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, 1997


             [ ]  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 27,  1998,  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):   55
<PAGE>


                                     PART 1

Item 1.       Business

History and Introduction

     Founded in 1968,  Telos  Corporation  ("Telos" or "the  Company")  provides
enterprise  integration  services and  solutions  primarily to the U.S.  Federal
Government  and  industry.  In  addition  to its  core  competency  of  software
development and systems support services,  Telos delivers information  security,
enterprise integration and networking infrastructure solutions to its customers.
The Company is headquartered in Ashburn, VA, part of Northern Virginia's growing
netplex region of high technology  companies.  There are  approximately 70 other
offices throughout the United States and around the world.

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

     In February 1998, Telos sold its contract labor division, Telos Information
Systems ("TIS") for  approximately  $15 million to NYMA, a subsidiary of Federal
Data Corporation of Bethesda,  Maryland.  In December 1996, Telos sold its other
contract labor division,  Telos Consulting  Services ("TCS"),  for approximately
$32 million to COMSYS Technical Services, Inc., a subsidiary of COREStaff,  Inc.
Telos  determined  that these  businesses  were not a core part of its long term
strategy described above.

Operating Groups

     During  1997,  the Company  provided  its  services  through two  operating
groups:  Telos Systems Integration Group and Systems and Support Services Group.
In addition,  there are two Telos  substantially  wholly-owned  or  wholly-owned
subsidiaries: Enterworks, Inc., formerly enterWorks.com ("Enterworks") and Telos
International Corporation.

Systems and Support Services

     The  Company's   Systems  and  Support  Services  Group  provides  software
development and support services for software and hardware including  technology
insertion, system redesign, software re-engineering,  Help Desk, and third party
maintenance.

     Until the time of its sale in February  1998,  the TIS division was part of
the Systems and Support Services Group.  During 1997, the TIS division  provided
engineering services for the California Institute of Technology's Jet Propulsion
Laboratory.  The  estimated  gain  resulting  from this sale is  disclosed  as a
subsequent event in the Company's consolidated  financial statements.  For 1997,
the  Systems  and  Support  Services  Group had  revenues  of $124.5  million or
approximately 49% of the Company's consolidated revenues.
<PAGE>

Systems Integration

     The Systems  Integration Group delivers  information  security,  enterprise
integration  and networking  infrastructure  solutions to its  customers.  These
solutions include providing  commercial  hardware,  software and services to its
customers.  The Systems Integration Group is capable of staging,  installing and
deploying  large  network   infrastructures  with  virtually  no  disruption  to
customers' ongoing operations.

     For 1997, the Systems  Integration  Group had revenues of $129.3 million or
approximately 51.0% of the Company's consolidated revenues.

Enterworks

     Enterworks,  Telos' substantially  wholly-owned  subsidiary,  was formed to
help companies build the fast and flexible information  infrastructure they need
to compete in a global  economy.  Through  Web-enabled  integration of disparate
data and intelligent  business  process flows,  their software links  employees,
customers,  and  partners  in ways that make the virtual  enterprise  a reality.
Their products  include  Virtual DB and soon to be released  process  automation
software.  Enterworks' advanced solutions serve telecommunications,  healthcare,
financial services, manufacturing, and government customers worldwide.

     For 1997,  Enterworks had revenues of $3.4 million or approximately 1.3% of
the Company's  consolidated  revenues.  Enterworks'  financial  information  is
included in the Systems and Support Services Group.

Telos International Corporation

     Telos International  Corporation ("TIC") was formed in 1996 to identify and
pursue opportunities for Telos products and services in overseas markets.  TIC's
approach to new business  development is to concentrate  on  establishing  local
partnerships  in  regions  with  healthy  economies  and  a  strong  market  for
information  technology goods and services.  International revenues are reported
as part of each operating group's financial results and were less than 1% of the
Company's consolidated revenues for 1997.

Revenues by Major Market and Significant Customers

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

                                                     Percentage of Total Consolidated Revenues For
                                                     ---------------------------------------------
                                                   1997                 1996(1)               1995
                                                   ----                 ----                  ----
<S>                                               <C>                    <C>                   <C>
Federal government                                94.6%                  84.8%                 80.6%
Commercial                                         3.9                   13.6                  15.2
State and local governments                        1.5                    1.6                   4.2
                                                 -----                  -----                 -----
         Total                                   100.0%                 100.0%                100.0%
                                                 =====                  =====                 =====

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

     Total  consolidated  revenue  derived from the federal  government for 1997
includes 58.1% of revenue from  contracts with the Department of Defense,  25.1%
of revenue from contracts with  Department of Justice,  7.3% of revenue from the
National Aeronautics and Space Administration ("NASA"), and 9.5% 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.  As the Company
becomes more focused on network-enabled  enterprise  computing,  the competition
shifts to include  companies that perform  enterprise  integration for large and
complex  information  technology  environments.  Among the major competitors are
Lockheed Martin,  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  employed  1,454 persons as of December 31, 1997.  The services
the  Company  provides  require  proficiency  in many  fields,  such as computer
science, mathematics, physics, engineering,  operations research, economics, and
business administration.

     Of the total Company personnel, 1,069 provide Systems and Support Services,
73 are employed by Enterworks and 168 provide System  Integration  Services.  An
additional 144 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 or if revenue
will be realized on projects included in the Company's backlog.
<PAGE>

     At December 31, 1997 and 1996,  the Company had total backlog from existing
contracts of approximately $1.0 billion and $1.2 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,
1997 is $844 million from indefinite delivery,  indefinite quantity contracts of
which the SMC-II contract comprises $838 million. This SMC-II contract is due to
expire  September 30, 1998.  Approximately  $104 million and $115 million of the
total was funded backlog at December 31, 1997 and 1996, respectively.

     While backlog remains an important  measurement  criteria,  during 1996 and
1997 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 1997

     The Company was well positioned at the start of 1997 to leverage its assets
in pursuit of new  business.  The Company  has  significantly  restructured  its
operations to contain costs,  reduce  discretionary  spending,  and identify new
business more  selectively  with the objective of  increasing  its margins.  The
Company had  organized its selling and new business  development  to profit from
changes in the federal government's procurement methods especially in its use of
the GSA schedule.  The Company had revenue growth of approximately 34% to $253.8
million  in 1997  from  $188.9  million  in 1996.  The  revenue  improvement  is
primarily a result of increased  order volume in several of the Company's  large
contracts for equipment and services. These contracts included the Army's SMC-II
network integration  contract,  the Joint Recruiting  Information Support System
blanket  purchase  agreement,  and the  Immigration and  Naturalization  Service
blanket purchase agreement. Operating income grew to $7.4 million in 1997 from a
loss of $9.4 million in 1996, an increase of $16.8 million. The operating income
improvement is primarily  attributable  to the increased order volume as well as
improved gross margins associated with the product mix in 1997 compared to 1996.
Cost reduction  measures  implemented in late 1996 also had a significant impact
on operating income in 1997.

     From an  international  perspective,  the Company  continues to broaden its
business base through contracts in the Philippines and Kuwait. Through its joint
ventures the Company is actively pursuing other opportunities in the Pacific Rim
and Middle East.

     The Company has  continued  to invest in  Enterworks,  primarily in product
development and in the sales and marketing areas. In 1997,  Enterworks'  revenue
was approximately  $3.4 million and it is expected to continue to expand in both
the federal government and the commercial marketplace.

     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.  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  1997  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.
<PAGE>

     In February  1998,  the Company  sold its TIS group for  approximately  $15
million. In late 1996, the Company sold its TCS division for $31.6 million.  The
Company  has  determined  that  these  operations  were  not a core  part of its
long-term  business  strategy and that the sales would  provide the Company with
additional  liquidity to fund  operations  and to invest in  strategic  business
areas.

     During 1997, the Company  continued the streamlining  and  consolidation of
its  infrastructure  and  general  and  administrative  functions.  The  Company
continuously evaluates its organizational  structure in response to customer and
market demands as well as to ensure it is providing cost effective solutions. In
order to gain further  operational  efficiencies in 1998, the Company expects to
continue  to further  consolidate  and  streamline  certain  reporting  units or
business functions.

Item 2.       Properties

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

     The  Company  leases  additional  space  for  regional  field  engineering,
contract  work sites,  training,  and sales  offices in 51  separate  facilities
located in 19 states, the District of Columbia, and Europe under various leases,
each of which expires on different dates through February 2007. The Company also
owns two buildings and a warehouse in Amery,  Wisconsin.

Item 3.       Legal Proceedings

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

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

     During the fourth  quarter of 1997, 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, 1998, there were 83 holders of the Company's Class A Common Stock and 3
holders of the Company's Class B Common Stock.

Item 6.       Selected Financial Data

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

                                                 OPERATING RESULTS

                                                                  Year Ended December 31,
                                            ---------------------------------------------------------------------
                                            1997             1996            1995           1994           1993
                                            ----             ----            ----           ----           ----
                                                                 (amounts in thousands)
<S>                                        <C>             <C>             <C>            <C>           <C>
Sales                                      $253,787        $188,895        $175,759       $150,676      $187,285

Income (loss) from
  continuing operations                       1,412          (9,816)            592        (11,838)        1,250

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

Income (loss) before
   extraordinary items                        1,412           2,208           1,015        (12,421)          548

Extraordinary items                              --              --              --           (196)           --

Net income (loss)                             1,412           2,208           1,015        (12,617)          548


                                                FINANCIAL CONDITION

                                                                   As of December 31,
                                             -----------------------------------------------------
                                             1997             1996           1995            1994         1993
                                             ----             ----           ----            ----         ----
                                                                (amounts in thousands)

Total assets                               $109,718        $110,064         $94,492        $86,872       $84,796

Long-term debt (2)                           56,875          32,857          47,316         40,414        30,790

Capital lease obligations,
   long-term (3)                             12,085          12,537              --             --            --

Senior redeemable
   preferred stock (4)                        5,207           4,828           4,494          4,192         3,922

Class B redeemable
   preferred stock (4)                       12,035          11,087          10,252          9,497         8,822

Redeemable preferred
   Stock (4)                                 29,951          24,230          18,647         14,263        11,417


(1) See Note 2 to the Consolidated Financial Statements in Item 8 regarding the sale of TCS.

(2) See Note 4 to the  Consolidated  Financial  Statements  in Item 8 regarding long-term debt obligations of the Company.
    Total long-term debt obligations include  amounts  due under the Senior  Credit  Facility  and  subordinated notes.

(3) See Note 8 to the Consolidated Financial Statements in Item 8 regarding the capital lease obligations of the Company.

(4) See Note 5 to the  Consolidated  Financial  Statements  in Item 8 regarding redeemable preferred stock of the Company.
</TABLE>
<PAGE>

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

General

     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. Company backlog decreased from $1.2 billion at December 31, 1996 to
$1.0 billion at December  31,  1997.  Backlog grew from $328 million at December
31, 1994 to $1.3  billion at December 31,  1995.  Additionally,  the Company has
established  a  comprehensive  offering  of  products  and  services  on its GSA
schedule.  These  investments and efforts have allowed the Company to win all of
its significant  contract rebids, as well as providing  significant new business
opportunities.

     During 1997, the Company  experienced a turnaround  year from an operations
perspective.  The Company  generated net income in 1997,  despite  incurrence of
operating losses at Enterworks of  approximately  $5.8 million (prior to certain
separate  company  adjustments)  primarily  due to the  start-up  nature  of its
operations and the continued development of its software products. The Company's
investment  in new software and hardware  products  provides the Company with an
expanded  product line that, the Company  believes,  offers its customers unique
value added solutions for 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).  This
investment in hardware  products has  historically  been through  Telos' Systems
Integration Group, however, based on market conditions no significant investment
in hardware product development is expected in the near term.

     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 systems  integration  facility in 1996 which resulted in
increased  rent expense and other costs  associated  with the move in 1996.  The
Company  continually  evaluates its cost  structure and in the fourth quarter of
1996 implemented a cost reduction plan focused on indirect costs and personnel.

     In February  1998 the Company sold  substantially  all of the net assets of
one of its  groups,  Telos  Information  Systems  (TIS)  for  approximately  $15
million.  Late in 1996 the Company  sold the net assets of its Telos  Consulting
Services (TCS) division for $31.6 million.  These transactions allow the Company
to  further  focus its  efforts on  strategic  business  opportunities.  See the
discussions  included in the "Results of Operations"  and "Liquidity and Capital
Resources" sections below.

Revenue by Contract Type

     Approximately   96.1%  of  the  Company's   total  revenues  in  1997  were
attributable to contracts with federal, state, and local governments,  including
94.6%  attributable  to the federal  government.  This represents an increase of
11.2% from 1996 and relates primarily to several  significant  contracts awarded
during  1997.  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,  for the most part, 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 1997,  revenue by
contract  type was as follows:  time and  materials,  28.7%;  firm fixed  price,
49.4%;  cost  reimbursable,  15.9%;  fixed monthly rate, 5.5%; 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,
                                             -------------------------------------------------------------------------
                                                     1997                     1996                     1995
                                             -------------------------------------------------------------------------
                                                                  (dollar amounts in thousands)
<S>                                          <C>         <C>          <C>          <C>          <C>        <C>
Sales                                        $253,787    100.0%       $188,895     100.0%       $175,759   100.0%

Cost of sales                                 218,430     86.1         168,281      89.1         145,522    82.8
Selling, general and
   administrative expenses                     27,054     10.7          29,055      15.4          23,262    13.2
Goodwill amortization                             892      0.3           1,001       0.5           1,950     1.1
                                              -------    -----         -------     -----         -------   -----

   Operating income (loss)                      7,411      2.9          (9,442)     (5.0)          5,025     2.9

Interest expense                               (7,455)    (2.9)         (5,668)     (3.0)         (4,385)   (2.5)
Other income (expense)                            124       --            (445)     (0.2)             27      --
                                              -------    -----         -------     -----         -------   -----
Income (loss) before taxes
   and minority interest                           80       --         (15,555)     (8.2)            667     0.4

Income tax (benefit) provision                 (1,332)    (0.6)         (5,739)     (3.0)             75      --
                                              -------    -----         -------     -----         -------   -----

Income (loss) from
   continuing operations                        1,412      0.6          (9,816)     (5.2)            592     0.4
Discontinued Operations:
  Income from discontinued
  operations                                       --       --             500       0.2             423     0.2
  Gain on sale of TCS                              --       --          11,524       6.1              --      --
                                              -------    -----         -------     -----         -------   -----
Net income                                   $  1,412      0.6%       $  2,208       1.1%       $  1,015     0.6%
                                              =======    =====         =======     =====         =======   =====
</TABLE>

Financial Data by Market Segment

     The Company operates in two principal market segments:  Systems and Support
Services,  which consists of Enterworks and software and hardware services,  and
Systems  Integration.  In 1998, the Company  expects to further  consolidate and
reorganize certain reporting units or business functions.

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

                                                                          Year Ended December 31,
                                                           ---------------------------------------------------
                                                           1997                     1996                  1995
                                                          ------                   ------               ------
                                                                       (dollar amounts in thousands)
<S>                                                     <C>                      <C>                   <C>
Sales:
    Systems and Support Services                        $124,450                 $103,675              $105,801
    Systems Integration                                  129,337                   85,220                69,958
                                                         -------                  -------               -------
      Total                                             $253,787                 $188,895              $175,759
                                                         =======                  =======               =======

Gross Profit:
    Systems and Support Services                          20,482                   12,192                15,122
    Systems Integration                                   14,875                    8,422                15,115
                                                         -------                  -------               -------
      Total                                             $ 35,357                 $ 20,614              $ 30,237
                                                         =======                  =======               =======

Gross Margin:

    Systems and Support Services                            16.5%                    11.8%                 14.3%
    Systems Integration                                     11.5%                     9.9%                 21.6%
      Total                                                 13.9%                    10.9%                 17.2%
</TABLE>
<PAGE>
Results of Operations

Years ended December 31, 1997 and 1996

     Sales  increased  $64.9 million,  or 34.4%,  from $188.9 million in 1996 to
$253.8  million in 1997.  This  increase  was  attributable  both to the Systems
Integration  Group which  reported an increase in sales of $44.1 million and the
Systems and Support Services Group with an increase in sales of $20.8 million.

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

     The  increase  in the  Systems  and  Support  Services  Group's  revenue is
primarily  attributable  to the effect of a Blanket  Purchase  Agreement won and
completed  in  1997  for  the  Immigration  and  Naturalization  Service  ($12.8
million).  The TIS division,  which held Jet  Propulsion  Laboratory  contracts,
experienced  an increase in revenue of $6.1  million in 1997,  compared to 1996.
Hardware support revenues remained fairly consistent between 1997 and 1996.

     Based on the Company's  backlog  position,  1998 should continue to present
significant  opportunities  for  revenue  generation.   Part  of  the  Company's
strategic  direction is to market  business  opportunities  with more profitable
product margins.  These markets are highly  competitive and revenue  projections
remain uncertain. The Company expects reduced revenue volume in 1998, due to the
sale of the TIS group which had total  revenue of  approximately  $24 million in
1997.

     Cost of sales  increased by $50.1 million,  or 29.8%,  to $218.4 million in
1997 from $168.3 million in 1996. This increase is the result of increased sales
during the year and changes in the revenue product mix. The Systems and Support
Services  Group  benefited  significantly  as a result of new contract  revenues
described above. The cost of labor required to support these new contracts, as a
percentage  of  revenue,  was much less  than to  support  traditional  services
contracts, on a per hour basis.  Additionally,  the Systems and Support Services
Group implemented a cost reduction program to reduce labor and material costs in
the hardware  support area.  The Systems  Integration  Group  benefited from the
insertion of new technology  with lower cost components as part of the solutions
provided in its larger contracts.  However,  in the second half of 1997, certain
additional  reserves for the  write-off  of  inventory  and software and product
development  costs of  approximately  $3 million were recorded.  Such write-offs
included  approximately  $900,000  for  a net  realizable  value  adjustment  to
deferred  software  costs which  resulted  from changes in the  marketplace  and
future cash flow projections.

     Gross profit  increased by $14.8  million for the year to $35.4  million in
1997, from $20.6 million in 1996. The increase is primarily  attributable to the
increased  order flow and the  increases in revenue and changes in cost of sales
discussed above. Gross profit also reflects the result of cost cutting measures
initiated in 1996 and continued in 1997,  including staff  reductions and branch
consolidation.  The Company  believes  that its gross  profit  will  continue to
improve by the end of 1998,  though there is no assurance that such  improvement
will occur.

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

     Goodwill  amortization  expense  was  $892,000  for 1997  compared  to $1.0
million for 1996.  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).

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

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

     Interest expense increased  approximately  $1.8 million to $7.5 million for
1997,  as  compared  to $5.7  million in 1996.  The  increase is a result of the
significant  increase in the average  outstanding  balance of the Senior  Credit
Facility  for most of 1997,  as well as an  increase in  interest  recorded  for
capital lease  obligations  associated  with the mid-1996 move by the Company to
its new  manufacturing  and support facility in Ashburn,  Virginia.  The Company
believes its  interest  expense in 1998 will be less than the 1997 levels with a
reduced  Senior  Credit  Facility   balance  and   anticipated   1998  operating
performance.  However,  there can be no assurance that the reduction in interest
expense will occur.

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

Years ended December 31, 1996 and 1995

     Sales  increased  $13.1  million,  or 7.5%,  from $175.8  million to $188.9
million for 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 $2.1 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 the
Systems Integration Group were due to the 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 $5.2 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  materials  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 subsidiary's products and related consulting.
The software support revenue increase is due to increased services under certain
of the Company's large labor contracts.

     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  the  Systems
Integration  Group, 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  rent  expense in 1996 as a result of the move to a new
facility.
<PAGE>

     Gross profit decreased by $9.6 million for 1996 to $20.6 million from $30.2
million in 1995.  The  decrease is primarily  attributable  to the cost of sales
increases  discussed  above.  The  Company  undertook  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 1996 as  compared to
17.2% for 1995.

     SG&A expenses  increased for 1996 by approximately  $5.8 million,  to $29.1
million in 1996 from $23.3 million in 1995.  These  increases were primarily due
to an increase in sales and marketing 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. SG&A as a
percentage of sales increased to 15.4% for 1996 from 13.2% in 1995.

     Goodwill  amortization  expense was $1.0 million for 1996  compared to $2.0
million for 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,  goodwill  amortization  declined  due to the  completion  of the goodwill
amortization associated with the 1989 leveraged buy out of the Company.

     Operating  income  decreased by $14.4  million to a loss of $9.4 million in
1996 from  income  of $5.0  million  in 1995 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 1996 compared
with  $27,000 of other  non-operating  income in 1995.  The  expense in 1996 was
primarily  attributable  to an additional  reserve to fully record the provision
for the settlement of litigation.

     Interest expense increased  approximately  $1.3 million to $5.7 million for
1996 from $4.4 million in 1995.  The increase 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 in 1996. 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.

     For 1996, the Company had a combined federal and state income tax provision
of  $1.2  million   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,  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 is net of $6.3 million of related income tax
expense.  The  sale of TCS has  been  treated  as a  discontinued  operation  in
accordance  with APB  Opinion  Number 30 ("APB  30").  Pursuant  to APB 30,  the
revenue,  costs and  expenses of TCS have been  excluded  from their  respective
captions in the Company's consolidated  statements of income and the net results
of these operations have been reported  separately as "Income from  discontinued
operations." Included in the results of the discontinued operations is allocated
interest   expense  of  $1.5  million  and  $1.1  million  for  1996  and  1995,
respectively.  Interest  has  been  allocated  based  on the net  assets  of the
discontinued operation in relation to the Company's consolidated net assets plus
non-specific debt. Additionally,  goodwill amortization of $418,000 and $420,000
for  1996 and  1995,  respectively,  has been  included  in the  results  of the
discontinued operations.
<PAGE>

Liquidity and Capital Resources

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

     At December  31,  1997,  the Company  had an  outstanding  balance of $39.9
million on its $45 million Senior Credit Facility ("Facility"). The Facility is
collateralized  by  certain  assets  of the  Company  (primarily  inventory  and
accounts  receivable)  and the  amount  of  borrowings  fluctuate  based on the
underlying  asset  borrowing  base  as  well as the  Company's  working  capital
requirements.  At December  31,  1997,  the Company,  under its  borrowing  base
formula, had $5.1 million of unused availability.

     The Facility has various covenants, which may, among other things, restrict
the  ability of the  Company  to merge with  another  entity,  sell or  transfer
certain  assets,  pay  dividends  and make other  distributions  beyond  certain
limitations.  The Facility also  requires the Company to meet certain  leverage,
net worth and tangible  capital goals, a fixed charge coverage ratio as well as
certain  financial  results  related to  Enterworks.  At December 31, 1997,  the
Company was not compliant with certain  covenants  contained in the Facility and
the bank has waived such non-compliance.

     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 1998.  However,  should  faster than  anticipated
growth occur, the Company believes that an expanded Facility would be required.

     The  Company's  subordinated  notes are held  principally  by  shareholders
and/or  management  and  approximate  $16.9 million at December 31, 1997.  These
notes bear interest at various  rates  between 8% and 17% and become  payable in
2000 through  2001.  During 1997,  the Company  repaid one of its notes with the
Company's  principal common shareholder  resulting in a decrease in subordinated
notes of  approximately  $651,000.  This  decrease  was  offset by  $143,000  of
accretion  of the  subordinated  notes  required as a result of the  issuance of
certain notes with warrants in 1996.

     The  Company  has  several  classes  of  redeemable  preferred  stock.  The
redeemable  preferred stock currently carries  cumulative  dividend rates of 12%
and 14.125%. At December 31, 1997 the total amount of redeemable preferred stock
including accumulated and unpaid dividends is $47.2 million. The Company accrues
dividends and provides for accretion related to the redeemable  preferred stock.
Mandatory  redemption  for both the senior  redeemable  preferred  stock and the
Class B redeemable preferred stock, including all dividends payable, is required
on  December  31,  2001.  Mandatory  redemption  for the  Company's  12%  public
preferred stock is required between 2005 and 2009.

     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.

     Cash used by operating  activities  was $15.3  million in 1997 due in large
part to prior  year  purchase  accruals,  the  timing  of the  accounts  payable
processing  and an increase in accounts  receivable as a result of sales growth.
Cash used by investing  activities was $5.7 million in 1997,  reflecting capital
expenditures  of $2.6  million  and $3.1  million in  continued  investments  in
software  and  product   development  costs  related  to  Enterworks   products.
Management  continues  to develop and  enhance  their  products in  anticipating
market demands. To provide cash for operating and investing  activities as noted
above,  the Company had cash flows from  financing  activities of  approximately
$18.8 million in 1997, reflecting  principally net proceeds from draws under the
Facility.

     Effective  February  28,  1998,   the  Company  sold  the  TIS  group  for
approximately $15 million. The Company used, as required,  the proceeds from the
sale to pay down amounts outstanding under the Facility.

     The Company has a net  deferred  tax asset of $5.0  million at December 31,
1997. Management believes that the asset is fully realizable given the Company's
existing  backlog,  projected taxable gains primarily as a result of the sale of
TIS in 1998,  and  potential  tax planning  strategies  existing at December 31,
1997.
<PAGE>

Capital Expenditures

     The Company believes that its business is generally not capital  intensive.
Capital  expenditures  for property and  equipment  were $2.6 million in each of
1997  and  1996  and  $1.0  million  in  1995.  The  Company   incurred  capital
expenditures in 1996 as a result of moving to a new headquarters and integration
facility.  In 1996, the Company  entered into a twenty year lease for a building
that provides  significantly  more  integration and warehouse space. The Company
expects capital  expenditures to increase during 1998, however,  there can be no
assurances that the additional capital expenditures will occur.

Inflation

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

Year 2000

     The  Company,  like most owners of computer  software,  will be required to
modify significant portions of its software so that it will function properly in
the year 2000. Systems that do not properly recognize date-sensitive information
could generate  erroneous data or cause a system to fail. The Company expects to
incur internal  staff costs as well as consulting and other expenses  related to
software and  infrastructure  enhancements  necessary to prepare the systems for
the year 2000.  Maintenance or modification  costs will be expensed as incurred,
while the costs of new  software  will be  capitalized  and  amortized  over the
software's  useful  life.  Management  believes  that the year  2000  compliance
expense will not have a material effect on the Company.

     The Company expects its year 2000 date  conversion  project to be completed
on a timely basis. However,  there can be no assurance that the systems of other
companies on which the Company's  systems rely also will be timely  converted or
that any such  failure to convert by another  company  would not have an adverse
effect on the Company's systems.

Newly Issued Accounting Standards

     In June 1997,  the FASB issued SFAS No. 130,  "Comprehensive  Income." SFAS
No. 130 becomes  effective  for the Company in 1998 and requires  disclosure  of
"comprehensive income" as defined, and its components.  The Company believes the
adoption  of SFAS No.  130 will not have a material  effect on its  consolidated
financial statements.

     Also,  in June 1997,  the FASB  issued  SFAS No.  131,  "Disclosures  about
Segments of an Enterprise and Related  Information."  This Statement changes the
way segment information is required to be reported. It also requires entity-wide
disclosure  about the  products and  services an entity  provides,  the material
countries  in  which  it  holds  assets  and  reports  revenues,  and its  major
customers.  The  Statement  is  effective  for the Company in 1998.  The Company
believes  the  adoption  of SFAS No. 131 will not have a material  effect on the
disclosures in its consolidated financial statements.

     In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which provides guidance on applying generally accepted accounting  principles in
recognizing  revenue on software  transactions  and supersedes  SOP 91-1.  Among
other matters,  the provisions of SOP 97-2  establish the  requirement  that the
allocation of revenue to the various  individual  elements of those arrangements
that provide for the sale of several products and/or services are to be based on
the fair value of each element. The provisions of SOP 97-2 are effective for the
Company for  transactions  entered into after  December  31, 1997.  On March 18,
1998, the Financial  Accounting  Standards Board cleared a Statement of Position
that  provides  for a one  year  deferral  of  certain  provisions  of  the  SOP
pertaining to its requirements for what constitutes  vendor specific evidence of
the fair value of multiple  elements  included in an arrangement.  It is AcSEC's
intention to immediately  begin a project to consider whether guidance is needed
on any restrictions  that should be placed on what constitutes  evidence of fair
value and, if so, what the guidance should be. Because of the uncertainties with
respect  to the  outcome  of any  such  project,  the  impact  of the  SOP  upon
expiration of the one year deferral period is not currently determinable.
<PAGE>

Forward-Looking Statements

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

Certain Factors That May Affect Future Results

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

     A number of  uncertainties  exist that could  affect the  Company's  future
operating results, including,  without limitation,  general economic conditions,
the timing and approval of the federal government's fiscal year budget, business
growth through obtaining new business and, once obtained,  the Company's ability
to successfully  perform at a profit,  the Company's ability to convert contract
backlog to  revenue,  the  Company's  ability  to secure  adequate  capital  and
financing  to support  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.

     While the Company believes it has adequate financing to support its revenue
base  anticipated  for 1998,  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


                                                                                                           Page
<S>                                                                                                         <C>
Report of Independent Accountants - Price Waterhouse LLP....................................................17

Report of Independent Accountants - Coopers & Lybrand L.L.P.................................................18

Consolidated Statements of Income for the Years Ended
 December 31, 1997, December 31, 1996 and December 31, 1995.................................................19

Consolidated Balance Sheets as of December 31, 1997 and
    December 31, 1996.......................................................................................20-21

Consolidated Statements of Cash Flows for the Years Ended
    December 31, 1997, December 31, 1996 and December 31, 1995..............................................22

Consolidated Statements of Changes In Stockholders' Investment (Deficit)
    for the Years Ended December 31, 1997, December 31, 1996
    and December 31, 1995...................................................................................23

Notes to Consolidated Financial Statements..................................................................24-40


                                                INDEX TO SCHEDULES

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



                        Report of Independent Accountants






To the Board of Directors and Stockholders
  of Telos Corporation



In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
investment  (deficit)  present fairly, in all material  respects,  the financial
position of Telos Corporation and its subsidiaries at December 31, 1997, and the
results of their  operations  and their cash flows for the year then  ended,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our  audit.  We  conducted  our audit of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audit  provides a reasonable  basis for the opinion  expressed
above.  The  consolidated  financial  statements  of Telos  Corporation  and its
subsidiaries  for the years ended  December  31,  1996 and 1995 were  audited by
other  independent  accountants  whose report dated March 28, 1997  expressed an
unqualified opinion on those statements.




PRICE WATERHOUSE LLP


Washington, DC
March 27, 1998
<PAGE>






                        Report of Independent Accountants






To the Board of Directors and Stockholders
  of Telos Corporation



     We have  audited  the  accompanying  consolidated  balance  sheet  of Telos
Corporation  and   Subsidiaries  as  of  December  31,  1996,  and  the  related
consolidated statements of income,  stockholders' investment (deficit), and cash
flows for each of the two 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 the consolidated  results of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 1996, in conformity with generally accepted accounting principles.





COOPERS & LYBRAND L.L.P


Washington, DC
March 28, 1997
<PAGE>
<TABLE>
<CAPTION>



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


                                                                      Year Ended December 31,
                                                      --------------------------------------------------
                                                         1997                   1996                  1995
                                                         ----                   ----                  ----
<S>                                                   <C>                     <C>                   <C>
Sales
    Systems and Support Services                      $124,450                $103,675              $105,801
    Systems Integration                                129,337                  85,220                69,958
                                                       -------                 -------               -------

                                                       253,787                 188,895               175,759
                                                       -------                 -------               -------
Costs and expenses
    Cost of Systems and
      Support Services                                 103,968                  91,483                90,679
    Cost of Systems Integration                        114,462                  76,798                54,843
    Selling, general and
      administrative expenses                           27,054                  29,055                23,262
    Goodwill amortization                                  892                   1,001                 1,950
                                                       -------                 -------               -------

                                                       246,376                 198,337               170,734
                                                       -------                 -------               -------

Operating income (loss)                                  7,411                  (9,442)                5,025

Other income (expenses)
    Non-operating income (expense)                         124                    (445)                   27
    Interest expense                                    (7,455)                 (5,668)               (4,385)
                                                       -------                 -------               -------

Income (loss) before income taxes                           80                 (15,555)                  667
(Benefit) provision for income taxes                    (1,332)                 (5,739)                   75
                                                       -------                 -------               -------
Income (loss) from continuing
    operations                                           1,412                  (9,816)                  592

Discontinued operations:
 Income from discontinued
    operations (net of income tax
    provision of $566 for 1996)                             --                     500                   423

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

Net income                                            $  1,412                $  2,208              $  1,015
                                                       =======                 =======               =======



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



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

                                                             ASSETS




                                                                                  December 31,
                                                                     ------------------------------------
                                                                         1997                      1996
                                                                         ----                      ----
<S>                                                                    <C>                       <C>
Current assets
    Cash and cash equivalents
      (includes restricted cash of
      $231 at December 31, 1996)                                      $    587                  $  2,781
    Accounts receivable, net                                            57,972                    51,549
    Inventories, net                                                    12,390                    17,066
    Deferred income taxes                                                4,632                     1,643
    Prepaid income taxes                                                   268                       694
    Other current assets                                                   408                       230
                                                                       -------                   -------

      Total current assets                                              76,257                    73,963
                                                                       -------                   -------

Property and equipment
    Land and building                                                      346                       408
    Furniture and equipment                                             21,469                    20,174
    Leasehold improvements                                               2,750                     2,650
    Property and equipment
      under capital leases                                              13,774                    13,644
                                                                       -------                   -------
                                                                        38,339                    36,876

    Accumulated depreciation
      and amortization                                                 (22,609)                  (20,390)
                                                                       -------                   -------

                                                                        15,730                    16,486
                                                                       -------                   -------

Goodwill, net                                                           12,466                    13,545
Deferred income taxes                                                      385                     1,468
Other assets                                                             4,880                     4,602
                                                                       -------                   -------

                                                                      $109,718                  $110,064
                                                                       =======                   =======


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

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

                                   LIABILITIES AND STOCKHOLDERS' INVESTMENT (DEFICIT)


                                                                                            December 31,
                                                                               ----------------------------------
                                                                                     1997                  1996
                                                                                     ----                  ----
<S>                                                                                <C>                   <C>
Current liabilities
   Accounts payable                                                               $ 16,912              $ 35,730
   Accrued compensation and benefits                                                 8,553                10,163
   Unearned warranty revenue                                                         1,135                 1,575
   Current portion, capital lease obligations                                          430                   357
   Other current liabilities                                                         5,401                 9,776
                                                                                   -------               -------

      Total current liabilities                                                     32,431                57,601

Senior credit facility                                                              39,945                15,418
Senior subordinated notes                                                           16,930                17,439
Capital lease obligations                                                           12,085                12,537
Other long-term liabilities                                                             --                   154
                                                                                   -------               -------
      Total liabilities                                                            101,391               103,149

                                                                                   -------               -------

Commitments and contingencies (Note 8)

Redeemable preferred stock
    Senior redeemable preferred stock, $.01 par value,
      Series A-1 and A-2, 1,250 and 1,750 shares authorized, issued
      and outstanding, respectively (aggregate liquidation preference
      of $3,000)                                                                     5,207                 4,828
    Class B Redeemable Preferred Stock, $.01 par value, 7,500 shares
      authorized, issued and outstanding (aggregate liquidation
      preference of $7,500)                                                         12,035                11,087
    Redeemable preferred stock, $.01 par value, issued and outstanding,
      6,000,000 shares authorized, 3,595,586 shares (aggregate liquidation
      preference of $35,956)                                                        29,951                24,230
                                                                                   -------               -------
                                                                                    47,193                40,145
                                                                                   -------               -------
Stockholders' investment
   Class A common stock, no par value, 50,000,000 shares authorized,
      23,076,753 shares issued and outstanding                                          65                    65
   Class B common stock, no par value, 50,000,000 shares authorized,
      4,037,628 shares issued and outstanding                                           13                    13
   Capital in excess of par                                                             --                 4,048
   Accumulated deficit                                                             (38,944)              (37,356)
                                                                                   -------               -------
     Total stockholders' investment (deficit)                                      (38,866)              (33,230)
                                                                                   -------               -------

                                                                                  $109,718              $110,064
                                                                                   =======               =======


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



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

                                                                                     Year Ended December 31,
                                                                               ----------------------------------
                                                                                  1997         1996         1995
                                                                                  ----         ----         ----
<S>                                                                             <C>          <C>          <C>
Operating activities:
    Net income                                                                  $ 1,412      $ 2,208      $ 1,015
    Adjustments to reconcile net income
      to cash used in operating activities:
      Depreciation and amortization                                               4,098        3,058        3,376
      Gain on sale of TCS                                                            --      (17,176)          --
      Loss on disposal of fixed assets                                              715           --           --
      Goodwill amortization                                                         892        1,418        2,370
      Amortization of debt issuance costs                                           243           78           17
      Accretion of subordinated notes                                               143           --           --
      Provision for inventory obsolescence                                        2,150        1,008          312
      Provision for doubtful accounts receivable                                    490          647          103
      Provision for loss on shutdown of division                                     --           --         (760)
      Provision for net realizable value of other assets                            887           --           --
      Deferred income tax (benefit) provision                                    (1,719)         900           --
      Provision for employee benefits                                                --           --          974
      Provision for employee insurance                                               --           --         (891)
      Changes in assets and liabilities
         Increase in accounts receivable                                         (6,913)     (14,487)      (3,870)
         Decrease (increase) in inventories                                       2,186       (2,364)      (8,582)
         Decrease (increase) decrease in other assets                               795       (2,076)       1,845
         Decrease (increase) in accounts payable and
           other liabilities                                                    (20,559)      11,283       (2,342)
                                                                                 ------       ------       ------
         Cash used in operating activities                                      (15,180)     (15,503)      (6,433)
                                                                                 ------       ------       ------
Investing activities:
    Proceeds from sale of discontinued operations                                    --       31,579           --
    Purchase of property and equipment                                           (2,589)      (2,558)      (1,013)
    Investment in other assets                                                   (3,083)      (1,422)        (680)
                                                                                 ------       ------       ------
         Cash (used in) provided by investing activities                         (5,672)      27,599       (1,693)
                                                                                 ------       ------       ------
Financing activities:
    Proceeds (payments) from Senior Credit Facility                              24,526      (16,894)      (1,688)
    Proceeds from debt issuance                                                      --        3,278       14,373
    (Decrease) increase in book overdrafts                                       (4,838)       3,833        2,722
    Repayment of long-term debt                                                    (651)          --       (5,800)
    Debt issue costs                                                                 --           --       (1,187)
    Payments under capital lease obligations                                       (379)        (267)          --
                                                                                 ------       ------       ------
         Cash provided by (used in) financing
         activities                                                              18,658      (10,050)       8,420
                                                                                 ------       ------       ------

    (Decrease) increase in cash and cash equivalents                             (2,194)       2,046          294
    Cash and cash equivalents at beginning of the year                            2,781          735          441
                                                                                 ------       ------       ------
    Cash and cash equivalents at end of year                                    $   587      $ 2,781      $   735
                                                                                 ======       ======       ======

Supplemental  disclosures  of cash flow  information:
Cash paid during the year for:
    Interest                                                                    $ 6,872      $ 5,760      $ 5,348
                                                                                 ======       ======       ======
    Income taxes paid (refunded)                                                $    92      $   187      $(2,155)
                                                                                 ======       ======       ======
Supplemental schedule of non-cash investing activities:
    Assets under capital lease                                                  $    --      $13,154      $    --
                                                                                 ======       ======       ======

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



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


                                                                                                          Total
                                                      Class A     Class B     Capital                  Stockholders'
                                                       Common     Common     In Excess   Accumulated    Investment
                                                       Stock      Stock       of Par       Deficit       (Deficit)
                                                       -----      -----       ------       -------       ---------
<S>                                                    <C>        <C>         <C>         <C>           <C>
Balance December 31, 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)
Redeemable preferred stock accretion                     --         --         (1,270)          --        (1,270)
Enterworks common stock warrants                         --         --            921           --           921
Net income for the year                                  --         --             --        2,208         2,208
                                                        ---        ---         ------       ------        ------

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


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

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



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



                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.       Summary of Significant Accounting Policies

Business and Organization

     Telos   Corporation   ("Telos"  or  "the  Company")   provides   enterprise
integration  services and solutions primarily to the U.S. Federal Government and
industry.  In  addition  to its core  competency  of  software  development  and
systems  support  services,  Telos delivers  information  security,  enterprise
integration and networking infrastructure solutions to its customers.

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

Principles of Consolidation

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

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period.  Significant estimates and assumptions used in the preparation
of the Company's  consolidated  financial statements include revenue recognition
under  contract  percentage  of completion  methodology,  allowance for accounts
receivable,  allowance  for  inventory  obsolescence,  valuation of goodwill and
other  noncurrent  assets,  the  valuation  allowance  for  deferred tax assets,
employee benefits and estimated useful lives of goodwill, property and equipment
and other noncurrent assets.  Actual results could differ from those estimates.

Revenue Recognition

     The majority of the Company's  sales are made directly or indirectly to the
federal government.  A substantial portion of the Company's revenues are derived
from time and materials and cost reimbursement contracts, under which revenue is
recognized  as  services  are  performed  and costs are  incurred.  The  Company
generally recognizes 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 American Institute of
Certified   Public   Accountants   (AICPA)   Statement  of  Position  91-1  (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.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents

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

Inventories

     Inventories  are  stated  at the  lower  of  cost  or  market,  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  systems  integration   services   performed  by  the  Company.
Inventories  also include spare parts of $1,329,000  and  $1,414,000 at December
31,  1997 and 1996,  respectively,  which are  utilized  to support  maintenance
contracts. Spare parts inventory is amortized on a straight line basis over five
years.  An allowance  for  obsolete,  slow-moving  or  non-salable  inventory is
provided  for all other  inventory.  This  allowance  is based on the  Company's
overall   obsolescence   experience  and  its  assessment  of  future  inventory
requirements.

     At December  31,  1997 and 1996,  the  Company's  allowance  for  inventory
obsolescence was $3,915,000 and $2,357,000,  respectively. The components of the
allowance for inventory obsolescence are set forth below (in thousands):
<TABLE>
<CAPTION>

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

<S>                                                <C>              <C>               <C>                <C>
Year Ended December 31, 1997                       $2,357           $2,150            $592               $3,915

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

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

(1) Inventories written off.
</TABLE>

Property and Equipment

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

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

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

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

     Depreciation  and  amortization  expense related to property and equipment,
including   property  and  equipment  under  capital  leases,   was  $2,630,000,
$2,255,000 and $1,865,000 for the years ended December 31, 1997,  1996 and 1995,
respectively.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill

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

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

     Accumulated  amortization  of goodwill  at  December  31, 1997 and 1996 was
$7,947,000 and $7,055,000, respectively.

Other Assets

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

     Unamortized  software and product  costs at December 31, 1997 and 1996 were
$3.6 million and $2.5 million,  respectively.  Amortization  expense  associated
with these capitalized  software and product costs was $1,128,000,  $689,000 and
$170,000  in 1997,  1996 and  1995,  respectively.  Additionally,  $887,000  was
written as a net realizable value adjustment in 1997.

     Debt issuance costs are amortized over the term of the underlying financial
instrument,  which  amortization  method does not differ  significantly from the
effective  interest method.  Unamortized costs amounted to $668,000 and $911,000
at December 31, 1997 and 1996, respectively.

Income Taxes

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


Accounting for Stock Based Compensation

     The Company accounts for stock-based compensation using the intrinsic value
method  provided  by  Accounting   Principles  Board  ("APB")  Opinion  No.  25,
"Accounting for Stock Issued to Employees." Pro forma disclosures are made as if
the  fair  value  measurement  provisions  of  SFAS  No.  123 had  been  used in
determining compensation expense.

Research and Development

     The  Company  charges  all  research  and  development  costs to expense as
incurred,  until, in the case of software,  technological feasibility is reached
after which time such costs are  capitalized  (see  discussion  in Other Assets,
above).  During 1997,  1996 and 1995,  the Company  expensed $1.0 million,  $1.2
million and $1.4 million in research and development costs, respectively.

Earnings per Share

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

Financial Instruments

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

     Fair  value  estimates  are made at a  specific  point  in  time,  based on
relevant  market  information.  These  estimates  are  subjective  in nature and
involve  matters of judgment and therefore  cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.

Newly Issued Accounting Standards

     In June 1997,  the FASB issued SFAS No. 130,  "Comprehensive  Income." SFAS
No. 130 becomes  effective  for the Company in 1998 and requires  disclosure  of
"comprehensive  income," as defined,  and its components.  The Company  believes
that the  adoption  of SFAS No.  130 will  not  have a  material  effect  on its
consolidated financial statements.

     Also,  in June 1997,  the FASB  issued  SFAS No.  131,  "Disclosures  about
Segments of an Enterprise and Related  Information."  This Statement changes the
way segment information is required to be reported. It also requires entity-wide
disclosure  about the  products and  services an entity  provides,  the material
countries  in  which  it  holds  assets  and  reports  revenues,  and its  major
customers.  The  Statement  is effective  for the Company for 1998.  The Company
believes  that the  adoption of SFAS No. 131 will not have a material  effect on
the disclosures in its consolidated financial statements.

     In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which provides guidance on applying generally accepted accounting  principles in
recognizing  revenue on software  transactions  and supersedes  SOP 91-1.  Among
other matters,  the provisions of SOP 97-2  establish the  requirement  that the
allocation of revenue to the various  individual  elements of those arrangements
that provide for the sale of several products and/or services are to be based on
the fair value of each element. The provisions of SOP 97-2 are effective for the
Company for  transactions  entered into after  December  31, 1997.  On March 18,
1998, the Financial  Accounting  Standards Board cleared a Statement of Position
that  provides  for a one  year  deferral  of  certain  provisions  of  the  SOP
pertaining to its requirements for what constitutes  vendor specific evidence of
the fair value of multiple  elements  included in an arrangement.  It is AcSEC's
intention to immediately  begin a project to consider whether guidance is needed
on any restrictions  that should be placed on what constitutes  evidence of fair
value and, if so, what the guidance should be. Because of the uncertainties with
respect  to the  outcome  of any  such  project,  the  impact  of the  SOP  upon
expiration of the one year deferral period is not currently determinable.
<PAGE>

                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 TCS has been treated as a discontinued  operation in accordance
with APB Opinion  Number 30 ("APB 30").  Pursuant to APB 30, the revenue,  costs
and expenses of TCS have been  excluded  from their  respective  captions in the
Company's  consolidated  statements  of  income  and the net  results  of  these
operations   have  been  reported   separately  as  "Income  from   discontinued
operations." Included in the results of the discontinued  operation is allocated
interest   expense  of  $1.5  million  and  $1.1  million  for  1996  and  1995,
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 and
$420,000 for 1996 and 1995,  respectively,  has been  included in the results of
the discontinued operations.

     TCS had  revenue  of $33.1  million  and $27.1  million  for 1996 and 1995,
respectively.


Note 3.       Revenue and Accounts Receivable

     Revenue resulting from contracts and subcontracts with federal,  state, and
local governments  accounted for 96.1%, 86.4% and 84.8% of consolidated  revenue
in 1997, 1996 and 1995,  respectively.  As the Company's primary customer is the
federal  government,  the Company has a concentration  of credit risk associated
with  its  accounts  receivable.  However,  the  Company  does not  believe  the
likelihood of loss arising from such  concentration is significant.  The Company
performs  ongoing  credit  evaluations  of its customers and generally  does not
require  collateral  from its customers.  The Company  maintains  allowances for
potential losses.
<TABLE>
<CAPTION>

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

                                                                                        December 31,
                                                                                ----------------------------
                                                                                  1997               1996
                                                                                  ----               ----
    <S>                                                                         <C>                 <C>
    Billed accounts receivable                                                  $48,207             $40,225
                                                                                 ------              ------

    Amounts billable upon acceptance by customer                                  3,236               5,165
    Amounts currently billable                                                    7,493               7,084
                                                                                 ------              ------

    Total unbilled accounts receivable                                           10,729              12,249
                                                                                 ------              ------

    Allowance for doubtful accounts                                                (964)               (925)
                                                                                 ------              ------
                                                                                $57,972             $51,549
                                                                                 ======              ======

</TABLE>

     The provision for doubtful accounts  receivable was $490,000,  $647,000 and
$103,000 for 1997, 1996 and 1995, respectively. Reductions to the allowance were
primarily due to write-offs of accounts receivable and other adjustments.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.  Debt Obligations

Senior Revolving Credit Facility

     At December 31, 1997, the Company has a $45 million Senior Revolving Credit
Facility (the  "Facility")  with a bank which expires on July 1, 2000 and has an
outstanding  balance  of  $39.9  million.  Borrowings  under  the  Facility  are
collateralized by certain assets of the Company (primarily  accounts  receivable
and inventory),  and the amount of the available borrowings  fluctuates based on
the  underlying   asset  borrowing  base  and  the  Company's   working  capital
requirements.  The  agreement  requires  payment  of a fee of .25% of the unused
portion of the  Facility.  The Facility  bears  interest at 1.0% over the bank's
base rate or 9.5% at December 31, 1997.  The weighted  average  interest rate on
the outstanding  borrowings  under the Facility was 9.44% for 1997 compared with
10.45% for 1996.  At December  31,  1997,  the Company  had  approximately  $5.1
million available under the Facility.

     The Facility has various covenants which may, among other things,  restrict
the  ability of the  Company  to merge with  another  entity,  sell or  transfer
certain  assets,  pay  dividends  and make other  distributions  beyond  certain
limitations.  The Facility also  requires the Company to meet certain  leverage,
net worth and tangible  capital goals, a fixed charge  coverage ratio as well as
certain  financial  results  related to  Enterworks.  At December 31, 1997,  the
Company was not compliant with certain  covenants  contained in the Facility and
the bank has waived such non-compliance.

     The  carrying  value  of  the  Facility  at  December  31,  1997  and  1996
approximates fair value.

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. C.  Porter,  the
Company's principal common shareholder.  The note had an interest rate per annum
of 11.875% from January 1, 1992 through  January 14, 1995, then increased to 14%
per annum from January 15, 1995 through  January 14, 1997,  and increased to 17%
thereafter.  Interest  was payable in  semi-annual  installments  on June 30 and
December 31 of each year. The note was  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 1997.

     In 1995 the Company issued additional Senior  Subordinated  Notes ("Notes")
to certain  shareholders.  The Notes are classified as either Series B or Series
C. Series B Notes,  which total $6.5 million at December 31, 1997 and 1996,  are
collateralized by fixed assets of the Company.  Series C Notes, which total $7.9
million at December  31,  1997 and 1996,  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%.  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, 1997, the prepayment  premium that would
be due upon a triggering event is $4,664,000.


Enterworks Subordinated Notes

     During 1996, the Company completed a private  financing whereby  $3,277,960
of 8% subordinated  debt of Enterworks was issued.  Investors  included  certain
members of the Board of Directors and management and certain shareholders of the
Company.  The  subordinated  debt has a five  year  maturity.  Interest  is paid
quarterly  on  January  1,  April 1,  July 1, and  October  1 of each  year.  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.
The amount  outstanding of this subordinated  debt was approximately  $2,557,000
and $2,414,000 at December 31, 1997 and 1996, respectively.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5.  Redeemable Preferred Stock

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%,  which  increased 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  redeemable  preferred  stock is senior to all other  present and future
equity of the  Company.  The Series A-1 is senior to the Series A-2. At December
31, 1997 and 1996 undeclared,  unpaid  dividends  relating to Series A-1 and A-2
redeemable preferred stock totaled $2,207,000 and $1,828,000,  respectively, and
have  been  accrued  and are  included  in the  Series  A-1  and A-2  redeemable
preferred  stock balances.  Mandatory  redemptions are required from excess cash
flows, as defined in the stock agreements.  Through December 31, 1997, 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 had a cumulative dividend rate per
annum equal to 11.125%,  which  increased 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,
1997  and  1996,  undeclared  and  unpaid  dividends  relating  to the  Class  B
redeemable preferred stock totaled $4,535,000 and $3,587,000,  respectively, and
have been  accrued and are included in the Class B  redeemable  preferred  stock
balance.  Redemption  of the  stock  may  occur  after  payment  in  full of the
principal and interest amount due on the Notes, and the redemption of the Series
A-1 and A-2 redeemable preferred stock.  Mandatory redemptions are required from
excess cash flows,  as defined in the stock  agreements.  Through  December  31,
1997, 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 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, 1997 and 1996 was $1,406,000
and $1,270,000, respectively.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Note 6.  Stockholders' Investment and Employee Benefit Plans

Common Stock

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

Stock Warrants

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

     In 1994, Mr. John R. C. Porter deposited $3 million with the Company's bank
to provide the Company with increased  borrowing  capability  under its Facility
(see Note 5). In  exchange,  Mr.  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 Mr.  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

     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 1991. In 1993,
stock option plan agreements were reached with certain  employees.  In 1996, the
Board of Directors approved and the shareholders  ratified the 1996 Stock Option
Plan ("1996 Stock Option Plan").

     The Company also approved an Enterworks stock option plan ("1996 Enterworks
Option  Plan")  during 1996.  The Company  generally  grants  options  under its
respective plans at the estimated fair value at the date of grant. Fair value is
determined by management and approved by the Company's Board of Directors and is
generally based on third party  appraisals and  information  with respect to the
business operations.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1990 Stock Option Plan

     Under the terms of the 1990  Stock  Option  Plan,  2,168,215  shares of the
Company's  Class A common stock are available for issuance  under options to key
employees, including officers and directors. The option price of $1.42 per share
was not less than the fair market value at the date of the grant and the options
are generally exercisable over a four year period.  Additional information as to
these options is as follows:
<TABLE>
<CAPTION>
                                                                     Stock Option Activity
                                                          ----------------------------------------------
                                                           Numbers of Shares            Weighted Average
                                                               (000's)                   Exercise Price
                                                           -----------------             --------------
<S>                                                             <C>                        <C>
Outstanding at December 31, 1994                                626                        $1.42

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

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

    Granted                                                      --                           --
    Exercised                                                    --                           --
    Canceled                                                    (55)                        1.42
                                                                ---                         ----
Outstanding at December 31, 1997                                530                        $1.42
                                                                ===                         ====
</TABLE>

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 at the
date of grant. Vesting of the stock options for key employees is based both upon
the passage of time and certain key events occurring including an initial public
offering or a change in control.  Vesting for options  granted to  employees  is
based upon the passage of time,  generally four years.  The stock options may be
exercised over a ten year period subject to the vesting requirements.

     Additional information as to these options follows:
<TABLE>
<CAPTION>
                                                                      Stock Option Activity
                                                          --------------------------------------------
                                                          Number of Shares            Weighted Average
                                                              (000's)                  Exercise Price
                                                          ----------------          ----------------
<S>                                                           <C>                          <C>
Outstanding at December 31, 1995                                 --                           --

    Granted                                                   3,897                        $0.95
    Exercised                                                    --                           --
    Canceled                                                    (29)                        0.97
                                                              ------                        ----
Outstanding at December 31, 1996                              3,868                         0.95

    Granted                                                   1,425                         1.01
    Exercised                                                    --                           --
    Canceled                                                   (286)                        0.97
                                                               ----                         ----
Outstanding at December 31, 1997                              5,007                        $0.97
                                                              =====                         ====
</TABLE>

Other Option Plans

     In 1993,  stock  option plan  agreements  were  reached to provide Mr. John
Wood, CEO and President, and Mr. Joseph Beninati,  former Chairman, with options
to each purchase up to 700,459 shares of the Company's Class A common stock from
the  Company  at $0.50 per  share.  Under the terms of the  agreements,  350,230
shares vested  immediately and the remainder vested ratably over the next twelve
months. The Company recorded compensation expense related to these options based
upon the  difference  between the exercise price and the estimated fair value of
$0.82 per share at the  measurement  date of the stock  option.  Mr.  Beninati's
agreement was canceled in 1996 and the shares now available will be administered
under the same terms as the 1996 Stock Option Plan.  John Wood has the option to
cancel the 1993 stock  options  discussed  above and receive an equal  number of
options  under  the  1996  Plan  at  an  exercise  price  of  $.95  per  share.

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

Additionally,  the effect on the 1996 Stock  Option Plan as of December 31, 1997
would be to  increase the number of shares  outstanding  to  5,707,000  with a
weighted average exercise price of $0.96 per share.

1996 Enterworks Option Plan

     In 1996,  Enterworks  implemented  a stock  option plan that allows for the
award of up to  5,000,000  shares of common  stock at an  exercise  price of not
lower than fair market value at the date of grant.  Vesting of the stock options
for key  employees is based both upon the passage of time and certain key events
occurring  including an initial public offering or a change in control.  Vesting
for options  granted to employees  is based upon the passage of time,  generally
four years. The stock options may be exercised over a ten year period subject to
the vesting requirements. Additional information as to these options follows:

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

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

    Granted                                                     691                           0.77
    Exercised                                                  (163)                          0.12
    Canceled                                                   (362)                          0.29
                                                              -----                           ----
Outstanding at December 31, 1997                              2,895                          $0.35
                                                              =====                           ====

</TABLE>

     The following table summarizes  information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>

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

                                                            Weighted
                                                            Average        Weighted                     Weighted
                           Range of          Number         Remaining       Average         Number      Average
                           Exercise       Outstanding      Contractual     Exercise      Exercisable    Exercise
                            Prices          (000's)       Life in Years     Price          (000's)       Price
                           --------         -------       -------------     -----          -------       -----
<S>                     <C>                  <C>            <C>             <C>            <C>           <C>
1990 Stock
  Option Plan                $1.42             530          2.5 years       $1.42            530         $1.42
                        =============        =====          =========       =====            ===         =====

1996 Stock
  Option Plan           $0.95 - $1.01        5,007          8.6 years       $0.97          1,436         $0.96
                        =============        =====          =========       =====          =====         =====

1996 Enterworks
   Option Plan               $0.12           1,865          8.5 years       $0.12            590         $0.12
                              0.77           1,030          9.3 years        0.77            149          0.77
                        -------------        -----          ---------       -----            ---         -----
                        $0.12 - $0.77        2,895          8.8 years       $0.35            739         $0.25
                        =============        =====          =========       =====            ===         =====
</TABLE>

     The  weighted-average  fair value of options  granted  under the 1996 Stock
Option  Plan and the 1996  Enterworks  Option Plan was $0.28 per share and $0.22
per share in 1997 and $0.31 per share and $0.04 per share in 1996, respectively.
Had the  Company  determined  compensation  cost  consistent  with SFAS No.  123
methodology,  net income would have been  $1,000,000  and $2,100,000 in 1997 and
1996,  respectively.  Significant assumptions used in determining the fair value
of each option grant at the date of grant were as follows:
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                      1996 Stock                      1996 Enterworks
                                                     Option Plan                       Option Plan
                                                ---------------------            --------------------

                                                1997             1996              1997            1996
                                                ----             ----              ----            ----
<S>                                             <C>              <C>               <C>             <C>
Expected dividend yield                         0.0%             0.0%              0.0%            0.0%
Expected stock price volatility                 0.0%             0.0%              0.0%            0.0%
Risk free interest rate                         6.28%            6.66%             6.10%           6.73%
Expected life of options                        5.5 years        6.0 years         5.7 years       6.0 years
</TABLE>

     Because  the pro forma  disclosures  under SFAS No. 123 only apply to stock
options  granted in or after 1995, pro forma net income for 1996 and 1997 is not
necessarily indicative of future periods.

Telos Shared Savings Plan

     The Company  sponsors a defined  contribution  employee  savings  plan (the
"Plan")  under which  substantially  all  full-time  employees  are  eligible to
participate. The Company matches one-half of voluntary participant contributions
to the  Plan  up to a  maximum  Company  contribution  of 3% of a  participant's
salary.  Total Company  contributions  to this Plan for 1997, 1996 and 1995 were
$1,335,000, $1,679,000 and $2,397,000, respectively.

Note 7.  Income Taxes

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

                                                                     For The Year Ended December 31,
                                                            ---------------------------------------------
                                                              1997               1996                1995
                                                              ----               ----                ----
<S>                                                        <C>                <C>                   <C>
Current provision (benefit)
     Federal                                               $   --             $  (421)              $  --
     State                                                    387                  --                  75
                                                            -----               -----                 ---

        Total current                                         387                (421)                 75
                                                            -----               -----                 ---

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

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

        Total (benefit) provision                         $(1,332)            $(5,739)               $ 75
                                                            =====               =====                 ===
</TABLE>

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

                                                                    For the Year Ended December 31,
                                                         ------------------------------------------------
                                                            1997                  1996              1995
                                                            ----                  ----              ----
<S>                                                     <C>                      <C>               <C>
Computed expected income tax
     provision (benefit)                                    34.0%                (34.0)%             34.0%
Goodwill amortization                                      379.6                   2.2               99.4
State income taxes, net of
     federal income tax benefit                              5.9                  (5.9)               5.9
Change in valuation allowance
     for deferred tax assets                            (2,214.0)                  0.2             (136.2)
Meals and entertainment                                    111.8                    --                 --
Other                                                       17.2                   0.6                8.1
                                                         -------                  ----              -----
                                                        (1,665.5)%               (36.9)%             11.2%
                                                         =======                  ====              =====
</TABLE>
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                -----------------------------
                                                                                   1997                1996
                                                                                   ----                ----
<S>                                                                               <C>                 <C>
      Accounts receivable, principally due
        to allowance for doubtful accounts                                        $  201              $  195
      Allowance for inventory obsolescence and
        amortization                                                               1,728               1,091
      Accrued liabilities not currently
        deductible                                                                   999               1,326
      Accrued compensation                                                         2,190               1,425
      Deferred office rent and accrued
        sublease liabilities                                                          25                 633
      Property and equipment, principally due
        to differences in depreciation methods                                     1,165               1,655
      Net operating loss carryforwards                                             3,140               2,272
      Alternative minimum tax credit carryforward                                    703                 573
                                                                                  ------               -----
            Total gross deferred tax assets                                       10,151               9,170
            Less valuation allowance                                              (2,974)             (4,702)
                                                                                  ------               -----
            Net deferred tax assets                                                7,177               4,468
                                                                                  ------               -----

Deferred tax liabilities:
      Unbilled accounts receivable, deferred for tax purposes                       (800)               (747)
      Software development costs                                                  (1,360)               (610)
                                                                                  ------               -----
            Total deferred tax liabilities                                        (2,160)             (1,357)
                                                                                  ------               -----
            Net deferred tax assets                                              $ 5,017              $3,111
                                                                                  ======               =====
</TABLE>

     The net change in the valuation  allowance was a decrease of $1,728,000 and
$3,453,000 for 1997 and 1996,  respectively.  The decreases resulted principally
from changes in judgments  with respect to  realizability  of net operating loss
carryforwards  due to specific  transactions  which give rise to future  taxable
income.  Included in the change in the  valuation  allowance  were  decreases of
approximately $187,000 and $926,000 for 1997 and 1996, 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  (California)  acquisition  reduce  goodwill.  The  total tax
benefits of future deductible temporary  differences acquired in connection with
the Telos  Corporation  (California)  acquisition were $6,097,000 at January 14,
1992. As of December 31, 1997,  $437,000 of tax benefits remain and are expected
to reverse in future years.

     At December 31, 1997, for federal income tax purposes,  the Company had net
operating loss  carryforwards  of approximately  $7,863,000  available to offset
future regular taxable income.  These net operating loss carryforwards expire in
2010 through  2013.  Additionally,  $5,313,000  of  alternative  minimum tax net
operating loss carryforwards are available to offset future alternative  minimum
taxable income.  These alternative  minimum tax net operating loss carryforwards
also  expire  from 2010 to 2013.  In  addition,  the  Company  has  $703,000  of
alternative minimum tax credits available to be carried forward  indefinitely to
reduce future regular tax liabilities.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 8.        Commitments and Contingencies

Leases

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

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

     The  following  is a schedule  by years of future  minimum  payments  under
capital leases together with the present value of the net minimum lease payments
as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>

                                                    Property       Equipment         Total
                                                    --------       ---------         -----
         <S>                                         <C>              <C>          <C>
         1998                                        $1,447           $197         $ 1,644
         1999                                         1,447            132           1,579
         2000                                         1,447             99           1,546
         2001                                         1,447             44           1,491
         2002                                         1,447             --           1,447
         Remainder                                   19,102             --          19,102
                                                     ------            ---          ------

         Total minimum obligations                   26,337            472          26,809
         Less amounts representing interest         (14,182)          (112)        (14,294)
                                                     ------            ---          ------

         Net present value of
           minimum obligations                       12,155            360          12,515
         Less current portion                          (248)          (182)           (430)
                                                     ------            ---          ------

         Long term capital lease
           obligations at December 31, 1997         $11,907           $178         $12,085
                                                     ======            ===          ======
</TABLE>

    Accumulated amortization for property and equipment under capital leases at
December 31, 1997 and 1996 is $1,196,000 and $397,000, respectively.

     Future minimum lease payments for all  non-cancelable  operating  leases at
December 31, 1997 are as follows (in thousands):
<TABLE>
         <S>                                         <C>
         1998                                        $2,747
         1999                                         1,927
         2000                                         1,215
         2001                                           496
         2002                                           254
         Remainder                                    1,128
                                                      -----

         Total minimum lease payments                 7,767
         Less total minimum
             sublease rentals                           (66)
                                                      -----
         Net minimum lease payments                  $7,701
                                                      =====
</TABLE>
     Net rent expense  charged to operations  for 1997,  1996,  and 1995 totaled
$2,545,000, $4,556,000, and $4,119,000, respectively.
<PAGE>

                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal

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

Note 9.  Related Parties

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

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

     Mr. Byers, a Director of the Company,  has a consulting  agreement with the
Company  to  help  the  Company   expand  its  business   operations   into  the
international  marketplace.  Under this agreement Mr. Byers  receives  $10,500 a
month  for his  services.  Mr.  Byers was  compensated  $130,000,  $128,000  and
$121,500 for 1997, 1996 and 1995, respectively.

Note 10. Business Segments

     The Company has two reportable  segments:  Systems and Support Services and
Systems  Integration.  The Company's Systems and Support Services Group provides
software  development and support  services for software and hardware  including
technology insertion,  system redesign and software re-engineering.  The Systems
Integration  Group delivers  information  security,  enterprise  integration and
networking  infrastructure  solutions to its customers.  These solutions include
providing  commercial  hardware,  software  and services to its  customers.  The
Systems Integration Group is capable of staging,  installing and deploying large
network  infrastructures  with  virtually no disruption  to  customers'  ongoing
operations.

     The Company  has  excluded  TCS amounts  from the  operating  revenues  and
operating  income  (loss)  segment  disclosures  as this  business  was  sold in
December  1996 and has been  treated  as a  disposal  of a segment of a business
under APB 30 (Note 2).
<PAGE>

                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Selected  financial  information  for the  Company's  business  segments is
presented below (in thousands):
<TABLE>
<CAPTION>
                                                                  For the Year Ended December 31,
                                                         1997                  1996                 1995
                                                      ----------------------------------------------------
<S>                                                    <C>                   <C>                  <C>
Operating Revenues(1)
      Systems and Support Services                     $124,450              $103,675             $105,801
      Systems Integration                               129,337                85,220               69,958
                                                        -------               -------              -------
      Total Revenues                                   $253,787              $ 188,895            $175,759
                                                        =======               ========             =======

Operating Income (Loss)
      Systems and Support Services                     $  3,435              $ (4,081)            $  1,955
      Systems Integration                                 3,976                (5,361)               3,070
                                                        ------                -------              -------
Total Operating Income (Loss)                          $  7,411              $ (9,442)            $  5,025
                                                        =======               =======              =======

Identifiable Assets (2)
      Systems and Support Services                     $ 62,208              $ 58,259             $ 47,436
      Systems Integration                                24,323                27,885               27,282
      Corporate (3)                                      23,187                23,920                7,665
                                                        -------               -------              -------
      Total Consolidated Assets                        $109,718              $110,064             $ 82,383
                                                        =======               =======              =======

Depreciation and Amortization (4)
      Systems and Support Services                     $  1,791              $  1,919             $  2,531
      Systems Integration                                   929                   949                1,885
      Corporate                                           2,270                 1,126                  853
                                                        -------               -------              -------
      Total Depreciation
        and Amortization                               $  4,990              $  3,994             $  5,269
                                                        =======               =======              =======

Capital Expenditures (5)
      Systems and Support Services                         $810              $    704             $    294
      Systems Integration                                   688                 1,087                  311
      Corporate                                           1,091                   656                  348
                                                        -------               -------              -------
      Total Capital Expenditures                       $  2,589              $  2,447             $    953
                                                        =======               =======              =======

(1)  Revenues between segments are not material.

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

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

(4)  Depreciation and amortization includes amounts relating to property and equipment, goodwill, deferred software costs and
     spare parts inventory.   The  depreciation   and  amortization   disclosure  above  is  net  of  TCS depreciation  and
     amortization  of  $482 and  $478  for  1996  and  1995, respectively.

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

                       TELOS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 11.   Subsequent Event

     On February 28, 1998, the Company sold  substantially all of the net assets
of one of its groups,  Telos Information Systems, to NYMA, Inc., a subsidiary
of Federal Data Corporation of Bethesda, Maryland, for approximately $15 million
in cash.  The sale price is subject to an adjustment  to be finalized  within 60
days from the date of closing.  Based on the $15  million  purchase  price,  the
Company will record a gain, net of applicable  income taxes, of approximately $4
million in the first quarter of 1998.

     The  purchase  price is subject to  increase  or  decrease  on a dollar for
dollar basis by the amount by which the net tangible  assets,  as defined in the
asset purchase  agreement  dated  February 20, 1998,  deviate from $3.3 million,
however, the total purchase price must not exceed $15 million. All proceeds from
the sale will be used to pay down amounts outstanding under the Facility.
<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 73) 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 34) was elected  President  and Chief  Executive  Officer on
February 16, 1994. Mr. Wood was appointed Chief Operating  Officer on October 8,
1993 after serving as Executive  Vice President from May of 1992. He was elected
to the Board of  Directors  on May 13,  1992.  Mr.  Wood  joined the  Company on
February  13,  1992.  Prior to joining  the  Company,  Mr. Wood was a founder of
Beninati & Wood, Inc., an investment banking firm which had provided services to
the Company.

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

     Dr.  Stephen Bryen (55) was elected to the Company's  Board of Directors on
January 31,  1994.  He  currently  serves as a Director in  Jefferson  Partners,
L.L.C., a strategic management consulting and merchant banking firm with offices
in  Washington,  D.C. and New York. Dr. Bryen  currently  serves on the board of
C-MAC  Industries in  Mechanicsburgh,  Pennsylvania  and is the senior technical
advisor to  Hollinger  Digital  Corporation  in New York.  From 1981 to 1988 Dr.
Bryen served as the Deputy Under  Secretary of Defense for Trade Security Policy
and as the Director of the Defense Technology Security Administration,  which he
founded.

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

     Mr.  Byers (age 51) was  elected to the Board of  Directors  on January 31,
1994. He has been  president of Byers  Consulting,  a Fairfax  County,  Virginia
international   business  consulting  firm  since  July 1996.  Before  that
appointment, he had served as the President of International Strategies Limited,
another  local  international  business  consulting  firm.  From 1968  until his
retirement  in 1989,  Mr.  Byers  served in a variety of  operational  and staff
positions in the United States Air Force.

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

     Mr.  Aldrich  (age  38)  joined  the  Company  in  September  1996  as Vice
President,  Corporate Development and Strategy. Prior to joining the Company, he
was a partner in the Financial  Advisory  Services Group - Corporate  Finance at
Coopers & Lybrand L.L.P.  Prior to joining Coopers & Lybrand L.L.P. in 1991, Mr.
Aldrich was Senior Vice  President at Dean Witter  Capital  Corp.,  the merchant
banking arm of Dean Witter Reynolds, Inc.

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

     Mr.  Brownley (age 41) 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 48) 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.
<PAGE>

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

 Mr.  Hester (age 45) joined  Telos in 1979 and was  appointed  as Executive
Vice President and Chief  Operating  Officer in 1998. He is responsible  for all
business  operation  activities  at Telos.  Previously  he has held  progressive
positions with Telos as President of Telos Systems Solutions, President of Telos
Field  Engineering,  Regional  Manager  of  Operations  and  Vice  President  of
Marketing.  Mr. Hester received  extensive training from IBM Corporation after a
successful military commitment of nearly eight years.

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

     Mr. Lewis (age 36) has served as the President of  Enterworks,  Inc.  since
its  inception  in  1996.  Mr.  Lewis'  prior  experience  has been  with  Telos
Corporation.  From 1991 to 1995,  he was  Director,  Business  Development  with
responsibility for major customer development and technology integration.

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

     Mr. Marino (age 61) joined the Company in 1988 as Senior Vice  President of
Sales and  Marketing.  In 1990,  his  responsibilities  were expanded to include
Program  Management in addition to Sales and Marketing.  On January 1, 1994, Mr.
Marino was appointed to President of Telos Systems  Integration,  and on January
1, 1998, he was appointed to his current position.  Prior to joining the Company
in February  1988,  Mr. Marino held the position of 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 40) was appointed Chief Financial Officer of the Company in
1993 and Treasurer in 1994.  He joined Telos  Corporation  (California)  in 1989
where he was  responsible for all financial and regulatory  functions.  Prior to
joining Telos  Corporation,  Mr.  Tellez served as a Senior  Manager with Arthur
Andersen & Company.

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

Item. 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, 1997,
1996, and 1995, of the Chief  Executive  Officer and four other most highly paid
executive officers during 1997.

<TABLE>
<CAPTION>


                                                       SUMMARY COMPENSATION TABLE


                                                                                          Long-Term Compensation (3)
                                                         Annual Compensation                Awards         Payouts
                                                         -------------------                ------         -------
Name                                                                            Other                        All
and                                                                            Annual                       Other
Principal                                                                      Compen-      Options/       Compen-
Position                               Year        Salary        Bonus(1)      sation(2)   SARs(#)(4)     sation (5)
--------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>           <C>            <C>         <C>              <C>
John B. Wood                           1997       $299,298      $492,000       $32,000            --        $4,750
(President, Chief                      1996        291,921            --        23,000     2,017,531         4,750
Executive Officer)                     1995        234,990       325,000        24,000            --         7,029

Mark W. Hester                         1997        174,990       275,000         6,000       150,000         3,525
(Executive V. P. and                   1996        184,607        80,000         6,000       185,000         2,850
  Chief Operating Officer)             1995        181,695        40,000         6,000            --         4,992

Lorenzo Tellez                         1997        195,000       195,000        24,000       150,000         4,750
(V.P., Treasurer, Chief                1996        188,269       145,000        15,000       465,000         4,750
  Financial Officer)                   1995        166,624        50,000         6,000            --         6,846

David S. Aldrich                       1997        150,010       195,000         6,000       300,000            --
(V.P., Corporate Development           1996         45,580            --            --       200,000            --
  and Strategy)

Gerald D. Calhoun                      1997        157,997       120,000         6,000        50,000         4,750
(V.P., Human Resources,                1996        165,970        85,000         6,000       130,000            --
 & Secretary)                          1995        143,943        40,000         6,000            --         4,603


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

                                      Number of       % of                                 Potential Realizable
                                     Securities       Total                                  Value at Assumed
                                     Underlying     Options/     Exercise                  Rates of Stock Price
  Name and Principal                Options/SARS      SARS        or Base    Expiration      Appreciation for
      Position                         Granted       Granted       Price        Date            Option Term
  ---------------------------------------------------------------------------------------------------------------
                                                                                              5%        10%
                                                                                              --        ---
<S>                                     <C>         <C>         <C>      <C>                <C>        <C>
John B. Wood
(President, Chief Executive
  Officer) --                                --        --          --               --           --          --


Mark W. Hester
(Executive V.P. and Chief
 Operating Officer)
                                        150,000      10.5%      $1.01    February 2007      $95,278    $241,452

Lorenzo Tellez
(V.P., Treasurer, Chief
  Financial Officer)
                                        150,000      10.5        1.01    February 2007       95,278     241,452

David S. Aldrich
(V.P., Corporate Development
  Strategy)
                                        300,000      21.0        1.01    February 2007      190,555     482,904

Gerald D. Calhoun
(V.P., Human Resources,
 & Secretary)
                                         50,000       3.5        1.01    February 2007       31,759      80,484
</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, 1997.
<TABLE>
<CAPTION>

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

                                                                     Number of
                                                                     Securities             Value of
                                                                     Underlying             Unexercised
                                                                     Unexercised            In-the-Money
                                                                     Options/SARs           Options/SARs
                                                                     at FY-End              at FY-End (1)(2)

                               Shares Acquired      Value            Exercisable/           Exercisable/
Name                             on Exercise      Realized          Unexercisable          Unexercisable
---------------------------------------------------------------------------------------------------------
<S>                                   <C>              <C>      <C>                       <C>
John B. Wood                          --               --       1,305,718/1,412,272       $481,433/191,733
(President, Chief Executive
 Officer)

Mark W. Hester                        --               --            85,500/249,500          14,025/35,725
(Executive V.P. and Chief
 Operating Officer)

Lorenzo Tellez                        --               --           169,500/445,500          28,875/70,375
(V.P., Treasurer,
  Chief Financial Officer)

David S. Aldrich                      --               --           120,000/380,000         42,600/105,400
(V.P. Corporate Development
  & Strategy)

Gerald D. Calhoun                     --               --           118,900/131,000          10,050/24,450
(V.P. Human Resources,
  and Secretary)

(1)   Based on an estimated fair market value of the Company's Class A common stock of $1.07 per share at December 31, 1997.
(2)   Based on an estimated fair market value of Enterworks common stock of $0.77 per share at December 31, 1997.
</TABLE>

Compensation of Directors

     During the fiscal year ended  December 31, 1997,  employee  directors  were
paid a fee of $2,000 for each Board  meeting  attended.  Outside  directors  Mr.
Byers and Dr. Bryen were paid an annual fee of $25,000,  and further compensated
at a rate of $750 for each meeting in excess of four  meetings a year.  Chairman
of the Board, Dr. Ikle, is paid $25,000  quarterly for his service on the Board.
In  addition,  Mr.  Byers  receives  $5,000  per annum for his  service as Proxy
Chairman.  The compensation  paid to the outside directors is paid pursuant to a
proxy agreement between the Company, the Defense Security Service and certain of
the Company  shareholders.  During the fiscal year ended  December 31, 1997,  no
directors of the Company were awarded options.

Employment Contracts

     As of December 31, 1997, the Company was a party to agreements with certain
of its executive officers.  Mr. David S. Aldrich, V.P. Corporate Development and
Strategy,  Mr. William L. P. Brownley,  V.P. and General Counsel,  Mr. Gerald D.
Calhoun, V.P. Human Resources and Secretary,  Mr. Mark W. Hester, Executive V.P.
and Chief  Operating  Officer,  Mr. Robert J. Marino,  Executive  V.P. and Chief
Marketing and Sales  Officer,  Mr.  Lorenzo  Tellez,  Chief  Financial  Officer,
Treasurer and V.P. and Mr. John B. Wood, Director, President and Chief Executive
Officer,  have  agreements  with the Company  which provide for a payment of two
years  base  salary  then in effect if  involuntarily  terminated.  Accordingly,
Mssrs.  Aldrich,  Brownley,  Calhoun,  Hester,  Marino,  Tellez  and Wood  would
receive,  given their  present  salary  levels,  $150,000,  $150,000,  $158,000,
$175,000,  $195,000, $195,000 and $300,000,  respectively for a two year period.
In  addition,  these  agreements  provide  for  bonus  payments  should  certain
operating  results  be  attained.  Each  year  the  Company  renegotiates  these
employment contracts as part of the yearly review process. Accordingly, in 1998,
the Company expects to review the contracts described above.
<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, 1998              Class
          --------------                -------------------             -----------------------         ----------
   <S>                              <C>                                     <C>                           <C>

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

   Class A Common Stock             Telos Shared Savings Plan                3,658,536 shares             15.85%
                                    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             David S. Aldrich                            98,392 shares (C)          0.43%
   Class A Common Stock             Gerald A. Calhoun                          133,293 shares (C)          0.58%
   Class A Common Stock             Mark W. Hester                             160,778 shares (C)          0.70%
   Class A Common Stock             Lorenzo Tellez                             317,440 shares (C)          1.38%
   Class A Common Stock             John B. Wood                             1,296,650 shares (C)          5.62%
   Class A Common Stock
   All Officers and Directors As A Group (8 persons)                         2,458,403 shares (D)         10.65%


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

                                    Fisher Ewing Partners
                                    2200 Ross Avenue, Ste 4660
                                    Dallas, TX  75201

   12% Cumulative Exchangeable      Wynnefield Partners/Small Value Cap        215,000 shares              5.98%
   Redeemable Preferred Stock       One Penn Plaza, Suite 4720
                                    New York, NY  10119


(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.  Aldrich,  Calhoun,  Hester, Tellez and Wood hold options to acquire 90,000, 114,900, 90,000, 165,000 and 1,288,000
    shares of the  Company's  Class A Common Stock,  respectively,  in  addition  to their current common stock holdings.
    These shares are  purchasable  upon exercise of warrant and are exercisable within 60 days of March 1, 1998.

(D) Under the  Company's  stock  option plans and certain  stocks option agreements,  all  officers  and  directors  as a group
    hold  options to acquire 2,071,218 shares of Class A Common Stock exercisable within 60 days after March 1, 1998.

(E) Value Partners Ltd. and Fisher Ewing Partners have filed jointly a Schedule 13D under which they  disclosed  that they may
    act as a "group" within the  meaning  of  Section  13(d) of the  Securities  Exchange  Act.  Each of the reporting  persons
    disclosed  that it may be  deemed  to  beneficially  own the aggregate of 714,317 shares of the Public  Preferred Stock
    held of record by the reporting persons collectively.
</TABLE>
<PAGE>

Item 13.      Certain Relationships and Related Transactions

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

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

     Mr. Byers, a Director of the Company,  has a consulting  agreement with the
Company  to  help  the  Company   expand  its  business   operations   into  the
international  marketplace.  Under this agreement Mr. Byers  receives  $10,500 a
month  for his  services.  Mr.  Byers was  compensated  $130,000,  $128,000  and
$121,500 for 1997, 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 a copy of other exhibits upon
payment  of $.20  per page to cover  the  expense  of  furnishing  such  copies.
Requests  should be directed to the  attention  of Investor  Relations  at Telos
Corporation, 19886 Ashburn Road, Ashburn, Virginia 20147-2358.

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

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

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

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

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

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

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

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

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

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

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

      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  Agreemen
                     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 d
                     an Restated Promissory Note
<PAGE>

     10.77           Enterworks, Inc. 1996 Stock Option Plan

     10.78           Form of Series A Senior Subordinated Unsecured Note

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

     10.80           Asset Purchase Agreement

     10.81           Amendment No. 1 to Asset Purchase Agreement

     10.82           Asset Purchase Agreement

     10.83           Interim 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 31, 1998

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 31, 1998
Fred Charles Ikle          Board of Directors



/s/  John B. Wood
----------------------     President, Chief Executive
John B. Wood               Officer & Director                March 31, 1998
                           (Principal Executive Officer)



/s/  Stephen D. Bryen
----------------------     Director                          March 31, 1998
Stephen D. Bryen




/s/  Norman P. Byers
----------------------     Director                          March 31, 1998
 Norman P. Byers




/s/  Lorenzo Tellez
----------------------     Chief Financial Officer           March 31, 1998
Lorenzo Tellez             (Principal Financial Officer
                           & Principal Accounting Officer)

<PAGE>