<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: June 30, 1998

[ ]              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 August 1, 1998, the  registrant  had  21,238,980  shares of Class A Common
Stock, no par value, and 4,037,628 shares of Class B Common Stock, no par value;
and 3,595,586 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):  17
                                                    -----


<PAGE>





                                           TELOS CORPORATION AND SUBSIDIARIES  

                                                            INDEX



                                              PART I. FINANCIAL INFORMATION
                                              ------  ---------------------
<TABLE>
<CAPTION>
                                                                                                              Page   
<S>                                                                                                            <C>
Item 1.        Financial Statements (Unaudited):           

     Condensed Consolidated Statements of Operations for the
         Three and Six Months Ended June 30, 1998 and 1997.....................................................3

     Condensed Consolidated Balance Sheets as of June 30, 1998
         and December 31, 1997 ................................................................................4

     Condensed Consolidated Statements of Cash Flows for the
         Six Months Ended June 30, 1998 and 1997...............................................................5

     Notes to Condensed Consolidated Financial Statements....................................................6-8

Item 2.        Management's Discussion and Analysis of Financial
               Condition and Results of Operations..........................................................9-14


                                                   PART II.   OTHER INFORMATION


Item 1.        Legal Proceedings..............................................................................15

Item 2.        Changes in Securities and Use of Proceeds......................................................15

Item 3.        Defaults Upon Senior Securities.............................................................15-16

Item 4.        Submission of Matters to a Vote of Security Holders............................................16

Item 6.        Exhibits and Reports on Form 8-K...............................................................16

SIGNATURES....................................................................................................17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                                                PART I - FINANCIAL INFORMATION

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


                                                        Three Months Ended                  Six Months Ended
                                                             June 30,                           June 30,
                                                     ------------------------          ------------------------
                                                       1998            1997                1998          1997
                                                       ----            ----                ----          ----

<S>                                                    <C>            <C>                <C>           <C>    
Sales
    Systems and Support Services                       $27,024        $32,189            $53,324       $58,025
    Systems Integration                                 18,153         24,907             34,346        53,134
    Enterworks                                           1,532            993              2,833         1,275
                                                        ------         ------             ------       -------
                                                        46,709         58,089             90,503       112,434
Costs and expenses
    Cost of sales                                       39,634         48,511             80,115        95,159
    Selling, general and
     administrative expenses                             6,431          6,869             12,673        13,394
    Goodwill amortization                                  132            209                325           434
                                                         -----          -----              -----        ------
Operating income (loss)                                    512          2,500             (2,610)        3,447

Other income (expenses)
    Gain on sale of assets                                  --             --              5,683            --
    Other income (expenses)                                  6             11                 26            23
    Interest expense                                    (1,537)        (1,883)            (3,316)       (3,643)
                                                         -----          -----              -----         -----
(Loss) income before taxes                              (1,019)           628               (217)         (173)

Income tax provision                                      (686)            --               (811)           --
                                                         ------         -----              -----         -----

Net (loss) income                                      $(1,705)        $  628            $(1,028)       $ (173)
                                                         =====          =====              =====         =====























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

</TABLE>
<PAGE>
<TABLE>
<CAPTION>


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

                                                        ASSETS

                                                                    June 30, 1998                December 31, 1997
                                                                    -------------                -----------------

<S>                                                                   <C>                            <C>    
Current assets
    Cash and cash equivalents                                         $   141                        $   587
    Accounts receivable, net                                           41,670                         57,972
    Inventories, net                                                   10,024                         12,390
    Deferred income taxes                                               2,204                          4,632
    Other current assets                                                  634                            676
                                                                       ------                         ------
       Total current assets                                            54,673                         76,257

Property and equipment, net of
    accumulated depreciation of
    $23,592 and $22,609, respectively                                  15,146                         15,730
Goodwill, net                                                           7,183                         12,466
Other assets                                                            7,546                          5,265
                                                                       ------                        -------
                                                                      $84,548                       $109,718
                                                                       ======                        =======

                                          LIABILITIES AND STOCKHOLDERS' INVESTMENT

Current liabilities
     Accounts payable                                                 $17,841                        $16,912
     Other current liabilities                                          7,296                          6,835
     Accrued compensation and benefits                                  6,007                          8,684
                                                                       ------                         ------
       Total current liabilities                                       31,144                         32,431

Senior credit facility                                                 23,750                         39,945
Senior subordinated notes                                              17,011                         16,930
Capital lease obligations                                              11,856                         12,085
                                                                       ------                        -------
       Total liabilities                                               83,761                        101,391
                                                                       ------                        -------
Redeemable preferred stock
     Senior redeemable preferred stock                                  5,417                          5,207
     Class B redeemable preferred stock                                    --                         12,035
     Redeemable preferred stock                                        32,880                         29,951
                                                                       ------                         ------
       Total preferred stock                                           38,297                         47,193
                                                                       ------                         ------
Stockholders' investment
     Common stock                                                          79                             78
     Capital in excess of par                                           2,397                             --
     Retained earnings (deficit)                                      (39,986)                       (38,944)
                                                                       ------                         ------
       Total stockholders' investment (deficit)                       (37,510)                       (38,866)
                                                                       ------                         ------
                                                                      $84,548                       $109,718
                                                                       ======                        =======






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


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

                                                                                                
                                                                                                Six Months
                                                                                              Ended June 30,
                                                                                      ----------------------------
                                                                                          1998            1997
                                                                                          ----            ----
<S>                                                                                    <C>             <C>    
Operating activities:
   Net loss                                                                            $(1,028)        $   (173)
   Adjustments to reconcile net loss to cash
     (used in) provided by operating activities:
     Gain on sale of assets                                                              (5,683)              --
     Depreciation and amortization                                                        1,668            1,919
     Goodwill amortization                                                                  325              434
     Other noncash items                                                                    381               39
     Changes in assets and liabilities                                                   12,541          (19,128)
                                                                                         ------           ------
     Cash provided by (used in) operating activities                                      8,204          (16,909)
                                                                                         ------           ------
Investing activities:
   Proceeds from sale of assets                                                          14,675               --
   Investment in products                                                                (1,111)          (1,154)
   Purchase of property and equipment                                                      (790)          (1,106)
                                                                                         ------            -----
     Cash provided by (used in) investing activities                                     12,774           (2,260)
                                                                                         ------            -----
Financing activities:
   (Repayment of) proceeds from borrowings under
      senior credit facility                                                            (16,195)          18,003
   Payments under capital leases                                                           (229)            (183)
   Retirement of Class B redeemable preferred stock                                      (5,000)              --
   Repayment of senior subordinated notes                                                    --             (675)
                                                                                         ------           ------
     Cash (used in) provided by financing activities                                    (21,424)          17,145
                                                                                         ------           ------
   Decrease in cash and cash equivalents                                                   (446)          (2,024)

   Cash and cash equivalents at beginning
     of period                                                                              587            2,781
                                                                                          -----            -----
   Cash and cash equivalents at end
     of period                                                                           $  141           $  757
                                                                                          =====            =====

















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

</TABLE>
<PAGE>


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


Note 1.           General

     The  accompanying  condensed  consolidated  financial  statements  of Telos
Corporation  ("Telos")  and its  wholly-owned  subsidiaries,  Telos  Corporation
(California),  Telos Field Engineering,  Inc., Telos International  Corporation,
and  its  majority-owned  subsidiary,   Enterworks,   Inc.  (collectively,   the
"Company")  have been  prepared  without  audit.  Certain  information  and note
disclosures   normally  included  in  the  financial   statements  presented  in
accordance with generally accepted accounting  principles have been condensed or
omitted. In the opinion of the Company, the accompanying  condensed consolidated
financial  statements  reflect  all  adjustments  and  reclassifications  (which
include  only normal  recurring  adjustments)  necessary  to present  fairly the
financial position of the Company as of June 30, 1998 and December 31, 1997, and
the  results  of its  operations  and its cash flows for the three and six month
periods  ended  June 30,  1998 and 1997.  Interim  results  are not  necessarily
indicative  of fiscal year  performance  because of the impact of  seasonal  and
short-term variations.  These condensed consolidated 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, 1997.

     Certain  reclassifications  have been made to the  prior  year's  financial
statements to conform to the classifications used in the current period.

Note 2.       Sale of Assets

     On February 28, 1998, Telos sold substantially all of the net assets of one
of its support services  divisions,  Telos Information Systems ("TIS"), to NYMA,
Inc.,  a  subsidiary  of Federal  Data  Corporation  of  Bethesda,  Maryland for
approximately  $14.7  million in cash.  The Company has  recorded a gain of $5.7
million in its condensed consolidated statement of operations for the six months
ended June 30, 1998.

Note 3.   Debt Obligations

     The Company has a $45 million Senior Credit  Facility  ("Facility")  with a
bank  which  matures  on  July  1,  2000.  Borrowings  under  the  Facility  are
collateralized by certain assets of the Company (primarily  accounts  receivable
and inventory),  and the amount of available borrowings  fluctuates based on the
underlying asset borrowing base and the Company's working capital  requirements.
At June 30,  1998,  the Company was not in  compliance  with  certain  financial
covenants contained within the Facility. The bank has waived this noncompliance.

Note 4.       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.  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  June  30  and  December  31 of  each  year.  The  liquidation
preference of the  preferred  stock is the face amount of the Series A-1 and A-2
($1,000 per share),  plus all accrued and unpaid  dividends.  The Series A-1 and
A-2  Preferred  Stock is senior to all other  present  and future  equity of the
Company.  The Company is required to redeem all of the outstanding shares of the
Series A-1 and A-2 on December 31, 2001,  subject to the legal  availability  of
funds.  At June 30, 1998 and December  31, 1997  cumulative  undeclared,  unpaid
dividends  relating  to Series  A-1 and A-2  Preferred  Stock were  accrued  for
financial  reporting  purposes  in  the  amount  of  $2,417,000  and  $2,207,000
respectively.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Class B Redeemable Preferred Stock
----------------------------------

     On May 8,  1998  the  Company  entered  into an  agreement  with one of its
shareholders,  Union de Banques Suisses (Luxembourg) S.A. ("UBS"), to retire all
of UBS's equity holdings in the Company.  These equity holdings  included all of
the 7,500 shares of the  Company's  Class B Preferred  Stock with a  liquidation
preference  of  $1,000  per  share,  and  the  cumulative  unpaid  dividends  of
approximately  $4.8 million,  1,837,773  shares of the Company's  Class A Common
Stock,  and  1,312,695  of the  Company's  Class A Common  Stock  warrants.  The
purchase price to retire these  interests was $6.5 million,  of which $5 million
was paid in cash,  and the  remaining  $1.5  million was funded by two  separate
letters of credit secured by the Company's lender.  These will mature in 120 and
180 days from the date of the transaction.

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

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, have
been  authorized for issuance.  The Company has issued  3,595,586  shares of the
Public  Preferred  Stock.  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.

     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.

     Through  November 21, 1995,  the Company had the option to pay dividends in
additional  shares of Preferred Stock in lieu of 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.  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.  No  dividends  have been  declared  or paid during
fiscal years 1992 through 1997.  Cumulative  undeclared dividends as of June 30,
1998 accrued for financial reporting purposes totaled $16,892,000. 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.

     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.

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

General

     In the first six months of 1998,  the  Company  experienced  a decrease  in
revenue of $21.9  million as compared to the same period in 1997.  This decrease
was  largely  attributable  to a decrease of $18.8  million of revenue  from the
Company's Systems  Integration Group. The Systems Integration Group was impacted
by the expiration of the Immigration  and  Naturalization  Services  Contract in
September 1997 and a lack of follow-up work from certain large  contracts  which
were in place in 1997. In addition,  Systems and Support  Services  revenues for
the first six months of 1998 were $4.7  million  less than the same 1997  period
principally due to the sale of TIS in February 1998.

     Operating  profitability  decreased  during the first six months of 1998 as
compared to the same 1997 period,  principally  due to the effect of the revenue
decreases  summarized  above, a less  profitable  product mix in 1998 on certain
System  Integration Group contracts,  and under absorption of infrastructure and
the fixed nature of facility costs.

     Total backlog from existing  contracts was approximately  $1.01 billion and
$1.07  billion as of June 30, 1998 and December 31, 1997,  respectively.  Of the
$1.01 billion in total  backlog,  $818.7  million is backlog under the Company's
SMC-II  contract.  The SMC-II contract expires on September 30, 1998. As of June
30, 1998,  the funded backlog of the Company  totaled $61.7 million,  a decrease
from $104.3  million from  December 31, 1997.  This decrease is primarily due to
the sale of TIS which  decreased  funded  backlog by $24.9  million in the first
quarter of 1998. 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  Telos
Corporation   (California),   Telos  Field  Engineering  Inc.   ("TFE"),   Telos
International  Corporation ("TIC"), and it majority owned subsidiary Enterworks,
Inc.  ("Enterworks")  ("the  Company").  The  major  elements  of the  Company's
operating  expenses as a percentage of sales for the three and six month periods
ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>


                                                             Three Months Ended              Six Months Ended
                                                                   June 30,                       June 30,
                                                           ----------------------         ----------------------
                                                            1998            1997           1998           1997
                                                            ----            ----           ----           ----
<S>                                                         <C>            <C>             <C>           <C>    
Sales                                                       100.0%         100.0%          100.0%        100.0%
Cost of sales                                                84.8           83.5            88.5          84.6
SG&A expenses                                                13.8           11.8            14.1          11.9
Goodwill amortization                                         0.3            0.4             0.3           0.4
                                                              ---           ----             ---          ----

Operating income (loss)                                       1.1            4.3            (2.9)          3.1
Other income (expense)                                         --             --              --            --
Gain on sale of assets                                         --             --             6.3            --
Interest expense                                             (3.3)          (3.2)           (3.6)         (3.2)
Income tax provision                                         (1.5)            --            (0.9)           --
                                                              ---            ---             ---            ---

Net (loss) income                                            (3.7)%          1.1%           (1.1)%        (0.1)%

                                                              ===            ===             ===           ===

</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                       Six Months Ended
                                                        June 30,                                June 30,
                                                   -------------------                  ----------------------
                                                    1998           1997                   1998            1997
                                                    ----           ----                   ----            ----
                                                                     (amounts in thousands)
<S>                                                <C>            <C>                    <C>           <C>    
Revenues:
   Systems and Support Services                    $27,024        $32,189                $53,324       $ 58,025
   Systems Integration                              18,153         24,907                 34,346         53,134
   Enterworks                                        1,532            993                  2,833          1,275
                                                    ------         ------                 ------        -------
         Total                                     $46,709        $58,089                $90,503       $112,434
                                                    ======         ======                 ======        =======

Gross Profit:
   Systems and Support Services                     $4,228         $6,126                 $8,412        $10,045
   Systems Integration                               1,947          3,692                  2,111          7,622
   Enterworks                                          900           (240)                  (135)          (392)
                                                     -----          -----                  -----         ------
         Total                                      $7,075         $9,578                $10,388        $17,275
                                                     =====          =====                 ======         ======

Gross Margin:
   Systems and Support Services                     15.6%           19.0%                  15.8%          17.3%
   Systems Integration                              10.7%           14.8%                   6.1%          14.3%
   Enterworks                                       58.7%          (24.2)%                 (4.8)%        (30.7)%
         Total                                      15.1%           16.5%                  11.5%          15.4%
</TABLE>

        
     For the three month period ended June 30, 1998,  revenue decreased by $11.4
million,  or 19.6% to $46.7 million from $58.1 million for the  comparable  1997
period.  Of the $11.4 million  decrease,  $6.7 million was  attributable  to the
Systems  Integration  Group,  which  experienced this loss of revenue  primarily
because  of  the  expiration  of its  Immigration  and  Naturalization  Services
contract  ("INS  contract")  in September  1997.  The INS  contract  contributed
revenues of $7.6 million in the second  quarter of 1997. The Systems and Support
Services Group also  experienced a $5.2 million  decrease in revenue from second
quarter 1998 compared to second quarter 1997.  This decrease is primarily due to
a $6.3 million  decrease in revenue  resulting from the sale of the TIS division
in February  1998.  This loss of revenue was partially  offset by an increase in
software  solutions  sales  related  to an order  under the  Artillery  Training
Simulation  Devices product line. The declines in System Integration and Systems
and  Support  Services  revenue  were also  partially  offset by an  increase of
$539,000 in  Enterworks  revenue for the second  quarter of 1998 compared to the
second quarter of 1997. The increase is primarily due to Enterworks sales to the
Army Logistics market segment.

     Revenue  decreased  $21.9  million  or 19.5% to $90.5  million  for the six
months ended June 30, 1998,  from $112.4 million for the comparable 1997 period.
The  decrease  for the six month period  includes an $18.8  million  decrease in
Systems  Integration  revenue and a $4.7 million decrease in Systems and Support
Services revenue,  partially offset by an increase of $1.6 million in Enterworks
revenue.  This decrease in the six month revenue is primarily due to the lack of
revenue from the INS contract,  which expired in September  1997 and had revenue
of $17.3  million in the first six months of 1997,  the sale of TIS in  February
1998, and the lack of follow-up work from large contracts which were in place in
1997. These decreases were slightly offset by sales under the Artillery Training
Simulation  Devices  product line of $3.0 million,  and Enterworks  sales to the
Army Logistics and health care market segments.
<PAGE>


     Cost of sales  decreased by $8.9 million or 18.3%,  to $39.6 million in the
three month  period ended June 30, 1998,  from $48.5  million in the  comparable
1997 period. The decrease in cost of sales for the three month period includes a
$5.0  million  decrease in systems  integration  cost of sales,  a $3.3  million
decrease in systems and support services cost of sales, and a $600,000  decrease
in  Enterworks  cost of sales.  Except for  Enterworks,  the decrease in cost of
sales resulted from the decreases in sales for the period. Additionally, cost of
sales  increased  due to  unfavorable  changes  in  product  mix and by an under
absorption of infrastructure and the fixed nature of facilities costs.

     For the six  months  ended June 30,  1998,  cost of sales  decreased  $15.0
million,  or 15.8%,  to $80.1  million from $95.1 million for the same period in
1997. The change in cost of sales  includes a $13.3 million  decrease in systems
integration  cost of sales and a $3.0  million  decrease  in systems and support
services cost of sales, and a $1.3 million increase in Enterworks cost of sales.
The  reasons  for  these  cost of sales  decreases  are  consistent  with  those
summarized in the preceding paragraph.

     Gross  profit  decreased  $2.5  million in the three  month  period to $7.1
million in 1998, from $9.6 million in the comparable  1997 period.  The decrease
in gross profit includes a $1.7 million  decrease in systems  integration  gross
profit,  and a $1.9  million  decrease  in systems and  support  services  gross
profit,  partially  offset by an increase  in  Enterworks  gross  profit of $1.1
million.  For the six month  period,  gross profit  decreased by $6.9 million to
$10.4 million from $17.3 million. This decrease includes a $5.5 million decrease
in systems  integration  gross profit and a $1.6 million decrease in systems and
support services gross profit,  offset by a $257,000 decline in Enterworks gross
loss.  The reasons for the gross profit  decrease for the periods ended June 30,
1998  compared to June 30, 1997 related to the reduced  revenue base in both the
Systems  Integration and Systems and Support Services Groups.  In addition,  the
Systems  Integration Group experienced shifts in product mix which significantly
impacted gross margin.

     Gross  margins  were 15.1% and 11.5%,  respectively,  for the three and six
month  periods of 1998 as  compared  to 16.5% and 15.4%,  respectively,  for the
comparable periods of 1997.

     Selling,   general,  and  administrative   expense  ("SG&A")  decreased  by
approximately  $438,000 or 6.4%,  to $6.4 million in the second  quarter of 1998
from $6.9 million in the comparable  period of 1997. For the six month period of
1998, SG&A decreased $721,000 to $12.7 million from $13.4 million in 1997. These
decreases are due primarily to the Company's consolidation of its administrative
support  functions  and were  partially  offset by an  increased  investment  in
research and development  and sales and marketing for Enterworks.  Excluding the
additional expense incurred for Enterworks  research and development of $545,000
and  Enterworks  sales and  marketing  costs of  $824,000,  selling  general and
administrative  expense decreased $2.1 million for the six months ended June 30,
1998 compared to the same period in 1997.

     SG&A as a percentage of revenues  increased to 13.8% for the second quarter
of 1998 from  11.8% in the  comparable  1997  period.  SG&A as a  percentage  of
revenues for the six month  period  ended June 30, 1998  increased to 14.1% from
11.9% compared to the same period in 1997.

     Goodwill  amortization  expense decreased $77,000 to $132,000 for the three
months and  decreased  by $109,000 to $325,000 for the six months ended June 30,
1998. These reductions are due to a decrease in the goodwill balance  associated
with the sale of TIS in early 1998.

     Operating  income  decreased by $2.0 million to $512,000 in the three month
period  ended  June 30,  1998  from  $2.5  million  of  operating  profit in the
comparable  1997  period.  Operating  income  decreased  $6.1  million to a $2.6
million  operating  loss for the six  months  ended  June 30,  1998  from a $3.4
million  operating  profit for the six month period  ended June 30, 1997.  These
decreases resulted from the aforementioned decreases in gross profit.
<PAGE>

     Telos sold  substantially  all of the net  assets of one of its  divisions,
TIS, in the first quarter of 1998. The transaction generated approximately $14.7
million in cash  proceeds and a gain of $5.7 million.  The Company  expects that
future 1998  quarterly  revenues  and  operating  profits  will  decrease,  when
compared to 1997, as a result of the TIS sale.  Although the Company  expects to
offset  effects of the TIS sale by  expanding  its  business  base,  there is no
assurance that such expansion will occur.

     Interest expense  decreased  approximately  $346,000 to $1.5 million in the
second  quarter of 1998 from $1.9 million in the  comparable  1997  period,  and
decreased  approximately  $327,000 to $3.3 million for the six months ended June
30, 1998 from $3.6 million for the comparable  1997 period.  These decreases are
due to decreased debt levels in 1998.

     The income tax  provision  was  $686,000 and $811,000 for the three and six
months ended June 30, 1998,  respectively.  The tax  provisions  were  primarily
attributable  to provisions  for state income taxes and increases and allowances
relating to the  recoverability  of deferred tax assets. An income tax provision
was not  recorded  for the  three or six  month  periods  ended  June 30,  1997,
principally  because  federal and state net operating  loss  carryforwards  were
sufficient to offset taxes due for those periods.

Liquidity and Capital Resources

     For the six months ended June 30, 1998, the Company  generated $8.2 million
of cash from its operating  activities.  This cash was provided by reductions of
accounts  receivable of $16.3 million,  offset by increased  losses  incurred in
operations.  Cash provided by investing  activities was $12.8 million,  which is
primarily  attributable  to the proceeds from the sale of TIS of $14.7  million.
Cash  used by  financing  activities  during  the  first  half of the  year  was
principally  due to $16.2  million  of net  repayment  of debt and $5.0  million
relating to the retirement of preferred stock.

     At  June  30,  1998,  the  Company  had  outstanding  debt  and  long  term
obligations  of $52.6  million,  consisting  of $23.7  million under the secured
senior credit facility, $17.0 million in subordinated debt, and $11.9 million in
capital lease obligations.

     The Company regularly  evaluates its financing  requirements to support its
business base. Company revenues are seasonal and are significantly influenced by
the federal  government's  fiscal year end,  which is September  30. The Company
anticipates that its projected cash flows from operations  together with amounts
available  under its senior credit  facility will be adequate to fund operations
at least through 1998. In addition, the Company has and continues,  from time to
time, to evaluate various financing options for additional  capital infusion and
long-term growth.

     In May 1998,  the Company  retired  all of the equity  holdings of Union de
Banques Suisses (Luxembourg) S.A. for $6.5 million, of which $5 million was paid
in cash in May 1998,  and the remaining  $1.5 million was funded by two separate
letters of credit secured by the Company's lender.  These will mature in 120 and
180 days from the date of transaction.

     At June 30,  1998,  the Company was  noncompliant  with  certain  financial
covenants contained in its senior credit facility. The Company's bank has waived
this noncompliance.

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,  modification costs and software purchased with the
express  purpose of fixing the year 2000  problem  will be expensed as incurred.
Management  believes  that on the basis of its review of its own computer  based
systems,  the  Company  is or will  be year  2000  compliant  without  incurring
additional  material  costs.  All  software  created  and sold by the Company is
believed to be compliant or will be compliant by the year 2000.  The Company has
been  informed by its  suppliers  that all software  licensed to the Company for
resale  will be  compliant  by the year  2000.  Agencies  of the  United  States
Government are principal  customers of the Company.  If such agencies experience
significant  year  2000  system  failures,  under  terms of  typical  government
contracts,  the  Company's  performance  could be delayed or contracts  could be
terminated for convenience.  If similar failures are experienced by customers or
potential  customers  of the  Company,  this  would  also  have an impact on the
Company's financial performance.
<PAGE>

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."

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 perform  successfully 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  significant 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 regularly reviews
the requirements for additional financing.  However, no assurance can be made on
whether such financing, if necessary, can be obtained on acceptable terms.


<PAGE>


                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

     On May 1,  1998,  the U.S.  District  Court  for the  Eastern  District  of
Virginia  entered its final order in Telos  Corporation  v. Cede & Co., Case No.
1:97CVO439.  In its final order, the court held that dividends payable on Telos'
12% Cumulative  Exchangeable  Redeemable Preferred Stock (the "Preferred Stock")
had been in arrears and unpaid for more than three  consecutive full semi-annual
periods and that the holders of the  Preferred  Stock were entitled to elect two
Class D directors on or before July 31, 1998. Said election was held on July 31,
1998, and the Preferred Stock shareholders elected two Class D directors.


Item 2.  Changes in Securities and Use of Proceeds

     On May 8,  1998  the  Company  entered  into an  agreement  with one of its
shareholders,  Union de Banques Suisses (Luxembourg) S.A. ("UBS"), to retire all
of UBS's equity holdings in the Company.  These equity holdings  included all of
the 7,500 shares of the  Company's  Class B Preferred  Stock with a  liquidation
preference  of  $1,000  per  share,  and  the  cumulative  unpaid  dividends  of
approximately  $4.8 million,  1,837,773  shares of the Company's  Class A Common
Stock,  and  1,312,695  of the  Company's  Class A Common  Stock  warrants.  The
purchase price to retire these  interests was $6.5 million,  of which $5 million
was paid in cash,  and the  remaining  $1.5  million was funded by two  separate
letters of credit secured by the Company's lender.  These will mature in 120 and
180 days from the date of the transaction.


Item 3.  Defaults Upon Senior Securities


Senior Redeemable Preferred Stocks

     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 $2,417,000 for the Series
A-1 and A-2 Preferred Stock at June 30, 1998.


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 0.06 of a share for each $.60 of such  dividends
not paid in cash.  No dividends  have been  declared or paid during fiscal years
1992 through 1997.  Cumulative  undeclared dividends as of June 30, 1998 accrued
for financial  reporting purposes totaled  $16,892,000.  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 $12,942,000.

     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.

<PAGE>

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

     On May 11,  1998 at the annual  meeting of common  shareholders  a vote was
taken to elect the following  directors:  Dr. Fred Charles  Ikle,  John B. Wood,
Norman P. Byers and Dr. Stephen Bryen. The persons nominated were approved to be
directors of the  Corporation by unanimous vote of all  shareholders  present at
the  meeting  which  represented  a  majority  of the  Company's  common  shares
outstanding.

     On July 31, 1998, at a special meeting of the holders of the 12% Cumulative
Exchangeable  Redeemable  Preferred  Stock ("12% Preferred  Stock"),  a vote was
taken to elect two new Class D  directors.  Mr.  Julio E.  Heurtematte,  Jr. and
Malcolm M.B. Sterrett were elected by plurality vote of all shareholders present
at the  meeting,  in person or by proxy,  which  represented  a majority  of the
Company's 12% Preferred Stock outstanding.


Item 6. Exhibits and Reports on Form 8-K

        (a)   Exhibits:

              10.85       Share Purchase Agreement between Telos Corporation, a
                          Maryland Corporation, formerly named and known as C3,
                          Inc. and Union Bank of Switzerland dated May 7, 1998.

              27          Financial Data Schedule

        (b) Reports on Form 8-K:

              None.



<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



August 14, 1998                                 /s/  Lorenzo Tellez
                                                --------------------------------
                                                Lorenzo Tellez
                                                (Principal Financial Officer &
                                                Principal Accounting Officer)

<PAGE>


                                Telos Corporation
                                  Exhibit Index

<TABLE>
<CAPTION>

   Exhibit
   Number                                   Exhibit Name                                                  Page
   ------                                   ------------                                                  ----
    <S>           <C>                                                                                      <C>    
   
    10.85         Share Purchase Agreement between Telos Corporation, a Maryland                           19
                  Corporation,  formerly  named and known as C3, Inc.  and Union
                  Bank of Switzerland dated May 7, 1998.

    27            Financial Data Schedule                                                                  27
</TABLE>