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TELOS CORP 10-Q Summary: Period Ended June 30, 2012

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2012, for Telos Corporation, an information technology solutions and services company serving U.S. Government and commercial customers. The company operates primarily through three business lines: Cyber Operations and Defense, Secure Communications, and Identity Management. The filing is unaudited and includes consolidated results for subsidiaries including Telos ID (60% owned).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 36.9% year-over-year for the quarter and 24.3% for the six-month period. This was driven primarily by an $11.4 million increase in sales from the U.S. Air Force NETCENTS contract.
• Profitability: Operating income surged 73.8% for the quarter and 52.7% for the six-month period, largely due to improved gross profit from a favorable mix of solutions sold.
• Net Income: Net income attributable to Telos Corporation increased 152.9% for the quarter and 99.2% for the six-month period compared to 2011.
• Cost Structure: Cost of sales increased 39.9% for the quarter, reflecting higher revenue volume and a shift in program mix toward Telos-installed solutions.
• Debt Reduction: The company redeemed $2.0 million of Senior Redeemable Preferred Stock in May 2012 at a 10% discount, recording a gain of approximately $0.2 million.

Guidance, Outlook, and Risks

Outlook and Liquidity: Management believes available cash and borrowings under the Wells Fargo revolving credit facility (the "Facility") are sufficient to meet operating and debt service needs for the foreseeable future. The company maintains $7.3 million in unused borrowing availability. No specific forward-looking financial guidance was provided in this filing.

Capital Structure Risks: The company carries significant obligations in the form of redeemable preferred stock, classified as liabilities. As of June 30, 2012, cumulative undeclared dividends on Senior Redeemable Preferred Stock totaled $4.5 million, and accrued cash dividends on Public Preferred Stock totaled $78.7 million. The company is precluded from paying these dividends due to covenants in its credit facility.

Legal Proceedings: Ongoing litigation includes Costa Brava Partnership III, L.P. v. Telos Corporation and Hamot et al. v. Telos Corporation. No material developments occurred in these cases during the period, and management does not expect a material adverse effect on financial position.

Subsequent Event: The company intends to redeem an additional 36.0% of Senior Redeemable Preferred Stock (carrying value $2.2 million) for $2.0 million on or about August 24, 2012.

Investor Verification Checklist

• Credit Facility Covenants: Verify continued compliance with EBITDA and recurring revenue covenants under the Wells Fargo Facility, which restricts dividend payments and redemptions.
• Preferred Stock Obligations: Review the magnitude of accrued but unpaid dividends ($83.2 million total) and the impact of the "liability" classification on the balance sheet.
• Backlog Trends: Note that total backlog decreased to $578.0 million from $594.2 million in the prior year, with funded backlog declining to $90.1 million.
• Revenue Concentration: Assess reliance on the U.S. Air Force NETCENTS contract, which drove the majority of recent revenue growth.
• Non-Controlling Interest: Confirm the allocation of profits to the 40% non-controlling interest in Telos ID, which reduced net income attributable to Telos shareholders.