UNITED STATES
                                   SECURITIES
                             AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)          Annual Report Pursuant to Section 13 or 15(d)
      [X]             of the Securities Exchange Act of 1934
                        For Fiscal Year Ended June 30, 1998

                                      OR

      [   ]    Transition Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
                  For the Transition Period From ..... to .....

                       Registrant, State of Incorporation,
                          Address and Telephone Number
                          ----------------------------

                             GRC INTERNATIONAL, INC.
                            (a Delaware Corporation)
Commission                    1900 Gallows Road             I.R.S. Employer
  File No.                  Vienna, Virginia  22182        Identification No.
   1-7517                      (703) 506-5000                 95-2131929

         Securities registered pursuant to Section 12(b) of the Act:

                                                       Name of each exchange on
 Title of each class                                      which registered
 Common Stock, $.10 par value                          New York Stock Exchange
                                                       Pacific Stock Exchange

         Securities   registered  pursuant  to  Section 12(g) of the Act:

                                      None
                                (Title of Class)

         Indicate by check mark whether the Registrant (1) has filed all reports
required 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      .
   ----      ----

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         As of July 31, 1998,  the  aggregate  market value of the  Registrant's
voting common stock held by non-affiliates was $61,481,621. As of July 31, 1998,
there were  10,213,482  shares of the  Registrant's  $.10 par value common stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions  of the Proxy  Statement  for the  Corporation's  1998  Annual
Meeting of  Shareholders  are  incorporated  by reference  into Part III of this
report.  The Proxy  Statement shall be filed in accordance with the rules of the
Commission  within  120 days  after the close of the  fiscal  year to which this
report pertains.

<PAGE>


                                              TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                          Page
                                                                                                          ----
PART I.
<S>            <C>                                                                                         <C>
Item 1.       Business                                                                                      3
Item 2.       Properties                                                                                    6
Item 3.       Legal Proceedings                                                                             6
Item 4.       Submission of Matters to a Vote of Security Holders                                           6

PART II.

Item 5.       Market for Registrant's Common Equity and Related Stockholder Matters                         7
Item 6.       Selected Financial Data                                                                       8
Item 7.       Management's  Discussion and Analysis of Financial Condition and Results
              of Operations                                                                                 9
Item 8.       Financial Statements and Supplementary Data                                                  18
Item 9.       Changes  in  and  Disagreements   with  Accountants  on  Accounting  and
              Financial Disclosure                                                                         42

PART III.

Item 10.      Directors and Executive Officers of the Registrant                                           42
Item 11.      Executive Compensation                                                                       42
Item 12.      Security Ownership of Certain Beneficial Owners and Management                               43
Item 13.      Certain Relationships and Related Transactions                                               43

PART IV.

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K                              43
              Signatures                                                                                   44
</TABLE>

<PAGE>


Forward-Looking Statements

In addition to historical information,  this Annual Report on Form 10-K contains
forward-looking  statements. The forward-looking statements contained herein are
subject to certain risks and  uncertainties  that could cause actual  results to
differ  materially  from  those  reflected  in the  forward-looking  statements.
Factors  that might  cause such a  difference  include,  but are not limited to,
those discussed in the "Risk Factors"  section of  "Management's  Discussion and
Analysis".   Readers  are  cautioned  not  to  place  undue  reliance  on  these
forward-looking  statements,  which reflect management's analysis only as of the
date hereof.  The Company  undertakes  no  obligation  to publicly  revise these
forward-looking  statements to reflect events or circumstances  that arise after
the date hereof.  Readers should carefully review the risk factors  described in
other  documents  the Company  files from time to time with the  Securities  and
Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by
the  Company  subsequent  to this  Annual  Report on Form  10-K and any  Current
Reports on Form 8-K filed by the Company.

                                     PART I

ITEM 1.         BUSINESS
                --------

         General
         -------

         GRC International,  Inc. (the "Company") was organized in California in
1961.  Since 1974, the Company has been a Delaware  corporation.  The Company is
headquartered in Vienna, Virginia.

         Almost  all of the  Company's  revenues  have been  generated  from the
Company's  professional services business.  The Company's  capabilities focus on
information  technology consulting services provided primarily to the Department
of Defense ("DoD") and its instrumentalities.  The number of active contracts at
year-end 1998, 1997 and 1996 were 156, 144 and 149, respectively,  substantially
all of which were with the DoD.

         The areas of expertise provided by these services include: software and
system engineering;  business decision support systems;  analytical modeling and
simulation;  database design and implementation;  legacy migration  engineering;
network design and integration;  systems  integration;  post deployment software
support;  operational support and management;  virtual manufacturing consulting;
communications engineering; and test and evaluation; among others.

         These  services are applied to such areas as:  financial  and personnel
management; automated acquisition systems; transportation planning and analysis;
manufacturing  analysis;  logistics  planning;  security  clearance  processing;
WAN/LAN  analysis;  training  systems;  as well as information  warfare  systems
relying on radar, optics,  communication networks,  electronics,  navigation and
guidance, control, space, and surveillance systems.

         As  a  professional  service  provider,   the  Company's  revenues  are
critically  dependent  upon the number  and skill  level of its  employees.  The
Company's  ability to meet  planned

<PAGE>

and expected revenue levels is a function, among other things, of its ability to
staff open  positions  with the  personnel  required to satisfy its  contractual
backlog.

         The  Company  also  develops   software  and  products  for  commercial
telecommunications  equipment  providers,  ranging from embedded  communications
software to graphical  user  interfaces  and resource  managers.  The  Company's
primary  commercial  telecommunications  customer is Lucent  Technologies,  Inc.
("Lucent").  The major task completed is the  development  of embedded  software
applications  and  capabilities  for the  Lucent  Digital  Access  Cross-Connect
Systems ("DACS"), particularly the development of embedded software for a Hybrid
DS3  Multiplexor  for DACS II CEF product.  The Company also provides  graphical
user  interfaces  for a  craftsperson  to manage the DACS II ISX  equipment  and
development of a digital multi-point bridge application for DACSII ISX product.

         Discontinued Operations
         -----------------------

         On February 28, 1997, the Company  committed itself to a formal plan of
disposition  for  two of  its  business  segments,  its  Telecommunications  and
Advanced  Products  Divisions.  By June 30,  1997,  the Company had sold its GRC
Instruments/Dynatup, Vindicator, and Optical Service Unit ("OSU") businesses.

         On December 19, 1997,  the Company sold the assets and  liabilities  of
its Commercial  Information Solutions ("CIS") business unit. Payment is based on
a royalty schedule.

         On January  8,  1998,  the  Company  sold the assets of its  NetworkVUE
business unit. Payment is based on a royalty schedule.

         The cash used by the  discontinued  operations in fiscal 1998 consisted
primarily of $1.6 million final cash payment of debt relating to an acquisition,
$1.7 million in operating  expenses and $200 thousand for payment of payroll and
accounts  payable  accrued in fiscal 1997.  The largest  components of operating
expenses  included  payment for outside  legal and  financial  fees,  as well as
payments to consultants  per  agreements  entered into during the closing of the
operations.

         The net liability  held for  disposition  was reduced in fiscal 1998 by
$4.3 million due primarily to the cash used by  discontinued  operations and the
reduction of exit accrual  requirements of $750 thousand,  reported as income in
the second quarter of fiscal 1998.

         Patents, Trademarks, Licenses, Copyrights
         -----------------------------------------

         The  Company  has  a  number  of  patents,   trademarks  and  trademark
applications, none of which is material to the operations of the Company.


<PAGE>


         Contracts
         ---------

         Government  contract revenues from professional and technical services,
either as prime contractor or subcontractor, represented approximately 98%, 95%,
and 93% of the  Company's  total  revenues for fiscal years ended June 30, 1998,
1997, and 1996, respectively.  The Company's government contracts generally fall
into one of three  categories:  (1) cost  reimbursable,  (2) fixed price, or (3)
time  and  materials.   Under  a  cost  reimbursable  contract,  the  government
reimburses  the Company for its  allowable  costs and  expenses,  and pays a fee
which is either  negotiated and fixed or awarded based on  performance.  Under a
fixed price contract, the government pays an agreed upon price for the Company's
services  or  products,  and the  Company  bears  the  risk  that  increased  or
unexpected costs may reduce its profits or cause it to incur a loss. Conversely,
to the extent the Company incurs actual costs below  anticipated  costs on these
contracts, the Company could realize greater profits. Under a time and materials
contract,  the government pays the Company a fixed hourly rate intended to cover
salary costs and related  indirect  expenses plus a certain profit  margin.  For
fiscal  years  1998,   1997,  and  1996,   approximately   49%,  60%,  and  62%,
respectively, of the Company's professional and technical services revenues were
from  cost  reimbursable  contracts,  while  approximately  51%,  40%,  and 38%,
respectively,  were fixed price or time and materials type contracts, with fixed
price constituting approximately 5% of the total in each year.

         The Company's  contracts are performed for a number of program  offices
within various defense agencies, including each of the armed services. Customers
outside the field of defense and national security include other agencies of the
federal  government  and  private  industry.  Any or all of the  contracts  with
agencies of the United States  government may be subject to termination  for the
convenience of the government. If a contract were to be terminated,  the Company
would be reimbursed for its allowable  costs up to the date of the  termination,
and would be paid a  proportionate  amount of the fees  attributable to the work
actually  performed.  In  addition to the normal  risks  found in any  business,
companies  conducting  research  and  analysis  services  for the United  States
government  are  subject to  changes  in the  defense  budget,  terminations  of
contracts  for cause or  government  convenience,  and  significant  changes  in
contract scheduling and funding.

         At June 30, 1998, the Company had a maximum contract backlog  amounting
to $450 million,  compared to $372 million,  and $327 million for 1997 and 1996,
respectively.  For this purpose, maximum contract backlog generally assumes that
all  government  contract  options  for  services  in  succeeding  years will be
exercised  and funded.  Only a portion of the  maximum  contract  backlog  would
generally relate to the upcoming year. Funded contract backlog at June 30, 1998,
amounted to $58 million,  compared to $44 million,  and $49 million for 1997 and
1996,  respectively.  Funded contract backlog  represents the expected  contract
revenues  for which  contract  awards have been made and funded,  and  primarily
represent the year-end backlog of firm orders for which revenues may be expected
in the following year.


<PAGE>


         Competition
         -----------

         The Company encounters substantial  competition in the professional and
technical  services  area  from a large  number of  entities,  some of which are
significantly  larger  than the  Company in size and  financial  resources.  The
management of the Company  believes that it has a relatively small percentage of
the total market. Competition comes principally from other companies and certain
non-profit  organizations  engaged in similar  aspects of research and analysis.
Competitors include AATI, ACSC, CACI, Condor, CSC, Nichols Research, SAIC, Titan
and TRW.

         Employees
         ---------

         As of June 30, 1998, the Company  employed  1,160 people,  comprised of
1,059 full time and 101 part time people,  an increase of 35 people, or 3%, from
the 1,125 people  employed at June 30, 1997,  comprised of 994 full-time and 131
part-time  people.  At June 30, 1998, the Company had approximately 173 openings
for  full-time  employees,  compared to  approximately  210 openings at June 30,
1997.

ITEM 2.         PROPERTIES
                ----------

         All of the Company's operations are conducted in leased facilities. The
Company has approximately 30 leased facilities for continuing  operations within
the United States comprising approximately 351 thousand square feet. The minimum
annual rentals for fiscal year 1999 under  non-cancelable  operating  leases are
approximately  $8.5  million.  The terms of Company  leases  range from  monthly
tenancies  to  multi-year  leases,  and many of these  leases may be renewed for
additional periods at the option of the Company.  Major leased facilities are at
locations in Virginia and California.  The Company  believes that its facilities
are adequate for its purposes.  The company currently owns no real property, but
has the option to buy a 3 acre parcel in California at a nominal price.

ITEM 3.         LEGAL PROCEEDINGS
                -----------------

         The Company is involved in a number of legal proceedings arising out of
the normal course of its business, none of which,  individually or in aggregate,
are, in the opinion of management,  material to the operations of the Company or
are likely to have a  material  adverse  impact on the  Company's  liquidity  or
financial condition.

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                ---------------------------------------------------

                No matter was  submitted  to a vote of holders of the  Company's
stock in the fourth quarter of fiscal year 1998.


<PAGE>



                                                   PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
            --------------------------------------------------------------------

         Stock Prices and Dividends
         --------------------------
<TABLE>
<CAPTION>
         The Company's  common stock is traded on the New York and Pacific Stock
Exchanges.  As of July 31,  1998,  there  were  1,314  holders  of record of the
Company's common stock.  Stock price  information by quarter is presented in the
following table:


         Market                                                        Fiscal Year
         Price                                            1998                                 1997
         --------                                  ---------------------               -----------------
                                                   High            Low                 High          Low
                                                   ----            ---                 ----          ---
     <S>                                          <C>             <C>                 <C>            <C>
         1st Quarter                               7 14/16      5                      38 5/8      13 3/4
         2nd Quarter                               7 3/16       5 1/4                  18 1/4      6
         3rd Quarter                               6 13/16      5 9/16                 8 3/8       3 3/4
         4th Quarter                               10 15/16     5 3/8                  6 1/4       4 1/4

</TABLE>

         On September 11, 1998, the closing price of the Company's  common stock
was $4.81.

         The  Company did not declare or pay any  dividend  with  respect to its
common stock during any of the years  included in the  financial  data,  and the
Board of  Directors  does not  presently  intend to commence the payment of such
dividends. See Note 10 to the Consolidated Financial Statements for a discussion
of the  Company's  Shareholder  Rights Plan under which a dividend of one common
stock  purchase  right is  automatically  issued for each share of the Company's
common stock.

         Recent Sales of Unregistered Securities

         None.



<PAGE>


ITEM 6.         SELECTED FINANCIAL DATA
                -----------------------
<TABLE>
<CAPTION>

GRC International, Inc. and Subsidiaries

FOR THE YEAR ENDED JUNE 30,                                            1998        1997       1996         1995         1994
                                                                       -----       -----      -----        -----        ----
                                                                                    (in thousands, except for per share data)
<S>                                                                     <C>          <C>        <C>           <C>        <C>
Revenue                                                                 $130,927   $117,599   $117,016     $132,812      $122,872
Operating income (loss)                                                    5,402      4,622       (182)*      6,800*        6,468
Interest income (expense), net                                            (1,866)    (1,343)      (518)         270           319
Income tax (provision) benefit                                             7,166     10,582        ---          ---          (299)
Cumulative effect of accounting change                                       ---        ---        ---          ---         1,000
                                                                         -------   --------   --------     --------        ------
Income (loss) from continuing operations                                  10,702     13,861       (700)       7,070         7,488
Gain (loss) on discontinued operations                                       758    (31,611)   (16,937)      (2,040)         (375)
                                                                         -------   -------    --------     --------       -------
Net income (loss)                                                       $ 11,460   $(17,750)  $(17,637)    $  5,030       $ 7,113
                                                                        ========   ========   ========     ========       =======

Basic income (loss) per share from continuing operations                $   1.09   $   1.48   $  (0.08)    $   0.79       $  0.83
Basic income (loss) per common share                                    $   1.17   $  (1.91)  $  (1.92)    $   0.56       $  0.79
Weighted average number of common shares outstanding                       9,838      9,338      9,172        9,001         9,037

Diluted income (loss) per share from continuing operations              $   1.07   $   1.45   $  (0.08)    $   0.75       $  0.80
Diluted net income (loss) per common share                              $   1.14   $  (1.76)  $  (1.92)    $   0.53       $  0.76
Weighted average number of common shares and equivalents                  10,254      9,843      9,172        9,393         9,370


Working capital (excluding discontinued operations)                     $ 19,073   $ 20,459   $ 14,857     $ 19,688       $24,683
Net assets (liabilities) of discontinued operations                     $   (297)  $ (4,591)  $ 14,742     $  9,975       $ 3,449
Total assets                                                            $ 71,263   $ 65,964   $ 67,070     $ 71,107       $67,230
Long-term debt (less current maturities)                                $ 23,256   $ 28,153** $ 16,527**   $    ---       $   ---
Stockholders' equity                                                    $ 27,360   $ 13,076   $ 28,675     $ 48,268       $45,040

</TABLE>

*  The operating  loss for 1996 reflects a write-off of $3.3 million in deferred
   software and related  costs,  and the operating  income for 1995 reflects the
   write-off of $0.5 million for deferred  software and a gain of  approximately
   $0.9 million from the sale of a facility.

** Excludes the QSI debt of $2 million in 1997 and $1.2 million in 1996.


<PAGE>



ITEM 7.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF RESULTS OF OPERATIONS AND
         -------------------------------------------------------------------
         FINANCIAL CONDITION
         -------------------

         Summary
         -------
<TABLE>
<CAPTION>
         The following  table sets forth for the years  indicated the percentage
of total revenues for each item in the Consolidated Statements of Operations and
the percentage change of those items as compared to the prior year:


                                                                                          Period to
                                               Relationship to Total Revenues            Period Change
                                               ------------------------------       --------------------- 
                                                 FY98       FY97       FY96         98 vs. 97    97 vs. 96
                                                 ----       ----       ----         ---------    ---------
<S>                                               <C>         <C>      <C>                <C>           <C>
Revenues  100%                                    100%       100%     11.3%             0.5%
Cost of revenues                                   84%        82%       85%            14.9%          -3.3%
                                                  ----       ----      ----
Gross Margin                                       16%        18%       15%            -4.8%          21.6%
G&A, marketing, R&D expenses                       12%        14%       12%           -10.8%          15.8%
Write-Down                                          0%         0%        3%               NM             NM
                                                    --         --         -
Operating income                                    4%         4%        0%            16.8%             NM
Net interest expense                                1%         1%        0%            38.9%          159.3%
                                                    --          -        --
Income (loss) from continuing operations,
  before income taxes                               3%         3%       -1%             7.8%             NM
Income tax benefit                                 -5%        -9%        0%               NM             NM
                                                   ---        ---        --
Income (loss) from continuing operations            8%        12%       -1%               NM             NM
                                                    --        ---        --
Discontinued operations, net of tax                 1%       -21%      -14%               NM             NM
Loss on disposal of discontinued
  operations                                        0%        -5%        0%               NM             NM
                                                    --        ---        --
Net income (loss)                                   9%       -15%     - 15%               NM             NM

"NM" indicates the percentage change is not meaningful.
</TABLE>

Fiscal Year 1998 Compared to Fiscal Year 1997
---------------------------------------------

Continuing Operations
---------------------

         Revenues
         --------

         Fiscal year 1998 revenues of $130.9 million were $13.3 million, or 11%,
higher than fiscal year 1997 revenues of $117.6 million.  Of the increase,  $9.3
million  was  attributable  to the award of the GCSS  contract  to develop a new
retail logistics information system for the United States Army.

         For 1998,  revenues of $130.9  million  consisted of $129.7  million in
services  revenues and $1.2 million in product revenues.  For 1997,  revenues of
$117.6 million  consisted of $115.9 million in service revenues and $1.7 million
in product revenues.


<PAGE>


         Cost of Revenues and Gross Profit
         ---------------------------------

         Cost of  revenues  for  1998  amounted  to  $110.5  million,  or 84% of
revenues,  compared to $96.1 million, or 82% of revenues for 1997. A significant
portion  of the  increase  in costs is a result of the GCSS  contract  mentioned
above.

         Gross profit for 1998  amounted to $20.5  million,  or 16% of revenues,
compared to $21.5  million,  or 18% of revenues  for 1997, a decrease of 5%. The
decrease in gross  profit is  primarily  the result of cost  overruns on certain
contracts during the current year.

         Operating Expenses and Operating Income
         ---------------------------------------

         Fiscal year 1998 total operating  expenses of $15.0 million,  or 12% of
revenues,  were $1.9 million less than the $16.9 million, or 14% of revenues, in
operating  expenses for 1997.  Operating  profit from continuing  operations for
1998 amounted to $5.4 million  compared to $4.6 million for FY 1997, an increase
of 17%. The  decreased  expenses and related  increased  operating  profits were
attributable   to   reductions  in  bid  and  proposal  and  other  general  and
administrative expenses.

         Net Interest Expense
         --------------------

         Net interest expense of $1.9 million for 1998, compared to net interest
expense of $1.3 million for 1997, reflects the increase in debt incurred in late
1997 in order to fund what are now discontinued operations.

         Income Tax Benefit
         ------------------

         In fiscal year 1998, the Company recognized a $7.2 million deferred tax
asset related to its net loss carryforwards for income tax purposes, bringing to
$17.9 million the total net deferred tax asset.

         As a result of tax losses  incurred in prior periods,  the Company,  at
June 30,  1998,  had tax loss  carryforwards  amounting  to $64  million.  Under
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), the Company is
required to recognize  the value of these tax loss  carryforwards  if it is more
likely  than not that they will be  realized  by  reducing  the amount of income
taxes  payable in future  income tax returns.  This in turn is a function of the
forecasts  of  the  Company's  profitability  in  future  years.  The  Company's
continuing  operations consist of its information  technology services business.
The Company has been  profitability  engaged in this  business for over 30 years
and  projects  continued  profitability  in the  future.  In recent  years,  the
Company's losses have been due to this  profitability  being more than offset by
the  losses  generated  from  its   Telecommunications   and  Advanced  Products
Divisions.  With those  Divisions  now having  been  discontinued,  the  Company
expects  to  report  profits  for  income  tax  purposes  in  the  future.  As a
consequence,  the Company has now recognized a portion of the benefit  available
from its tax loss carryforwards.

         The Company is considering  certain tax planning  strategies  which, in
conjunction with operating income, would enable the Company to fully utilize the
tax loss  carryforward  expiring in the fiscal year ending June 30, 1999. If the
Company does not generate

<PAGE>

sufficient  taxable  income to fully  utilize  such tax loss  carryforward,  the
maximum tax benefit will not be recognized.

         Income from Continuing Operations
         ---------------------------------

         Income from  continuing  operations for 1998 amounted to $10.7 million,
compared to $13.9 million for 1997. This $3.2 million  decrease is primarily due
to a $3.4 million reduction in recognized income tax benefit from fiscal 1997 to
fiscal 1998.

         Discontinued Operations
         -----------------------

         The  1998  gain  on  discontinued   operations  reflects  the  sale  of
NetworkVUE,  the last remaining business, and adjustments of estimated remaining
liabilities related to such business.

         Net Income or Loss
         ------------------

         Net income for fiscal year 1998 amounted $11.5 million,  comprised of a
profit  from   continuing   operations  of  $10.7  million  and  a  profit  from
discontinued operations of $758 thousand.

         Net loss for fiscal year 1997 amounted to $17.8 million, comprised of a
profit from continuing  operations of $13.9 million and a loss from discontinued
operations of $31.6 million.

Fiscal Year 1997 Compared to Fiscal Year 1996
---------------------------------------------

Continuing Operations
---------------------

         Revenues
         --------

         Fiscal year 1997 revenues of $117.6 million were $583 thousand,  or 1%,
higher than fiscal year 1996 revenues of $117.0 million.

         For 1997,  revenues of $117.6  million  consisted of $115.9  million in
services  revenues and $1.7 million in product revenues.  For 1996,  revenues of
$117.0 million consisted of $110.1 million in service revenues,  $2.4 million in
product revenues,  and $4.5 in revenues from the minority-interest  portion of a
majority-owned  joint venture,  which was accounted for on a consolidated  basis
through   the  first   quarter  of  1996.   Excluding   this  $4.5   million  in
minority-interest  revenues,  FY 1997  revenues  increased by 4.4% over FY 1996,
from $112.5  million to $117.6  million.  The same change in revenues is the net
effect  of  a  variety  of  factors,   none  significant,   over  the  Company's
approximately 150 active contracts.

         Cost of Revenues and Gross Profit
         ---------------------------------

         Cost  of  revenues  for  1997  amounted  to  $96.1  million,  or 82% of
revenues,  compared to $99.3 million,  or 85% of revenues for 1996. Gross profit
for 1997  amounted  to

<PAGE>

$21.5 million, or 18% of revenues, compared to $17.7 million, or 15% of revenues
for 1996, an increase of 21%.

         Operating Expenses and Operating Income
         ---------------------------------------

         Fiscal year 1997 total operating  expenses of $16.9 million,  or 14% of
revenues,  were $1.0 million less than the $17.9  million in operating  expenses
for 1996.  However,  excluding a $3.3 million write off of capitalized  software
and related items in FY 1996,  operating expenses were $14.6 million in FY 1996.
The $2.3  million  increase  in adjusted  operating  expenses  was  attributable
primarily  to bid and  proposal  and other  general and  administrative  expense
increases during fiscal year 1997.

         Operating  profit from continuing  operations for 1997 amounted to $4.6
million, compared to a loss of $182 thousand for FY 1996.

         Net Interest Expense
         --------------------

         Net interest expense of $1.3 million for 1997, compared to net interest
expense of $518  thousand for 1996,  reflects the  significant  increase in debt
incurred during 1997 in order to fund what are now discontinued operations.

         Income or Loss from Continuing Operations
         ----------------------------------------

         Income from  continuing  operations for 1997 amounted to $13.9 million,
compared to a loss of $700 thousand for 1996.

         Discontinued Operations
         -----------------------

         The net loss from discontinued operations for fiscal year 1997 amounted
to $31.6  million,  compared to a loss of $16.9 million for 1996.  The 1997 loss
included a substantial write down of capitalized software.

         Net Income or Loss
         ------------------

         Net loss for fiscal year 1997 amounted  $17.8  million,  comprised of a
profit from continuing  operations of $13.8 million and a loss from discontinued
operations  of $31.6  million,  compared  to a net loss for fiscal  year 1996 of
$17.6 million, comprised of loss of $700 thousand from continuing operations and
a loss from discontinued operations of $16.9 million.

         Borrowings
         ----------

         At June 30, 1998, the Company was party to a revolving credit agreement
that  provides  for  secured  borrowings  of up to $22  million,  of which $14.9
million (net of cash) was utilized at June 30, 1998.  The  agreement  extends to
January 2000,  with the bank required to provide 15 months prior written  notice
to terminate the facility  (absent any defaults under the  agreement).  The bank
has  provided  up to an  additional  $8 million in term

<PAGE>

loan financing under a standby  facility,  available on an offering basis,  with
borrowings thereunder due September 1, 2000, of which $4.75 million was utilized
at June 30, 1998.  Advances  under the revolving  credit  agreement and the term
loans  accrue  interest  at the bank's  prime rate which was 8.5% as of June 30,
1998. The collateral  under the Amended and Restated  Revolving  Credit and Term
Loan Agreement includes all of the Company's assets.

         In June  1996,  the  Company  completed  a $7.5  million  financing  of
substantially all of its furniture and equipment.  The loan was originally to be
amortized  over a five year period at an interest  rate of 9%, but with  partial
paydowns  that were made from the proceeds of the  following  divestitures,  the
loan is now  anticipated to be fully retired by the end of fiscal 1999. On April
30, 1997,  the Company  applied the $2 million in proceeds  from the sale of its
GRC  Instruments/Dynatup  business  against its obligations  under the equipment
financing.  In June and July 1997, the Company  applied $1.5 million in proceeds
from the sale of its OSU business  against its  obligations  under the equipment
financing.  As of June  30,  1998,  the  outstanding  balance  on the  equipment
financing was $961 thousand.

         Liquidity and Capital Resources
         -------------------------------

         The Company had $3.6 million in cash and cash  equivalents  at June 30,
1998, compared to $5.8 million at June 30, 1997.

         Net cash provided by continuing operations amounted to $5.6 million for
fiscal  1998,  compared  to $5.7  million  for  fiscal  1997.  Net cash  used in
discontinued  operations  amounted to $3.1 million for fiscal 1998,  compared to
$12.4 million in fiscal 1997.  Net cash used in investing  activities for fiscal
1998 amounted to $1.8 million,  compared to $3.8 million for the prior year. Net
cash used in  financing  activities  amounted to $2.8  million for fiscal  1998,
compared to $13.6 million  provided in fiscal 1997. The net decrease in cash and
cash  equivalents  for fiscal  1998  amounted  to $2.1  million,  compared to an
increase of cash and cash equivalents of $3.0 million in the prior year.

         As a result of the decrease in debt and  increase in net income  during
fiscal  1998,  the  Company's  ratio  of  total  debt  (net of  cash)  to  total
capitalization  amounted  to 43% at June 30,  1998,  compared to 67% at June 30,
1997.

         For fiscal 1999,  the Company  expects  positive  cash flow,  including
capital  expenditures and payments on outstanding debt.  Liquidity over the next
year  will be  determined  by (a) net cash  flow from  operations,  (b)  capital
expenditures  (including the possible  replacement of the Company's MIS system),
(c) payments on outstanding  debt, (d) receipt of payment on $2 million note due
January 31, 1999 relating to the 1995 sale of its Santa Barbara property.  Given
the number of factors,  some of which  cannot be foreseen,  which can  influence
this expectation, actual results may differ materially from those expected.

         At June 30, 1998,  the Company had $24.3  million of debt and equipment
lease financings,  $1.0 million of which was classified as short term, and $23.3
million of which was

<PAGE>

classified  as long  term.  The  Company  had  $27.1  million  of bank  debt and
equipment lease financings at June 30, 1997.

         The credit facilities with the Company's bank consist of the following:
an $8 million term loan ("Term Loan")  available on an approval  basis, of which
$4.8 million was drawn down at June 30, 1998;  a $22 million  revolving  line of
credit ("Revolving  Credit"),  of which $18.5 million was used at June 30, 1998;
and a $961  thousand  debt  (as of June 30,  1998)  arising  from the  equipment
financing  ("Equipment  Lease")  arranged  with  the  bank's  equipment  leasing
subsidiary.

         The Term Loan is due on  September 1, 2000,  and bears  interest at the
bank's floating prime rate,  currently 8.50% per annum.  The Revolving Credit is
due on January 15, 2000, and, if the Company is not in default, is automatically
renewable for one-year  renewal  terms unless the bank, at its option,  delivers
written notice of non-renewal to the Company at least 15 months prior to the end
of the initial term or any renewal term. No notice of  non-renewal  was received
by October 15, 1997, and, thus, the Revolving  Credit is currently  repayable on
January 15, 2000.  The Revolving  Credit has typically been renewed in the past,
and the Company anticipates that it will continue to be renewed,  although there
is no guarantee of renewal.  The Revolving  Credit bears  interest at the bank's
floating  prime rate,  currently  8.50% per annum.  The Term Loan and  Revolving
Credit  facilities  are  collateralized  by the  Company's  working  capital and
equipment.  The  Equipment  Lease was  originally  for a term of 60 months which
commenced  in June 1996 and bears  interest at 9%. It is now expected to be paid
in full by the end of fiscal 1999, under the revised payment schedule.

         The  Amended  and  Restated  Revolving  Credit and Term Loan  Agreement
("Loan Agreement")  containing the Term Loan and Revolving Credit was amended as
of March 31, 1996,  and again as of June 30, 1996,  to amend  various  financial
ratio  covenants so as to bring the Company into compliance with those covenants
as of those dates.  At December 31, 1996 and March 31, 1997,  the Company was in
breach of financial covenants under the Loan Agreement.  On February 7, 1997 and
May 13, 1997,  the Loan  Agreement was again amended as of December 31, 1996 and
March 31,  1997,  respectively,  to bring the Company into  compliance  with the
covenants  thereunder.  At June 30, 1998, the Company was in compliance with its
covenants under this Agreement.

         The  chairman of the board of the bank  providing  the credit under the
Loan Agreement and Equipment  Lease is a member of the Board of Directors of the
Company.  The Company believes that the terms of its credit  agreements with the
bank are  substantially  similar to those that could have been  obtained from an
unaffiliated third party.

         Outlook
         -------

         With  the  discontinuation  of  the   Telecommunications  and  Advanced
Products Divisions, the Company is now focused on its information technology and
professional services business. This business has been and is expected to remain
profitable with positive  operating cash flows. With the positive free cash flow
expected from the services  business and with the potential to raise  additional
equity from the Company's Equity Line Agreement, the Company expects, over time,
to reduce substantially the outstanding principal amount of its bank debt.

         Risk Factors
         ------------

         The Company and its shareholders face a number of risks, including, but
not limited to the following:

         -     The Company's  ability to sufficiently grow its services business
               to  generate  the needed  positive  free cash flow to support the
               debt service described above.
         -     The Company's  ability to manage within amounts  accrued for, and
               to  fund  residual  net  cash   expenditures   required  by,  its
               discontinued operations.
         -     The Company's ability to keep and attract the personnel  required
               to service its current and future contract portfolio.
         -     A  dependence  upon  government   contracting  in  general,   and
               particularly a high  concentration of the Company's business with
               the U.S. Department of Defense and its instrumentalities.
         -     The high  degree of  financial  leverage  under which the Company
               will  continue  to  operate  until its  current  debt  levels are
               reduced and its equity levels increased.
         -     The  risk  that  the  Equity  Line   Agreement  will  not  remain
               available,  either  because the investor  does not make  required
               purchases due to any future securities  registration problems, or
               otherwise.
         -     The risk that the Company will not be  sufficiently  prepared for
               the  so-called  Y2K  problem,  and/or  that the Company may incur
               Y2K-related liabilities (see the next section).

         Year 2000 Issue
         ---------------

         The Year 2000 (Y2K)  problem is the result of computer  programs  being
written using two digits rather than four to define the  applicable  year.  Thus
the  year  1998 is  represented  by the  number  "98" in  many  legacy  software
applications.  Consequently, on January 1, 2000, the year will jump back to "00"
in  accordance  with many non-Y2K  compliant  applications.  To systems that are
non-Y2K compliant,  the time will seem to have reverted back 100 years. So, when
computing  basic  lengths of time,  the  Company's  computer  programs,  certain
building  infrastructure  components  (including,   elevators,   alarm  systems,
telephone networks,  sprinkler systems, security access systems and certain HVAC
systems) and any additional  time-sensitive  software that are non-Y2k compliant
may  recognize a date using "00" as the Year 1900.  This could  result in system
failures or miscalculations which could cause personal injury,  property damage,
disruption  of  operations,   and/or  delays  in  payments  from  the  Company's
customers,  any or all of which could materially  adversely effect the Company's
business, financial condition, or results of operations.

         During the fourth  quarter of fiscal  1998 the Company  implemented  an
internal Y2K  compliance  task force.  The goal of the task force is to minimize
the  disruptions  to the  Company's  business  which  could  result from the Y2K
problem,  and to minimize  other  liabilities  which the Company  might incur in
connection with the Y2K problem.  The task

<PAGE>

force consists of existing  employees of the Company,  and no new employees have
been hired specifically to address the Company's internal Y2K issues.

         The Company is in the process of conducting a  company-wide  assessment
of its computer systems and operations  infrastructure,  including systems being
developed to improve  business  functionality,  to identify  computer  hardware,
software,  and process control  systems that are not Y2K compliant.  The Company
presently  believes that its  business-critical  computer  systems which are not
presently  Y2K-compliant  will have been  replaced,  upgraded or modified in the
normal replacement cycle prior to 2000.

         The Company's  financial  accounting  software  system is an old system
which was built in the early 1980's on a commercial database platform by Company
employees. The Company has modified this system to be Y2K compliant, but its Y2K
compliance has not been tested by any independent  party. The Company  presently
intends to have this system  independently tested in the quarter ending December
31, 1998. If significant  deficiencies are found, the Company may have to expend
significant  resources to correct them,  or in an extreme case,  the Company may
have to purchase and implement a new system on an accelerated  basis.  Either of
those  outcomes  would  be  likely  to have a  material  adverse  affect  on the
Company's operating results and financial position.

         The Company has also initiated  communications with third parties whose
computer systems'  functionality  could impact GRCI. These  communications  will
facilitate  coordination  of Y2K solutions and will permit GRCI to determine the
extent to which the Company may be  vulnerable  to failures of third  parties to
address  their own Y2K issues.  However,  as to the systems of the third parties
that are linked to GRCI, in particular those of the US Government,  there can be
no guarantee  that such systems  that are not now Y2K  compliant  will be timely
converted to Y2K compliance.

         The Company is also assessing any potential Y2K-related exposure it may
have with respect to software or hardware it has delivered to its customers.

         The costs of the Company's Y2K compliance efforts are being funded with
cash flows from operations.  As normal business costs, these costs are generally
reimbursible by the government  under the Company's  government  contracts under
present regulations.  In total, these costs are not expected to be substantially
different  from the  normal,  recurring  costs  that are  incurred  for  systems
development,  implementation and maintenance.  As a result,  these costs are not
expected  to have a  material  adverse  effect  on  GRCI's  overall  results  of
operations or cash flows.

         Additionally,  there can be no guarantee that third parties of business
importance to GRCI, in  particular  the US  Government,  will  successfully  and
timely  reprogram  or replace,  and test,  all of their own  computer  hardware,
software and process  control  systems.  Because the  majority of the  Company's
business is contracted with the US Government,  the failure of the US Government
to achieve  Y2K  compliance  by the year 2000 would have a  significant  adverse
effect on GRCI's business,  financial  position,  results of operations and cash
flows.  Furthermore,  if the Company's  government customers delay other work in

<PAGE>

order  to  accelerate  their  own  Y2K  compliance  efforts,  it  could  have  a
significant adverse effect on GRCI's business, financial position and results of
operations.

         The Company  does not yet have a  comprehensive  contingency  plan with
respect to the Y2K problem, but intends to establish such a plan during calendar
1999 as part of its ongoing Y2K compliance effort.

         The  foregoing  assessment  of the impact of the Y2K problem on GRCI is
based on  management's  best  estimates  at the present  time,  and could change
substantially.  The  assessment is based upon numerous  assumptions as to future
events. There can be no guarantee that these estimates will prove accurate,  and
actual  results  could differ from those  estimated if these  assumptions  prove
inaccurate.

ITEM 7a.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                ----------------------------------------------------------
<TABLE>
<CAPTION>
         The table below  provides  information  about the  Company's  financial
instruments that are sensitive to changes in interest rates, in particular, debt
obligations.  GRCI does not trade in these  instruments or use derivatives.  The
table  represents  principal cash flows and related  weighted  average  interest
rates by expected maturity dates.


                                     Financial Instruments by Expected Maturity Date
                                                     (in thousands)

                                                                             There-                Fair
                      1999       2000       2001       2002       2003       after      Total      Value
                      ----------------------------------------------------------------------------------
<S>                   <C>         <C>       <C>        <C>        <C>        <C>          <C>       <C>
Liabilities
Long-term debt:

Variable rate           ---    $23,256        ---         ---       ---        ---     $23,256     $23,256
Average interest
   Rate                8.5%       8.5%        ---         ---       ---        ---         ---         ---
</TABLE>




<PAGE>



ITEM 8.         FINANCIAL STATEMENTS
                --------------------
<TABLE>
<CAPTION>

                                    INDEX TO FINANCIAL STATEMENTS
                                    -----------------------------

                                                                                                          Page
                                                                                                          ----
<S>        <C>                                                                                           <C>
         Independent Auditors' Report                                                                     19

         Report of Management                                                                             20

         Consolidated Statements of Operations for the years ended
           June 30, 1998, 1997 and 1996                                                                   21

         Consolidated Balance Sheets as of June 30, 1998 and 1997                                      22-23

         Consolidated Statements of Cash Flows for the years ended
           June 30, 1998, 1997 and 1996                                                                24-25

         Consolidated Statements of Stockholders' Equity
           for the years ended June 30, 1998, 1997 and 1996                                               26

         Notes to Consolidated Financial Statements                                                       27

</TABLE>

<PAGE>



                          INDEPENDENT AUDITORS' REPORT


To the Stockholders of GRC International, Inc.:
Vienna, Virginia

We  have  audited  the   accompanying   consolidated   balance   sheets  of  GRC
International,  Inc.  and  subsidiaries  as of June 30,  1998 and 1997,  and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the three years in the period ended June 30, 1998.  Our audits
also included the financial  statement  schedule listed in the Index at Item 14.
These   financial   statements   and  financial   statement   schedule  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on the financial  statements and financial  statement  schedule based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position  of GRC  International,  Inc.  and
subsidiaries  as of June 30, 1998 and 1997, and the results of their  operations
and their  cash flows for each of the three  years in the period  ended June 30,
1998 in conformity with generally accepted accounting  principles.  Also, in our
opinion,  such financial statement schedule,  when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.




DELOITTE & TOUCHE LLP
McLean, Virginia
July 28, 1998


<PAGE>


                              REPORT OF MANAGEMENT


The management of GRC International, Inc. is responsible for all information and
representations  contained  in the annual  report.  The  consolidated  financial
statements,   which  include   amounts  based  on  estimates  and  judgments  of
management,  have been prepared in conformity with generally accepted accounting
principles.  Other financial information in the annual report is consistent with
the consolidated financial statements.

The Company  maintains a system of internal  financial  controls  which provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations,  that assets are properly safeguarded and
accounted  for, and that records are  maintained so as to permit  preparation of
financial   statements  in  accordance   with  generally   accepted   accounting
principles.   This  system  includes  written  policies  and  an  organizational
structure that segregates duties.  The Company also has instituted  policies and
guidelines  which  require all  employees to conduct  business  according to the
highest standards of integrity.

In addition, the Audit Committee of the Board of Directors, consisting solely of
outside  directors,  meets  periodically  with  management  and the  independent
auditors  to  discuss  auditing,  internal  accounting  controls  and  financial
reporting  matters  and  to  ensure  that  each  is  properly   discharging  its
responsibilities.  The  independent  auditors  periodically  meet alone with the
Audit  Committee and have full and  unrestricted  access to the Committee at any
time.


GRC INTERNATIONAL, INC.


/s/ Gary Denman                               /s/ Timothy C. Halsey
-------------------------------------         ----------------------------------
Gary Denman                                   Timothy C. Halsey
President and Chief Executive Officer         Controller,
                                              (Acting) Chief Financial Officer &
                                              (Acting) Chief Accounting Officer


<PAGE>


                    GRC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                          FOR THE YEARS ENDED JUNE 30,

<TABLE>
<CAPTION>

                                                                 1998              1997             1996
                                                              ----------        ----------        --------
                                                                 (in thousands, except for per share data)
<S>                                                              <C>              <C>                <C>
Revenues                                                       $130,927         $117,599          $117,016
Cost of services                                                110,477           96,123            99,344
Write down of deferred software
  and other related costs                                           ---              ---             3,283
Indirect and other costs                                         15,048           16,854            14,571
                                                             ----------        ---------        ----------

Operating income (loss)                                           5,402            4,622              (182)

Interest expense, net                                            (1,866)          (1,343)             (518)
                                                            -----------        ---------       ------------

Income (loss) from continuing operations
  before income tax benefit                                       3,536            3,279              (700)
Income tax benefit                                                7,166           10,582               ---
                                                            -----------        ---------       -----------

Income (loss) from continuing operations                         10,702           13,861              (700)
                                                             ----------       ----------       ------------

Discontinued Operations:

Income (loss) from discontinued operations,                         758          (25,220)          (16,937)
  net of tax of $471 in 1998
Loss on disposal of discontinued operations,
  including provision of $2,775 for
  operating losses during phase out                                 ---           (6,391)              ---
                                                             ---------         ---------       -----------

Income (loss) from discontinued operations                          758          (31,611)          (16,937)
                                                             ----------        ---------        ----------

Net income (loss)                                             $  11,460        $ (17,750)        $ (17,637)
                                                              =========        =========         ==========

Earnings Per Share Amounts:

Basic income (loss) per share from
  continuing operations                                     $      1.09      $      1.48       $     (0.08)
Basic income (loss) per common share                        $      1.17      $     (1.91)      $     (1.92)
Weighted average common shares outstanding                        9,838            9,338             9,172

Diluted income (loss) per share from
  continuing operations                                     $      1.07     $       1.45       $     (0.08)
Diluted net income (loss) per common share                  $      1.14     $      (1.76)      $     (1.92)
Weighted average common shares and
  Equivalents                                                    10,254            9,843             9,172

                    The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>


                    GRC INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 AS OF JUNE 30,
                                     ASSETS
<TABLE>
<CAPTION>


                                                                               1998                    1997
                                                                            ----------               -------
                                                                                      (in thousands)
<S>                                                                             <C>                      <C>
CURRENT ASSETS:

Cash and cash equivalents                                                  $   3,648               $   5,756
Accounts receivable, net                                                      28,702                  25,087
Unbilled reimbursable costs and fees, net                                      4,189                   4,076
Other receivables                                                                893                   1,090
Prepaid expenses and other current assets       486                              576
Deferred income taxes                                                          1,239                   2,686
                                                                            --------               ---------
         Total current assets                                                 39,157                  39,271
                                                                            --------                --------

PROPERTY AND EQUIPMENT, at cost:

Land, buildings and leasehold improvements                                     5,121                   4,874
Equipment, furniture and fixtures                                             15,517                  15,093
  Less - Accumulated depreciation and amortization                           (11,069)                 (9,414)
                                                                            --------               ---------
         Property and equipment, net                                           9,569                  10,553
                                                                           ---------                --------

OTHER ASSETS:

Goodwill and other intangible assets, net                                      2,176                   2,409
Software development costs, net                                                  349                     461
Deferred income taxes                                                         16,678                   8,896
Deposits and other                                                             3,334                   4,374
                                                                            --------               ---------
         Total other assets                                                   22,537                  16,140
                                                                            --------                --------

TOTAL ASSETS                                                                $ 71,263                $ 65,964
                                                                            ========                ========








               The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>


                    GRC INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 AS OF JUNE 30,
                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                             1998                       1997
                                                                          ----------                   -------
                                                                                 (in thousands, except share
                                                                                     and per share data)
<S>                                                                        <C>                           <C>
CURRENT LIABILITIES:

Current maturities of long-term debt                                      $      975                 $   1,679
Accounts payable                                                               3,897                     2,610
Accrued compensation and benefits                                             13,268                    12,210
Accrued expenses and other current liabilities                                 1,944                     2,313
Net liabilities related to discontinued operations                               297                     4,591
                                                                            --------                 ---------
         Total current liabilities                                            20,381                    23,403
                                                                            --------                  --------


LONG-TERM LIABILITIES:

Long-term debt                                                                23,264                    28,153
Other long-term liabilities                                                      258                     1,332
                                                                            --------                 ---------
         Total long-term liabilities                                          23,522                    29,485
                                                                            --------                  --------

COMMITMENTS AND CONTINGENCIES                                                    ---                       ---

STOCKHOLDERS' EQUITY:

Preferred stock, $1.00 par value -
  300,000 shares authorized, none outstanding                                    ---                       ---
Common stock, $.10 par value -
  Authorized - 30,000,000 shares,
  issued - 10,508,791 shares in 1998
  and 9,849,000 shares in 1997                                                 1,051                       985
  Paid-in capital                                                             79,712                    76,954
  Accumulated deficit                                                        (49,558)                  (61,018)
                                                                            --------                  --------
                                                                              31,205                    16,921

   Less:  Treasury stock, at cost; 300,000 shares                             (3,845)                   (3,845)
                                                                            --------                 ---------

         Total stockholders' equity                                           27,360                    13,076
                                                                            --------                 ---------

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                   $ 71,263                  $ 65,964
                                                                            ========                  ========


                    The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>


                    GRC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>

                                                                                   1998              1997            1996
                                                                                ----------       ----------       -------
                                                                                                (in thousands)
<S>                                                                                  <C>            <C>            <C> 
CASH FLOWS FROM CONTINUING OPERATIONS:
Income (loss) from continuing operations                                       $   10,702     $     13,861       $     (700)
Reconciliation of income from continuing operations
     Depreciation and amortization                                                  3,177            3,330            3,509
     Loss provision on current assets                                               1,052            1,067              956
     Income tax benefit                                                            (6,806)         (10,582)             ---
     Write-down of deferred software and related costs                                ---              ---            3,283
     Changes in assets and liabilities
         Accounts receivable                                                       (4,780)            (120)           5,414
         Prepaid expenses and other current assets                                    287              (37)             239
         Accounts payable                                                           1,287           (2,197)          (2,472)
         Accrued expenses and other current liabilities                               689              227              467
         Income taxes payable                                                         ---              114             (176)
         Other                                                                        (44)             (11)             129
                                                                               ----------     ------------    ------------
Net cash provided by operating activities                                           5,564            5,652           10,649
                                                                               ----------        ---------       ----------

CASH FLOWS FROM DISCONTINUED OPERATIONS:
Loss from discontinued operations                                                     758          (31,611)         (16,937)
Reconciliation of income from discontinued operations
     Non-cash charges and changes in net assets/liabilities                        (4,223)           9,429           (4,767)
     Proceeds from sale of discontinued operations                                    400            3,366              ---
     Provision for loss on disposal of discontinued operations                        ---            6,391              ---
                                                                               ----------       ----------   --------------
Net cash used in discontinued operations                                           (3,065)         (12,425)         (21,704)
                                                                               ----------        ---------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisitions of property and equipment                                        (1,733)          (3,468)          (3,141)
     Proceeds from sale of property and equipment                                      74              ---              ---
     Deferred software costs                                                          ---              (97)          (2,919)
     Proceeds from notes receivable                                                   ---              ---            1,440
     Other                                                                           (106)            (247)             (35)
                                                                               ----------      -----------     ------------
Net cash used in investing activities                                              (1,765)          (3,812)          (4,655)
                                                                               ----------       ----------       ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Principal payments on debt and capital lease obligations                      (5,552)          (4,443)            (148)
     Bank borrowings                                                                2,710           13,881           17,925
     Proceeds from convertible debenture, warrants and other                          ---            4,000              ---
     Deferred financing costs                                                         ---             (207)             ---
     Issuance of common stock                                                         ---              320              ---
     Taxes related to exercises of employee stock options                             ---              ---           (1,956)
                                                                               ----------       ----------      -----------
Net cash (used in) provided by financing activities                                (2,842)          13,551           15,821
                                                                               ----------        ---------       ----------

Net (decrease) increase in cash and equivalents                                    (2,108)           2,966              111
Cash and equivalents at beginning of year                                           5,756            2,790            2,679
                                                                               ----------      -----------       ----------
Cash and equivalents at end of year                                            $    3,648       $    5,756       $    2,790
                                                                               ==========       ==========       ==========


                         The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>


                    GRC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>

                                                                   1998             1997              1996
                                                                   ----             ----              ----
                                                                               (in thousands)
<S>                                                                 <C>              <C>                 <C>
Supplemental disclosures:

Cash paid for:

         Interest                                                $2,239           $2,055              $754

         Taxes                                                       28               80                84

Other non-cash financing activities:

         Conversion of debenture to common stock                  2,814              750               ---






























                    The accompanying notes are an integral part of these statements.
</TABLE>



<PAGE>


                    GRC INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                           Common Stock         Paid-in           Accumulated           Treasury
                                                          Shares    Amount      Capital             Deficit              Stock
                                                          ------    ------      -------           -----------           --------
                                                                                                 (in thousands)
<S>                                                         <C>       <C>         <C>               <C>                     <C>
Balances as of July 1, 1995                                9,325     $  932     $76,812             $(25,631)             $(3,845)

     Stock options exercised net of shares retained
       for exercise price and taxes                          261         26      (1,869)                 ---                  ---
     Compensation on officers' stock options                 ---        ---          88                  ---                  ---
     Discount on Employee Stock Purchase Plan                ---        ---        (201)                 ---                  ---
     Net loss                                                ---        ---         ---              (17,637)                 ---
                                                          ------     ------     -------             --------               ------

Balances as of June 30, 1996                               9,586        958      74,830              (43,268)              (3,845)

     Stock options exercised net of shares retained
       for exercise price and taxes                           73          8         365                  ---                  ---
     Compensation on officers' stock options                   4        ---          31                  ---                  ---
     Discount on Employee Stock Purchase Plan                ---        ---         (86)                 ---                  ---
     Conversion of debenture to common stock                 184         18         732                  ---                  ---
     Proceeds from sale of warrants and other                ---        ---         882                  ---                  ---
     Stock issued for consulting services                      5          1         200                  ---                  ---
     Net loss                                                ---        ---         ---              (17,750)                 ---
                                                          ------    -------     -------             --------              -------

Balances as of June 30, 1997                               9,852        985      76,954              (61,018)              (3,845)

     Stock options exercised net of shares retained
       for exercise price and taxes                           25          2           9                  ---                  ---
     Compensation on officers' stock options                  13          1          86                  ---                  ---
     Conversion of debenture to common stock                 621         63       2,751
     Discount on Employee Stock Purchase Plan                ---        ---         (88)                 ---                  ---
     Net income                                              ---        ---         ---               11,460                  ---
                                                         -------    -------     -------              -------              --------

Balances as of June 30, 1998                              10,511     $1,051     $79,712             $(49,558)             $(3,845)
                                                          ======     ======     =======             =========             ========


                         The accompanying notes are an integral part of these statements.
</TABLE>


<PAGE>




                    GRC INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          June 30, 1998, 1997 and 1996


(1)      ACCOUNTING POLICIES

         Principles of  consolidation - The  consolidated  financial  statements
include the  accounts  of GRC  International,  Inc.  and all  subsidiaries  (the
Company).  All  significant  intercompany  balances and  transactions  have been
eliminated.

         Major  customer  - 98%,  94% and  91% of the  Company's  revenues  were
derived from contracts with the U.S.  Department of Defense (DoD) and 8%, 9% and
17% of revenues  were derived from one contract for fiscal years 1998,  1997 and
1996, respectively.

         Cash and cash equivalents - Cash and cash  equivalents  include cash on
hand,  cash in  banks  and  temporary  investments  purchased  with an  original
maturity of three months or less.

         Property  and  equipment  -  Expenditures  for  betterments  and  major
renewals are  capitalized,  and ordinary  maintenance and repairs are charged to
operations as incurred.

         Depreciation  is computed using the  straight-line  method based on the
estimated useful lives of assets,  which range from 3 to 10 years.  Amortization
of leasehold  improvements is computed using the  straight-line  method based on
the remaining term of the related lease.

         Upon sale or  retirement  of property  and  equipment,  the  difference
between the proceeds and the net book value of the assets is charged or credited
to income.

         Intangible  assets - Goodwill,  representing  the cost in excess of the
fair value of the net  assets of  businesses  acquired,  is being  amortized  to
operations  on a  straight-line  basis  over  periods  of up to 40 years.  Other
intangible  assets are being  amortized to operations on a  straight-line  basis
over periods of up to 7 years. The Company  periodically  evaluates the goodwill
and other intangible assets in relation to the operating  performance and future
contribution to the underlying  businesses and makes adjustments,  if necessary,
for any  impairment of these assets.  As of June 30, 1998 and 1997,  accumulated
amortization  of goodwill was $1,312,000 and  $1,235,000,  respectively,  and of
other intangible assets was $1,392,000 and $1,272,000, respectively.

         Software  development  costs - Software  development costs incurred for
products  to be sold  are  capitalized  only  after  establishing  technological
feasibility. Capitalized software is amortized over the greater of straight-line
method over the estimated  economic life of the product,  ranging  between three
and five years, or the ratio that current  revenues bear to the total of current
and estimated  future revenue stream on an individual  product basis. At the end
of each quarter,  the Company  re-evaluates the estimates of future revenues and
remaining  economic  life  of  products  for  which  software  costs  have  been

<PAGE>

capitalized,  and, if required under SFAS 86, writes-down the carrying values to
net realizable value. Accumulated amortization as of June 30, 1998 and 1997, was
$336,000 and $130,000, respectively.

         Revenue  recognition  - Service  revenues  result from  contracts  with
various government agencies and private industry.  Revenues on cost plus fee and
fixed price contracts are recognized  using the percentage of completion  method
generally  determined  on the basis of cost  incurred to date as a percentage of
estimated total cost. Revenues on time and materials contracts are recognized at
contractual  rates as  labor  hours  and  materials  are  expended.  Losses  are
recognized in the period in which they become determinable.

         Costs incurred in excess of current  contract funding are deferred when
management  believes they are realizable through subsequent  additional funding.
No revenues are recognized  related to such costs which are included in unbilled
reimbursable costs and fees in the accompanying consolidated balance sheets.

         Retirement  plans - The  Company  has a defined  contribution  deferred
income plan covering substantially all of its employees.  The plan provides that
the Company may make pension and employee  deferred  matching  contributions for
the  benefit  of  employees.  The  amount  of any such  contributions  is at the
discretion  of the Board of  Directors.  The total  expense  under the  deferred
income plan was  approximately  $3,367,000,  $3,785,000  and $3,842,000 in 1998,
1997 and 1996, respectively.

         The Company has an unfunded  defined benefit pension plan for directors
who are not employees of the Company.  After  termination  as a director for any
reason, a director will receive the then-current directors' retainer fee for the
lesser of 15 years or life.  Directors  may also  elect to receive a lump sum or
other  actuarial  equivalent of the  foregoing  benefit.  Directors  achieve 50%
vesting after five years of service,  with annual  increases of 10%,  until full
vesting is achieved after 10 years of service. However, in the event of a change
in control, directors immediately become fully vested. The total expense charged
under the defined benefit pension plan was  approximately  $61,000,  $53,000 and
$50,000 in 1998, 1997 and 1996, respectively. The present value of the projected
benefit  obligation is approximately  $156,000 and $145,000 at June 30, 1998 and
1997, respectively.

         Income  taxes - The Company  accounts  for income taxes under the asset
and liability approach which requires the recognition of deferred tax assets and
liabilities for the differences between the financial reporting and tax bases of
assets and liabilities.  A valuation  allowance reduces deferred tax assets when
it is more likely than not that some  portion or all of the  deferred tax assets
will not be realized.

         Earnings  per share - During  1998,  the Company  adopted  Statement of
Financial  Standards  (SFAS) No. 128,  Earnings Per Share and has computed basic
and diluted earnings per share based on the weighted average number of shares of
common stock and potential common stock outstanding during the period. Potential
common stock, for purposes of determining diluted earnings per share,  includes,
where  applicable,   the  effects  of  dilutive  stock  options,  warrants,  and
convertible  securities,  computed  using  the  treasury

<PAGE>

stock method or the  if-converted  method.  Comparative  earnings per share data
have been restated for prior periods.

         Use  of  estimates  -  The  preparation  of  financial   statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements and the reported amount of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.

         New Accounting  Pronouncements  - In 1999, the Company will be required
to adopt the provisions of Statement of Financial  Accounting  Standards  (SFAS)
No. 130, Reporting  Comprehensive  Income,  and SFAS No. 131,  Disclosures About
Segments of an Enterprise and Related Information. The Company has not completed
its evaluation of the impact that the adoption of such  statements  will have on
its financial statements.


<PAGE>


<TABLE>
<CAPTION>

(2)      EARNINGS PER SHARE

         The following table represents a  reconciliation  of the net income and
shares outstanding figures used in the basic and diluted earnings per share from
continuing operations computations.


                                                 1998                             1997                              1996
                                      -----------------------------    ---------------------------    -----------------------------
                                                          $ Per                             $ Per      Income           $ Per
                                      Income     Shares   Share        Income      Shares   Share      Loss      Shares   Share
                                      -----------------------------    ---------------------------    -----------------------------
<S>                                    <C>        <C>      <C>          <C>          <C>    <C>          <C>          <C>    <C>
Basic EPS                           $ 10,702     9,838  $   1.09       $13,861     9,338   $ 1.48     $  (700)    9,172  $ (0.08)
Income available to common
   stockholders
Effect of dilutive securities
Stock options                                      146                               176                           ---
Debenture                                184       270                     425       329
                                                                                                          ---      ---
Diluted earnings per share
Income available to common
                                     ------------------------------    ----------------------------   -----------------------------
   stockholders assuming conversion $ 10,886    10,254   $  1.07       $14,286     9,843   $ 1.45     $  (700)     9,172  $ (0.08)
</TABLE>



<PAGE>


(3)      DEBT

         Long-term debt at June 30, consists of the following:

                                                  1998                  1997
                                               ---------             -------
                                                        (in thousands)

         Revolving credit agreement             $ 18,506            $   19,267
         Term loans                                4,750                 4,900
         Equipment financing                         961                 2,871
         Convertible debenture                       ---                 2,758
         Other                                        22                    36
                                               ---------           -----------

         Total long-term debt                   $ 24,239              $ 29,832
         Less current portion                       (975)               (1,679)
                                               ----------           -----------

                                                $ 23,264              $ 28,153
                                                ========              ========

         The fair market values of the Company's  debt  instruments  approximate
the carrying values.

         Equipment  Financing  - In June  1996,  the  Company  completed  a $7.5
million financing of substantially all of its furniture and equipment.  The loan
was  originally  to be amortized  over a five year period at an interest rate of
9%, but with  partial  paydowns  made from the  proceeds  from  divestitures  of
discontinues operations,  the loan is now anticipated to be fully retired by the
end of fiscal 1999. As of June 30,1998, the outstanding balance on the equipment
financing lease was $961 thousand.

         Revolving  Credit  Agreement  and Term  Loans - At June 30,  1998,  the
Company had a revolving credit agreement with its bank that provides for secured
borrowings up to $22 million.  The agreement  extends to January 2000,  with the
bank  required  to provide  15 months  prior  written  notice to  terminate  the
facility  (absent any defaults  under the  agreement).  The bank has provided an
additional $5 million financing under term loans due September 1, 2000. Advances
under the revolving  credit  agreement and the term loans accrue interest at the
bank's prime rate which was 8.5% as of June 30, 1998. The  collateral  under the
Amended and Restated  Revolving  Credit and Term Loan Agreement  includes all of
the Company's assets, except for property and equipment.

         The revolving credit agreement contains certain covenants,  including a
material  adverse change clause,  which require the Company to maintain  certain
minimums for earnings,  tangible net worth working capital and debt ratios.  The
Amended and Restated  Revolving  Credit and Term Loan  Agreement  containing the
term loan and the revolving line of credit was amended as of March 31, 1996, and
again as of June 30, 1996, to reduce various  financial ratio covenant levels so
as to bring the Company into  compliance with those covenants as of those dates.
At June 30, 1998,  the Company was in compliance  with its covenants  under this
Agreement.

         Convertible Debenture - On January 21, 1997, the Company entered into a
Convertible  Securities   Subscription  Agreement   ("Subscription   Agreement")
pursuant to which an investor  purchased a $4 million 5%  Convertible  Debenture
due January 2000  ("Debenture").  By April 1998,  the  Debenture  had been fully
converted into 804,322 shares.
<PAGE>

         The investor also received a 7-year warrant to purchase  320,000 shares
of the  Company's  Common  Stock  at a price  of  $8.47  per  share  ("Debenture
Warrant").  The Debenture  Warrant  became  exercisable on July 31, 1998. If the
Company  sells  substantially  all of its  assets  or  enters  into a merger  or
acquisition  or  other  similar  transaction,  the  Debenture  Warrant  is to be
repriced  at the lesser of (i) $8.47 per share,  or (ii) 80% of the  Transaction
Value (as defined in the Debenture Warrant).

         Aggregate annual  maturities for long-term debt for the next five years
(unless extended) are as follows: 1999, $975 thousand;  2000,  $23,264,000;  and
nothing thereafter.

(4)      INCOME TAXES

<TABLE>
<CAPTION>
         The differences  between the tax provision  calculated at the statutory
federal income tax rate and the actual tax provision  recorded for each year are
as follows:

                                                                 1998               1997              1996
                                                               --------           --------          ------
                                                                           (in thousands)
<S>                                                                <C>               <C>              <C>
Income tax (benefit) at statutory federal rate                 $   1,619         $   1,115       $    (238)
State income taxes, net of federal benefit                           225               151             (28)
Change in valuation reserve                                       (8,349)          (11,848)            230
Other                                                               (190)              ---              36
                                                                --------         ---------        --------

Income tax benefit                                             $  (6,695)         $(10,582)      $     ---
                                                               =========          ========       =========
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

     The primary  components  of the  Company's  net  deferred  tax asset are as
follows:

                                                                                As of June 30,
                                                                         1998                      1997
                                                                       --------                 -------
                                                                                  (in thousands)
<S>                                                                        <C>                    <C>
Deferred tax assets:
     Reserves and other nondeductible accruals                         $   2,167               $  4,266
     Compensation not currently deductible                                 2,094                  2,207
     Net operating losses                                                 26,257                 26,195
     AMT and general business credits                                        816                    800
     Other                                                                     9                    ---
     Valuation reserve                                                    (9,150)               (17,500)
                                                                       ---------               --------
           Total deferred tax assets                                      22,193                 15,968
                                                                       ---------               --------

Deferred tax liabilities:
     Reimbursable costs and fees                                          (2,945)                (3,555)
     Prepaid expenses and rent                                              (342)                  (232)
     Depreciation (tax over book)                                           (349)                  (410)
     Internally developed software                                          (143)                  (189)
      Other                                                                 (497)                   ---
                                                                        ---------              ---------
           Total deferred tax liabilities                                 (4,276)                (4,386)
                                                                        --------               ---------

           Net deferred tax asset                                       $ 17,917               $ 11,582
                                                                        ========               ========
</TABLE>

         At June 30, 1998, the Company had net operating loss  carryforwards  of
approximately $64 million available to reduce future federal tax liabilities, of
which  approximately $10 million expire in 1999, $15 million expire between 2000
and 2010, $27 million expire in 2011, and $12 million expire in 2012.

         Realization of the net deferred tax asset of $17.9 million is dependent
on  generating  sufficient  taxable  income  prior  to  expiration  of the  loss
carryforwards.  Although  realization is not assured,  management believes it is
more likely than not that all of the  recorded  net  deferred  tax asset will be
realized. The amount of the deferred tax asset considered  realizable,  however,
could be reduced in the near term if estimates of future  taxable  income during
the carryforward periods are reduced.


<PAGE>


(5)      COMMITMENTS AND CONTINGENCIES
<TABLE>
<CAPTION>
         Commitments  - The  Company  leases  all of its  facilities  and  rents
certain  equipment  under  operating  lease  agreements,   some  with  inflation
escalator clauses. The minimum annual rentals due under non-cancelable operating
leases during each of the next five years and in total thereafter, are presented
in the table below.


                                                                   Operating               Sublease
                                                                    Leases               Rental Income
                                                                           (in thousands)
     <S>                                                              <C>                      <C>
         1999                                                      $  6,538                  $  1,166
         2000                                                         5,737                     1,155
         2001                                                         5,086                     1,014
         2002                                                         4,806                       462
         2003                                                         4,656                       142
         Thereafter                                                  28,244                       ---
                                                                   --------              ------------
                                                                    $55,067                  $  3,939
                                                                    =======                  ========
</TABLE>

         Rent expense under  operating  leases was $ 7,429,000,  $7,367,000  and
$6,643,000,  net of sublease  income of  $1,095,000,  $555,000 and $477,000,  in
1998, 1997 and 1996, respectively.

         As of June 30,  1998,  the Company had  employment  agreements  with 16
employees  providing for severance payments upon employment  termination after a
change in control.  The maximum  amount  payable  under these  arrangements  was
approximately $3,300,000.

(6)      ACCOUNTS RECEIVABLE AND UNBILLED REIMBURSABLE COSTS AND FEES
<TABLE>
<CAPTION>
         A  summary  of  U.S.   government  and  non-U.S.   government  accounts
receivable and unbilled reimbursable costs and fees is as follows:


                                                                                 1998                  1997
                                                                              ----------           --------
                                                                                      (in thousands)
          <S>                                                                    <C>                 <C>
         Accounts receivable, net of reserves of
         $41 in 1998 and 1997 -
            U.S. government                                                     $ 27,616            $ 23,420
            Non-U.S. government                                                    1,086               1,667
                                                                                --------           ---------

                                                                                $ 28,702            $ 25,087
                                                                                ========            ========
         Unbilled reimbursable costs and fees,
         net of reserves of $4,743 in 1998
         and $4,594 in 1997 -
            U.S. government                                                    $   3,424           $   3,646
            Non-U.S. government                                                      765                 430
                                                                                --------           ---------

                                                                               $   4,189           $   4,076
                                                                               =========           =========

</TABLE>


<PAGE>


         Invoices released in July that relate to June activity were $12,668,000
and $10,736,000 for 1998 and 1997,  respectively,  and are reflected in accounts
receivable in the accompanying financial statements.
<TABLE>
<CAPTION>

         The components of unbilled reimbursable costs and fees are as follows:


                                                                                      1998              1997
                                                                                    --------          ------
                                                                                      (in thousands)
          <S>                                                                         <C>            <C>
         Retainages billable upon completion of contract                           $ 2,561           $ 2,301
         Unbilled direct costs, fee and indirect costs incurred
            in excess of provisional billing rates                                     836               501
         Costs incurred in excess of contractual authorization,
            billable upon execution of a contract or contractual
            amendment to increase funding                                              792             1,274
                                                                                  --------          --------

                                                                                   $ 4,189          $  4,076
                                                                                   =======          ========
</TABLE>

         At June 30, 1998,  unbilled  reimbursable costs and fees expected to be
collected after one year were approximately $2,050,000.

         Costs  incurred by the Company in the  performance  of U.S.  government
contracts are subject to audit by the Defense  Contract Audit Agency (DCAA).  In
the opinion of management,  the final  settlement of these costs will not result
in significant adjustments to recorded amounts.

(7)      RELATED PARTY TRANSACTIONS

         The  chairman  and chief  executive  officer of  Mercantile  Bankshares
Corporation  (Mercantile)  is a member  of the  Company's  Board  of  Directors.
Mercantile has entered into a revolving  credit and term loan agreement with the
Company (see Note 3 for discussion).

         In  January  1997,  the  Company  arranged  for  up to $22  million  in
financing,  consisting of a $4 million  convertible  debenture  with the Halifax
Fund,  L.P.  ("Halifax")  and an $18  million  equity  line with  Cripple  Creek
Securities,  LLC ("Cripple  Creek").  The investment manager for Halifax and the
sole member of Cripple Creek is The Palladin Group, L.P. ("Palladin"),  of which
one of the  Company's  directors  was a special  limited  partner until June 30,
1997.


<PAGE>


(8)      STOCK-BASED COMPENSATION PLANS

         At June 30, 1998, the Company has seven stock-based compensation plans,
as follows (and more fully  described  below):  1985 Employee Stock Option Plan;
1994 Employee Stock Option Plan;  1996 Employee Stock Option Plan; 1996 Officers
Stock Option Plan; Cash Compensation Replacement Plan; Directors Fee Replacement
Plan; and Employee Stock Purchase Plan.

         Under the 1985  Employee  Stock Option Plan ("1985  Plan"),  no further
options may be granted,  but 80,470  options  remain  outstanding as of June 30,
1998.

         Under the 1994  Employee  Stock Option Plan ("1994  Plan"),  a total of
20,720 shares have been issued (17,222 of them to officers), and 795,317 options
are outstanding, of which 541,854 are held by officers.

         Under the 1996 Employee Stock Option Plan ("1996  Employee  Plan"),  no
shares  have  been  issued,  202,813  options  are  outstanding.  Under the 1996
Officers Stock Option Plan ("1996 Officers  Plan"),  no shares have been issued,
302,250 options are  outstanding.  (The 1996 Employee Plan and the 1996 Officers
Plan are sometimes referred to collectively as the "1996 Plans".)

         Under the Employee Stock Purchase Plan,  participating employees during
a quarter  have a "look back"  option to purchase  shares at 85% of the lower of
the stock price on the first trading day or the last trading day of the quarter.

         Under the 1985,  1994 and 1996 Plans,  options vest ratably over a four
year period, although options issued to the CEO, Chairman and Vice Chairman vest
in 6 to 24 months. Options have a 10-year term and are issued at the fair market
value on the date of grant, and therefore,  under the intrinsic value method, no
compensation is recorded in the Statement of Operations.

         During  the  second  quarter  of  FY98,  employees  other  than  the  7
highest-paid  officers  were  permitted  to  reprice  their  options at the then
current fair value in exchange for a reduced number of options.

         Under the Company's  Directors Fee Replacement Plan,  outside directors
may elect to receive stock and/or  non-qualified  options in lieu of annual fees
and/or other compensation.  Options are immediately exercisable.  Options remain
exercisable for 3 years after a participant ceases to be a director.  As of June
30, 1998,  options for 59,542  shares are  exercisable.  A separate plan permits
outside  directors to receive  their fees in the form of phantom  stock,  but to
date, no phantom stock has been awarded.  Compensation cost recognized under the
Directors Fee Replacement  Plan for the years ended June 30, 1998, June 30, 1997
and June  30,  1996 was  approximately  $78  thousand,  $112  thousand  and $118
thousand, respectively.

         Under the Company's Cash Compensation  Replacement  Plan,  officers may
elect to forego cash  compensation (up to 25% of salary and up to 100% of bonus)
to purchase stock and/or  non-qualified  options at a 20% discount.  The options
are immediately exercisable as to 80% of the shares, with the remainder becoming
exercisable in increments  over a four year period.  Options remain  exercisable
for 3 years after an officer's  termination as an employee. As of June 30, 1998,
options for 46,850 shares are

<PAGE>

exercisable.   Compensation   cost  recognized   under  the  Cash   Compensation
Replacement  Plan for the years ended June  30,1998,  June 30, 1997 and June 30,
1996 equaled  approximately  $37  thousand,  $103  thousand  and $359  thousand,
respectively.
<TABLE>
<CAPTION>
The  Company  uses the  intrinsic  value  method and  applies APB Opinion 25 and
related  interpretations  in accounting for its plans. Had compensation cost for
the Company's seven stock-based  compensation plans been determined based on the
fair value at the grant dates for awards under those plans  consistent  with the
method of FASB  Statement  123, the  Company's net income and earnings per share
would have been reduced to the pro forma  amounts  indicated  below.  (These pro
forma amounts may not be indicative of such effects in future years.):


                                                          1998                             1997
                                                ------------------------          ---------------------
                                                    As              Pro              As             Pro
                                                 Reported          Forma          Reported         Forma
                                                ---------          -----          --------         -----
<S>                                                <C>                <C>          <C>              <C>
Net income (loss) (in thousands)                   $11,460       $  9,422        $(17,750)        $(19,562)

Earnings Per Share Amounts (Diluted)
-----------------------------------
Net income (loss)                                  $  1.14       $    .94        $  (1.76)        $  (1.94)
</TABLE>
<TABLE>
<CAPTION>

         A summary of the status of the  Company's  stock options as of June 30,
1998, 1997 and 1996 and changes during those years is presented below (shares in
thousands):

1985, 1994 and 1996 Plans

                                    1998                       1997                          1996
                         ---------------------------  --------------------------   -----------------------
                                        Weighted                    Weighted                     Weighted
                                         Average                     Average                      Average
                          Shares     Exercise Price    Shares    Exercise Price    Shares     Exercise Price
                         --------------------------   --------------------------   -------------------------
<S>                           <C>           <C>         <C>            <C>           <C>            <C>
Outstanding @
   beginning of year    1,133,540        $17.42        855,661       $18.58        829,745        $ 9.04
     Granted              814,349         $6.77        518,771       $13.59        415,011        $25.20
     Exercised            (82,665)       $ 5.71        (83,655)      $ 6.02       (373,595)       $ 4.89
     Canceled            (484,375)       $18.85       (157,237)      $17.15        (15,500)       $15.35
                        ---------                   ----------                   ---------

Outstanding @
   end of year          1,380,849        $11.32      1,133,540       $17.42        855,661        $18.58
                        =========                    =========                    ========

Options exercisable
   at year end            606,244        $12.18        292,165       $16.20        166,286        $18.90
                       ==========                    =========                    ========

Options available
   for future grant       137,473                      172,053                      95,337
                       ==========                   ==========                   =========

Weighted Average
   fair value of options
   granted during the
   year               $     3.40                  $       6.66                   $    9.16
                      ==========                  ============                   =========
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

Directors Fee Replacement Plan & Cash Compensation Replacement Plan

                                    1998                       1997                          1996
                         ---------------------------  --------------------------   ----------------------
                                        Weighted                    Weighted                     Weighted
                                         Average                     Average                      Average
                          Shares     Exercise Price    Shares    Exercise Price    Shares     Exercise Price
                         ---------------------------  --------------------------   -------------------------
<S>                      <C>                 <C>        <C>            <C>            <C>        <C>
Outstanding @
  beginning of year        89,810         $3.20         59,924        $3.59         41,503         $1.96
     Granted               22,881         $1.68         29,906        $2.40         22,982         $6.92
     Exercised             (6,299)        $4.00            (20)       $9.43         (4,561)        $5.53
     Canceled                 ---           ---            ---          ---            ---           ---
                       ----------                   ----------                  ----------

Outstanding @
  end of year             106,392         $2.82         89,810        $3.20         59,924         $3.59
                        =========                    =========                   =========

Options exercisable
  at year end             100,050         $2.60         82,628        $3.05         54,117         $3.38
                        =========                    =========                   =========

Options available
  for future grant        389,499                      419,503                     459,858
                        =========                    =========                    ========

Weighted Average fair
   value of options
   granted during the
   year                $     5.57                  $     7.98                    $   22.78
                       ==========                  ==========                    =========
</TABLE>

         Under the Directors Fee Replacement Plan,  options expire 3 years after
the optionee ceases to be a director.  Under the Cash  Compensation  Replacement
Plan, options expire 3 years after the optionee ceases to be an employee.  As of
June 30, 1998, 1,352 and 10,560 of the outstanding  shares expire in FY 1999 and
FY 2000,  respectively.  As of June 30, 1998, 1,103 and 9,813 of the exercisable
shares expire in FY 1999 and FY 2000, respectively.

         The fair value of each option  granted during each year is estimated on
the  date of  grant  using  the  Black-Scholes  option-pricing  model  with  the
following assumptions:

                                              1998     1997     1996
                                             ------   ------   ------

(a)   Dividends                               ---       ---     ---
(b)   Expected volatility                     50%       50%     44%
(c)   Risk-free interest rate                5.5%      6.5%    6.5%
(d)   Expected life in years                   5         5       5


<PAGE>

<TABLE>
<CAPTION>

         The  following  table  summarizes   information   about  stock  options
outstanding at June 30, 1998 (shares in thousands):

1985, 1994 and 1996 Plans

                                 Options Outstanding                           Options Exercisable
                                 -------------------                           -------------------
                                        Weighted          Weighted                              Weighted
    Range of                             Average           Average                               Average
    Exercise            Number          Remaining         Exercise             Number           Exercise
     Prices           Outstanding         Life              Price            Exercisable          Price
---------------------------------------------------------------------------------------------------------
<S>                      <C>                 <C>             <C>                 <C>             <C>  
$  4.13 - $  9.38        915,349           8.5            $  6.44              339,119          $  5.66
$ 15.44 - $37.69         465,500           7.5             $20.91              267,125           $20.45
                       ---------           ---             ------              -------           ------
$  4.13 - $37.69       1,380,849           8.2             $11.32              606,244           $12.18
</TABLE>
<TABLE>
<CAPTION>

Directors Fee Replacement Plan & Cash Compensation Replacement Plan

                            Options Outstanding                        Options Exercisable
                            -------------------                        -------------------
                                            Weighted                                  Weighted
      Range of                               Average                                   Average
      Exercise          Number              Exercise              Number              Exercise
       Prices         Outstanding             Price             Exercisable             Price
-------------------------------------        --------------------------------------------------
<S>                      <C>                      <C>                  <C>                 <C>  
$.  10 -  $ 3.77         83,511               $1.75                79,563               $1.74
$ 5.07 - $ 9.43          22,881               $6.73                20,487               $6.78
                        -------               -----              --------               -----
$  .10 -  $ 9.43        106,392               $2.82               100,050               $2.77
</TABLE>

         Employee  Stock  Purchase  Plan -  Employees  may  purchase  stock at a
discount through payroll  deduction under the Company's  Employee Stock Purchase
Plan.  The  purchase  price of the shares is the lower of 85% of the fair market
value of the  stock on the  first  or the  last  day of the  quarterly  offering
period. The Company sold 58,230, 65,871 and 25,304 shares of common stock to its
employees during the years ended June 30, 1998, 1997 and 1996, respectively. The
weighted  average value of those  purchase  rights  granted in 1998 and 1997 was
approximately $2.40 and $1.89 per share.

         The Company's current policy allows for the acceptance of mature shares
of the Company's stock at market value in lieu of cash for the proceeds due upon
exercise of the stock  options and for tax  withholdings  due from the employee.
Furthermore,  the Company  accepts  shares  issuable upon exercise at their fair
market value in lieu of cash for the tax  withholdings.  The shares received are
retired and are reflected as reductions in common stock and paid-in capital.

 (9)     COMMON STOCK

         Purchase Rights - The Company has a Shareholder Rights Plan under which
a dividend of one common stock  purchase right (right) is  automatically  issued
for each share of the Company's  common stock. The rights are not exercisable or
transferable  apart from the common stock until ten business days after a person
has  acquired  beneficial  ownership  of 25% or more  of the  common  stock,  or
commences, or announces an intention to commence, a tender offer for 25% or more
of the common  stock.  Separate  certificates  for

<PAGE>

the rights  will be mailed to holders of the common  stock as of such date,  and
each right will  entitle the holder  thereof to buy one share of common stock at
an  exercise  price  of $100.  However,  if any  person  or  group  becomes  the
beneficial owner of 25% or more of the stock other than pursuant to an offer for
all shares which the independent  Directors of the Company  determine is fair to
and  otherwise in the best  interest of the Company and its  shareholders,  each
right not owned by such person or group will entitle the holder to purchase,  at
the exercise  price of the rights,  that number of shares of common stock of the
Company (or other  consideration)  which would have a market  value of two times
the exercise price of the right.  Similarly,  in the event that the Company is a
party to a merger or other  business  combination  transaction,  each right will
entitle the holder to purchase, at the exercise price of the rights, that number
of shares of common  stock of the  acquiring  company  which would have a market
value of two times the exercise price of the right. The rights are redeemable at
$.05 per right prior to the tenth business day following the public announcement
that a person has acquired beneficial ownership of 25% of the common stock. Upon
redemption, the rights will terminate. The rights expire on December 31, 2005.

         Structured  Equity  Line  Financing  -  The  Company  is a  party  to a
Structured Equity Line Flexible  Financing  Agreement  ("Equity Line Agreement")
whereby the Company can require the investor to purchase up to $3 million of the
common stock per quarter up to an aggregate maximum of $18 million over a 3 year
period beginning  October 1, 1998. The purchase price is equal to 94% of the low
trade  price  during  the 3 trading  days  immediately  preceding  the notice of
purchase by the investor.  The investor,  however, may not purchase common stock
if such low trade price is less than $4 per share.  If the  Company  issues less
than $5 million of its common stock under the Equity Line Agreement, it must pay
the investor up to $300,000 as liquidated damages.  The investor also received a
7-year  Warrant to purchase  125,000  shares of the Company's  common stock at a
price of $8.47 per share ("Equity Line Warrant"). If the Company elects to issue
more than $5 million,  the Company will issue an additional  7-year  warrant for
the purchase of 75,000 shares of the Company's common stock ("Additional  Equity
Line  Warrant") at a price equal to 140% of the price of the common stock at the
time of the  issuance of the  Additional  Equity Line  Warrant.  Under a related
Registration Rights Agreement ("Registration Rights Agreement"), the Company was
obligated to file a  registration  statement  with the  Securities  and Exchange
Commission with respect to the Company's  common stock for which the Equity Line
Warrant  and  the  Additional  Line  Warrant  (collectively,  the  "Equity  Line
Warrants") are exchangeable.  The Equity Line Warrant became exercisable on July
31, 1998. If the Company sells  substantially all of its assets or enters into a
merger or acquisition or other similar transaction, the Equity Line Warrant will
be repriced at the lesser of (i) $8.47, or (ii) 80% of the Transaction Value (as
defined in the Equity Line Warrant).  The Additional  Equity Line Warrant,  when
issued,  will  contain  provisions  similar  to the  Equity  Line  Warrant.  The
investor's  obligation to purchase under the Equity Line Agreement is subject to
various conditions,  including (i) the effectiveness of a registration statement
with respect to the underlying  shares,  (ii) limitations based on the price and
volume of the  Company's  common stock,  and (iii) the  percentage of the common
stock beneficially owned by the investor from time to time.


<PAGE>


(10)     DISCONTINUED OPERATIONS

         During the quarter ended March 31, 1997, the Company  adopted a plan to
dispose of its Telecommunications and Advanced Products Divisions. As of January
8, 1998, all business units within those divisions had been sold.  Consequently,
the Company has reported its results of  operations  for the  Telecommunications
and Advanced Products Divisions as discontinued operations.

         On April 30, 1997,  the Company sold the assets and  liabilities of its
GRC  Instruments/Dynatup  business unit of its  discontinued  Advanced  Products
Division for $2.0 million in cash.

         On June 5, 1997,  the Company  sold the assets and  liabilities  of its
Vindicator  business unit of its  discontinued  Advanced  Products  Division for
approximately $700 thousand,  with initial payment of $250 thousand.  Subsequent
installments of approximately $130 thousand have been received. The remainder of
the purchase price, $320 thousand, is due on December 31, 1998, and is reflected
within net liabilities of discontinued operations.

         On June 27, 1997,  the Company sold the assets and  liabilities  of its
OSU business unit of its discontinued Telecommunications Division for an initial
payment of $1.5 million and  royalties  on sales of the OSU unit or  derivatives
over the next 10 years.

         On December  19, 1997,  the Company  sold the assets of its  Commercial
Information  Solutions ("CIS")  component of its discontinued  Advanced Products
Division in exchange for royalties on future sales of Flow Gemini and derivative
products and related services.

         On January  8,  1998,  the  Company  sold the assets of its  NetworkVUE
business unit of its  discontinued  Telecommunications  Division in exchange for
royalties on future sales of NetworkVUE,  NetSolve and  derivative  products and
related services.



<PAGE>

<TABLE>
<CAPTION>

         Summarized balance sheet data related to the discontinued operations is
as follows:

                                                                              June 30,           June 30,
                                                                                1998               1997
                                                                                ----               ----
                                                                                   (in thousands)
                    <S>                                                           <C>                <C>
                  Net assets to be disposed of:
                      Current assets                                         $      40           $    417
                      Property, plant & equipment, net                             391              1,035
                      Other                                                         10                 44
                                                                             ---------           --------
                                                                                   441              1,496
                      Liabilities                                                   96                ---
                                                                             ---------           --------
                      Net assets to be disposed of                                 345                874

                  Proceeds receivable from sale of divisions                       400                400
                  Provision for losses                                          (1,042)            (3,883)
                  QSI obligation                                                   ---             (1,982)
                                                                             ---------           --------
                  Net liabilities related to discontinued
                      operations                                              $   (297)           $(4,591)
                                                                              ========            =======
</TABLE>

         Discontinued  operations  reflect  management's  estimates  of the  net
amounts  expected  to be  incurred  to  dispose  of its  Telecommunications  and
Advanced  Products  businesses.  The amounts the Company will  ultimately  incur
could differ significantly in the near term from the amounts assumed in arriving
at the loss on disposal of the discontinued operations.

ITEM 9.  CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON ACCOUNTING  AND
         --------------------------------------------------------------------
         FINANCIAL DISCLOSURE
         --------------------

                None.

                                    PART III
                                    --------

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
                --------------------------------------------------

                The information  required by this item is hereby incorporated by
reference to the Proxy Statement (to be filed).

ITEM 11.        EXECUTIVE COMPENSATION
                ----------------------

                The information  required by this item is hereby incorporated by
reference to the Proxy Statement (to be filed).


<PAGE>


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  --------------------------------------------------------------

                The information  required by this item is hereby incorporated by
reference to the Proxy Statement (to be filed).

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
                ----------------------------------------------

                The information  required by this item is hereby incorporated by
reference to the Proxy Statement (to be filed).

                                                                         PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
                ----------------------------------------------------------------

                (a)      EXHIBITS

                         See  "Index  to  Exhibits"  hereinafter  contained  and
incorporated herein by reference.

                (b)      SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE

                         The following  financial  information is filed herewith
on the pages indicated:

                       Schedule II - Valuation and Qualifying Accounts (Page 45)

                (c)      REPORTS ON FORM 8-K

                         None.

<PAGE>


                                   SIGNATURES


         Pursuant to the  requirements  of section 13 or 15(d) of the Securities
and  Exchange  Act of 1934,  the  Registrant  has duly  caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                                    GRC INTERNATIONAL INC.



Date: September 17, 1998                            By: /s/ Gary Denman
      ------------------                            ----------------------------
                                                   Gary Denman
                                                   President and Chief Executive
                                                      Officer


                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes and appoints Timothy C. Halsey his  attorney-in-fact,
with the power of substitution,  for him in any and all capacities,  to sign any
amendments to this Report, and to file the same, with exhibits thereto and other
documents in connection therewith,  with the Securities and Exchange Commission,
hereby  ratifying  and  confirming  all  that  said  attorney-in-fact,   or  his
substitute or substitutes, may do or cause to be done by virtue hereof.

         Pursuant to the  Securities  and Exchange Act of 1934,  this Report has
been signed below by the following  persons on behalf of the  Registrant  and in
the capacities and on the dates indicated:


Date: September 17, 1998                          By: /s/ Gary Denman
      -----------------                               --------------------------
                                                   Gary Denman
                                                   President and Chief Executive
                                                     Officer


Date: September 17, 1998                          By: /s/ Timothy C. Halsey
      ------------------                              --------------------------
                                                      Timothy C. Halsey
                                                      Controller,
                                                     (Acting) Chief Financial
                                                        Officer & (Acting) Chief
                                                        Accounting Officer



<PAGE>



Date: September 17, 1998                     By: /s/ Joseph R. Wright, Jr.
      ------------------                         -------------------------------
                                                 Joseph R. Wright, Jr., Chairman
                                                 of the Board of Directors


Date: September 17, 1998                     By: /s/ Peter A. Cohen
      ------------------                         -------------------------------
                                                 Peter A. Cohen, Vice Chairman
                                                 of the Board of Directors


Date: September 17, 1998                      By: /s/ H. Furlong Baldwin
      ------------------                          ------------------------------
                                                  H. Furlong Baldwin, Director


Date: September 17, 1998                      By: /s/ Frank J.A. Cilluffo
      ------------------                          ------------------------------
                                                  Frank J.A. Cilluffo, Director


Date: September 17, 1998                      By: /s/ Leslie B. Disharoon
      ------------------                          ------------------------------
                                                  Leslie B. Disharoon, Director


Date: September 17, 1998                      By: /s/ Charles H.P. Duell
      ------------------                          ------------------------------
                                                  Charles H.P. Duell, Director


Date: September 17, 1998                      By: /s/ Edward C. Meyer
      ------------------                          ------------------------------
                                                  Edward C. Meyer, Director


Date: September 17, 1998                      By: /s/ George R. Packard
      ------------------                          ------------------------------
                                                  George R. Packard, Director


Date: September 17, 1998                      By: /s/ Herbert Rabin
      ------------------                          ------------------------------
                                                  Herbert Rabin, Director


Date: September 17, 1998                      By: /s/ Jim Roth
      ------------------                          ------------------------------
                                                  Jim Roth, Director


Date: September 17, 1998                      By: /s/ E. Kirby Warren
      ------------------                          ------------------------------
                                                  E. Kirby Warren, Director


<PAGE>


                          INDEPENDENT AUDITORS' CONSENT


         We consent to the incorporation by reference in Registration Statements
Nos. 33-1046, 33-39512,  33-39513,  33-52536,  33-52538,  33-87981, 33-87982 and
333-38445  of GRC  International,  Inc. on Form S-8 of our report dated July 28,
1998,  appearing in this Annual Report on Form 10-K of GRC  International,  Inc.
for the year ended June 30, 1998.





DELOITTE & TOUCHE LLP
McLean, Virginia
September 18, 1998


<PAGE>

                                                                           
                                   GRC INTERNATIONAL, INC. AND SUBSIDIARIES
                              SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                              (in thousands)
<TABLE>
<CAPTION>

                                                                      Additions
                                             Balance at     Charged to          Charged            Deductions             Balance
                                             Beginning      Costs and           to Other           from                   at End of
Description                                  of Period      Expenses            Accounts (A)       Reserves (B)           Period
-----------                                  ---------      --------            --------           --------               ----------
<S>                                            <C>            <C>                 <C>                 <C>                   <C>
Year ended June 30, 1998

Reserves for uncollectible receivables -
  Deducted from accounts receivable         $      41        $    ---           $   ---             $   ---             $      41
  Deducted from unbilled reimbursable
    costs and fees                              4,594             925               127                (904)                4,742
                                             --------        --------           -------             -------              --------

                                            $   4,635        $    925           $   127             $  (904)            $   4,783
                                            =========        ========           =======             =======              ========

Year ended June 30, 1997

Reserves for uncollectible receivables -
  Deducted from accounts receivable         $       5        $     36           $  ---              $  ---              $     41
  Deducted from unbilled reimbursable
    costs and fees                              3,691             855              176                (128)                4,594
                                             --------        --------           ------              ------              --------

                                            $  3,696         $    891           $  176              $ (128)              $ 4,635
                                            ========         ========           ======              ======               =======

Year ended June 30, 1996

Reserves for uncollectible receivables -
  Deducted from accounts receivable         $   ---          $      5           $  ---              $  ---               $     5(c)
  Deducted from unbilled reimbursable
    costs and fees                            3,821               496              455              (1,081)                3,691
                                            -------          --------           ------              ------              --------

                                            $ 3,821          $    501           $  455             $(1,081)              $ 3,696
                                            =======          ========           ======             =======               =======


                           (A) Reductions of revenue for potentially nonrecoverable costs.
               (B) Write off of uncollectible accounts and cost against reserves, net of recoveries.
                              (c) Relates to receivable from discontinued operations.
</TABLE>

<PAGE>

                                INDEX TO EXHIBITS
                  (Exhibit Numbers correspond to Exhibit Table,
                            Regulation S-K, Item 601)
<TABLE>
<CAPTION>
Exhibit
Number                                                                                           Page
<S>            <C>                                                                               <C>
3.1            Restated Certificate of Incorporation  (incorporated by reference
               to Exhibit 3.1 to the 1994 Form 10-K)

3.2            Bylaws                                                                            -----

10.1*          1985  Employee  Stock Option Plan  (incorporated  by reference to
               Exhibit 10.1 to the 1996 Form 10-K)

10.2*          1994 Employee Option Plan  (incorporated  by reference to Exhibit
               10.2 to the 1997 Form 10-K)

10.3*          1996 Officers Stock Option Plan                                                   -----

10.4*          1998 Option Plan                                                                  -----

10.5*          Cash Compensation  Replacement Plan (incorporated by reference to
               Exhibit 10.4 to the 1997 Form 10-K)

10.6*          Incentive Compensation Plan (incorporated by reference to Exhibit
               10.7 to the 1995 Form 10-K)

10.7*          Directors  Fee  Replacement  Plan  (incorporated  by reference to
               Exhibit 10.6 to the 1997 Form 10-K)

10.8*          Directors  Phantom  Stock  Plan  (incorporated  by  reference  to
               Exhibit 10.7 to the 1996 Form 10-K)

10.9*          Directors  Retirement Plan  (incorporated by reference to Exhibit
               10.8 to the 1997 Form 10-K)

10.10          Amended and  Restated  Revolving  Credit and Term Loan  Agreement
               ("Loan Agreement"), with Exhibits, with Mercantile-Safe Deposit &
               Trust  Company  ("Mercantile"),  dated as of February  12,  1996,
               First  Confirmation  and  Amendment  thereto  dated May 15, 1996,
               Second  Confirmation  and Amendment  thereto dated July 18, 1996,
               and Third  Confirmation and Amendment thereto dated September 24,
               1996  (incorporated by reference to Exhibit 10.9 to the 1996 Form
               10-K)

10.11          Fourth  Confirmation and Amendment dated February 7, 1997 to Loan
               Agreement  between the Company and  Mercantile  (incorporated  by
               reference  to  Exhibit  10.1 to the  Company's  Form 10-Q for the
               quarter ended December 31, 1996)
<PAGE>

10.12          Fifth  Confirmation  and  Amendment  dated April 30, 1997 to Loan
               Agreement  between the Company and  Mercantile  (incorporated  by
               reference  to  Exhibit  10.1 to the  Company's  Form 10-Q for the
               quarter ended March 31, 1997)

10.13          Sixth  Confirmation  and  Amendment  dated  May 13,  1997 to Loan
               Agreement  between the Company and  Mercantile  (incorporated  by
               reference  to  Exhibit  10.2 to the  Company's  Form 10-Q for the
               quarter ended March 31, 1997)

10.14          Third Allonge to Secured Note (Commercial) of GRC  International,
               Inc. to Mercantile-Safe  Deposit & Trust Company in the Principal
               Amounts of $2,200,000  dated  February 12, 1996;  $400,000  dated
               March 8, 1996; and $2,600,000 dated June 7, 1996                               -----

10.15          Lease Agreement dated as of June 30, 1989, with Exhibits, between
               the Company and Centennial III Limited Partnership  (incorporated
               by reference to Exhibit 10.17 to the 1989 Form 10-K)

10.16          Lease  Amendment  No.  1, with  Exhibits,  to Lease  between  the
               Company and Centennial III Limited  Partnership  (incorporated by
               reference to Exhibit 10.6 to the 1990 Form 10-K)

10.17          Lease  Amendments Nos. 2, 3, 4 and 5 to Lease between the Company
               and Richmond Land  Corporation  (as  successor to Centennial  III
               Limited Partnership) (incorporated by referenced to Exhibit 10.12
               to the 1994 Form 10-K)

10.18          Lease  Amendment  No. 6 to Lease between the Company and Richmond
               Land   Corporation   (as  successor  to  Centennial  III  Limited
               Partnership)  (incorporated by referenced to Exhibit 10.13 to the
               1995 Form 10-K)

10.19          Amended and Restated Rights Agreement dated June 30, 1995 between
               the  Company  and the  American  Stock  Transfer & Trust  Company
               (incorporated  by  referenced  to Exhibit  10.14 to the 1995 Form
               10-K)

10.20*         Employment Agreement between the Company and Jim Roth dated as of
               July 1, 1995  (incorporated  by reference to Exhibit 10.16 to the
               1996 Form 10-K)

10.21*         Amendment Number One to Employment  Agreement between the Company
               and Jim Roth dated as of June 30, 1998                                         -----

10.22*         Note dated July 9, 1992, and Deed of Trust dated as of August 11,
               1993,  by and between the Company and Jim Roth  (incorporated  by
               reference to Exhibit 10.15 to the 1994 Form 10-K)
<PAGE>

10.23*         Amendment to Deed of Trust Note dated as of March 26, 1998                     -----

10.24*         Independent Contractor Agreement dated as of July 1, 1998 between
               the Company and Jim Roth                                                       -----

10.25*         Employment Agreement between the Company and Gary L. Denman                    -----

10.26*         Form of  Employment  Agreement for Thomas E. McCabe and Ronald B.
               Alexander                                                                      -----

10.27*         Form of  Employment  Agreement for James L. Selsor and Michael G.
               Stolarik                                                                       -----

10.28          Building  Lease  between  the  Company  and  Bermant  Development
               Company  (incorporated  by reference to Exhibit 10.21 to the 1995
               Form 10-K)

10.29          First and Second Amendments to Building Lease between the Company
               and Bermant  Development  Company  (incorporated  by reference to
               Exhibit 10.23 to the 1997 Form 10-K)

10.30          Convertible Securities Subscription Agreement dated as of January
               21, 1997 between the Company and Halifax Fund,  L.P.  ("Halifax")
               (incorporated  by reference to Exhibit 10.2 to the Company's Form
               10-Q for the quarter ended December 31, 1996)

10.31          $4,000,000  5%  Convertible  Debenture  Due January 30, 2000 (the
               "Debenture")  issued by the Company to Halifax  (incorporated  by
               reference  to  Exhibit  10.3 to the  Company's  Form 10-Q for the
               quarter ended December 31, 1996)

10.32          320,000 Share Common Stock Purchase Warrant issued by the Company
               to Halifax in  connection  with the  Debenture  (incorporated  by
               reference  to  Exhibit  10.4 to the  Company's  Form 10-Q for the
               quarter ended December 31, 1996)

10.33          Registration  Rights  Agreement  dated  as of  January  30,  1997
               between  the  Company  and  Halifax  relating  to  the  Debenture
               (incorporated  by reference to Exhibit 10.5 to the Company's Form
               10-Q for the quarter ended December 31, 1996)

10.34          Structured Equity Line Flexible Financing Agreement ("Equity Line
               Agreement") dated as of January 21, 1997 (amended and restated as
               of August  26,  1998)  between  the  Company  and  Cripple  Creek
               Securities, LLC ("Cripple Creek")
<PAGE>

10.35          125,000 Share Common Stock Purchase Warrant issued by the Company
               to Cripple  Creek in  connection  with the Equity Line  Agreement
               (incorporated  by reference to Exhibit 10.7 to the Company's Form
               10-Q for the quarter ended December 31, 1996)

10.36          Registration  Rights  Agreement  dated  as of  January  30,  1997
               between the Company and Cripple Creek relating to the Equity Line
               Agreement  (incorporated  by  reference  to  Exhibit  10.8 to the
               Company's Form 10-Q for the quarter ended December 31, 1996)

11             Statement of Computation of Earnings Per Share                            -----

21             Subsidiaries of the Registrant                                            -----

23             Consent of  Deloitte & Touche  LLP  (included  on Page 43 of Form
               10-K)

24             Powers of Attorney  (included as a part of signature pages to the
               Form 10-K)

27             Financial Data Schedule                                                   -----

* Indicates management contract or compensatory plan.
</TABLE>