Telos (TLS) 8-K/A Completion of Acquisition or Disposition of Assets

Exhibit 99.3

TELOS CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(amounts in thousands)

The following Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2011 and the following Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2010 and for the six months ended June 30, 2011 are based on the historical financial statements of Telos Corporation (“Telos” or the “Company”) and IT Logistics, Inc. (“ITL”) after giving effect to the acquisition of certain assets of ITL by Telos (as discussed in Note 1) as if it had occurred at June 30, 2011 for the balance sheet and January 1, 2010 for the statements of operations, and after applying the assumptions and adjustments described in the accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements. This acquisition became effective on July 1, 2011 (the “Closing Date”).

The Unaudited Pro Forma Condensed Combined Financial Statements were prepared using the purchase method of accounting with Telos treated as the acquiring entity. Accordingly, the aggregate value of the consideration paid by Telos to complete the acquisition will be allocated to the assets acquired and liabilities assumed from ITL based upon their estimated fair values on the Closing Date. As of the date of this Form 8-K/A, Telos has not completed the detailed valuations necessary to estimate the fair value of the assets acquired and the liabilities assumed from ITL and the related allocations of purchase price, nor has Telos identified all adjustments necessary to conform ITL’s accounting policies to Telos’ accounting policies. Additionally, a final determination of the fair value of assets acquired and liabilities assumed from ITL will be based on the actual net tangible and intangible assets and liabilities of ITL that existed as of the Closing Date. Accordingly, the pro forma purchase price adjustments presented herein are preliminary, and do not reflect any final purchase price adjustments made. These pro forma purchase price adjustments have been made solely for the purpose of providing the Unaudited Pro Forma Condensed Combined Financial Statements required pursuant to Item 9.01 of Form 8-K. Telos estimated the fair value of ITL’s assets and liabilities based on discussions with ITL’s management, due diligence and preliminary work performed by third-party valuation specialists. As the final valuations are being performed, increases or decreases in the fair value of relevant balance sheet amounts will result in adjustments, which may result in material differences from the information presented herein.

These Unaudited Pro Forma Condensed Combined Financial Statements have been developed from, and should be read in conjunction with, (1) the unaudited interim consolidated financial statements of Telos contained in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, (2) the audited consolidated financial statements of Telos contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and (3) the audited financial statements of ITL for the fiscal years ended December 31, 2010 and December 31, 2009 contained in Exhibit 99.1 to this Current Report on Form 8-K/A. Prior to the acquisition, ITL was a privately held company whose fiscal year ended at the close of each calendar year, and the historical financial statements of ITL included within the Unaudited Pro Forma Condensed Combined Financial Statements have been subjected to neither audit nor review procedures conducted by an independent registered public accounting firm. The Unaudited Pro Forma Condensed Combined Financial Statements are provided for informational purposes only and do not purport to represent Telos’ actual consolidated results of operations or consolidated financial position had the acquisition occurred on the dates assumed, nor are these financial statements necessarily indicative of Telos’ future consolidated results of operations or consolidated financial position.

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TELOS CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

(amounts in thousands)

	Six Months Ended June 30, 2011
	TELOS			ITL			Pro Forma Adjustments			Notes	Pro Forma Condensed Combined
Revenue
Products	$	23,765		$	0		$	0			$	23,765
Services		65,357			7,822			(6,271	)	g		66,908
		89,122			7,822			(6,271	)			90,673
Costs and expenses
Cost of sales - Products		18,958			0			0				18,958
Cost of sales - Services		46,945			5,201			(6,271	)	g		45,875
		65,903			5,201			(6,271	)			64,833
Selling, general and administrative expenses		15,805			870			1,145		h,i		17,820
Operating income		7,414			1,751			(1,145	)			8,020
Other income (expense)
Other income		281										281
Interest expense		(2,920	)		(30	)		(513	)	j		(3,463	)
Income before income taxes		4,775			1,721			(1,658	)			4,838
Provision for income taxes		(2,307	)					(136	)	k		(2,443	)
Net income		2,468			1,721			(1,794	)			2,395
Less: Net income attributable to non-controlling interest		(572	)		0			0				(572	)
Net income attributable to Telos Corporation	$	1,896		$	1,721		$	(1,794	)		$	1,823

See accompanying notes to the unaudited pro forma financial statements.

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TELOS CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

(amounts in thousands)

	Year Ended December 31, 2010
	TELOS			ITL			Pro Forma Adjustments			Notes	Pro Forma Condensed Combined
Revenue
Products	$	102,895		$	0		$	0			$	102,895
Services		122,902			15,075			(14,844	)	g		123,133
		225,797			15,075			(14,844	)			226,028
Costs and expenses
Cost of sales - Products		86,084			0			0				86,084
Cost of sales - Services		92,413			8,979			(14,844	)	g		86,548
		178,497			8,979			(14,844	)			172,632
Selling, general and administrative expenses		32,294			2,371			2,040		h		36,705
Operating income		15,006			3,725			(2,040	)			16,691
Other income (expense)
Other income		174			65			0				239
Interest expense		(6,228	)		(10	)		(1,025	)	j		(7,263	)
Income before income taxes		8,952			3,780			(3,065	)			9,667
Provision for income taxes		(4,708	)		(257	)		(478	)	k		(5,443	)
Net income		4,244			3,523			(3,543	)			4,224
Less: Net income attributable to non-controlling interest		(1,197	)		0			0				(1,197	)
Net income attributable to Telos Corporation	$	3,047		$	3,523		$	(3,543	)		$	3,027

See accompanying notes to the unaudited pro forma financial statements.

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TELOS CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

(amounts in thousands)

	June 30, 2011
	TELOS		ITL		Pro Forma Adjustments			Notes	Pro Forma Condensed Combined
ASSETS
Current assets
Cash and cash equivalents	$	283	$	25	$	(25	)	a	$	283
Accounts receivable, net of reserve		41,785		2,050		(2,050	)	a		41,785
Inventories, net of obsolescence reserve		9,294		513						9,807
Deferred program expenses		217		0						217
Other current assets		3,413		780		(776	)	a		3,417
Total current assets		54,992		3,368		(2,851	)			55,509
Property and equipment, net of accumulated depreciation		5,223		160						5,383
Deferred income taxes, long-term		1,665								1,665
Intangible Asset						15,786		g		15,786
Goodwill						10,200		f		10,200
Other assets		339		77						416
Total assets	$	62,219	$	3,605	$	23,135			$	88,959

See accompanying notes to the unaudited pro forma financial statements.

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TELOS CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

(amounts in thousands)

	June 30, 2011
	TELOS			ITL			Pro Forma Adjustments			Notes	Pro Forma Condensed Combined
LIABILITIES, REDEEMABLE PREFERRED STOCK, NON-CONTROLLING INTEREST AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and other accrued payables	$	20,297		$	2,137		$	(2,137	)	a	$	20,297
Accrued compensation and benefits		5,931			70			(30	)	a		5,971
Deferred revenue		2,960										2,960
Deferred income taxes		275										275
Senior credit facility – short-term		375			1,950			(1,950	)	a		375
Capital lease obligations – short-term		980										980
Note payable – short-term		0						6,950		b		6,950
Other current liabilities		2,764										2,764
Total current liabilities		33,582			4,157			2,833				40,572
Senior revolving credit facility		12,263						8,000		c		20,263
Capital lease obligations		5,473										5,473
Senior redeemable preferred stock		8,069										8,069
Public preferred stock		106,717										106,717
Subordinated Note Payable		0						11,750		d		11,750
Other liabilities		100										100
Total liabilities		166,204			4,157			22,583				192,944
Commitments, contingencies and subsequent events		0
Stockholders’ deficit
Telos stockholders’ deficit
Common stock		78			1			(1	)	a		78
Additional paid-in capital		103										103
Accumulated other comprehensive loss		(67	)									(67	)
Accumulated deficit		(104,509	)		2,560			(2,560	)	a		(104,509	)
Treasury stock					(3,113	)		3,113		a		0
Total Telos stockholders’ deficit		(104,395	)		(552	)		552				(104,395	)
Non-controlling interest in subsidiary		410										410
Total stockholders’ deficit		(103,985	)		(552	)		552				(103,985	)
Total liabilities, redeemable preferred stock, non-controlling interest and stockholders’ deficit	$	62,219		$	3,605		$	23,135			$	88,959

See accompanying notes to the unaudited pro forma financial statements.

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TELOS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1: Basis of Pro Forma Presentation

On the Closing Date, Telos acquired certain assets of ITL in accordance with the Asset Purchase Agreement, dated as of July 1, 2011.

The ITL assets were acquired for cash consideration of $8.0 million and a note payable of $7.0 million, due in 10 monthly payments of $700,000 plus accrued interest beginning 30 days after the Closing Date. There is additional consideration to be paid in the form of a subordinated promissory note (“the Note”) with a principal amount of $15 million. The Note accrues interest at a rate of 6.0% per annum beginning November 1, 2012, and is payable on July 1, 2041. The entire unpaid principal balance plus accrued and unpaid interest is due and payable upon the occurrence of a Change in Control (as defined in the Note), provided that all “Senior Obligations” are satisfied prior to or concurrent with such Change in Control. For purposes of the Note, “Senior Obligations” means, collectively, all (1) outstanding indebtedness of Telos, and (2) amounts due to the holders of the outstanding shares of the Company’s Series A-1 Redeemable Preferred Stock, Series A-2 Redeemable Preferred Stock, and 12% Cumulative Exchangeable Preferred Stock (or any securities redeemable or exchangeable for any of the foregoing) upon a Change in Control, upon the voluntary or involuntary liquidation, dissolution, or winding up of the affairs of Telos, or otherwise. The Asset Purchase Agreement and the complete terms of the notes are filed as exhibits to the Form 8-K filed by the Company on July 8, 2011. Borrowings of $8.0 million were drawn from Telos’ Revolving Credit Facility in order to finance the initial cash consideration.

The accompanying Unaudited Pro Forma Condensed Combined Financial Statements were prepared in accordance with Financial Accounting Standards Board Statement No. 141(R),Business Combinations(codified in ASC Topic 805, Business Combinations). Under the purchase method of accounting, the total purchase price will be allocated to ITL’s net tangible and intangible assets based on their estimated fair values as of the Closing Date of the acquisition. The excess of the purchase price over the net tangible and intangible assets will be recorded as goodwill. Telos has made a preliminary allocation of the estimated purchase price using estimates described in the introduction to these Unaudited Pro Forma Condensed Combined Financial Statements as follows (amounts in thousands):

Inventories, net	$	513
Other current assets		5
Property and equipment		160
Other assets		77
Accrued Compensation and Benefits		(40	)
Total Net Tangible Assets	$	714
Amortizable Intangible Asset:
Customer relationship		10,200
Goodwill		15,786
Total preliminary estimated purchase price allocation	$	26,700

Of the total purchase price, a preliminary estimate of approximately $10.2 million has been allocated to amortizable intangible assets acquired and a preliminary estimate of approximately $714,000 has been allocated to tangible net assets assumed in connection with the acquisition. The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect to the acquisition as if it had occurred on June 30, 2011 and includes estimated pro forma adjustments for the preliminary valuations of net assets acquired and liabilities assumed. These adjustments may be subject to further revision should additional information become available and pending the outcome of additional analyses currently underway. The Unaudited Pro Forma Condensed Combined Statements of Operations gives effect to the acquisition as if it had occurred January 1, 2010.

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Note 2: Pro Forma Adjustments

The Unaudited Pro Forma Condensed Combined Financial Statements reflect the following:

(a) Adjustment to reflect assets and liabilities excluded under the asset purchase agreement and to eliminate the equity of the acquiree.

(b) Adjustment to reflect the discounted present value of the $7 million note, assuming a discount rate of 6.9% for 10 months.

(c) Adjustment to reflect utilization of the Company’s revolving credit facility with Wells Fargo Capital Finance to make the initial $8 million cash consideration payment.

(d) Adjustment to reflect the discounted present value of the $15 million note, assuming a discount rate of 18% and various maturity terms up to 60 months.

(e) Utilized an excess earnings approach to value the enhancement to the value of existing customer relationships. The estimated useful life of the intangible asset is 60 months.

(f) Adjustment to record goodwill as part of purchase accounting.

(g) Adjustment to eliminate intercompany revenue and expenses

(h) Adjustment to record the amortization of the intangible asset described in (f) above.

(i) Adjustment to record estimated legal, accounting and other costs related to the transaction of $125,000.

(j) Adjustment to reflect accrued interest expense for the periods presented. Interest calculated at 0.5% on the $7 million note balance assuming the entire face amount of the note was outstanding for the entire period. Accretion on the $7 million note is considered to be immaterial and has not been included in the adjustment. Interest calculated at 4.25% on the $8 million revolving credit facility utilization assuming the amount remained outstanding for the entire period. The interest expense adjustment also reflects accretion on the $15 million subordinated note.

(k) Adjustment to record the estimated tax effect of the combined earnings.

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