidated   balance  sheets  of  Telos
Corporation  and  Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income,  stockholders' investment (deficit), and cash
flows for each of the three years in the period ended  December 31, 1996.  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  in  accordance  with  generally   accepted  auditing
standards.  Those standards 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.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of Telos Corporation
and Subsidiaries as of December 31, 1996 and 1995, and the consolidated  results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.














                                                       COOPERS & LYBRAND L.L.P.

McLean, VA
March 28, 1997


<PAGE>
<TABLE>
<CAPTION>





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

                                                                        Year Ended December 31,
                                                                        -----------------------
                                                            
                                                         1996                   1995                   1994
                                                         ----                   ----                   ----
<S>                                                  <C>                     <C>                   <C>    
Sales
    Systems and Support Services                      $103,675                $105,801              $111,357
    Systems Integration                                 85,220                  69,958                39,319
                                                        ------                  ------                ------

                                                       188,895                 175,759               150,676
                                                       -------                 -------               -------
Costs and expenses
    Cost of Systems and
      Support Services                                  91,483                  90,679                94,574
    Cost of Systems Integration                         76,798                  54,843                32,644
    Selling, general and
      administrative expenses                           29,055                  23,262                25,321
    Goodwill amortization                                1,001                   1,950                 2,701
                                                         -----                 -------               -------

                                                       198,337                 170,734               155,240
                                                       -------                 -------               -------

Operating (Loss) income                                 (9,442)                  5,025                (4,564)

Other income (expenses)
    Non-operating (expense) income                        (445)                     27                (5,458)
    Interest expense                                    (5,668)                 (4,385)               (3,029)
                                                         -----                   -----                 -----

(Loss) income before taxes                             (15,555)                    667               (13,051)
Income tax (benefit) provision                          (5,739)                     75                (1,213)
                                                       --------                  -----               --------
(Loss) income from continuing
    operations                                          (9,816)                    592               (11,838)

Discontinued operations:
 Income (loss) from discontinued
    operations (net of income tax
    provision of $566 for 1996 and
    an income tax benefit of $70
    for 1994)                                              500                     423                  (583)

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

Income (loss) before
    extraordinary item                                   2,208                   1,015               (12,421)

Extraordinary item
    Loss from early debt
      retirement                                            --                      --                  (196)
                                                        ------                   -----                ------

Net income (loss)                                       $2,208                  $1,015              $(12,617)
                                                         =====                   =====                ======
</TABLE>








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


<PAGE>
<TABLE>
<CAPTION>



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

                                                      ASSETS





                                                                                  December 31,
                                                                                  ------------
                                                                       1996                       1995
                                                                       ----                       ----
                                                                       
    <S>                                                                <C>                       <C>    
    Cash and cash equivalents
      (includes restricted cash of
      $231 at December 31, 1996)                                       $ 2,781                   $   735
    Accounts receivable, net                                            51,549                    44,112
    Inventories, net                                                    17,066                    15,877
    Deferred income taxes                                                1,643                     1,217
    Prepaid income taxes                                                   694                       320
    Other current assets                                                   230                       384
                                                                        ------                    ------

      Total current assets                                              73,963                    62,645
                                                                        ------                    ------

Property and equipment
    Land and building                                                      408                       408
    Furniture and equipment                                             20,174                    18,180
    Leasehold improvements                                               2,650                     2,683
    Property and equipment
      under capital leases                                              13,644                        --
                                                                        ------                    ------
                                                                        36,876                    21,271

    Accumulated depreciation                                           (20,390)                  (18,600)
                                                                        -------                   ------

      Total property and equipment                                      16,486                     2,671
                                                                        ------                    ------

Goodwill                                                                13,545                    22,814
Deferred income taxes                                                    1,468                     1,868
Other assets                                                             4,602                     4,494
                                                                       -------                    ------

                                                                      $110,064                   $94,492
                                                                       =======                    ======

</TABLE>


















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


<PAGE>
<TABLE>
<CAPTION>


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

                                       LIABILITIES AND STOCKHOLDERS' INVESTMENT


                                                                                             December 31,
                                                                                             ------------
                                                                                    1996                      1995
                                                                                    ----                      ----
<S>                                                                                 <C>                     <C>    
Current liabilities
   Accounts payable                                                                 $35,730                 $26,528
   Accrued compensation and benefits                                                 10,163                   8,804
   Unearned warranty revenue                                                          1,575                     699
   Current portion, capital lease obligations                                           357                      --
   Other current liabilities                                                          9,776                   6,253
                                                                                      -----                  ------

      Total current liabilities                                                      57,601                  42,284

Senior credit facility                                                               15,418                  32,312
Senior subordinated notes                                                            17,439                  15,004
Capital lease obligations                                                            12,537                      --
Other long-term liabilities                                                             154                   1,108
                                                                                     ------                  ------
      Total liabilities                                                             103,149                  90,708
                                                                                    -------                  ------

Commitments and contingencies
Preferred stock
    Senior redeemable preferred stock
      Series A-1, and A-2                                                             4,828                   4,494
    Class B Redeemable Preferred Stock par value $.01,
      7,500 shares authorized, issued and outstanding                                11,087                  10,252
    Redeemable preferred stock, $.01 par value,
      6,000,000 shares authorized, 3,595,586 shares
      issued, and outstanding $10.00 per share
      liquidation and redemption value                                               24,230                  18,647
                                                                                     ------                  ------
      Total preferred stock                                                          40,145                  33,393
                                                                                     ------                  ------

Stockholders' investment
   Class A common stock, no par value, 23,076,753                                        65                      65
     shares issued and outstanding
   Class B common stock, no par value, 4,037,628
    shares issued and outstanding                                                        13                      13
   Capital in excess of par                                                           4,048                   7,669
   Retained earnings (deficit)                                                      (37,356)                (37,356)
                                                                                     ------                  ------
     Total stockholders' investment (deficit)                                       (33,230)                (29,609)
                                                                                     ------                  ------

                                                                                   $110,064                 $94,492
                                                                                    =======                  ======
</TABLE>















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


<PAGE>
<TABLE>
<CAPTION>

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

                                                                                      Year Ended December 31,
                                                                                      -----------------------
                                                                                  1996         1995         1994
                                                                                  ----         ----         ----
<S>                                                                             <C>           <C>        <C>    
Operating activities:
    Net income (loss)                                                           $ 2,208       $1,015     $(12,617)
    Adjustments to reconcile net income (loss)
      to cash provided by operating activities:
      Depreciation and amortization                                               3,058        3,376        4,289
      Gain on sale of TCS                                                       (17,176)          --           --
      Goodwill amortization                                                       1,418        2,370        3,178
      Amortization of discount on debt                                               78           17           68
      Non-cash interest expense                                                      --           --          410
      Provision for inventory obsolescence                                        1,008          312         (899)
      Provision for doubtful accounts receivable                                    647          103         (319)
      Loss from early repayment of debt                                              --           --          196
      Provision for loss on shutdown of division                                     --         (760)          --
      Provision for deferred income taxes                                           900           --           --
      Provision for employee benefits                                                --          974          600
      Provision for employee insurance                                               --         (891)          --
      Write-down of license investment                                               --           --        1,440
      Changes in assets and liabilities
        (Increase) in accounts receivable                                       (14,487)      (3,870)      (9,347)
        (Increase) in inventories                                                (2,364)      (8,582)      (1,124)
        (Increase) decrease in other assets                                      (2,076)       1,845         (751)
        Increase (decrease) in accounts payable and
        other current liabilities and noncurrent
        liabilities                                                              11,283       (2,342)       7,796
                                                                                 ------        -----     --------
        Cash (used in) operating activities                                     (15,503)      (6,433)      (7,080)
                                                                                 ------        -----        ------
Investing activities:
    Proceeds from sale of discontinued operations                                31,579           --           --
    Purchase of property and equipment                                           (2,558)      (1,013)      (1,226)
    Investment in joint venture                                                      --         (111)          --
    Investment in products                                                       (1,422)      (  569)      (1,354)
                                                                                  -----        -----        -----
        Cash provided by (used in) investing activities                          27,599       (1,693)      (2,580)
                                                                                 ------        -----        -----
Financing activities:
    (Repayment of) proceeds from senior
      credit facility                                                           (16,894)      (1,688)      11,185
    Proceeds from debt issuance                                                   3,278       14,373           --
    Increase in book overdrafts                                                   3,833        2,722           --
    Repayment of long-term debt                                                      --       (5,800)      (1,825)
    Debt issue costs                                                                 --       (1,187)          --
    Payments under capital leases                                                  (267)          --           --
    Issuance of Class A common stock                                                 --           --           (3)
                                                                                 ------       ------        ------
        Cash (used in) provided by  financing
        activities                                                              (10,050)       8,420        9,357
                                                                                 -------       -----        -----

    Increase (decrease) in cash and cash equivalents                              2,046          294         (303)
    Cash and cash equivalents at beginning of the
      period                                                                        735          441          744
                                                                                  -----        -----        -----
    Cash and cash equivalents at end of period                                   $2,781       $  735       $  441
                                                                                  =====        =====        =====
Supplemental  disclosures of cash flow information: 
Cash paid during the period for:

    Interest                                                                     $5,760      $ 5,348       $3,697
                                                                                  =====        =====        =====
    Income taxes paid (refunded)                                                 $  187      $(2,155)     $(1,672)
                                                                                  =====        =====        =====
Supplemental schedule of non-cash investing activities:
    Assets under capital lease                                                  $13,154       $   --       $   --
                                                                                 ======        =====        =====
    Sapiens Settlement                                                           $   --       $   --       $3,735
                                                                                  =====        =====        =====
</TABLE>

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

                                       
<PAGE>
<TABLE>
<CAPTION>

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



                                                     Class A     Class B       Capital      Retained        Total
                                                      Common     Common       In Excess     Earnings     Stockholders'
                                                      Stock      Stock         of Par       (Deficit)   Investment (Deficit)
                                                      -----      -----         ------       ---------   --------------------
                                                    
<S>                                                     <C>        <C>        <C>           <C>            <C>    
Balance as of December 31, 1993                         $65        $13        $15,479       $(24,739)      $(9,182)
                                                         
Senior redeemable preferred stock dividend               --         --           (271)            --          (271)
Class B redeemable preferred stock dividend              --         --           (675)            --          (675)
Redeemable preferred stock dividend                      --         --         (1,805)            --        (1,805)
Redeemable preferred stock accretion                     --         --         (1,040)            --        (1,040)
Net loss for the year                                    --         --                       (12,617)      (12,617)
Retirement of employee stock                                        --             (3)            --            (3)
Issuance of Class A common stock                         --         --            410             --           410
                                                        ---        ---          -----         ------        ------

Balance December 31, 1994                                65         13         12,095        (37,356)      (25,183)
                                                         --         --         ------         ------        ------

Senior redeemable preferred stock dividend               --         --             --           (302)         (302)
Class B redeemable preferred stock dividend              --         --            (42)          (713)         (755)
Redeemable preferred stock dividend                      --         --         (3,236)            --        (3,236)
Redeemable preferred stock accretion                     --         --         (1,148)            --        (1,148)
Net income for the year                                  --         --             --          1,015         1,015
                                                         --         --          -----         ------        ------
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)
enterWorks common stock warrants                         --         --            921             --           921
Redeemable preferred stock accretion                     --         --         (1,270)            --        (1,270)
Net income for the year                                  --         --             --          2,208         2,208
                                                         --         --          -----         ------        ------
Balance December 31, 1996                               $65        $13         $4,048       $(37,356)     $(33,230)
                                                         ==         ==          =====         ======        ======

</TABLE>


























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

<PAGE>


                       TELOS CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENT


Note 1.       Summary of Significant Accounting Policies

Business and Organization

         Telos Corporation  ("Telos" or the "Company") provides  information and
network  technology  products and services  primarily to various agencies of the
Federal Government . The Company also provides these services to state and local
governments and the private sector.  Services  provided by the Company encompass
the full life cycle of computer  services  including  system  specification  and
evaluation,  hardware  and  software  integration,   deployment,   installation,
training, hardware maintenance and software sustainment. The Company has further
enhanced its ability to deliver solutions to its customers by providing software
and applications  focused on emerging information and network technology markets
such as data migration and integration, workflow and network security.

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

Principles Of Consolidation

         The accompanying consolidated financial statements include the accounts
of Telos  Corporation  and its  wholly  owned  subsidiaries,  Telos  Corporation
(California),   Telos  Field   Engineering,   Inc.,   enterWorks.com  and  Telos
International   Corporation   (collectively  the  "Company").   All  significant
inter-company  transactions  have  been  eliminated.  The  Company  also  has an
investment  in an  international  joint  venture that is accounted for under the
equity method of accounting.

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.  Revenue
from the licensing of software is  recognized in accordance  with AICPA SOP 91-1
"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.  The Company
records loss provisions for its contracts,  if required, at the time such losses
are identified.

Cash and Cash Equivalents

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

Inventories

         Inventories  are  stated at the  lower of cost or  market,  cost  being
determined  primarily  on the  first-in,  first-out  method.  Substantially  all
inventories  consist of purchased  hardware and component computer parts used in
connection  with  system   integration   services   performed  by  the  Company.
Inventories  also include spare parts of $1,414,000  and  $1,508,000 at December
31,  1996 and 1995,  respectively,  which are  utilized  to support  maintenance
contracts. Spare parts inventory is amortized on a straight line basis over five
years.  An allowance  for  obsolete,  slow-moving  or  non-salable  inventory is
provided  for all other  inventory.  This  allowance  is based on the  Company's
overall   obsolescence   experience  and  its  assessment  of  future  inventory
requirements.

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

         At December 31, 1996 and 1995 the  Company's  allowances  for inventory
obsolescence were $2,357,000 and $1,385,000, respectively. The components of the
allowance for inventory obsolescence are set forth (in thousands):
<TABLE>
<CAPTION>
                                                                              Additions
                                                             Balance          Charged to                         Balance
                                                            Beginning         Costs and                          at End
                                                            of Period          Expense     Deductions(1)        of Period
                                                            ---------          -------     -------------        ---------
   <S>                                                        <C>             <C>            <C>                 <C>    
   Year Ended December 31, 1996                               $1,385          $1,008         $   36              $2,357

   Year Ended December 31, 1995                               $1,078          $  312         $    5              $1,385

   Year Ended December 31, 1994                               $2,189          $ (899)        $  212              $1,078
  <FN>
  (1) Inventories written off.
  </FN>
</TABLE>


Property and Equipment

         Property  and   equipment  is  recorded  at  cost.   Depreciation   and
amortization are provided for using the straight-line  method over the estimated
useful lives of the assets as follows:

         Buildings                                                   20   Years
         Machinery and equipment                                    3-7   Years
         Office furniture and fixtures                              5-7   Years
         Leasehold                                                Life of 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 income.  Expenditures  for
repairs and maintenance are charged to operations as incurred.
        
     Depreciation and amortization expense related to property and equipment was
$2,202,000,  $1,862,000,  and  $2,463,000 for the years ended December 31, 1996,
1995 and 1994, respectively.

Goodwill

         Goodwill of approximately  $31.19 million resulted from the acquisition
of Telos Corporation (California) in 1992 and has been assigned a useful life of
twenty years. The twenty year life considered a number of factors  including the
Company's  maintenance  of  long-term  significant  customer  relationships  for
periods of up to twenty-seven years and its strong positions in the marketplace.

         The Company  assesses the potential  impairment and  recoverability  of
goodwill on an annual basis and more frequently if factors  dictate.  Management
forecasts  are used to evaluate  the  recovery of goodwill  through  determining
whether amortization of goodwill can be recovered through undiscounted operating
cash flow (excluding goodwill amortization,  interest expense, and non-recurring
charges).  If an impairment of goodwill appears to have occurred,  impairment is
measured based on projected  discounted  operating cash flow (excluding goodwill
amortization, interest expense, and non-recurring charges) 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 for Telos Corporation (California) at
December 31, 1996 and 1995 was $7,055,000 and $6,054,000, respectively.


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

Income Taxes

         The Company  accounts  for income  taxes under  Statement  of Financial
Accounting  Standards 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  portions of
the deferred tax assets will not be realized.

401(k) Retirement Savings And Profit Sharing 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.  Additionally,  the Company, on a discretionary basis, may contribute 1%
of all eligible  employee  wages to the Plan  regardless of whether the employee
elected to participate in the Plan. This discretionary contribution was not made
in 1996.  Total Company  contributions  to the Plan for 1996, 1995 and 1994 were
$1,679,000, $2,397,000, and $2,517,000, respectively.

Software Development Costs

         The Company  expenses all research and  development  costs  incurred in
connection  with software  development  projects  until such  software  achieves
technical  feasibility.  All costs  thereafter are  capitalized.  The Company is
amortizing  such  capitalized  costs over the  estimated  product  life of three
years. 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.

         Unamortized  software  costs at  December  31,  1996 and 1995 were $1.5
million and $1.2 million,  respectively.  Amortization  expense  associated with
these capitalized  software costs was $351,000,  $80,000 and zero in 1996, 1995,
and 1994, respectively.

     During  1996,  1995,  and 1994,  respectively,  the Company  incurred  $1.2
million,  $1.4  million,  and $1.9  million in research and  development  costs,
respectively.

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. Actual results could differ from those estimates.


Reclassifications

         Certain  reclassifications have been made to the prior years' financial
statements to conform to the  classifications  used in the current period.  (See
Note 2).



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

Note 2.  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 Telos  Consulting  Services 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 income 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  $1,475,000,   $1,106,000  and
$1,028,000 for 1996, 1995, and 1994,  respectively.  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,  $420,000  and  $477,000  for  1996,  1995 and 1994,
respectively, has been included in the results of the discontinued operations.
        
     TCS had revenue of $33.1  million,  $27.1  million,  and $24.4  million for
1996, 1995 and 1994, respectively.


Note 3.  Revenue and Accounts Receivable

         Revenue resulting from contracts and subcontracts with federal,  state,
and local governments  accounted for 86.4%, 84.8% and 88.6%, of total revenue in
the years ended December 31, 1996, 1995 and 1994, 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 components of accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>


                                                                                       December 31,
                                                                                       ------------
                                                                                 1996               1995
                                                                                 ----               ----

    <S>                                                                         <C>                 <C>    
    Billed accounts receivable                                                  $40,225             $30,286
                                                                                 ------              ------

    Amounts billable upon acceptance by customer                                 10,370               6,900
    Amounts currently billable                                                    1,879               7,650
                                                                                 ------               -----

                Total unbilled accounts receivable                               12,249              14,550
                                                                                 ------              ------

         Allowance for doubtful accounts                                           (925)               (724)
                                                                                 ------              ------
                                                                                $51,549             $44,112
                                                                                 ======              ======
</TABLE>


         The  provision  for  doubtful  accounts  was  $694,000,  $103,000,  and
$(319,000) for the years ended December 31, 1996,  1995 and 1994,  respectively.
Reductions to the allowance were primarily due to account receivable  write-offs
and other adjustments.



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

Note 4.  Income Taxes

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


                                                                      For The Year Ended December 31,
                                                                      -------------------------------
                                                              1996               1995               1994
                                                              ----               ----               ----
<S>                                                          <C>                 <C>              <C>    
Current (benefit) provision
     Federal                                                 $(421)              $ --             $(3,017)
     State                                                      --                 75                (406)
                                                               ---                 --               -----

        Total current                                         (421)                75              (3,423)
                                                               ---                 --               -----

Deferred (benefit) provision
     Federal                                                (4,527)                --               1,881
     State                                                    (791)                --                 329
                                                              -----                --                ----
                                                            

        Total deferred                                      (5,318)                 --              2,210
                                                            ------                  --              -----

        Total (benefit) provision                          $(5,739)                $75            $(1,213)
                                                            ======                  ==              =====
</TABLE>



         The  provisions  for income  taxes vary from the amount of income taxes
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,
                                                                     -------------------------------
                                                            1996                  1995              1994
                                                            ----                  ----              ----
<S>                                                        <C>                    <C>               <C>    
Computed expected tax
     provision (benefit)                                   (34.0)%                34.0%             (34.0)%
Goodwill amortization                                        2.2                  99.4%               7.0%
State income taxes, net of
     federal tax benefit                                    (5.9)%                 5.9%              (5.9)%
Change in valuation allowance
     of deferred tax assets                                  0.2%               (136.2)%             (7.1)%
Limitation of net operating loss
 carryback                                                    --                    --               26.1%
Other                                                        0.6%                  8.1%               4.7%
                                                             ---                   ---               ----
                                                           (36.9)%                11.2%             ( 9.2)%
                                                           ======                 ====               ====

</TABLE>



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

         The tax effects of temporary  differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                                          ------------
                                                                                   1996                1995
                                                                                   ----                ----
<S>                                                                                <C>                <C>    
Deferred tax assets:
      Accounts receivable, principally due
        to allowance for doubtful accounts                                         $ 195              $  176
      Inventory valuation allowance and
        amortization                                                               1,091               1,500
      Accrued liabilities not currently
        deductible                                                                   716               1,412
      Accrued compensation                                                         1,425               2,486
      Deferred office rents and accrued
        sublease liabilities                                                         633                 498
      Property and equipment, principally due
        to differences in depreciation method                                      1,655               1,472
      Net operating loss carryforward                                              2,272               3,922
      Alternative minimum tax credit carryforward                                    573                 994
                                                                                  ------              ------
            Total gross deferred tax assets                                        8,560              12,460
            Less valuation allowance                                              (4,702)             (8,155)
                                                                                   -----               -----
            Net deferred tax assets                                                3,858               4,305
                                                                                   -----               -----

Deferred tax liabilities:
      Unbilled revenue, deferred for tax purposes                                   (747)             (1,166)
      Other                                                                           --                 (54)
                                                                                   -----               -----
            Total deferred tax liabilities                                          (747)             (1,220)
                                                                                   -----               -----
            Net deferred tax assets                                               $3,111              $3,085
                                                                                   =====               =====
</TABLE>


         The net change in the valuation  allowance was a decrease of $3,453,000
and  $4,195,000 for 1996 and 1995,  respectively.  Included in the change in the
valuation allowance were decreases of approximately  $926,000 and $1,391,000 for
1996 and 1995,  respectively,  related to the reversal of temporary  differences
acquired  from Telos  Corporation  (California).  The reversals of the temporary
differences  related to the 1992 Telos Corporation  acquisition reduce goodwill.
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, 1996,  $623,000 of tax benefits remain and will reverse
in future years.

         For the year ended  December 31, 1996,  the Company  generated  taxable
income of $8,197,000  which was offset by the  $13,886,000  net  operating  loss
available for regular  federal income tax purposes,  resulting in $5,689,000 net
operating loss available to offset future regular  taxable  income.  Included in
the $8,197,000  taxable  income was a $25,000,000  taxable gain from the sale of
the TCS  division.  Additionally,  $3,135,000  of  alternative  minimum  tax net
operating loss  carryforward is available to offset future  alternative  minimum
taxable income.  The net operating loss  carryforward will begin expiring in the
year 2011.  The Company  also has  $573,000 of  alternative  minimum tax credits
available  to be carried  forward  indefinitely  to reduce  future  regular  tax
liabilities.

         During 1995 the Company  settled an Internal  Revenue Service audit for
the years 1987 through 1991. The audit resulted in the  disallowance  of certain
costs that the Company had previously  claimed.  In 1996, due to tax legislation
enacted  in 1996  which  allowed  the  deduction  of  certain  costs  previously
disallowed  during the audit, the Company filed amended returns claiming refunds
of taxes previously paid and recorded a tax benefit of $421,000.

         At December  31,  1996,  the Company has a $3.1  million  deferred  tax
asset.  The  realization of this asset is dependent  upon future  income,  which
cannot be predicted with certainty,  and on certain tax planning strategies that
would result in taxable income. The Company believes that it is more likely than
not that the Company will realize the net deferred tax asset recorded.



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

Note 5.  Debt Obligations

Senior Revolving Credit Facility

         At December 31, 1996,  the Company has a $45 million  Senior  Revolving
Credit Facility (the "Facility") with its bank which expires on July 1, 1997 and
has an outstanding  balance of $15.4 million.  Borrowings under the facility are
collateralized by certain assets of the Company (primarily  accounts  receivable
and inventory),  and the amount of borrowings  fluctuate based on the underlying
asset borrowing base as well as on the Company's  working capital  requirements.
The  Facility  bears  interest  at 1.5%  over the  bank's  base rate or 9.75% at
December  31,  1996.  The  weighted  average  interest  rate on the  outstanding
borrowings  under the facility  was 10.45% for the year ended  December 31, 1996
compared with 9.32% for the year ended  December 31, 1995. At December 31, 1996,
the Company had approximately $24 million of availability under the Facility.

         Subsequent  to December  31,  1996,  the  Company's  bank has agreed to
refinance the  Facility.  Under the  agreement,  the Facility will remain at $45
million with terms and  conditions  similar to the Company's  previous  Facility
with an expiration date of July 1, 2000.

Senior Subordinated Notes

         At December  31, 1996 the  Company had a $675,000  Senior  Subordinated
Note, Series A with a balance of $651,000  outstanding with John R. Porter,  the
Company's principal common shareholder.  The Note had an interest rate per annum
of 11.875% from January 1 through  January 14, 1995,  then  increased to 14% per
annum from  January 15, 1995  through  January 14,  1997,  and  increases to 17%
thereafter.  Interest  is payable  in  semi-annual  installments  on June 30 and
December 31 of each year.  The note is  collateralized  by certain assets of the
Company.  The note was  issued in 1992 and  matures  on January  14,  2002.  The
Company retired this note in March 1997.

         In 1995 the Company  retired the Series B-1 an B-2 Senior  Subordinated
Notes and related accrued  interest and fees for $6.5 million.  The funds to pay
Union de  Banques  Suisses,  the  noteholder,  were  provided  by certain of the
Company's  common  shareholders.  The  shareholders  were  issued  $6.5  million
Subordinated  Bridge Notes in exchange for these funds. On October 13, 1995, the
Company issued to these shareholders $14.4 million of Senior  Subordinated Notes
("Notes")  which  included  shareholder  fees related to the debt  issuance,  in
exchange for the $6.5 million Subordinated Bridge Notes, as well as the transfer
to the Company of certain  shareholders'  deposits  of $7 million  held with the
Company's bank which the Company had used for additional borrowing capacity. The
Notes are classified as either Series B or Series C. Series B Notes, which total
$6.5  million  and  replace  the  retired   Senior   Subordinated   Notes,   are
collateralized  by fixed assets of the Company.  Series C Notes which total $7.9
million 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  occurrence of a triggering  event.  At December 31,
1996,  the  prepayment  premium  that  would be due upon a  triggering  event is
$2,483,000.


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

enterWorks.com, Inc., Subordinated Notes

         During  1996,  the  Company   completed  a  private  financing  whereby
$3,277,960 of 8% subordinated debt of enterWorks,  a wholly-owned  subsidiary of
the Company,  was issued.  Investors included certain Board of Director members,
certain members of Company  management and certain  shareholders of the Company.
The   subordinated   debt  has  a  five  year  maturity  with  interest  payable
semi-annually  beginning  January  1, 1998.  In  connection  with the debt,  the
Company  issued  2,048,725 of 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 at December 31, 1996.

Transaction Costs

         In 1994, the Company  attempted to  recapitalize  its balance sheet and
refinance  its  existing  debt.  These   transactions  were  not  completed  and
accordingly,  the Company recorded $4,205,000 of non-operating  expenses for the
cost of the failed  transactions in December 1994.  Included in the above amount
are  certain  provisions  for  settlement  with  parties  involved in the failed
financing  transaction.  The  Company  has paid all costs  associated  with this
transaction as of December 31, 1996.

Note 6.  Redeemable Preferred Stocks

Senior Redeemable Preferred Stock

         The components of the senior redeemable  preferred stock are Series A-1
and Series A-2 redeemable preferred stock each with $.01 par value and 1,250 and
1,750 shares authorized, issued and outstanding,  respectively. Through June 30,
1995, the Series A-1 and Series A-2 carried a cumulative per annum dividend rate
of 9% of their  liquidation value of $1,000 per share. From July 1, 1995 through
June 30,  1997,  the Series A-1 and A-2 each carry a  cumulative  dividend  rate
equal to  11.125%,  and  increases  again to 14.125% per annum  thereafter.  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.  The Series A-1
and A-2 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.  At December  31, 1996 and
1995 undeclared, unpaid dividends relating to Series A-1 and A-2 Preferred Stock
totaled $1,828,000 and $1,494,000,  respectively,  and have been accrued and are
included in the Series A-1 and A-2 redeemable preferred stock balance. Mandatory
redemptions  are  required  from  excess  cash  flows,  as  defined in the stock
agreements.  Through  December 31, 1996,  there has been no available  cash flow
permitting mandatory redemption.

Class B Redeemable Preferred Stock

         The Class B Redeemable Preferred Stock has a $.01 par value, with 7,500
shares  authorized,  issued and outstanding.  Through June 30, 1995, the Class B
Redeemable Preferred Stock carried a cumulative per annum dividend rate of 9% of
its  liquidation  value of $1,000 per share.  From July 1, 1995 through June 30,
1997, the Class B Redeemable  Preferred Stock has a cumulative dividend rate per
annum equal to 11.125% and increases to 14.125% per annum thereafter.  The Class
B Redeemable  Preferred Stock may be redeemed at its liquidation  value together
with all accrued and unpaid  dividends at any time at the option of the Company.
The liquidation preference of the Class B Redeemable Preferred stock is the face
amount, $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. At December 31, 1996 and 1995
undeclared,  unpaid dividends relating to the Class B Redeemable Preferred Stock
totaled $3,587,000 and $2,752,000,  respectively,  and have been accrued and are
included in the Class B Redeemable Preferred Stock balance.



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

         Redemption  of the  stock  may  occur  after  payment  in  full  of the
principal  and interest  amount due on the senior  subordinated  notes,  and the
redemption of the Series A-1 and A-2 Preferred Stock.  Mandatory redemptions are
required  from excess cash flows,  as defined in the stock  agreements.  Through
December 31, 1996,  there has been no available cash flow  permitting  mandatory
redemption.

12% Cumulative Exchangeable Redeemable Preferred Stock

         The  Company  initially  issued  2,858,723  shares  of  12%  Cumulative
Exchangeable  Redeemable  Preferred Stock (the "Public  Preferred  Stock"),  par
value $.01 per share,  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, 1996 and 1995 was
$1,270,000 and $1,148,000, respectively.

         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, the date of
the stock's  issuance,  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 $6,471,000.

         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.

Note 7.       Stockholders' Investment and Stock Options

Common Stock

         At December  31, 1996 and 1995,  common  stock  consists of  50,000,000
shares authorized and 23,076,753 shares issued and outstanding of Class A common
stock;  and  5,000,000  shares   authorized  and  4,037,628  shares  issued  and
outstanding  of Class B common  stock.  The common stock has no par value and an
aggregate capital value for all shares of $77,500.

         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
preferred stock, holders of Class A and the Class B common stock are entitled to
receive such dividends as may be declared.

Stock Warrants

         The Company issued the Class B Preferred Stock shareholder common stock
warrants  to  purchase  up to  3,150,468  shares of Class A common  stock of the
Company in 1992.  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, 1996,  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.

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

         In  1994,  Mr.  John  Porter,   the  Company's  majority  common  stock
shareholder, deposited $3 million with the Company's bank to provide the Company
with increased  borrowing  capability under its senior credit facility (see Note
5). In exchange,  Porter 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 Porter a warrant 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. The
warrant is fully exercisable and has a term of ten years from the date of issue.

Stock Options

Long-Term Incentive Compensation Plans

         The Company  has  granted  stock  options to certain  employees  of the
Company under three 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.  The Company also  approved an  enterWorks  stock option plan
during 1996.

         The Company applies APB Opinion No. 25 and related  interpretations  in
accounting for its stock option plans.  SFAS No. 123 "Accounting for Stock-Based
Compensation"  was issued in late 1995 and  introduced a fair value based method
of  accounting  for  stock-based  compensation.  While the  expense  recognition
provision of SFAS 123 is  optional,  pro-forma  disclosure  of the effect on net
income as if the Company had  adopted the cost  measurement  aspects of SFAS 123
are presented below.

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 granted
by the Plan  Administrator,  who is appointed by the Board of Directors,  to key
employees,  including  officers  and  directors.  The option  price of $1.42 per
share,  determined by the Board of  Directors,  is 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 options is as follows (amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
                                                                           Options
                                                                                         Option price
                                                            Outstanding                   per share
                                                            ---------------------------------------
<S>                                                             <C>                        <C>                       
Balance, December 31, 1993                                      683                        $1.42

    Granted                                                      --                           --
    Exercised                                                    --                           --
    Canceled                                                    (57)                        1.42
                                                               -----                        ----
Balance, December 31, 1994                                      626                         1.42

    Granted                                                      --                            --
    Exercised                                                    --                           --
    Canceled                                                    (28)                        1.42
                                                               -----                        ----
Balance, December 31, 1995                                      598                         1.42

    Granted                                                      --                           --
    Exercised                                                    --                           --
    Canceled                                                    (13)                        1.42
                                                                ---                         ----
Balance, December 31, 1996                                      585                        $1.42
</TABLE>
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENT

1996 Stock Option Plan

         The 1996 Stock  Option  Plan  allows  for the award of up to  6,644,974
shares of common stock at an exercise price of not lower than fair market value.
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 option may be exercised over a
ten year period subject to the vesting requirements.

         During  1996,  the  Company  granted  4,439,265  of stock  options at a
weighted average  exercise price of $.95 a share. At December 31, 1996,  887,853
stock options were exercisable.

     Had the  Company  recorded  compensation  cost  consistent  with  SFAS  123
methodology, pro forma net income for 1996 would have been $2,076,000.

         The fair value of each option  grant is  estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:

               Executed dividend yield                            0%
               Expected stock price volatility                    0%
               Risk free interest rate                            6.66%
               Expected life of options                           6 years

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 $.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 $.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.

1996 enterWorks Option Plan

         enterWorks, a wholly-owned subsidiary,  implemented an 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.  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 option may be exercised over a ten year period subject to
the vesting requirements.

     During 1996,  the Company  granted  2,694,000 of stock  options at exercise
prices of $.12 and $.77 a share.  At December 31, 1996,  583,800  stock  options
were exercisable.
         Had the Company  recorded  compensation  cost  consistent with SFAS 123
methodology, net income would not have materially changed.

         The fair value of each option  grant is  estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:

                Executed dividend yield                            0%
                Expected stock price volatility                    0%
                Risk free interest rate                            6.73%
                Expected life of options                           6 years




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

Note 8.     Agreement with Sapiens International

         In 1993, the Company  entered into a series of agreements (the "Sapiens
Agreements") with Sapiens,  the developers of certain  commercial user interface
software,  for certain  exclusive  marketing and distribution  rights on certain
Sapiens  software.  In 1994,  the  Company  restructured  these  agreements  and
recorded a  provision  of  approximately  $1.4  million to fully  write-off  the
remaining asset value of the Systems Software license based on a reevaluation of
its business plans.

Note 9.        Commitments and Contingencies

Leases

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

         In 1996,  the Company  entered  into a twenty year  capital  lease with
annual  payments  of  $1,447,000  commencing  March 1, 1996 for a building  that
serves  as  its  corporate  headquarters.   The  building  provides  significant
additional  manufacturing  and integration  space. 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  of which  the  Company  has  utilized
approximately  $1,069,000  for such  purposes as of  December  31, 1996 with the
remaining balance of $231,000 recorded as restricted cash. The Company's move to
its new  facilities  was  substantially  completed in July 1996.  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 Company  also has  certain  equipment  leases that are  recorded as
capital leases. Such equipment totals approximately $600,000. 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, 1996 (in
thousands):
<TABLE>
<CAPTION>


                                                    Real
                                                   Estate        Equipment         Total

         <S>                                         <C>              <C>           <C>    
         
         1997                                        $1,447           $215          $1,662
         1998                                         1,447            197           1,644
         1999                                         1,447            132           1,579
         2000                                         1,447             99           1,546
         2001                                         1,447             44           1,491
         Remainder                                   20,499             --          20,499
                                                     ------            ---          ------

         Total minimum obligations                   27,734            687          28,421
         Less interest                               15,404            123          15,527
                                                     ------            ---          ------

         Present value of net
             minimum obligations                     12,330            564          12,894
         Less current portion                           225            132             357
                                                    -------            ---          ------

         Long term obligations at
             December 31, 1996                      $12,105           $432         $12,537
</TABLE>

         Accumulated  amortization  for assets under capital  leases at December
31, 1996 is $397,000.

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

         Future minimum lease payments for all non-cancellable  operating leases
at December 31, 1996 are as follows (in thousands):

         1997                                        $3,379
         1998                                         2,323
         1999                                         1,834
         2000                                         1,151
         2001                                           449
                                                      -----

         Total minimum lease payments                 9,136
         Less total minimum
             sublease rentals                           331
                                                        ---
         Net minimum lease payments                  $8,805
                                                     ======

         Rent expense  charged to operations  for 1996,  1995,  and 1994 totaled
$4,804,000, $4,349,000, and $5,178,000, respectively.

Legal

         A description of certain legal matters follows:

Rosecliff, Inc., et al v. C3, Inc., et al. (94 CIV. 9104)

         This case was filed in  December,  1994 in the United  States  District
Court for the Southern District of New York. Rosecliff,  Inc. ("Rosecliff") is a
merchant   banking  group  with  whom  the  Company  had  been   negotiating  an
equity/subordinated debt private placement transaction. Upon termination of this
transaction,  Rosecliff  filed a suit  seeking  payment of its  expenses  and $1
million for the violation of the "no-shop"  provision in the  Agreement.  During
1996,  the Company  entered  into a  settlement  agreement  with  Rosecliff  and
recorded an  additional  $355,000 of  non-operating  expense to fully record the
provisions of the  settlement.  At December 31, 1996 all amounts  related to the
settlement were fully paid.

         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  materially  adverse  effect  on the  Company's  consolidated
financial position or results of operations.


Note 10.  Related Parties

     Mr.  John B. Wood  became an  employee of the Company in 1992 and serves as
President, Chief Executive Officer and Director, respectively.

     Mr. Joseph P. Beninati  served as Chairman of the Board for the majority of
1994  before  resigning  January 5,  1995.  The  Company is paying him  $165,000
annually  subject to a three year  employment  agreement that began in 1995. Mr.
Beninati resigned from the Board in 1996.

     In 1996, the Company paid previously  accrued  advisory fees of $525,000 to
the firm Beninati and Wood, Inc.

     Mr. John R. Porter, the majority common stock shareholder, has a consulting
agreement with the Company  whereby he will be  compensated  $200,000 a year for
specified  services.  Accordingly,  the Company has accrued $200,000 at December
31, 1996 for this agreement.

     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  $8,000 a
month for his  services,  and receives an  additional  $500 per day for overseas
travel undertaken on behalf of the Company.  Mr. Byers was compensated  $184,300
and $121,500 for 1996 and 1995, respectively.


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

Note 11. Business Segments

         In 1996, the Company reviewed and changed its organizational  structure
to  more  efficiently   support  customer  needs  and  address  changing  market
conditions.  As a result of these organizational changes, the Company's business
segment disclosure has been modified to reflect the systems integration division
as one  business  segment  ("Systems  Integration")  and  the  consolidation  of
software and hardware support  services into one business segment  ("Systems and
Support Services").  The Company has restated its segment disclosure information
for 1995 and 1994  consistent  with its  revised  organization.  The Company has
excluded the  Consulting  Group from the revenue and  operating  income  segment
disclosures  as this group was sold in December  1996 and has been  treated as a
disposal of a segment of a business under APB 30 (Note 2).

              The Systems and Support  Services  Group  consists of software and
trademark  services.  This group  provides  turnkey system  solutions,  supports
clients through software, hardware and systems engineering services,  facilities
management,  training,  post-implementation  technical  services and third party
computer hardware maintenance.

         The  Systems and  Integration  Group  provides  computer  hardware  and
software integration services with a primary focus on network based computing.

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

         Selected  financial  information for the Company's business segments is
presented  below (in  thousands).  For a description of the accounting  policies
related to this information see Note 1.
<TABLE>
<CAPTION>
                                                                  For the Year Ended December 31,
                                                          1996                 1995                 1994
                                                       ----------------------------------------------------
<S>                                                    <C>                   <C>                  <C>   
Operating Revenues(1)
      Systems and Support Services                     $103,675              $105,801             $111,357
      Systems Integration                                85,220                69,958               39,319
                                                        -------               -------               ------
      Total Revenues                                    188,895              $175,759             $150,676
                                                        =======               =======              =======

Operating (Loss) Income
      Systems and Support Services                      $(4,081)               $1,955              $   663
      Systems Integration                                (5,361)                3,070               (5,227)
                                                          -----                 -----                -----
      Total Operating (Loss) Income                     $(9,442)               $5,025              $(4,564)
                                                          =====                 =====               ======

Identifiable Assets (2)
      Systems and Support Services                      $58,259               $47,436              $47,343
      Systems Integration                                27,885                27,282               19,858
      Corporate (3)                                      23,920                 7,665                7,098
                                                       --------                 -----                -----
      Total Consolidated Assets                        $110,064               $82,383              $74,299
                                                        =======                ======               ======

Depreciation and Amortization (4)
      Systems and Support Services                       $1,919                $2,531               $3,533
      Systems Integration                                   949                 1,885                2,395
      Corporate                                           1,126                   853                  975
                                                          -----                 -----                -----
      Total Depreciation
        and Amortization                                 $3,994                $5,269               $6,903
                                                          =====                 =====                =====

Capital Expenditures (5)
      Systems and Support Services                       $  704                  $294               $  186
      Systems Integration                                 1,087                   311                  463
      Corporate                                             656                   348                  547
                                                          -----                 -----                -----
      Total Capital Expenditures                         $2,447                  $953               $1,196
                                                          =====                   ===                =====
<FN>
(1)    Revenues between segments are not material.

(2)  The identifiable assets above are net of the TCS assets in 1995 and 1994 of
     $12,109 and $12,573, respectively.

(3)  Corporate  assets are principally  property and equipment,  cash, and other
     assets.  Goodwill and related  amortization from the acquisitions of C3 and
     Telos Corporation has been allocated to their respective industry segments.

(4)  The  depreciation   and  amortization   disclosure  above  is  net  of  TCS
     depreciation  and  amortization of $482,  $478, and $564 for 1996, 1995 and
     1994, respectively.

(5)  The capital expenditure disclosure above is net of TCS capital expenditures
     of $111, $60, and $30 for 1996, 1995 and 1994, respectively.
</FN>
</TABLE>


<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 72) 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.

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

     Mr.  Wood (age 33) 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.

Joseph P. Beninati, Director

     Mr.  Beninati  (age 33),  resigned  from the Board of  Directors in October
1996. Previously, Mr. Beninati had served as the Company's Chairman from 1994 to
1995.

Dr. Stephen D. Bryen, Director

     Dr.  Stephen Bryen (54) was elected to the Company's  Board of Directors on
January 31,  1994.  He is currently  President of Delta Tech, a high  technology
consulting and government  relations  firm.  Delta Tech  specializes in U.S. and
foreign high technology issues. Concurrently,  Dr. Bryen is President of Secured
Communications  Technology,  Inc. a developer of computer security software. Dr.
Bryen serves as a Security Board Member of the Space  Systems/Loral  Corporation
of Palo Alto,  California which develops and manufactures  civilian and military
satellites for  telecommunications,  television,  weather forecasting,  mapping,
scientific  measurement  and  other  tasks.  Dr.  Bryen  is a  board  member  of
Greenray/CMAC Industries,  based in Mechanicsburg,  Pennsylvania.  Greenray/CMAC
makes high  technology  quartz  crystals  used in various  defense and  civilian
electronics  applications.  From 1981 to 1988 Dr.  Bryen  served as 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 50) was  elected to the Board of  Directors  on January 31,
1994. He has been president of International  Strategies  Limited, a Washington,
DC  international  business  consulting firm since November,  1993.  Before that
appointment,   he  had  served  as  the  vice  president  of  the   Beaconsfield
Corporation,  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.

David S. Aldrich, Vice President, Corporate Development and Strategy

     Mr.  Aldrich  (age  37)  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  LLP.  Prior to  joining  Coopers & Lybrand  LLP in 1991,  Mr.
Aldrich was Senior Vice  President at Dean Witter  Capital  Corp.,  the merchant
banking arm of Dean Witter Reynolds, Inc.


<PAGE>


William L. Prieur Brownley, Vice President and General Counsel

     Mr. Brownley (age 40) 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 Secretary,
Telos Corporation

     Mr. Calhoun (age 47) joined the Company as Vice President, Human Resources,
in August,  1989.  Prior to joining the Company he served as Director,  Risk and
Financial  Management  of  BDM  International,  a  government  contractor  which
provides consulting services, Vice President, Human Resources of Halifax Corp. a
government  contractor  providing  technical  services and third party  computer
maintenance,  and as  Director  for the U.S.  Department  of  Labor,  Employment
Standards Administration.

Mark W. Hester, President, Telos Field Engineering and Vice President,
Telos Corporation

     Mr.  Hester (age 44) joined Telos in 1979 and was appointed as President of
Field Engineering in 1987. He is responsible for all new business activities and
operations  activities at 85 computer Field Service locations nationally as well
as 6 overseas  locations.  Previously he has held  progressive  positions within
Telos as a Field and  Regional  Manager  of  Operations  and Vice  President  of
Marketing.  Mr. Hester received  extensive training from IBM Corporation after a
successful military commitment of nearly eight years.
Robert W. Lewis, President, enterWorks.com

     Mr.  Lewis (age 35) has served as the  President  of  enterWorks  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, President, Telos Systems Integration and
Executive Vice President

         Mr. Marino (age 60) 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,  a position he
currently holds. Prior to joining the Company in February, 1988, Mr. Marino held
the position of Sr. Vice  President of Sales and Marketing  with Centel  Federal
Systems and M/A-COM Information Systems, both of which are U.S.
Government contractors.

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

     Mr. Tellez (age 39) 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.  Mr. Tellez
is a Certified Public Accountant. Prior to joining Telos Corporation, Mr. Tellez
served as a Senior Manager with Arthur Andersen & Company,  a public  accounting
firm.
      
     Each of the  directors  and  executive  officers of the Company is a United
States citizen.





<PAGE>






Item. 11.  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, 1996,  1995,  and 1994, of the Chief  Executive  Officer and four other most
highly paid executive officers during 1996.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE


                                                                                        Long-Term Compensation
                                                Annual Compensation                          Awards         Payouts
Name                                                                Other      Restricted                LTIP      All
and                                                                Annual        Stock                   Pay-     Other
Principal                                                          Compen-      Award(s)    Options/     outs     Compen-
Position                          Year      Salary       Bonus     sation(1)      ($)      SARs(#)(2)     ($)    sation (3)
---------------------------------------------------------------------------------------------------------------------------
<S>                               <C>     <C>         <C>         <C>             <C>      <C>            <C>    <C>       
Gerald D. Calhoun                 1996    $165,970    $85,000     $ 6,000         --        130,000       --     $   --
(V.P., Human Resources,           1995     143,943     40,000       6,000         --             --       --      4,603
 & Secretary, Telos Corp.)        1994     119,595     65,657       6,000         --             --       --      3,520

Mark W. Hester                    1996     184,607     80,000       6,000         --        185,000       --      2,850
(President, Telos Field           1995     181,695     40,000       6,000         --             --       --      4,992
  Engineering, V.P.               1994     164,635     40,805       6,000         --             --       --      3,949
   Telos Corp.)

Robert J. Marino                  1996     182,310     90,000       6,000         --        212,500       --      4,750
(President, Telos Systems         1995     158,546     50,000       6,000         --             --       --      6,565
  Integration, Senior V.P,        1994     147,118     36,000       6,000         --             --       --      1,264
   Telos Corp.)

Lorenzo Tellez                    1996     188,269    145,000      15,000         --        465,000       --      4,750
(V.P., Treasurer, Chief           1995     166,624     50,000       6,000         --             --       --      6,846
  Financial Officer)              1994     157,014     56,000       6,000         --             --       --      4,620

John B. Wood                      1996     291,921         --      23,000         --      2,017,531       --      4,750
(President, Chief                 1995     234,990    325,000      24,000         --             --       --      7,029
Executive Officer)                1994     161,833         --      38,000         --             --       --      3,976
<FN>
(1)  Other annual  compensation  represents  Director's Fees paid and automobile
     and living allowances provided to executives.
(2)  Options  granted  are in both  the  Company's  common  stock  as well as in
     enterWorks.com, inc. common stock.
(3)  All other compensation  represents Company  contributions made on behalf of
     the executive  officers to the Telos Corp.  401(k)  Retirement  Savings and
     Profit Sharing 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 1996.
<TABLE>
<CAPTION>
                                                                                               Potential Realizable
                                     Number of       % of                                         Value at Assumed
                                     Securities       Total                                     Rates of Stock Price  
                                     Underlying     Options/     Exercise                        Appreciation for
  Name and Principal                Options/SARS      SARS        or Base    Expiration            Option Term 
     Position                         Granted       Granted       Price         Date             5%             10%    
     --------                         -------       -------       -----         ----             --             ---    
        
                                                                                                   
                                                                                                  
<S>                                   <C>              <C>      <C>          <C>             <C>              <C>
Gerald D. Calhoun 
(V.P., Human Resources 
  & Secretary, Telos Corp.)
      Telos                           100,000          2.7%     $   .95      May 2006        $   93,000       $  151,000
      enterWorks                       30,000          1.3          .12      June 2006            2,400            5,700

Mark W. Hester
(President, Telos Field
  Engineering, V.P 
   Telos Corp.)
      Telos                           150,000          4.0          .95      May 2006           139,500          226,500
      enterWorks                       35,000          1.5          .12      June 2006            2,800            6,650

Robert J. Marino
(President, Telos Systems
  Integration, Senior V.P,
   Telos Corp.)
           Telos                      167,500          4.5          .95      May 2006           155,775          252,925
           enterWorks                  45,000          1.9          .12      June 2006            3,600            8,550

Lorenzo Tellez
(V.P., Treasurer, Chief
  Financial Officer)
           Telos                      400,000         10.7          .95      May 2006           372,000          604,000
           enterWorks                  65,000          2.8          .12      June 2006            5,200           12,350

John B. Wood
(President, Chief
Executive Officer)
           Telos                    1,957,531         52.4          .95      May 2006         1,820,504        2,955,872
           enterWorks                  60,000          2.6          .12      June 2006            4,800           11,400

</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, 1996.
<TABLE>
<CAPTION>

                                AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                                           AND FY-END OPTION/SAR VALUES

                                                                                              Value of
                                                                     Number of              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>    

Gerald D. Calhoun                     --                  --         95,900/104,000          $5,100/20,400
(V.P. Human Resources,
  and Secretary, Telos Corp.)

Mark W. Hester                        --                  --         37,000/148,000           6,350/25,400
(President, Telos Field
 Engineering & V.P.
 Telos Corporation)

Robert J. Marino                      --                  --        207,400/170,000           7,860/31,440
(President, Telos Systems
  Integration, Senior V.P.,
    Telos Corp.)

Lorenzo Tellez                        --                  --         93,000/372,000          13,250/53,000
(V.P., Treasurer,
  Chief Financial Officer)

John B. Wood                          --                  --      1,244,057/1,473,933       396,928/116,756
(President, Chief Executive
 Officer)
<FN>
(1)  Based on an  estimated  fair market value of the  Company's  Class A common
     stock of $1.01 per share at December 31, 1996.
(2)  Based on an estimated fair market value of enterWorks common stock of $0.77
     per share at December 31, 1996.
</FN>
</TABLE>
Compensation of Directors

         During the fiscal year ended December 31, 1996, 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  Investigative  Service and
certain of the Company shareholders.
  During the fiscal year ended  December 31,  1996,  no directors of the Company
were awarded options.

Employment Contracts

     The  Company  is a  party  to  agreements  with  certain  of its  executive
officers.  Mr. William  Brownley,  General  Counsel,  Mr. Gerald  Calhoun,  Vice
President  Human   Resources,   Mr.  Mark  Hester,   President  of  Telos  Field
Engineering,  Mr. Robert  Marino,  President of Telos Systems  Integration,  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.  Accordingly, Mr.
Brownley,  Calhoun,  Hester,  Marino, Tellez and Wood would receive, given their
present salary levels,  $150,000,  $158,000,  $175,000,  $195,000,  $195,000 and
$300,000,  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, 1997              Class
      --------------                 -------------------                  -------------------              -----

   <S>                              <C>                                  <C>                              <C>    
   
   Class A Common Stock             John Porter                          23,030,718 shares(A)             75.99%
                                    15 Bernes St.
                                    London SW1W 9EA England

   Class A Common Stock             C3, Inc. 401(k) Plan and              3,658,536 shares                15.85%
                                    Telos Corporation Savings Plan
                                    c/o C3, Inc.
                                    19886 Ashburn Road
                                    Ashburn, Virginia 20147

   Class A Common Stock             Union de Banques                      3,150,468 shares(B)             12.92%
                                    Suisses (Luxembourg) S.A.
                                    299 Park Ave., 37th Fl.
                                    New York, NY  10171

   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             Bank of Scotland (London)               815,700 shares                20.20%
                                    Nominees Limited
                                    11 Devonshire Square
                                    London EC 2M 4YR England

   Class A Common Stock             Gerald A. Calhoun                       108,293 shares (C)             0.47%
   Class A Common Stock             Mark W. Hester                           90,976 shares (C)             0.39%
   Class A Common Stock             Robert J. Marino                        320,452 shares (C)             1.38%
   Class A Common Stock             Lorenzo Tellez                          232,440 shares (C)             1.00%
   Class A Common Stock             John B. Wood                          1,091,965 shares (D)             4.52%
   Class A Common Stock             All Officers And Directors
                                    As A Group (8 persons)                1,934,907 shares (E)             7.86%

   12% Cumulative Exchangeable      Value Partners, Ltd.                    714,317 shares (F)            19.87%
   Redeemable Preferred Stock       2200 Ross Avenue, Ste 4660
                                    Dallas, TX  75201

   12% Cumulative Exchangeable      Fisher Ewing Partners                   714,317 shares (F)            19.87%
   Redeemable Preferred Stock       2200 Ross Avenue, Ste 4660
                                    Dallas, TX  75201
<FN>
(A)  Mr.  Porter's  holdings  include  7,228,916  shares of Class A Common Stock
     purchasable upon exercise of a warrant.
(B)  Union de Banques  Suisses  (Luxembourg)  S.A.  holdings  include  1,312,695
     shares of Class A Common Stock purchasable upon exercise of a warrant.
(C)  Messrs. Calhoun, Hester, Marino, and Tellez hold options to acquire 89,900,
     30,000,  198,400,  and 80,000 shares of the Company's Class A Common Stock,
     respectively,  in addition to their current  common stock  holdings.  These
     shares are purchaseable upon exercise of warrant and are exercisable within
     60 days of March 1, 1997.
(D)  Mr. Wood owns no shares of  Common Stock,  however,  he  holds an option to
     acquire  1,091,965   shares  of  the  Company's   Class A   Common   Stock
     purchasable upon exercise of options.
(E)  Under the Company's stock option plan and certain stock option  agreements,
     all  officers and  directors  as a group hold options to acquire  1,532,265
     shares of Class A Common  Stock  exercisable  within 60 days after March 1,
     1997.
(F)  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.
</FN>
</TABLE>


<PAGE>


Item 13. Certain Relationships and Related Transactions

     Mr.  John B. Wood  became an  employee of the Company in 1992 and serves as
President, Chief Executive Officer and Director, respectively.

     Mr. Joseph P. Beninati  served as Chairman of the Board for the majority of
1994  before  resigning  January 5,  1995.  The  Company is paying him  $165,000
annually  subject to a three year  employment  agreement that began in 1995. Mr.
Beninati resigned from the Board in 1996.

     In 1996, the Company paid previously  accrued  advisory fees of $525,000 to
the firm Beninati and Wood, Inc.

     Mr. John R.  Porter,  the  majority  common  shareholder,  has a consulting
agreement with the Company  whereby he will be  compensated  $200,000 a year for
specified  services.  Accordingly,  the Company has accrued $200,000 at December
31, 1996 for this agreement.

     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  $8,000 a
month for his  services,  and receives an  additional  $500 per day for overseas
travel undertaken on behalf of the Company.  Mr. Byers was compensated  $184,300
and $121,500 for 1996 and 1995, respectively.


<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  acopy 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)

     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)

                                       
<PAGE>

   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.

   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.  

                                       
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

   10.74  1996 Stock Option Plan

   10.75  None

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

                                       
<PAGE>

   10.77  enterWorks.com 1996 Stock Option Plan

   10.78  Form of Series A Senior Subordinated Unsecured Note

   10.79  Form of enterWorks.com, inc. Capital Stock Purchase Series A Warrant

   10.80  Asset  Purchase  Agreement

   10.81  Amendment  No. 1 to Asset 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:  March 28, 1997

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

     Signature                     Title                              Date



/s/  Fred Charles Ikle'       Chairman of the                    March 28, 1997
-----------------------
Fred Charles Ikle'            Board of Directors



/s/  John B. Wood             President, Chief Executive
--------------------------
John B. Wood                  Officer & Director                 March 28, 1997
                              (Principal Executive Officer)



/s/  Stephen D. Bryen         Director                           March 28, 1997
------------------------
Stephen D. Bryen




/s/  Norman P. Byers           Director                          March 28, 1997
------------------------
 Norman P. Byers




/s/  Lorenzo Tellez            Chief Financial Officer           March 28, 1997
------------------------
Lorenzo Tellez                 (Principal Financial Officer
                               & Principal Accounting Officer)