<PAGE>




                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


             [ X] Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

               For the quarterly period ended: September 30, 2000

             [ ] Transition Report Pursuant to Section 13 or 15(d)
                     of 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                                 20147-2358
(Address of principal executive offices)                              (Zip Code)


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


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

As of November 10, 2000, the registrant had 21,241,980  shares of Class A Common
Stock, no par value, and 4,037,628 shares of Class B Common Stock, no par value;
and 3,185,586 shares of 12% Cumulative  Exchangeable  Redeemable Preferred Stock
par value $.01 per share, outstanding.

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

Number of pages in this report (excluding exhibits): 20
                                                     --



<PAGE>





                                        TELOS CORPORATION AND SUBSIDIARIES

                                                      INDEX




                                           PART I.   FINANCIAL INFORMATION
                                           ------    ---------------------

<TABLE>
<CAPTION>

<S>                                                                                                        <C>
Item 1.        Financial Statements:

     Condensed Consolidated Statements of Operations for the
         Three and Nine Months Ended September 30, 2000 and 1999 (unaudited)...................................5

     Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited)
         and December 31, 1999 ................................................................................6

     Condensed Consolidated Statements of Cash Flows for the
         Nine Months Ended September 30, 2000 and 1999  (unaudited) ...........................................7

     Notes to Condensed Consolidated Financial Statements (unaudited).......................................8-13

Item 2.        Management's Discussion and Analysis of Financial
               Condition and Results of Operations.........................................................14-18

Item 3.        Quantitative and Qualitative Disclosures about Market Risk.....................................18



                                          PART II.   OTHER INFORMATION
                                          -------    -----------------


Item 1.        Legal Proceedings............................................................................. 19

Item 3.        Defaults Upon Senior Securities................................................................19

Item 4.        Submission of Matters to a Vote of Security Holders............................................19

Item 6.        Exhibits and Reports on Form 8-K...............................................................19

SIGNATURES....................................................................................................20

</TABLE>



<PAGE>
<TABLE>
<CAPTION>
                                                              PART I - FINANCIAL INFORMATION

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



                                                         Three Months Ended                 Nine Months Ended
                                                           September 30,                       September 30,
                                                         -----------------                   ----------------
                                                         2000           1999                2000          1999
                                                         ----           ----                ----          ----
<S>                                                    <C>           <C>                 <C>          <C>
Sales

    Systems and Support Services                       $13,384       $ 22,012            $34,278      $ 65,414
    Products                                            17,829         18,893             47,126        66,872
    Xacta                                                3,661          1,204              9,475         4,594
                                                        ------         ------             ------     ---------
                                                        34,874         42,109             90,879       136,880


Costs and expenses

    Cost of sales                                       30,694         36,813             78,631       117,407
    Selling, general and
     administrative expenses                             4,189          3,857             12,636        12,311
    Goodwill amortization                                   71            133                250           397
                                                        ------         ------             ------       -------

    Operating (loss) income                                (80)         1,306               (638)        6,765


Other income (expenses)

    Gain on sale of assets                                  --          4,731                 --         4,731
    Equity in net losses of Enterworks                      --         (4,407)                --       (13,575)
    Equity in earnings of Telos OK                         321             --              2,328            --
    Other income                                             4              7                 42            60
    Interest expense                                    (1,151)        (1,437)            (3,514)       (4,456)
                                                        -------        -------            -------      --------

(Loss)income before taxes                               (  906)           200             (1,782)       (6,475)
Income tax (provision) benefit                          (1,355)          (572)            (1,172)          976
                                                        -------         ------            -------       ------

Net loss                                              $ (2,261)      $   (372)          $ (2,954)     $ (5,499)
                                                        =======         ======            =======       =======

</TABLE>























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


<PAGE>
<TABLE>
<CAPTION>


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

                                                                   September 30, 2000            December 31, 1999
                                                                   ------------------            -----------------
<S>                                                                       <C>                       <C>
Current assets
    Cash and cash equivalents (includes restricted
     cash of $54 at September 30, 2000 and
         December 31, 1999)                                               $   399                   $    315
    Accounts receivable, net                                               28,527                     27,030
    Inventories, net                                                        5,483                      4,779
    Deferred income taxes                                                   2,537                      4,802
    Other current assets                                                      199                         83
                                                                            -----                      -----
       Total current assets                                                37,145                     37,009

Property and equipment, net of
    accumulated depreciation of
    $8,934 and $23,093, respectively                                       12,416                     12,236
Deferred income taxes, long term                                            4,210                      2,930
Goodwill, net                                                               2,811                      4,284
Investment in Enterworks                                                       --                         --
Investment in Telos OK                                                         --                         --
Other assets                                                                  538                        427
                                                                           ------                     ------
                                                                         $ 57,120                   $ 56,886
                                                                           ======                     ======

                                                    LIABILITIES AND STOCKHOLDERS' INVESTMENT

Current liabilities
     Accounts payable                                                    $ 12,354                    $13,792
     Other current liabilities                                              2,632                      3,421
     Unearned revenue                                                       6,035                      5,183
     Senior credit facility                                                17,388                         --
     Senior subordinated notes                                              8,537                         --
     Accrued compensation and benefits                                      5,437                      7,645
                                                                           ------                     ------
       Total current liabilities                                           52,383                     30,041

Senior credit facility                                                         --                     16,508
Senior subordinated notes                                                      --                      8,537
Capital lease obligations                                                  11,108                     11,362
                                                                           ------                    -------
       Total liabilities                                                   63,491                     66,448
                                                                           ------                     ------

Redeemable preferred stock
     Senior redeemable preferred stock                                      6,373                      6,054
     Redeemable preferred stock                                            40,041                     36,975
                                                                           ------                     ------
       Total preferred stock                                               46,414                     43,029
                                                                           ------                     ------

Stockholders' investment
     Common stock                                                              78                         78
     Capital in excess of par                                               5,135                         --
     Retained deficit                                                     (57,998)                   (52,669)
                                                                          --------                    ------
       Total stockholders' investment (deficit)                           (52,785)                   (52,591)
                                                                          --------                    ------
                                                                         $ 57,120                   $ 56,886
                                                                           ======                     ======

</TABLE>



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


<PAGE>
<TABLE>
<CAPTION>

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


                                                                                             Nine Months
                                                                                         Ended September 30,
                                                                                         -------------------
                                                                                         2000              1999
                                                                                         ----              ----
<S>                                                                                    <C>              <C>
Operating activities:
     Net loss                                                                          $(2,954)         $(5,499)
       Adjustments to reconcile net loss to cash
        (used in) provided by operating activities:
       Gain on sale of fixed assets                                                         --              (88)
       Gain on sale of assets                                                               --           (4,731)
       Depreciation and amortization                                                     1,260            3,082
       Goodwill amortization                                                               250              397
       Other noncash items                                                                  93            2,096
       Changes in assets and liabilities                                                (3,743)          16,119
                                                                                       -------           ------
         Cash (used in) provided by operating activities                                (5,094)          11,376
                                                                                         -----           ------

Investing activities:
     Proceeds from sale of fixed assets                                                     --              171
     Proceeds from sale of assets                                                           --           10,000
     Investment in capitalized software and other assets                                    --             (762)
     Cash distributions from Telos OK, LLC                                               6,000               --
     Purchases of property and equipment                                                (1,447)          (1,047)
                                                                                        ------           ------
         Cash provided by investing activities                                           4,553            8,362
                                                                                         -----            -----

Financing activities:
     Proceeds (repayment of) borrowings under senior
      credit facility                                                                      880          (19,368)
     Payments under capital leases                                                        (255)            (275)
                                                                                           ---          -------
         Cash provided by (used in) financing activities                                   625          (19,643)
                                                                                         -----           ------
         Increase in cash and cash equivalents                                              84               95

   Cash and cash equivalents at beginning of period                                        315              408
                                                                                         -----          -------
   Cash and equivalents at end of period                                                   399         $    503
                                                                                         =====           ======


</TABLE>











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


<PAGE>


                       TELOS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)




Note 1.  General

         The  accompanying   condensed  consolidated  financial  statements  are
unaudited and include the accounts of Telos Corporation ("Telos") and its wholly
owned  subsidiaries  (collectively,  the  "Company").  Significant  intercompany
transactions  have  been  eliminated.   In  the  opinion  of  the  Company,  the
accompanying  financial statements reflect all adjustments and reclassifications
(which  include  only normal  recurring  adjustments)  necessary  for their fair
presentation  in  conformity  with  generally  accepted  accounting  principles.
Interim  results  are not  necessarily  indicative  of fiscal  year  performance
because of the impact of seasonal and  short-term  variations.  These  financial
statements  should  be read  in  conjunction  with  the  consolidated  financial
statements  and notes thereto  included in the  Company's  annual report on Form
10-K for the fiscal year ended December 31, 1999.

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

          In June  2000,  the FASB  issued  SFAS 138,  "Accounting  for  Certain
  Derivative  Instruments and Certain Hedging Activities" which amends SFAS 133.
  SFAS 138 amends SFAS 133 to 1)expand the scope of the "normal sales and normal
  purchases" exception;  2)introduce the benchmark rate as an interest rate that
  may be hedged;  3)permit a recognized foreign currency denominated asset to be
  hedged and; 4)allow certain intercompany derivatives that are offset net to be
  designated as hedging instruments. The Company does not anticipate SFAS 138 to
  have a material impact on its financial statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin  101  "Revenue  Recognition  in  Financial  Statements"  ("SAB 101") to
provide  guidance  regarding the  recognition,  presentation  and  disclosure of
revenue in the financial statements. The Company expects to adopt the provisions
of SAB 101 (as amended by SAB 101B which  deferred  the  implementation  date by
three quarters) on October 1, 2000.  Management does not anticipate the adoption
of SAB 101 to have a material  impact on its results of  operations or financial
condition.

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

         Certain  reclassifications  have  been made to prior  period  financial
statements to conform to the classifications used in the current period.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
Note 2.  Contribution of Assets

     On July 28, 2000, the Company  entered into a  Subscription  Agreement with
certain investors ("Investors"), which provided for the formation of an Oklahoma
Limited  Liability  Company  named Telos OK, L.L.C.  ("Telos  OK").  The Company
contributed  all  of the  assets  of  its  Digital  Systems  Test  and  Training
Simulators  ("DSTATS")  business  as well as its  Government  Contract  with the
Department of the Army at Ft. Sill  (hereafter  referred to as the Company's Ft.
Sill business) to Telos OK. The net assets  contributed  by the Company  totaled
$353,000.  The  Investors  contributed  $3.0 million in cash to Telos OK, and at
closing  Telos OK borrowed  $4.0 million  cash from a bank.  The Company and the
Investors  each have  guaranteed  a portion of the loan of Telos OK. The Company
has  guaranteed $2 million and the  Investors  have  guaranteed  $1 million.  In
addition,  Telos OK entered into a $500,000 senior credit facility with the same
bank, which expires August 1, 2001. Borrowings under the facility,  should there
be any, will be collateralized by certain assets of Telos OK (primarily accounts
receivable).  The Company and the Investors have agreed to guarantee this credit
facility in the amount of $250,000 each when and if drawn.

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

     The Company  received $6 million in cash,  retained  $2.5  million in trade
receivables  of the Ft.  Sill and  DSTATS  businesses,  and  received a $500,000
receivable  from  Telos  OK for a  total  consideration  of $9  million  for the
contribution of the net assets.

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

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

Class B - owns 40% of Telos OK. The  Investors own all 2.9 million units of this
class.  This  class  does not have  voting  rights to elect  directors,  but can
request  the  redemption  of all or a portion  of the Class B units  outstanding
beginning  one year after the  closing  date,  subject to certain  restrictions.
Class B holders can redeem no more than 500,000  units per quarter at a price of
$1.00 per unit,  and such  redemption can only be made from the excess cash flow
of Telos OK as defined in the agreement.

Class C- owns 40% of Telos OK. The Company  owns all 2.9  million  units of this
class.  This class does not have voting rights to elect  directors,  and has the
same redemptive rights as class B above, except that no right of redemption will
exist until all Class B units have been redeemed.  In addition,  when any of the
Class B units have been redeemed, the Company will receive a warrant to purchase
a number of Class C units equal to the amount of the Class B units redeemed at a
price of $0.01 per unit.

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

     As  indicated  above,  the  Company  owns 50% of Telos OK LLC,  and  shares
control over Telos OK, LLC,  therefore has changed its method of accounting  for
the  contributed  assets  from the  consolidation  method to the equity  method.
Pursuant to this change, the revenues,  costs and expenses from the Ft. Sill and
DSTATS  businesses  have been  excluded  from their  respective  captions in the
Company's Consolidated Statement of Operations,  and the net earnings from these
businesses have been reported separately as "Equity in Net Earnings of Telos OK"
for the  three  and nine  months  ended  September  30,  2000.  The  results  of
operations of the Ft. Sill and DSTATS businesses  included in the "Equity in Net
Earnings of Telos OK" caption are comprised of the following:
<TABLE>
<CAPTION>
                                                                     (in thousands)
                                                                   September 30, 2000
                                                               ------------------------
                                                                  3-months          9-months
                                                                   ended             ended
                                                                   -----            ------
<S>                                                                <C>              <C>
Sales                                                              1,774            13,339
Cost of Sales                                                     (1,453)          (11,011)
                                                                 -------          --------
Gross Profit                                                         321             2,328
                                                                 =======            ======
</TABLE>
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 3.  Deconsolidation of Enterworks

         On December 30, 1999, Enterworks, Inc. ("Enterworks"), a majority-owned
subsidiary of the Company, completed a private placement of 21,739,127 shares of
Series A Convertible Preferred Stock ("Preferred Stock") at a price of $1.15 per
share which generated gross proceeds of  $25,000,000.  In addition,  the Company
entered into a series of concurrent transactions pursuant to which the Company's
voting interest in Enterworks was reduced to approximately 34.8%. The concurrent
transactions were as follows:

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

2.   Enterworks  purchased 5,000,000 shares of Enterworks' Common Stock owned by
     the  Company at a price of $1.00 per share.  This amount was reduced by 20%
     of the Agent's fee; the  Company's  pro rata share of the proceeds from the
     transaction.  The net amount received was $4.7 million.  This  transaction,
     together  with  the  one  described  above,   resulted  in  an  $8  million
     extraordinary  gain,  net of tax of $5.3 million,  which is included in the
     Company's statement of operations for the year ended December 31, 1999.


3.   Enterworks'  payable to the Company,  which was approximately $24.4 million
     at December 30, 1999, was cancelled in its entirety  before the issuance of
     Series A Preferred  Stock.  The  forgiveness  of the payable  increased the
     Company's  investment in Enterworks.  Funding required to cover Enterworks'
     working  capital  needs from  November  30, 1999 to the date of closing was
     funded by the Company and was repaid through  collections  from Enterworks'
     trade accounts  receivable.  This funding  approximated $2.0 million.  This
     forgiveness  of  intercompany  debt is deemed by  management to be a normal
     occurrence of a capital raising transaction.

4.   Enterworks  issued  4,000,000  shares of Enterworks'  Common Stock to Telos
     concurrent with the issuance of the Enterworks'  Series A Preferred  Stock.
     This  issuance  increased  the  Company's  investment  in  Enterworks as it
     increased the number of shares the Company owned in Enterworks.

5.   Enterworks issued a warrant to acquire 350,000 shares of Enterworks' Common
     Stock to  Telos'  primary  lender,  Bank of  America,  in  connection  with
     obtaining the necessary approvals for this offering.  The exercise price of
     the warrant equaled $1.15 per share, the same per share price of the Series
     A Preferred Stock.  This warrant was recorded at its fair market value as a
     charge to interest  expense and a reduction to the Company's  investment in
     Enterworks.

6.   Telos contributed 210,912 shares of Enterworks' Common Stock owned by Telos
     to the  Enterworks  Treasury  for the  subsequent  grant of warrants to the
     Agent,  Deutsche Bank Alex.  Brown. This issuance of warrants was also part
     of the  Agent's  fee.  This  contribution  of  shares  was also a charge to
     interest expense and a reduction to the Company's investment in Enterworks.

        As a result of the reduction of the Company's  ownership  percentage in
Enterworks  the Company  changed its method of accounting  for its investment in
Enterworks from the consolidation method to the equity method.  Pursuant to this
change the  Company's  interest in the losses of  Enterworks  have been reported
separately as "Equity in Net Losses of Enterworks" in the Company's consolidated
statement of operations for the three and nine months ended  September 30, 1999.
Additionally,  the Company  established an "Investment in Enterworks" account in
accordance  with  Accounting  Principles  Board 18. As of September 30, 2000 and
December  31,  1999,  respectively,  the  balance is zero in the  Investment  in
Enterworks account due to the fact that the Company's share of cumulative losses
exceeds its investment basis.

Note 4.       Sale of Assets

         On September 29, 1999, the Company sold substantially all of the assets
of its computer  maintenance and service business,  Telos Field Engineering Inc.
("TFE"), to TFE Technology Holdings LLC ("TFE Holdings"), an affiliate of Carr &
Company,  for $10 million. As a result of this sale, the Company recorded a gain
of $4.7 million in its  consolidated  statement of operations for the year ended
December  31, 1999.  This gain  included a write-off of $2.1 million of goodwill
allocated  to TFE  operations.  The  Company  and TFE  Holdings  entered  into a
one-year  corporate  services agreement on the date of the sale. Under the terms
of the Agreement,  Telos  continued to provide  certain  administrative  support
functions to TFE Holdings,  including but not limited to finance and  accounting
and  human  resources,  in return  for a monthly  payment.  This  agreement  was
terminated on August 31, 2000.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
Note 5.   Debt Obligations

Senior Credit Facility

         The Company has a $35 million Senior Credit Facility  ("Facility") with
a bank,  which matures on July 1, 2001. At September 30, 2000,  the Facility was
classified  as a current  liability  as the Facility has a term of less than one
year.  Borrowings  under the  Facility are  collateralized  by a majority of the
Company's assets including accounts receivable,  inventory,  and Telos' stock in
Enterworks,  Inc. The amount of  available  borrowings  fluctuates  based on the
underlying  asset  borrowing base. At September 30, 2000, the Company was not in
compliance  with several  financial  covenants  contained  within the  Facility,
including  covenants  relating to certain  fixed  charge  coverage  and leverage
goals. The bank has waived this noncompliance.

Senior Subordinated Notes

         In 1995 the Company  issued  Senior  Subordinated  Notes  ("Notes")  to
certain  shareholders.  The Notes are classified as either Series B or Series C.
Fixed  assets of the Company  collateralize  Series B Notes.  Series C Notes are
unsecured. Both the Series B and Series C Notes have a maturity date of April 1,
2001 and have interest rates ranging from 14% to 17%. Interest is paid quarterly
on  January 1,  April 1, July 1, and  October 1 of each  year.  The Notes can be
prepaid at the  Company's  option.  Additionally,  these Notes have a cumulative
payment  premium of 13.5% per annum  payable  only upon  certain  circumstances.
These  circumstances  include an initial public offering of the Company's common
stock or a significant refinancing,  to the extent that net proceeds from either
of the above events are received and are  sufficient to pay the premium.  Due to
the contingent  nature of the premium  payment,  the associated  premium expense
will only be recorded after the occurrence of a triggering  event.  At September
30, 2000 the  prepayment  premium that would be due upon a  triggering  event is
$7.9 million.

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

         The  balances of the Series B and Series C Notes were $5.5  million and
  $3.0  million,  respectively,  at September 30, 2000 and December 31, 1999. At
  September 30, 2000,  the Series B and Series C notes are classified as current
  liabilities as they have a term of less than one year.

Note 6.       Preferred Stock

Senior Redeemable Preferred Stock

         The components of the senior redeemable  preferred stock are Series A-1
and Series A-2, each with $.01 par value and 1,250 and 1,750 shares  authorized,
issued and outstanding, respectively. The Series A-1 and Series A-2 each carry a
cumulative  per annum  dividend  rate of 14.125% of their  liquidation  value of
$1,000 per share.  The dividends are payable  semi-annually  on September 30 and
December 31 of each year.  The  liquidation  preference of the senior  preferred
stock is the face amount of the Series A-1 and A-2 ($1,000 per share),  plus all
accrued  and unpaid  dividends.  The  Company is  required  to redeem all of the
outstanding  shares of the stock on  December  31,  2001,  subject  to the legal
availability  of funds.  Mandatory  redemptions  are  required  from excess cash
flows,  as defined  in the stock  agreements.  The Series A-1 and A-2  Preferred
Stock is senior to all other  present  and  future  equity of the  Company.  The
Series A-1 is senior to the Series A-2. The Company has not  declared  dividends
on its senior  redeemable  preferred stock since its issuance.  At September 30,
2000 and December 31, 1999 cumulative  undeclared,  unpaid dividends relating to
Series A-1 and A-2 redeemable  preferred stock totaled $3,373,000 and $3,054,000
respectively.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

12% Cumulative Exchangeable Redeemable Preferred Stock

         A maximum of 6,000,000 shares of 12% Cumulative Exchangeable Redeemable
Preferred Stock (the "Public  Preferred  Stock"),  par value $.01 per share, has
been authorized for issuance.  The Company  initially issued 2,858,723 shares of
the Public  Preferred  Stock  pursuant to the  acquisition of the Company during
fiscal year 1990. The Public  Preferred  Stock was recorded at fair value on the
date of original  issue,  November 21, 1989, and the Company is making  periodic
accretions  under the interest method of the excess of the redemption value over
the recorded  value.  Accretion for the nine months ended September 30, 2000 was
$1,155,000. The Company declared stock dividends totaling 736,863 shares in 1990
and 1991.

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

         The Public Preferred Stock has a 20 year maturity, however, the Company
must redeem, out of funds legally  available,  20% of the Public Preferred Stock
on the 16th 17th, 18th and 19th  anniversaries of November 12, 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 the annual
rate of 12% ($1.20) per share,  based on the  liquidation  preference of $10 per
share and is fully  cumulative.  Through  November 21, 1995, the Company had the
option to pay dividends in additional shares of Preferred Stock in lieu of cash.
Following  November 21, 1995,  dividends are only payable in cash.  Dividends in
additional  shares of the Preferred Stock were paid at the rate of 6% of a share
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 and
is able to pay dividends under its charter and other corporate  documents,  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 these 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 $20,588,000.

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

Note 7.  Reportable Business Segments

         The Company  adopted SFAS No. 131,  "Disclosures  About  Segments of an
Enterprise and Related Information", in 1998, which changes the way the Company
reports information about its operating segments.

         The Company has three reportable segments:

     Systems and Support  Services:  provides  software  development and support
services  for  software  including  technology  insertion,  system  redesign and
software re-engineering.  This segment consists of two divisions - solutions and
international.

     Products:  delivers  enterprise  integration and networking  infrastructure
solutions  to  its  customers.  These  solutions  include  providing  commercial
hardware,  software  and  services  to its  customers.  This group is capable of
staging,  installing and deploying large network  infrastructures with virtually
no disruption to customer's ongoing operations.


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

         The Company  evaluates the performance of its operating  segments based
on revenue, gross profit and income before goodwill amortization,  income taxes,
non-recurring items and interest income or expense.

         Summarized  financial  information  concerning the Company's reportable
segments for the three months ended  September 30, 2000 and 1999 is shown in the
following table. The "other" column includes corporate related items.

<PAGE>
Enterworks,  Inc. (Note 3) was disclosed as a segment in 1999 filed reports
and therefore it is still identified as a segment in the 1999 captions below.

                       TELOS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                             (amounts in thousands)
                              Systems and
                           Support Services    Products        Xacta         Enterworks       Other (1)     Total
                           ------------------------------------------------------------------------------------
<S>                               <C>           <C>         <C>             <C>            <C>           <C>
September 30, 2000
External Revenues                 $13,384       $17,829     $ 3,661         $    --        $   --        $34,874
Intersegment Revenues                  --            --          --              --            --             --
Gross Profit                        1,175         1,973       1,032              --            --          4,180
Segment (loss) profit(3)             (359)          415         (65)             --            --             (9)
Total assets                        9,110        19,816       5,449              --        22,745         57,120
Capital Expenditures                   76           (42)         88              --           364            486

Depreciation &
 Amortization (2)                      88            75          29              --           310            502

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

September 30, 1999
External Revenues                 $22,012      $ 18,893     $ 1,204         $    --       $    --        $42,109
Intersegment Revenues                  40            --          27              --            --             67
Gross Profit                        3,639         1,906        (249)             --            --          5,296
Segment profit (loss)(3)            2,200          (197)       (564)             --            --          1,439
Total assets                        7,483        21,570       3,293           8,671         22,788        63,805
Capital Expenditures                   24            (3)         60             185            115           381
Depreciation &
 Amortization (2)                 $    82      $    120     $    28         $   528        $   311       $ 1,069

<FN>
(1)  Corporate  assets   are  principally property and equipment, cash and other
     assets.
(2)  Depreciation  and  amortization  includes  amounts relating to property and
     equipment,  goodwill,  deferred  software  costs  (1999)  and  spare  parts
     inventory.
(3)  Segment   profit   (loss)   represents  operating   income   (loss)  before
     goodwill amortization.
</FN>
</TABLE>

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

Note 8.  Stock Incentive Plans

Telos Stock Incentive Plan

     During the third  quarter of 2000,  the Board of  Directors  of the Company
approved  a new stock  option  plan for Telos  Delaware,  Inc.,  a wholly  owned
subsidiary of the Company.  Certain key  executives and employees of the Company
are  eligible  to receive  stock  options  under the plan.  Under the plan,  the
Company may award up to 3,500,000  shares of common stock as either incentive or
non-qualified  stock options. An incentive option must have an exercise price of
not lower than fair market value on the date of grant.  A  non-qualified  option
will not have an exercise  price any lower than 85% of the fair market  value on
the date of grant.  All  options  have a term of ten years and vest no more than
20% each year over a five-year  period unless changed by the option committee of
the Board of  Directors.  Through  September  30, 2000,  the Company has awarded
1,796,813  options for shares of common stock at an exercise  price of $1.37 per
share.

Xacta Stock Incentive Plan

     In the third quarter 2000,  Xacta,  Inc., a wholly owned  subsidiary of the
Company,  initiated a stock  option plan under which up to  3,500,000  shares of
Xacta common stock maybe awarded to key employees  and  associates.  The options
may be awarded as incentive or non-qualified,  have a term of 10 years, and vest
ratably  over a 5 year period  unless  otherwise  directed by a committee of the
Company's  Board of Directors.  The exercise price may not be less than the fair
market  value on the date of grant for an incentive  option,  or 85% of the fair
market  value on the date of  grant  for a  non-qualified  stock  option.  As of
September  30,  2000,  the Company has granted  1,316,531  options for shares of
Xacta common stock at an exercise price of $0.75 per share.

<PAGE>


Item 2.  Management's  Discussion  and Analysis of Financial  Condition and
         Results of Operations.

General

         Sales for the first nine months of 2000 were $90.9 million,  a decrease
of $46.0 million or 33.6% as compared to the same 1999 period. This decrease was
partially  attributable to a $19.7 million  decrease in sales from the Company's
Products Group,  which experienced  decreased sales due to its completion of the
Joint Recruitive  Information  Support  Services  Blanket Purchase  Agreement in
1999.  The decline in sales was also  attributable  to sales from the  Company's
Systems & Support  Services  Group,  which  decreased its sales by $31.1 million
compared to 1999.  This decline in this Group's  sales is mostly due to the sale
of the Company's field  engineering  division  ("TFE") in September 1999 and the
presentation  of the Ft. Sill business under the equity method of accounting for
the year 2000.  These  decreases were partially  offset by increases in sales in
the Xacta Group of approximately $4.9 million.  These increases are attributable
to increased sales of its Certification and Accreditation product.

         The  operating   loss  through  the  first  nine  months  of  2000  was
approximately $600,000 as compared to an operating profit of $6.8 million during
the same 1999  period.  The decline in  operating  profitability  is primarily a
result of decreased third quarter revenues,  the sale of TFE in 1999, as well as
the deconsolidation of the Ft. Sill profits.

         Total backlog from existing contracts was approximately  $275.2 million
and $242.2 million as of September 30, 2000 and December 31, 1999, respectively.
As of  September  30,  2000,  the funded  backlog of the Company  totaled  $61.3
million, an increase of approximately $16 million from December 31, 1999. Funded
backlog  represents  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.

Results of Operations

         The condensed consolidated statements of operations include the results
of operations of Telos Corporation and its wholly owned subsidiaries.  The major
elements of the  Company's  operating  expenses as a percentage of sales for the
three and nine month periods ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>


                                                             Three Months Ended              Nine months Ended
                                                                September 30,                   September 30,
                                                                -------------                   -------------
                                                             2000           1999          2000            1999
                                                             ----           ----          ----            ----
<S>                                                         <C>            <C>             <C>           <C>
Sales                                                       100.0%         100.0%          100.0%        100.0%
Cost of sales                                                88.0           87.4            86.5          85.8
SG&A expenses                                                12.0            9.2            13.9           9.0
Goodwill amortization                                         0.2            0.3             0.3           0.3
                                                             ----           ----            ----          ----

Operating income                                             (0.2)           3.1            (0.7)          4.9
Other income                                                   --             --              --            --
Gain on sale of assets                                         --           11.2              --           3.5
Equity in net losses of Enterworks                             --          (10.5)             --          (9.9)
Equity in earnings of Telos OK                                0.9             --             2.6            --
Interest expense                                             (3.3)          (3.4)           (3.9)         (3.2)
Income tax (provision) benefit                               (3.9)          (1.3)           (1.3)          0.7
                                                             -----          -----          ------          ---

Net loss                                                     (6.5)%         (0.9)%          (3.3)%        (4.0)%
                                                             ====           ====            ====          ====

</TABLE>


<PAGE>

Financial Data by Market Segment

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

<TABLE>
<CAPTION>

                                                      Three Months Ended                   Nine months Ended
                                                        September 30,                         September 30,
                                                       -------------                         -------------
                                                     2000           1999                   2000            1999
                                                     ----           ----                   ----            ----
                                                                     (amounts in thousands)
Sales:
<S>                                                <C>            <C>                   <C>            <C>
   Systems and Support Services                    $13,384        $22,012               $ 34,278       $ 65,414
   Products                                         17,829         18,893                 47,126         66,872
   Xacta                                             3,661          1,204                  9,475          4,594
                                                    ------         ------                 ------         ------
   Total                                           $34,874        $42,109               $ 90,879       $136,880
                                                    ======         ======                =======        =======


Gross Profit:

   Systems and Support Services                    $ 1,175        $ 3,639               $  3,893       $ 11,202
   Products                                          1,973          1,906                  5,396          7,040
   Xacta                                             1,032          ( 249)                 2,959          1,231
                                                    ------         ------                -------         ------
   Total                                           $ 4,180        $ 5,296               $ 12,248       $ 19,473
                                                   =======        =======               ========       ========


Gross Margin:

   Systems and Support Services                       8.8%          16.5%                  11.4%          17.1%
   Products                                          11.1%          10.1%                  11.5%          10.5%
   Xacta                                             28.2%         (20.7)%                 31.2%          26.8%
   Total                                             12.0%          12.6%                  13.5%          14.2%
</TABLE>


         For the three month period ended September 30, 2000, sales decreased by
$7.2 million,  or 17.2% to $34.9  million from $42.1 million for the  comparable
1999 period. Of the $7.2 million decrease,  $8.6 million was attributable to the
Systems and Support  Services Group.  The Group  experienced  decreased sales of
$7.5  million due to the sale of TFE at the end of the third  quarter of 1999 as
well as a decrease due to the  presentation of the Ft. Sill businesses under the
equity  method for the year 2000.  This  decrease  was enhanced by a decrease in
Products'  Group  revenue of $1.1  million from third  quarter 2000  compared to
third quarter 1999.  This decrease is primarily due to a decline in revenue from
the Group's  racks  products.  Offsetting  these  decreases  was a $2.5  million
increase in sales from the  Company's  Xacta  segment.  This  increase is mostly
attributable to sales from the Company's information security business line.

         Sales  decreased  $46.0  million or 33.6% to $90.9 million for the nine
months ended  September 30, 2000,  from $136.9 million for the  comparable  1999
period. The decrease for the nine month period includes a $19.7 million decrease
in Products' sales and a $31.1 million  decrease in Systems and Support Services
sales,  partially  offset by an increase of $4.9 million in Xacta revenue.  This
decrease in the  nine-month  revenue is primarily due to the decrease in revenue
from  the  Joint  Recruitive   Information  Support  Services  Blanket  Purchase
Agreement of $19.0 million,  the  deconsolidation  of Ft. Sill revenue,  and the
sale of TFE. The TFE division  generated  sales of $24.3 million for the Company
prior to being sold.  These  decreases were slightly  offset by increased  sales
under the Company's information security product line of $4.2 million.

         Cost of sales was 88.0% of sales for the quarter and 86.5% of sales for
the nine months ended September 30, 2000, as compared to 87.4% and 85.8% for the
same periods in 1999.  The  increases in cost of sales as a percentage  of sales
are primarily  attributable to loss of profits  realized under the TFE contracts
sold in  September  1999 and the  deconsolidation  of the  profitable  Ft.  Sill
contract for all of 2000.

         Gross profit  decreased  approximately  $1.1 million in the three-month
period to $4.2 million in 2000, from $5.3 million in the comparable 1999 period.
Gross profit decreased $7.3 million in the nine-month period to $12.2 million in
2000  from  $19.5  million  in  1999.   Gross  margins  were  12.0%  and  13.5%,
respectively,  for the three and nine month periods of 2000 as compared to 12.6%
and 14.2%,  respectively,  for the comparable  periods of 1999. The decreases in
gross  margin  were  attributable  to the  sales  decreases  and  cost of  sales
increases explained above.


     Selling,   general,  and  administrative   expense  ("SG&A")  increased  by
approximately  $300,000 or 8.6%,  to $4.2  million in the third  quarter of 2000
from $3.9 million in the comparable period of 1999. For the nine month period of
2000, SG&A increased  approximately $300,000 or 2.6% to $12.6 million from $12.3
million in 1999.  These  increases are due primarily to the Company's  increased
investment in its Xacta group.


     SG&A as a percentage  of revenues  increased to 12.0% for the third quarter
of 2000  from  9.2% in the  comparable  1999  period.  SG&A as a  percentage  of
revenues for the nine-month  period ended  September 30, 2000 increased to 13.9%
from 9.0% compared to the same period in 1999.

     Goodwill  amortization expense decreased for the comparative three and nine
month  periods of 2000 from 1999.  This  reduction  is due to a decrease  in the
goodwill  balance  associated with the sale of TFE in the third quarter 1999 and
the asset transfer from the Ft. Sill transaction.

     The  operating  income  of the  Company  decreased  by $1.4  million  to an
operating  loss of $80,000 in the  three-month  period ended  September 30, 2000
from a $1.3 million  operating  profit in the comparable 1999 period.  Operating
income  decreased  $7.4  million to a $600,000  loss for the nine  months  ended
September  30,  2000 from a $6.8  million  operating  income  for the nine month
period ended September 30, 1999. The decreases in operating profit for the three
and nine month periods are mostly  attributable to the decreases in gross profit
and increases in S,G & A discussed above.

     At the end of the third quarter 1999, the Company sold substantially all of
the  assets of its  computer  maintenance  and  service  business,  Telos  Field
Engineering Inc.  ("TFE"),  to TFE Technology  Holdings,  an affiliate of Carr &
Company,  for $10 million. As a result of this sale, The Company recorded a gain
of $4.7 million in its condensed  consolidated  statement of operations  for the
nine months ended September 30, 1999.


         In order to present the statement of operations in accordance  with APB
18,  the  revenues  and cost of sales  for the Ft.  Sill and  DSTATS  businesses
contributed  to Telos OK,  LLC were  presented  in one line item  "Equity in net
earnings of Telos OK" due to the joint  venture  agreement  signed July 28, 2000
(See Note 2). The equity in net earnings of Telos OK was approximately  $300,000
for the  three-month  period and $2.3  million for the  nine-month  period ended
September 30, 2000.


         Interest expense decreased to $1.1 million in the third quarter of 2000
compared to $1.4 million in the same 1999 period,  and  decreased  approximately
$1.0 to $3.5  million for the nine  months  ended  September  30, 2000 from $4.5
million  for the  comparable  1999  period.  The  decreases  for the  three  and
nine-month periods are due to decreased debt levels in 2000.

         The income tax  provision  was $1.4  million  and $1.2  million for the
three and nine months ended  September  30, 2000,  respectively.  The  provision
incurred was a result of the taxable gain generated from proceeds  received from
the  contribution of assets to Telos OK in July 2000 (see Note 2). The Company's
net  deferred  tax asset  includes  substantial  amounts of net  operating  loss
carryforwards.  Failure  to  achieve  forecasted  taxable  income may affect the
ultimate  realization  of the net deferred tax assets.  Management  believes the
Company will generate taxable income in excess of operating losses sufficient in
amounts to realize the net deferred tax assets.  The Company  recorded an income
tax  provision of  approximately  $600,000 and a benefit of $1.0 million for the
three and nine months ended September 30, 1999, respectively.  The tax provision
was a result of the gain  generated  from the sale of TFE.  The tax  benefit was
principally  due to the net operating loss  carryforwards  generated  during the
first quarter 1999.

Liquidity and Capital Resources

         For the nine months ended  September  30,  2000,  the Company used $5.1
million of cash in its operating activities.  This cash was used by increases of
accounts  receivable of $2.9 million and inventory of $1.0 million,  enhanced by
increases  in accounts  payable of $1.0  million and $3.0  million in net losses
incurred in operations.  Cash provided by investing activities was $4.6 million,
mostly due to the cash received from the  contribution of the Company's Ft. Sill
and DSTATS assets (See Note 2). Cash was provided by financing activities during
the nine months due to increased  borrowings under the Senior Credit Facility of
approximately $900,000.

         At September 30, 2000, the Company had  outstanding  debt and long-term
obligations  of $37.0  million,  consisting  of $17.4  million under the secured
senior credit facility,  $8.5 million in subordinated debt, and $11.1 million in
capital lease obligations. The Company believes it will generate enough funds in
the ordinary course of business, or from a debt or equity financing,  during the
next twelve months to fund its operations and service its debt and capital lease
obligations.

         At September 30, 2000, the Company had an outstanding  balance of $17.4
million on its $35 million Senior Credit Facility (the "Facility"). The Facility
matures on July 1, 2001 and is  collateralized  by a majority  of the  Company's
assets   (including   inventory,   accounts   receivable  and  Telos'  stock  in
Enterworks).  The amount of borrowings  fluctuates based on the underlying asset
borrowing base as well as the Company's  working capital  requirements.  Because
the Facility  matures on July 1, 2001,  at September 30, 2000 the Facility has a
term of less than one year,  and therefore is classified as a current  liability
on the Company's condensed  consolidated balance sheet. The Facility has various
covenants that may,  among other things,  restrict the ability of the Company to
merge with another entity,  sell or transfer  certain assets,  pay dividends and
make other distributions beyond certain limitations.  The Facility also requires
the Company to meet certain leverage, net worth, interest coverage and operating
goals.  At September 30, 2000,  the Company was not in  compliance  with several
covenants  contained  in  the  Facility;  however,  the  bank  has  waived  this
non-compliance.

New Accounting Pronouncements

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

     In June 2000, the FASB issued SFAS 138,  "Accounting for Certain Derivative
Instruments  and Certain  Hedging  Activities"  which amends SFAS 133.  SFAS 138
amends  SFAS  133 to 1)  expand  the  scope  of the  "normal  sales  and  normal
purchases"  exception;  2) introduce the benchmark rate as an interest rate that
may be hedged; 3) permit a recognized  foreign currency  denominated asset to be
hedged and; 4) allow certain intercompany  derivatives that are offset net to be
designated as hedging  instruments.  The Company does not anticipate SFAS 138 to
have a material impact on its financial statements.


     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting  Bulletin 101 "Revenue  Recognition  in Financial  Statements"  ("SAB
101") to provide guidance regarding the recognition, presentation and disclosure
of  revenue  in the  financial  statements.  The  Company  expects  to adopt the
provisions of SAB 101 (as amended by SAB 101B which deferred the  implementation
date by three  quarters) on October 1, 2000.  Management does not anticipate the
adoption of SAB 101 to have a material  impact on its results of  operations  or
financial condition.

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

Forward-Looking Statements

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


<PAGE>


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 Quarterly Report on Form 10-Q 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. The Company is exposed to
interest rate volatility with regard to its variable rate debt obligations under
its Senior Credit  Facility.  This facility bears interest at 1.00%,  subject to
certain  adjustments,  over the bank's base rate. The weighted  average interest
rate for the first nine months of 2000 was 10.14%. This facility expires on July
1, 2001 and has outstanding balance of $17.4 million at September 30,2000.

     The Company's other long-term debt at September 30, 2000 consists of Senior
Subordinated  Notes B and C, which bear interest at fixed rates ranging from 14%
to 17%. The Senior  Subordinated  Notes mature as to principal in the  aggregate
amount of $8,537,000 on April 1, 2001. The Company has no cash flow exposure due
to rate changes for its Senior Subordinated Notes.





<PAGE>


                           PART II - OTHER INFORMATION


Item 1.  Legal Proceedings

         The Company is 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 3.  Defaults Upon Senior Securities

Senior Redeemable Preferred Stock

         The  Company  has  not  declared  dividends  on its  Senior  Redeemable
Preferred  Stock,  Series A-1 and A-2, since their  issuance.  Total  undeclared
unpaid dividends accrued for financial reporting purposes are $3,373,000 for the
Series A-1 and A-2 Preferred Stock at September 30, 2000.

12% Cumulative Exchangeable Redeemable Preferred Stock

         Through  November 21, 1995, the Company had the option to pay dividends
in additional  shares of Preferred Stock in lieu of cash (provided there were no
blocks on payment as further  discussed  below).  Dividends  are  payable by the
Company, provided the Company has legally available funds under Maryland law and
is able to pay dividends under its charter and other corporate  documents,  when
and if declared by the Board of Directors,  commencing June 1, 1990, and on each
six month anniversary  thereof.  Dividends in additional shares of the Preferred
Stock were paid at the rate of 6% of a share for each $.60 of such dividends not
paid in cash.  Cumulative  undeclared dividends as of September 30, 2000 accrued
for financial reporting purposes totaled $24.5 million.  Dividends for the years
1992 through 1994 and for the dividend  payable June 1, 1995 were accrued  under
the assumption that the dividend will be paid in additional  shares of preferred
stock and are valued at $3,950,000. Had the Company accrued these 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 $20,588,000.

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

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

     The Company's  annual meeting of common  shareholders was held on September
14,  2000.  The  only  matter  set  forth in the  meeting  was the  election  of
directors. The shareholders of the common stock necessary to constitute a quorum
were present  either in person or  represented  by proxy or  attorney.  Dr. Fred
Charles Ikle,  John B. Wood,  Norman P. Byers,  Dr. Stephen Bryen,  and David S.
Aldrich  were elected to a term of  approximately  one year, a term to expire at
the next annual meeting of shareholders upon the election of their successors.

Item 6. Exhibits and Reports on Form 8-K

        (a)   Exhibits:  27   Financial Data Schedule

        (b)   Reports on Form 8-K:    None.

Items 2 and 5 are not applicable and have been omitted.

<PAGE>




                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



DATE:                                                          Telos Corporation



November 14, 2000                                         /s/  Thomas J. Ferrara
                                                          ----------------------
                                                               Thomas J. Ferrara
                                                  (Principal Financial Officer &
                                                   Principal Accounting Officer)