<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: March 31, 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 May 15, 1998 the registrant had 21,238,980 shares of Class A Common Stock,
no par  value,  4,037,628  shares of Class B Common  Stock,  no par  value;  and
3,595,586 shares of 12% Cumulative  Exchangeable Redeemable Preferred Stock, par
value $.01 per share, outstanding.

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>
<S>                                                                                                         <C>    


Item 1.       Financial Statements (Unaudited):

     Condensed Consolidated Statements of Income for the Three Months
       Ended March 31, 1998 and 1997 (Unaudited)...............................................................3

     Condensed Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
       and December 31, 1997...................................................................................4

     Condensed Consolidated Statements of Cash Flows for the Three Months
       Ended March 31, 1998 and 1997 (Unaudited)...............................................................5

     Notes to Condensed Consolidated Financial Statements (Unaudited)........................................6-8

Item 2.       Management's Discussion and Analysis of
              Financial Condition and Results of Operations.................................................9-13


                           PART II. OTHER INFORMATION


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

Item 5.        Other Events...................................................................................14

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 INCOME

                                                   (Unaudited)

                                              (amounts in thousands)


                                                                        Three Months Ended
                                                                             March 31,
                                                                 ---------------------------------
                                                                   1998                    1997
                                                                   ----                    ----
<S>                                                                <C>                   <C>   
Sales
    Systems and Support Services                                   $26,300               $25,836
    Systems Integration                                             16,193                28,227
    Enterworks                                                       1,301                   282
                                                                   -------                ------

                                                                    43,794                54,345
Costs and expenses
    Cost of sales                                                   40,481                46,648
    Selling, general and
      administrative expenses                                        6,242                 6,525
    Goodwill amortization                                              193                   225
                                                                    ------                ------
Operating (loss) income                                             (3,122)                  947
Other income (expenses)
    Gain on sale of assets                                           5,683                    --
    Other income                                                        20                    12
    Interest expense                                                (1,779)               (1,760)
                                                                    ------                 -----

Income (loss) before taxes                                             802                  (801)
Income tax provision                                                  (125)                   --
                                                                    ------                 -----
Net income (loss)                                                  $   677                $ (801)
                                                                    ======                 =====


















                         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
                                                         
                                                           ASSETS
                                                   (amounts in thousands)

                                                            March 31, 1998                December 31, 1997
                                                            --------------                -----------------
                                                              (Unaudited)
<S>                                                            <C>                            <C>  
Current assets
     Cash and cash equivalents                                 $   412                        $   587
     Accounts receivable, net                                   35,427                         57,972
     Inventories, net                                            9,899                         12,390
     Deferred income taxes                                       4,806                          4,632
     Other current assets                                          688                            676
                                                                ------                         ------
         Total current assets                                   51,232                         76,257

Property and equipment, net of
     accumulated depreciation of
     $22,715 and $22,609, respectively                          15,502                         15,730

Goodwill                                                         7,316                         12,466
Other assets                                                     6,002                          5,265
                                                                ------                        -------
                                                                80,052                        109,718
                                                                ======                        =======



                                             LIABILITIES AND STOCKHOLDERS' INVESTMENT

Current liabilities
     Accounts payable                                           10,617                         16,912
     Other current liabilities                                  10,949                          6,966
     Accrued compensation and benefits                           7,608                          8,553
                                                                ------                         ------
         Total current liabilities                              29,174                         32,431

Senior credit facility                                          12,914                         39,945
Senior subordinated notes                                       16,970                         16,930
Capital lease obligations                                       11,990                         12,085
                                                                ------                        -------
         Total liabilities                                      71,048                        101,391

Redeemable preferred stocks
     Senior redeemable preferred stock                           5,312                          5,207
     Class B redeemable preferred stock                         12,296                         12,035
     Redeemable preferred stock                                 30,336                         29,951
                                                                ------                        -------
         Total preferred stock                                  47,944                         47,193

Stockholders' investment
     Common stock                                                   78                             78
     Capital in excess of par                                       --                             --
     Retained deficit                                          (39,018)                       (38,944)
                                                                ------                        -------
         Total stockholders' investment                        $80,052                       $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)

                                                                                           Three Months
                                                                                          Ended March 31,
                                                                                    ---------------------------
                                                                                     1998                1997
                                                                                     ----                ----
<S>                                                                                <C>                <C>    
Operating activities:
     Net income (loss)                                                             $   677            $  (801)
     Adjustments to reconcile net loss to cash
       provided by (used in) operating activities:
         Gain on sale of assets                                                     (5,683)                --
         Depreciation and amortization                                                 897                989
         Goodwill amortization                                                         193                225
         Other non-cash items                                                          128                220
         Changes in assets and liabilities that
          provided (used) cash                                                      17,135            (16,459)
                                                                                    ------             ------
         Cash provided by (used in) operating
              activities                                                            13,347            (15,826)
                                                                                    ------             ------

Investing activities:
     Proceeds from sale of assets                                                   14,675                --
     Purchase of property and equipment                                               (544)              (553)
     Investment in other assets                                                       (527)              (563)
                                                                                    ------              -----
         Cash provided by (used in) investing
              activities                                                            13,604             (1,116)
                                                                                    ------              -----

Financing activities:
     (Repayment of) Proceeds from senior credit facility                           (27,031)            15,900
     Repayment of long-term debt                                                        --               (675)
     Payments under capital leases                                                     (95)               (85)
                                                                                    ------             ------
         Cash (used in) provided by financing
              activities                                                           (27,126)            15,140
                                                                                    ------             ------

Decrease in cash and cash equivalents                                                 (175)            (1,802)
Cash and cash equivalents at beginning of period                                       587              2,781
                                                                                    ------              -----

Cash and cash equivalents at end of period                                         $   412            $   979
                                                                                    ======             ======





















                            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.  The Company  believes  the  disclosures  made are adequate to make the
information presented consistent with past practices.  However,  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.

     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 March 31, 1998 and  December  31, 1997,
and the results of its operations and its cash flows for the three month periods
ended March 31, 1998 and 1997. Interim results are not necessarily indicative of
fiscal  year  performance  because  of the  impact of  seasonal  and  short-term
variations.

     During the first  quarter of 1998,  the  Company  modified  its view of the
business  segments  that it  operates  given  the  increased  activities  of its
majority-owned  subsidiary,  Enterworks,  Inc.  The  Company  now  analyzes  its
business in three distinct market  segments:  systems and support services which
consists of the Company's  hardware  services, software systems and solutions
services; systems integration and Enterworks, Inc.

     Statement  of Financial  Accounting  Standards  (SFAS) No. 130,  "Reporting
Comprehensive  Income"  became  effective  for the  Company  on January 1, 1998.
Because the Company has no items of other comprehensive  income, FAS 130 did not
affect the Company's financial statements presentation or disclosure.

     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 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 income for the three months ended March 31,
1998.


Note 3.       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 March 31, 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  $2,312,000  and  $2,207,000
respectively.
<PAGE>
                       TELOS CORPORATION AND SUBSIDIARIES
               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

     The Class B  Redeemable  Preferred  Stock has a $.01 par value,  with 7,500
shares  authorized,  issued and  outstanding.  The Class B Redeemable  Preferred
Stock has a cumulative  dividend  payable  semi-annually at June 30 and December
31. The  dividend  is  calculated  at a rate  equal to 14.125%  per annum of its
liquidation value. The Class B Redeemable Preferred Stock may be redeemed at its
liquidation  value together with all accrued and unpaid dividends at any time at
the option of the Company. The liquidation  preference of the Class B Redeemable
Preferred  Stock is the face  amount,  $1,000 per share,  plus all  accrued  and
unpaid  dividends.  The  Company is  required  to redeem all of the  outstanding
shares of the stock on December 31, 2001,  subject to the legal  availability of
funds. At March 31, 1998 and December 31, 1997, cumulative undeclared and unpaid
dividends  relating to the Class B redeemable  preferred  stock were accrued for
financial  reporting  purposes  in the  amount  of  $4,796,000  and  $4,535,000,
respectively.  The Class B Redeemable  Preferred  Stock was retired in May 1998.
See Note 4. - Subsequent Event.

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 $.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 March 31,
1998 accrued for financial reporting purposes totaled $14,735,000. 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.

Note 4.       Subsequent Event

     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 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 $5.5 million.

     In addition, the Company agreed to pay UBS $1.0 million for the termination
of a letter agreement between UBS and the Company,  as well as a negotiation fee
for certain expenses UBS incurred in connection with past services  performed on
behalf of the Company.

     The  total  price of $6.5  million  was  funded  by  borrowings  under  the
Company's term facility as well as 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 will be  recorded as an increase in
stockholders' investment; there is no impact on income from this transaction.
<PAGE>

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

General

     In the first three months of 1998,  the Company had  decreased  revenue and
profitability  as  compared to 1997.  The  decreased  revenue and  profitability
resulted  primarily  from the  expiration  of the  Systems  Integration  Group's
Immigration and  Naturalization  Services  Contract in September 1997.  Overall,
Systems Integration  revenues decreased by $12 million in 1998 compared to 1997.
As  a   result,   absorption   of   facility   and   infrastructure   costs  was
disproportionate  with  associated  revenues.  A  change  in  product  mix  also
contributed  to a  decrease  in  profitability  from 1997 to 1998.  Accordingly,
product margins were significantly impacted in the first quarter of 1998.

     Total backlog from existing  contracts was approximately  $1.01 billion and
$1.07  billion as of March 31, 1998 and December 31, 1997,  respectively.  As of
March 31, 1998,  the funded  backlog of the Company  totaled  $70.4  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 income  include the results of
operations  of  Telos  Corporation  and  its  wholly  owned  subsidiaries  Telos
Corporation   (California),   Telos  Field  Engineering,   Inc.  ("TFE"),  Telos
International  Corporation,  and its majority owned subsidiary Enterworks,  Inc.
("Enterworks")  (collectively,   "the  Company").  The  major  elements  of  the
Company's  operating  expenses  as a  percentage  of sales for the  three  month
periods ended March 31, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
  
                                            Three Months Ended
                                                  March 31,
                                         -------------------------
                                          1998               1997
                                          ----               ----
                                                             
<S>                                       <C>                <C>   
Sales                                     100.0%             100.0%
Cost of sales                             (92.4)             (85.8)
SG&A expenses                             (14.2)             (12.0)
Goodwill amortization                      (0.4)              (0.4)
                                          -----              -----
Operating (loss) income                    (7.0)               1.8

Gain on sale of Assets                     13.0                 --
Other income                                 --                 --
Interest expense                           (4.1)              (3.2)
                                           ----               ----
Income (loss) before taxes                  1.9               (1.4)

Income tax provision                       (0.3)                --
                                           ----                ---
Net income (loss)                         $ 1.6%             $(1.4)%
                                           ====                ===
</TABLE>

Financial Data by Market Segment

     During the first  quarter of 1998,  the  Company  modified  its view of the
business  segments  that it  operates  given  the  increased  activities  of its
majority-owned  subsidiary,  Enterworks,  Inc.  The  Company  now  analyzes  its
business in three distinct market  segments:  systems and support services which
consists of the Company's  hardware  services and software systems and solutions
services; systems integration and Enterworks, Inc.
<PAGE>
 
    Sales,  gross  profit,  and gross  margin by market  segment  for the first
quarter of 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                               March 31,
                                                 ---------------------------------
                                                     1998                    1997
                                                     ----                    ----
                                                       (amounts in thousands)
<S>                                                <C>                     <C>  
Sales:
     Systems and Support Services                  $26,300                 $25,836
     Systems Integration                            16,193                  28,227
     Enterworks                                      1,301                     282
                                                    ------                  ------
         Total                                     $43,794                 $54,345
                                                    ======                  ======

Gross Profit:
     Systems and Support Services                  $ 4,184                  $3,919
     Systems Integration                               164                   3,930
     Enterworks                                     (1,035)                   (152)
                                                    ------                   -----
         Total                                     $ 3,313                  $7,697
                                                    ======                   =====

Gross Margin:
     Systems and Support Services                     15.9%                   15.2%
     Systems Integration                               1.0%                   13.9%
     Enterworks                                      (79.6)%                 (53.9)%
         Total                                         7.6%                   14.2%
</TABLE>
    
     For the  three  month  period  ended  March 31,  1998  sales  decreased  by
approximately  $10.5 million,  or 19.4%, to $43.8 million from $54.3 million for
the comparable  1997 period.  This decrease for the three month period is due to
the Systems  Integration Group, which reported decreased sales of $12.0 million.
Offsetting  this decrease was  increased  sales during the period by the Systems
and Support  Services  Group and Enterworks of  approximately  $500,000 and $1.0
million, respectively.

     Systems Integration Group sales decreased by $12.0 million during the first
quarter of 1998 as  compared  to the first  quarter of 1997.  The  decrease  was
primarily due to the Immigration and  Naturalization  Services  Contract,  which
ended on September 30, 1997.

     Within the Systems and Support  Services  Group,  software  services  sales
increased approximately $500,000 due to the start up of MIS Services-II contract
supporting Air Force Material Command Sites.

     Enterworks  sales for the three months ended March 31, 1998 of $1.3 million
increased  approximately  361% or $1.0 million from $282,000 for the  comparable
period ended 1997. The increase is primarily due to Enterworks sales to the Army
Logistics and healthcare market segments.

     Cost of sales  decreased by $6.2 million or 13.2% to $40.5  million  during
the three  month  period  ended  March  31,  1998,  from  $46.6  million  in the
comparable 1997 period. The decrease in cost of sales resulted from the decrease
in sales for the period, offset by a change in product mix.

     Gross profit decreased by $4.4 million in the first quarter of 1998 to $3.3
million  from $7.7  million  in the  comparable  1997  period as a result of the
matters  discussed  above. The Systems and Support Services Group improved gross
margin was attributed to the MIS Services-II  contract.  The Systems Integration
Group  reduced  revenue  base  resulted  in  increased  costs  of  sales  due to
disproportionate  absorption  of  its  facility  and  infrastructure  costs.  In
addition,  the Systems Integration Group experienced shifts in product mix which
significantly  impacted gross margin. The result was a decrease in gross margins
of 12.9% percent for the Systems  Integration Group.  Accordingly,  gross margin
decreased  significantly from 1997 to 1998. The decrease in the Enterworks gross
margin is  directly  attributed  to  increased  product  amortization  costs and
increased staff in  anticipation  of future growth.  Total Company gross margins
were 7.6% and 14.2% for the three month  periods  ended March 31, 1998 and 1997,
respectively.
<PAGE>

     Selling,  general and  administrative  costs  decreased for the three month
period by  approximately  $300,000 to $6.2  million in 1998 from $6.5 million in
1997. This decrease is due to the Company's  consolidation of its administrative
support functions.  This decrease was slightly offset by increased investment in
research and  development  and sales and marketing for its Enterworks  division.
SG&A as a  percentage  of sales was 14.2% and 12.0% for the three month  periods
ended March 31, 1998 and 1997, respectively.

     Goodwill amortization expense was $193,000 for the three months ended March
31, 1998  compared to $225,000 for the period ended March 1997.  The decrease in
Goodwill amortization was a result of the Goodwill writedown associated with the
sale of TIS.

     Operating  income  decreased by $4.1 million  during the three months ended
March 31, 1998 to $3.1 million in operating  loss.  The Company had an operating
income of $947,000 in the  comparable  period of 1997. The decrease in operating
profit  resulted  primarily  from the  aforementioned  sales  and  gross  profit
decreases.

     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 proceeds and a gain of $5.7 million.  The sale had no material impact
on the operating  results for the first quarter of 1998 as compared to 1997. 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 increased by approximately  $19,000 to $1.8 million during
the three month period ended March 31, 1998, from $1.8 million in the comparable
period of 1997.

     The Company had a tax  provision  of  $125,000  for the three month  period
ended 1998,  the Company did not have a tax  provision in the three month period
ended March 31, 1997.

Liquidity and Capital Resources

     For the three  months  ended March 31,  1998,  the Company  provided  $13.3
million of cash in its  operating  activities.  Excluding  the effect of the TIS
transaction,  this cash was provided by  reductions  of accounts  receivable  of
$22.5  million,  offset by  decreases  in accounts  payable of $6.3  million and
increased losses incurred in operations.  Cash provided by investing  activities
was $13.6  million,  which is a result of the  proceeds  from the sale of TIS of
$14.7 million.  Cash was used by financing  activities during the quarter to pay
down approximately $27.0 million in debt.

     At March  31,  1998,  the  Company  had  outstanding  debt  and  long  term
obligations  of $41.9  million,  consisting  of $12.9  million under the secured
senior credit facility, $17.0 million in subordinated debt, and $12.0 million in
capital lease obligations.

     The Company continually evaluates its financing requirements to support its
business  base.  Company  revenues  are  seasonal  primarily  due to the federal
government's  fiscal  year  ending in  September  30, of each year.  The Company
anticipates that its current secured senior credit facility will be adequate for
1998. The Company has and continues to evaluate  various  financing  options for
additional capital infusion and long-term growth.

     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 for  approximately  $5.5  million.  In
addition,  the Company  agreed to pay UBS $1.0 million for the  termination of a
letter agreement  between UBS and the Company,  as well as a negotiation fee for
certain  expenses UBS incurred in  connection  with past  services  performed on
behalf of the Company.  The total price of $6.5 million was funded by borrowings
under the  Company's  term  facility as well as two  separate  letters of credit
secured by the Company's lender.

Year 2000
---------

     The  Company,  like most owners of computer  software,  will be required to
modify significant portions of its software so that it will function properly in
the year 2000. Systems that do not properly recognize date-sensitive information
could generate  erroneous data or cause a system to fail. The Company expects to
incur internal  staff costs as well as consulting and other expenses  related to
software and  infrastructure  enhancements  necessary to prepare the systems for
the year 2000.  Maintenance or modification  costs will be expensed as incurred,
while the costs of new  software  will be  capitalized  and  amortized  over the
software's  useful  life.  Management  believes  that the year  2000  compliance
expense will not have a material effect on the Company.
<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 successfully  perform at a profit,  the Company's ability to convert contract
backlog to  revenue,  the  Company's  ability  to secure  adequate  capital  and
financing  to support  continued  business  growth,  and the risk of the federal
government  terminating  contracts  with the Company.  While the Company has not
experienced  contract  terminations  with the  federal  government,  the federal
government can terminate at its  convenience.  Should this occur,  the Company's
operating results could be adversely impacted.

     As a high percentage of the Company's revenue is derived from business with
the federal  government,  the  Company's  operating  results  could be adversely
impacted  should the federal  government  not approve and  implement  its annual
budget in a timely fashion.

     While the Company believes it has adequate financing to support its revenue
base  anticipated  for 1998,  the Company's  growth  depends upon its ability to
obtain additional capital and financing sources. The Company continually reviews
the requirements for additional financing.  However, no assurance can be made on
whether such financing, if necessary, can be obtained, or if available,  that it
will be available on acceptable terms.
<PAGE>



                           PART II - OTHER INFORMATION


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

Senior and Class B Redeemable Preferred Stocks
----------------------------------------------

     The Company has not declared  dividends on its Senior Redeemable  Preferred
Stock,  Series A-1 and A-2,  and its Class B  Redeemable  Preferred  Stock since
their  issuance.  Total  undeclared  unpaid  dividends,  accrued  for  financial
reporting  purposes,  are $2,312,000 for the Series A-1, A-2 Preferred stock and
$4,796,000  for the  Class B  Preferred  Stock at March  31,  1998.  The Class B
Redeemable  Preferred  stock was  retired  in May  1998.  See  Subsequent  Event
discussed in Note 4 to financial statements for quarter ended March 31, 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 March 31, 1998 accrued
for financial  reporting purposes totaled  $14,735,000.  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 $10,795,000.

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


Item 5.       Other Events
              ------------

Sale of Assets
--------------

     On February 28, 1998, Telos  Corporation sold  substantially all of the net
assets of one of its 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 on its condensed  consolidated  statement of income for the three months
ended March 31, 1998.



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

        (a)   Exhibits:

                  27       Financial Data Schedule


        (b)   Reports on Form 8-K:  Registrant filed a  Current  Report on Form
                                    8-K/A, dated March 18, 1998, in respect of 
                                    the  Registrant's   selling  its  software 
                                    support division, Telos Information Systems,
                                    on February 28, 1998.

<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



May 15, 1998                               /s/ Lorenzo Tellez
                                           ------------------
                                           Lorenzo Tellez
                                           (Principal Financial Officer &
                                           Principal Accounting Officer)