<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, 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 November 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): 16
                                                    ----



<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 Nine Months Ended September 30, 1998 and 1997...........................................3

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

     Condensed Consolidated Statements of Cash Flows for the
         Nine Months Ended September 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......................................................9-13


                                 PART II.   OTHER INFORMATION


Item 1.        Legal Proceedings..........................................................................14

Item 2.        Changes in Securities and Use of Proceeds..................................................14

Item 3.        Defaults Upon Senior Securities.........................................................14-15

Item 4.        Submission of Matters to a Vote of Security Holders........................................15

Item 6.        Exhibits and Reports on Form 8-K...........................................................15

SIGNATURES................................................................................................16
</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,
                                                    ------------------------            -----------------------
                                                       1998            1997              1998           1997
                                                       ----            ----              ----           ----
<S>                                                    <C>            <C>                <C>           <C>    
Revenue
    Systems and Support Services                       $22,347        $32,380            $75,671       $90,406             
    Systems Integration                                 16,802         34,576             51,148        87,710
    Enterworks                                           1,309          1,045              4,142         2,319
                                                        ------         ------             ------       --------
                                                        40,458         68,001            130,961       180,435
Costs and expenses
    Cost of revenue                                     37,399         59,406            117,514       154,565             
Selling, general and
     administrative expenses                             6,446          6,422             19,119        19,816             
    Goodwill amortization                                  132            210                457           644
                                                         -----          -----             ------        ------
Operating (loss) income                                 (3,519)         1,963             (6,129)        5,410

Other income (expenses)
    Gain on sale of assets                                  --             --              5,683            --
    Other income                                            14             22                 40            45             
Interest expense                                        (1,662)        (1,908)            (4,978)       (5,551)
                                                         -----          -----              -----         -----

(Loss) income before taxes                              (5,167)            77             (5,384)          (96)

Income tax provision                                      (117)            --               (928)           --
                                                           ---           ----                ---           ---

Net (loss) income                                      $(5,284)        $   77            $(6,312)         $(96)
                                                         =====          =====              =====            ==























                                           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

                                                                 September 30, 1998              December 31, 1997
                                                                 ------------------              -----------------
<S>                                                                   <C>                            <C>    
Current assets
    Cash and cash equivalents                                         $   471                        $   587
    Accounts receivable, net                                           36,268                         57,972
    Inventories, net                                                   12,581                         12,390
    Deferred income taxes                                               1,752                          4,632
    Other current assets                                                  725                            676
                                                                       ------                         ------
       Total current assets                                            51,797                         76,257

Property and equipment, net of
    accumulated depreciation of
    $24,217 and $22,609, respectively                                  14,660                         15,730
Goodwill, net                                                           7,051                         12,466
Other assets                                                            7,961                          5,265
                                                                       ------                        -------
                                                                      $81,469                       $109,718
                                                                       ======                        =======

                                               LIABILITIES AND STOCKHOLDERS' INVESTMENT

Current liabilities
     Accounts payable                                                 $20,728                        $16,912
     Accrued compensation and benefits                                  7,608                          8,684
     Other current liabilities                                          7,699                          6,835
                                                                       ------                         ------

       Total current liabilities                                       36,035                         32,431

Senior credit facility                                                 21,117                         39,945
Senior subordinated notes                                              17,054                         16,930
Capital lease obligations                                              11,762                         12,085
                                                                       ------                        -------

       Total liabilities                                               85,968                        101,391
                                                                       ------                        -------

Redeemable preferred stock
     Senior redeemable preferred stock                                  5,524                          5,207
     Class B redeemable preferred stock                                    --                         12,035
     Redeemable preferred stock                                        33,265                         29,951
                                                                       ------                         ------

       Total preferred stock                                           38,789                         47,193
                                                                       ------                         ------

Stockholders' investment
     Common stock                                                          78                             78
     Capital in excess of par                                           1,905                             --
     Retained earnings (deficit)                                      (45,271)                       (38,944)
                                                                       ------                         ------

       Total stockholders' investment (deficit)                       (43,288)                       (38,866)
                                                                       ------                         ------
                                                                      $81,469                       $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)

                                                                                             Nine Months
                                                                                         Ended September 30,
                                                                                      -------------------------
                                                                                         1998            1997
                                                                                         ----            ----
<S>                                                                                    <C>             <C>    
Operating activities:
     Net loss                                                                          $(6,312)        $    (96)
     Adjustments to reconcile net loss to cash
       provided by (used in) operating activities:
         Gain on sale of assets                                                         (5,683)              --
         Depreciation and amortization                                                   3,169            2,988
         Goodwill amortization                                                             457              644
         Other noncash items                                                               574            1,604
         Changes in assets and liabilities                                              20,931          (23,287)
                                                                                        ------           ------
         Cash provided by (used in) operating activities                                13,136          (18,147)
                                                                                        ------           ------
Investing activities:
     Proceeds from sale of assets                                                       14,675               --
     Investment in software products                                                    (1,806)          (1,989)          
     Purchase of property and equipment                                                   (970)          (1,877)
                                                                                        ------            -----
         Cash provided by (used in) investing activities                                11,899           (3,866)
                                                                                        ------            -----
Financing activities:
     (Repayment of) proceeds from borrowings under
         senior credit facility                                                        (18,828)          20,612            
     Payments under capital leases                                                        (323)            (281)           
     Retirement of Class B redeemable preferred stock                                   (6,000)              --
     Repayment of senior subordinated notes                                                 --             (675)
                                                                                        ------           ------
         
         Cash (used in) provided by financing activities                               (25,151)          19,656
                                                                                        ------           ------
     Decrease in cash and cash equivalents                                                (116)          (2,357)

     Cash and cash equivalents at beginning
         of period                                                                         587            2,781
                                                                                           ---            -----
     Cash and cash equivalents at end
         of period                                                                      $  471           $  424
                                                                                          ====             ====












                                             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.           Basis of Presentation

         The accompanying  interim financial  statements include the accounts of
Telos Corporation ("Telos") and its wholly-owned  subsidiaries Telos Corporation
(California),   Telos  Field   Engineering,   Inc.,   and  Telos   International
Corporation,   and  its  substantially   owned  subsidiary,   Enterworks,   Inc.
(collectively,  the "Company").  Significant intercompany transactions have been
eliminated.  In the opinion of management,  the accompanying  interim  financial
statements  include all adjustments  (consisting only of normal recurring items)
necessary for their fair  presentation  in conformity  with  generally  accepted
accounting principles. Interim results are not necessarily indicative of results
for a full year.  The  information  included in this Form 10-Q should be read in
conjunction with Management's  Discussion and Analysis and financial  statements
and  notes  thereto   included  in  the  Company's   1997  Form  10-K.   Certain
reclassifications have been made to conform to the current period presentation.

Note 2.       Sale of Assets

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

Note 3.   Senior Credit Facility

         The Company has a $45 million Senior Credit  Facility ("the  Facility")
with a bank which  matures on July 1, 2000.  Borrowings  under the  Facility are
collateralized primarily by the Company's accounts receivable and inventory, and
the amount of available  borrowings  fluctuates  based on the  underlying  asset
borrowing  base. At September 30, 1998,  the Company was not in compliance  with
several of the  covenants  contained  within the Facility,  including  covenants
relating to certain  leverage,  net worth,  tangible  capital  and fixed  charge
coverage goals. The bank has waived this noncompliance.

Note 4.       Redeemable Preferred Stock

Senior Redeemable Preferred Stock

         The components of the Senior Redeemable  Preferred Stock are Series A-1
and Series A-2 Redeemable Preferred Stock each with $.01 par value and 1,250 and
1,750 shares authorized,  issued and outstanding,  respectively.  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 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.  Mandatory
redemptions  are  required  from  excess  cash  flows,  as  defined in the stock
agreements.  Through  September 30, 1998,  there has been no available cash flow
permitting  mandatory  redemption.  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.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

         The  Company  has  not  declared  dividends  on its  Senior  Redeemable
Preferred Stock since its issuance.  At September 30, 1998 and December 31, 1997
cumulative  undeclared,  unpaid dividends relating to Series A-1 and A-2 totaled
$2,524,000, and $2,207,000,  respectively,  and have been accrued as a component
of the carrying value of the Senior  Redeemable  Preferred Stock balances in the
accompanying financial statements.

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

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

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

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 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  1998.  Cumulative  undeclared  dividends as of
September 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.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

         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

         Revenue  for the  first  nine  months  of 1998 was  $131.0  million,  a
decrease  of $49.5  million or 27% as  compared  to the same 1997  period.  This
decrease was primarily  attributable  to a $36.6 million decline in revenue from
the Company's Systems Integration Group, which was impacted by the expiration of
the  Immigration  and  Naturalization  Services  contract in September  1997. In
addition, Systems and Support Services revenue for the first nine months of 1998
were $14.7 million less than the same 1997 period,  principally  due to the sale
of TIS in February 1998.

         Operating  losses  through  the  first  nine  months  of 1998 were $6.1
million as compared to an operating  profit of $5.4 million during the same 1997
period. Operating profitability declined as a result of the decreases in revenue
noted in the preceding paragraph, the under absorption of certain infrastructure
costs, and a less profitable  product mix for the Systems  Integration  Group in
1998 as compared to 1997.

         As of September  30, 1998,  the funded  backlog of the Company  totaled
$89.6  million,  a decrease  from $104.0  million as of December 31, 1997.  This
decrease  is  primarily  due to the sale of TIS 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.  Total backlog from existing contracts was approximately $994 million
and $1.07 billion as of September 30, 1998 and December 31, 1997,  respectively.
Of the $994  million in total  backlog,  $799.6  million  is  backlog  under the
Company's SMC-II contract which expires on January 31, 1999.

Results of Operations

         The condensed consolidated statements of operations include the results
of operations of Telos Corporation and its  subsidiaries.  The major elements of
the  Company's  operating  expenses as a percentage of revenue for the three and
nine month periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>

                                                             Three Months Ended            Nine Months Ended
                                                              September 30,                  September 30,
                                                           ---------------------          --------------------
                                                            1998            1997           1998            1997
                                                            ----            ----           -----           ----
<S>                                                         <C>            <C>             <C>           <C>    
Revenue                                                     100.0%         100.0%          100.0%        100.0%
Cost of revenue                                              92.4           87.4            89.7          85.7
SG&A expenses                                                15.9            9.4            14.6          11.0
Goodwill amortization                                         0.4            0.3             0.4           0.3
                                                              ---           ----             ---          ----

Operating (loss) income                                      (8.7)           2.9            (4.7)          3.0
Other income (expense)                                         --             --              --            --
Gain on sale of assets                                         --             --             4.3            --
Interest expense                                             (4.1)          (2.8)           (3.8)         (3.1)
Income tax provision                                         (0.3)            --            (0.7)           --
                                                              ---            ---             ---           ---

Net (loss) income                                           (13.1)%          0.1%           (4.9)%        (0.1)%
                                                             ====            ===             ===           ===


</TABLE>

<PAGE>

Financial Data by Market Segment

         Revenue,  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,    
                                                   ------------------                     ---------------------
                                                    1998           1997                    1998           1997
                                                    ----           ----                    ----           ----
                                                                      (amounts in thousands)
<S>                                                <C>            <C>                   <C>            <C>    
Revenue:
   Systems and Support Services                    $22,347        $32,380               $ 75,671       $ 90,406
   Systems Integration                              16,802         34,576                 51,148         87,710
   Enterworks                                        1,309          1,045                  4,142          2,319
                                                    ------         ------                -------        -------
         Total                                     $40,458        $68,001               $130,961       $180,435
                                                    ======         ======                =======        =======

Gross Profit:
   Systems and Support Services                    $ 3,119        $ 5,792               $ 11,531       $ 15,837
   Systems Integration                                 808          2,973                  2,919         10,595
   Enterworks                                         (868)          (170)                (1,003)          (562)
                                                     -----          -----                 ------         ------
         Total                                     $ 3,059        $ 8,595               $ 13,447       $ 25,870
                                                    ======         ======                =======        =======

Gross Margin:
   Systems and Support Services                     14.0%           17.9%                  15.2%          17.5%            
   Systems Integration                               4.8%            8.6%                   5.7%          12.1%
   Enterworks                                      (66.3)%         (16.3)%                (24.2)%        (24.2)%
         Total                                       7.6%           12.6%                  10.3%          14.3%
</TABLE>
         
     Revenue for the quarter ended September 30, 1998 was $40.5 million, a $27.5
million or 40% decrease from the  comparable  1997 period.  Approximately  $17.8
million of this  decrease was  attributable  to the Systems  Integration  Group,
which  experienced lower revenue primarily due to the completion of two separate
projects during the third quarter of 1997: the  Immigration  and  Naturalization
Services Contract ("INS Contract") and the Joint Recruiting  Information Support
System Blanket Purchase  Agreement ("JRISS BPA"). The INS Contract and JRISS BPA
contributed revenue of $7.2 million and $7.6 million, respectively, in the third
quarter of 1997. In addition, the Systems and Support Services Group experienced
a $10.0  million  decrease in revenue from the third quarter of 1998 compared to
the third quarter of 1997. This decrease was primarily due to the sale of TIS in
February 1998 and the expiration of its Immigration and Naturalization  Services
Blanket Purchase  Agreement for Field Operation  Support Contract ("INS BPA") in
the fourth quarter of 1997. TIS and INS BPA contributed  revenue of $6.4 million
and $4.5  million,  respectively,  during  the  third  quarter  of 1997  with no
corresponding 1998 revenues. The declines in Systems Integration and Systems and
Support  Services  revenue were  partially  offset by an increase of $264,000 in
Enterworks  revenue for the third  quarter of 1998 compared to the third quarter
of 1997.

         For the nine months  ended  September  30, 1998 as compared to the same
1997 period,  revenue  decreased $49.5 million or 27.4% to $131.0  million.  The
decrease for the nine month period includes a $36.6 million  decrease in Systems
Integration revenue and a $14.7 million decrease in Systems and Support Services
revenue,  partially offset by an increase of $1.8 million in Enterworks revenue.
The revenue  decreases  are primarily  attributable  to the factors noted in the
preceding paragraph,  including INS contract, JRISS BPA, INS BPA and TIS revenue
which were $23.9 million,  $7.6 million,  $8.9 million and $18.0 million higher,
respectively, during the first nine months of 1997 than the first nine months of
1998.

<PAGE>

         Cost of  revenue  was 92.4% of  revenue  for the  quarter  and 89.7% of
revenue for the nine months ended  September  30, 1998, as compared to 87.4% and
85.7% for the  comparable  1997  periods.  The increases in cost of revenue as a
percentage  of revenue are  primarily  attributable  to  unfavorable  changes in
product mix and the under absorption of infrastucture  costs. On a dollar basis,
the  decreases in cost of revenue for the quarter and nine months as compared to
the same 1997 periods are primarily attributable to the decreases in revenue.

         Selling, general and administrative expenses ("SG&A") were $6.4 million
in both the third  quarter  of 1998 and 1997.  For the nine  month  period  SG&A
decreased  $697,000 to $19.1 million in 1998 from $19.8 million in 1997.  During
the first nine months of 1998, the Company increased expenditures for Enterworks
research  and  development  and sales and  marketing  by $1.0  million  and $1.8
million,  respectively,  as compared  to the same 1997  period.  However,  these
increases  were more than offset by  reductions in SG&A  expenditures,  relating
principally to the consolidation of certain administrative support functions.

         Goodwill  amortization  expense  decreased  $78,000 to $132,000 for the
three  months and  decreased  by $187,000 to $457,000  for the nine months ended
September  30,  1998.  These  reductions  are due to a decrease in the  goodwill
balance associated with the sale of TIS, one of Telos' divisions, in early 1998.

         Telos  sold  substantially  all of the net  assets  of TIS in the first
quarter of 1998. The transaction  generated $14.7 million in cash proceeds and a
gain of $5.7 million.  The Company  expects that future  quarterly  revenues and
operating  profits will decrease,  when compared to 1997, as a result of the TIS
sale.  Although the Company  continues to seek 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  $246,000 to $1.7 million in
the third quarter of 1998 from $1.9 million in the comparable  1997 period,  and
decreased  approximately  $573,000 to $5.0  million  for the nine  months  ended
September  30, 1998 from $5.5  million for the  comparable  1997  period.  These
decreases are due principally to decreased debt levels in 1998.

         The income tax  provision was $117,000 for the quarter and $928,000 for
the nine months ended  September 30, 1998.  These tax provisions  were primarily
attributable  to state income taxes and increases in allowances  relating to the
recoverability  of deferred tax assets. An income tax provision was not recorded
for the three or nine  month  periods  ended  September  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 nine months ended  September  30, 1998,  the Company  generated
$13.1  million of cash from its  operating  activities.  This cash was generated
largely by reductions of accounts receivable of $21.7 million, offset by the net
loss from operations.  Cash provided by investing activities for the nine months
was $11.9  million,  which was primarily  attributable  to the proceeds from the
sale of TIS of $14.7 million.  Cash used in financing activities during the nine
month  period of $25.2  million  was  principally  due to an $18.8  million  net
repayment  of the senior  credit  facility and the $6.0  million  retirement  of
preferred stock.

         At September 30, 1998, the Company had  outstanding  debt and long-term
obligations  of $50.0  million,  consisting  of $21.1  million  under the senior
credit facility, $17.1 million in subordinated debt and $11.8 million in capital
lease obligations.
<PAGE>

         The Company regularly  evaluates its financing  requirements to support
its  business  base.   Certain  revenues  are  seasonal  and  are  significantly
influenced by customer order activity near the federal  government's fiscal year
end of 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.  For 1999, in addition to
projected  cash flows from  operations  and amounts  available  under its senior
credit facility,  the Company expects to continue to evaluate various  financing
options to fund its activities.

         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.  UBS was paid using the first
letter of credit,  in the amount of $1.0  million,  in September  1998,  and the
second letter of credit of $500,000 matures in November 1998.

         At September 30, 1998,  the Company was not in compliance  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  internal  use  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 continue to incur internal staff costs as well as
consulting   and  other   expenses   related  to  software  and   infrastructure
enhancements  necessary  to prepare  the  systems  for the year  2000.  However,
management estimates that the total amount of these future costs will not have a
material  adverse  effect on the  Company's  business or results of  operations.
Maintenance,  modification costs and software purchased with the express purpose
of fixing the year 2000 problem will be expensed as incurred.

         The Company has been informed by its suppliers  that software  licensed
to the  Company  for  resale  will  be  compliant  by the  year  2000.  If  this
information  is not  correct,  there could be a material  adverse  effect on the
Company. 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,  which could have a
material  adverse effect on the Company.  If similar failures are experienced by
other customers or potential  customers of the Company,  this would also have an
impact on the Company.

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

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

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 materially 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 the remainder of 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

         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 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.  The first letter of credit
matured  120 days after the date of the  transaction,  and the second  letter of
credit will mature 180 days from the date of the transaction.

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 $2,524,000 for the
Series A-1 and A-2 Preferred Stock at September 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  1998.  Cumulative  undeclared  dividends as of September  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.

<PAGE>

         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

     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 Mr.
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.   Specifically,  Mr.  Heurtematte
received 2,617,736 votes, and Mr. Sterrett also received 2,617,736 votes.


Item 6.           Exhibits and Reports on Form 8-K

        (a)   Exhibits:

              27          Financial Data Schedule

(b)      Reports on Form 8-K:

              None.

  Item 5 and Item 7 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 16, 1998                                 /s/  Lorenzo Tellez          
                                                  ------------------------------
                                                  Lorenzo Tellez
                                                  (Principal Financial Officer &
                                                  Principal Accounting Officer)