Note 2. Sale of Assets

On April 11, 2007, Telos ID was formed as a limited liability company under the Delaware Limited Liability Company Act, specifically with the purpose of performing substantially all of our Identity Management business. We assigned the rights to perform under our U.S. Government contract with the Defense Manpower Data Center (“DMDC”) to Telos ID and contributed substantially all of the assets of the business line at their stated book values. The net book value of assets we contributed totaled $17,000. Until April 19, 2007, we owned 99.999% of the membership interests of Telos ID and certain private equity investors ("Investors") owned 0.001% of the membership interests of Telos ID. On April 20, 2007, we sold an additional 39.999% of the membership interests to the Investors in exchange for $6 million in cash consideration. In accordance with ASC 505-10, we recognized a gain of $5.8 million. As a result, we own 60% of Telos ID, and therefore continue to account for the investment in Telos ID using the consolidation method. Legal and investment banking expenses directly associated with the transaction amounted to approximately $190,000.

The Amended and Restated Operating Agreement of Telos ID (“Operating Agreement”) provides for a Board of Directors comprised of five members. Pursuant to the Operating Agreement, John B. Wood, Chairman and CEO of Telos, has been designated as the Chairman of the Board of Telos ID. The Operating Agreement also provides for two subclasses of membership units: Class A, held by us and Class B, held by certain private equity investors. The Class A membership unit owns 60% of Telos ID, as mentioned above, and as such is allocated 60% of the profit or loss, which was $1.7 million, and $2.5 million for the three and nine months ended September 30, 2011, respectively, and $0.7 million and $1.1 million for the three and nine months ended September 30, 2010, respectively, and is entitled to appoint three members of the Board of Directors. The Class B membership unit owns 40% of Telos ID, and as such is allocated 40% of the profit or loss, which was $1.1 million and $1.7 million profit for the three and nine months ended September 30, 2011, respectively, and $0.5 million and $0.7 million for the three and nine months ended September 30, 2010, respectively, and is entitled to appoint two members of the Board of Directors. The Class B membership unit is the non-controlling interest as defined by ASC 810, “Consolidation.”

In accordance with the Operating Agreement, quarterly distributions of $450,000 were required to be made to the Class B membership unit for the initial eighteen month period after the sale of the Telos ID membership interests. Further, subsequent to the initial eighteen month period, distributions were to be made to the members in the subsequent period only when and to the extent determined by the Telos ID's Board of Directors, in accordance with the Operating Agreement. The Class B member received a total of $0.4 million and $1.0 million for the three and nine months ended September 30, 2011, respectively, and $0.3 million and $0.6 million for the three and nine months ended September 30, 2010, respectively, of such distributions.

The following table details the changes in non-controlling interest for the three and nine months ended September 30, 2011 and 2010 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Non-controlling interest, beginning of period	$	410		$	(293	)	$	454		$	328
Net income		1,100			459			1,672			747
Distributions		(405	)		(289	)		(1,021	)		(612	)

Non-controlling interest, end of period	$	1,105		$	463		$	1,105		$	463