SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
                             ------------------------

                                    FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

      For the fiscal year ended                            Commission File
           June 30, 1997                                      No. 0-24108

                                   ----------

                               Sarnia Corporation
             (Exact name of registrant as specified in its charter)

               Virginia                                 54-1215366
  (State or other jurisdiction of           (I.R.S. employer identification no.)
   incorporation or organization)
6850 Versar Center, Springfield, Virginia                  22151
(Address of principal executive offices)                 (Zip code)

                                 (703) 642-6800
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: NONE

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

                           Common Stock, no par value
                                (Title of Class)

   Indicate  by check mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes  X    No
                                              ---      ---

   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.

   The aggregate market value of the voting stock held by  non-affiliates of the
registrant as of September 2, 1997 was approximately $1,181,622.

   The number of shares of Common Stock  outstanding as of September 2, 1997 was
4,572,545.

   The Exhibit Index is located on Pages 14 through 15 hereof.

                                   ----------

                       DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the registrant's  Proxy Statement to be filed with the Securities
and Exchange  Commission with respect to the 1997 Annual Meeting of Stockholders
scheduled to be held on November  12, 1997 are  incorporated  by reference  into
Part III hereof.

<PAGE>
                                     PART I

Item 1.  Business

Forward Looking Statements

The  statements  in this  report that are  forward-looking  are based on current
expectations,  and actual  results may differ  materially.  The  forward-looking
statements  include those regarding cost controls and  reductions,  the expected
annual  rent  escalations,  the  possible  impact of current  and future  claims
against the Company based upon  negligence and other theories of liability,  and
the  possibility  of tenants  continuing to renew their leases.  Forward-looking
statements  involve  numerous  risks and  uncertainties  that could cause actual
results to differ materially,  including,  but not limited to, the possibilities
that the demand for the  Company's  services may decline as a result of possible
changes in general and industry specific economic  conditions and the effects of
competitive  services  and pricing;  one or more  current or future  claims made
against the Company may result in substantial liabilities;  and such other risks
and  uncertainties  as are described in reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission.

         Sarnia  Corporation  ("Sarnia"  or  "the  Company")  is the  owner  and
operator  of  commercial  real  estate.  Its  sole  asset is an  office  park of
approximately  18.3  acres  located  in  Springfield,  Virginia  known as Versar
Center. Sarnia was incorporated in Virginia on November 22, 1982 (under the name
of Versar Virginia,  Inc.) to acquire property from its then parent corporation,
Versar, Inc.  ("Versar"),  in order to own, develop and manage the Versar Center
complex.  On June 30, 1994,  Versar spun-off Sarnia to Versar's  shareholders on
the basis of one share of Sarnia  common  stock for every  outstanding  share of
Versar  common   stock.   Sarnia  is  now  a  public   company   traded  on  the
over-the-counter market.

         Versar Center  consists of two four-story  office  buildings:  the 6850
Building  (approximately 108,000 square feet) which was constructed in 1982, and
the 6800 Building  (approximately  120,500 square feet) which was constructed in
1986.  At the end of June 1997,  the 6850  Building  was 98% leased and the 6800
Building was 97% leased.  On June 29, 1994,  Versar and Sarnia  entered into two
15-year  leases  through May 2009  pursuant to which  Versar  leased from Sarnia
108,506 square feet (99,588 of which was located in the 6850 Building).  On June
22, 1995,  Versar's lease in the 6850 Building was modified to reduce the square
footage from 99,588 to 73,371.  On July 1, 1996 Versar modified its lease in the
6850 Building to further reduce the square  footage from 73,371 to 68,239.  Four
major tenants,  the General Services  Administration  ("GSA"),  Cornet,  C-Cubed
Corporation and RGE Engineering,  lease  approximately  68% of the 6800 Building
and have leases which terminate between February 1999 and June 2001.

         Sarnia believes that the relatively  stable employment base provided by
the federal government,  supplemented by moderate business growth in the region,
makes  Versar  Center an  attractive  real  estate  investment.  Because  of the
presence of the federal government,  the area has attracted a high percentage of
professional  workers which provide the region with a private sector labor force
base particularly suited to an increasingly service-oriented national economy.

         Since 1985, the Washington,  D.C.  metropolitan  area has had the sixth
highest employment base in the nation.  Population and employment growth in this
metropolitan area have historically moved outward from the District of Columbia,
first  to the  immediate  suburbs,  and  then  to the  adjacent  counties,  with
Montgomery  County in Maryland and Fairfax County in Virginia  absorbing most of
the growth.

         Fairfax  County,  in which Versar  Center is located,  has  experienced
growth  in  the  past  in  terms  of  residential,   commercial  and  industrial
development. In the past two years, the regional economy, especially in Northern
Virginia and Fairfax County has become robust.  That,  combined with the lack of
new buildings under

                                        2

<PAGE>



construction  has lead to an increase in occupancy and generally  higher rentals
for vacant or renewed office space.

         Versar  Center  competes for tenants with other  properties  throughout
Springfield and central Fairfax County.  Competition for tenants is on the basis
of location  and rent  charged.  The success of Sarnia  depends on,  among other
factors,  the trends of the economy in the Washington,  D.C.  metropolitan area,
government  spending and the ability of Sarnia to keep Versar  Center  leased at
profitable levels and controlled operating costs.

         Sarnia's staff perform the actual  day-to-day  management  functions of
Versar  Center,  including  maintenance  of the property and  equipment,  tenant
build-outs and other facilities management functions.

Operating Data

         The occupancy  rate for the 6850 Building for fiscal years 1997 through
1993 was 98%, 93%, 99%, 93% and 94%,  respectively.  The occupancy  rate for the
6800 Building for fiscal years 1997 through 1993 was 97%, 94%, 93%, 85% and 79%,
respectively.

         The principal  businesses conducted by the tenants in the 6800 Building
and the 6850  Building  are as  follows:  environmental  consulting,  government
agencies,  government contractors, an architectural firm, a health care provider
organization and other various service  businesses.  Versar and National Capital
Preferred  Provider  Organization,  Inc.  ("NCPPO")  are the only tenants  which
occupy more than 10% of the total rentable space in the 6850 Building.  Versar's
principal business is environmental  engineering and consulting,  and NCPPO is a
national  health  care  provider.  C-Cubed  Corporation,  Cornet,  GSA  and  RGE
Engineering  each  occupy  more  than  10% of the  rentable  space  in the  6800
building.  The loss of any of these  tenants,  if not replaced on  substantially
similar terms,  would have an adverse  effect on Sarnia's  results of operations
and financial condition.

         Versar entered into lease agreements with Sarnia for 68,239 square feet
of office space in the 6850 Building,  and 4,918 square feet of storage space in
the 6800 Building, at an annual aggregate rent of $1,037,000. Both leases expire
on May 31, 2009.  The lease on 6850 Building has an annual 4% escalation in rent
costs with fair market  adjustment  every five years at June 1, 1999 and June 1,
2004. The lease on 6800 Building is subject to 2% annual rent escalation.  There
are no renewal options in the leases.

         With respect to the 6850 Building,  the average effective annual rental
per square foot was $14.02,  $13.59,  $13.52, $13.41 and $14.04 for fiscal years
1997,  1996,  1995,  1994  and  1993,  respectively.  With  respect  to the 6800
Building,  the  average  effective  annual  rental per square  foot was  $12.60,
$11.76,  $11.52,  $11.29 and $11.84 for fiscal years 1997,  1996, 1995, 1994 and
1993,  respectively.  In addition,  the average net rental rates per square foot
for both buildings were $7.01,  $6.09,  $6.30,  $5.42 and $4.54 for fiscal years
1997, 1996, 1995, 1994 and 1993,  respectively.  The net rental rates per square
foot for Versar alone, as a significant  tenant, were $7.83, $6.88, $7.06, $7.57
and $8.88 for fiscal years 1997,  1996, 1995, 1994 and 1993,  respectively.  The
average  effective  annual rental per square foot is derived using annual rental
income  divided by occupied  square  feet.  The net rental rate  represents  the
difference between income per square foot and operating expense per square foot.



                                        3

<PAGE>



         The  following  table sets forth the schedule of the lease  expirations
for each of the ten years commencing with calendar year 1997:

<TABLE>
<CAPTION>

                                                                                    Percent of Gross
           Number of Tenants     Total Square                 Annual Rent                 Rent
             Whose Leases        Feet Covered                 Represented              Represented
 Year         Will Expire          by Leases                   by Leases                by Leases
------      ---------------     ---------------             ---------------          ------------
<S>               <C>               <C>                       <C>                          <C> 
1997               1                 4,523                    $    52,000                   1.9%
1998               3                10,945                    $   135,000                   4.8%
1999               3                33,887                    $   449,000                  16.1%
2000               7                68,499                    $   831,000                  29.8%
2001               2                21,517                    $   260,000                   9.3%
2002              --                    --                             --                    --
2003              --                    --                             --                    --
2004              --                    --                             --                    --
2005              --                    --                             --                    --
2006              --                    --                             --                    --

</TABLE>

         The  following  table sets forth  information  with respect to the 6850
Building and the 6800 Building regarding tax depreciation:

<TABLE>
<CAPTION>

                              Original
                                 Cost          Rate                Method           Life
                                 ----          ----                ------           ----
<S>                        <C>                <C>        <C>                        <C>
6850 Building              $   6,072,575       6.70%          Straight-line          15

Capitalized Interest       $     750,179                    Fully depreciated
(6850 Building)

Land                       $     650,000                 Land is nondepreciable

Leaseholds to              $     578,428       3.17%          Straight-line        31.5/39
6850 Building

6800 Building              $   8,325,674       5.26%              ACRS               19
                                                              Straight-line

Capitalized Interest       $     584,179      10.00%          Straight-line          10
(6800 Building)

Leaseholds to              $     592,923       3.17%          Straight-line        31.5/39
6800 Building

Equipment                  $      31,806       8.93%             Double               7
                                                               declining
                                                                balance

Security System to         $      53,002       5.26%          Straight-line          19
6850 Building

Security System to         $      51,520       5.26%          Straight-line          19
6800 Building
</TABLE>

                                        4

<PAGE>




         The real property tax rate is $1.231 per $100 of assessed value. Annual
real property taxes for 1997 are approximately  $65,000 and $74,000 for the 6850
Building and the 6800 Building, respectively.

Employees

         At June 30, 1997, Sarnia employed seven (7) full time employees. Sarnia
considers  relations with its employees to be good. No employees are represented
by labor unions.

Executive Officers

         The current executive  officers and directors of Sarnia,  their ages as
of September 2, 1997,  their  current  offices or positions  and their  business
experience for the past five years are set forth below.

                                       Business Experience
                                       During Last Five Years
Name                          Age      and Other Information
----                          ---      ---------------------

Charles I. Judkins, Jr.       66       President and Chief Executive Officer
                                       President and Chief Executive Officer
                                       from June 1994 to present; Retired former
                                       Senior Vice President of Versar from
                                       August 1992 to May 1993; Senior
                                       Vice President and Chief Financial
                                       Officer of Versar from July 1991 to
                                       August 1992.

Benjamin M. Rawls             56       Chairman of the Board
                                       Chairman of the Board since November
                                       1993 and President and Chief Executive
                                       Officer of Versar since April 1991.

Lawrence W. Sinnott           35       Treasurer
                                       Chief Financial Officer and Treasurer
                                       of Versar from May 1994 to present;
                                       Treasurer and Controller of Versar from
                                       June 1992 to April 1994.

Gerald T. Halpin              74       Director
                                       President, WEST*GROUP Management
                                       LLC, a real estate development and
                                       construction firm and its predecessors,
                                       since 1962.

Michael Markels, Jr.          71       Director
                                       Chairman, President and CEO of Ocean
                                       Farming, Inc. since 1995.  Co-founder of
                                       Versar; Chairman Emeritus and Director
                                       of Versar; Retired former Chairman of the
                                       Board of Versar from March 1991 to
                                       November 1993.


                                        5

<PAGE>



                                       Business Experience
                                       During Last Five Years
Name                          Age      and Other Information
----                          ---      ---------------------

Thomas G. Hotz                37       Director
                                       Partner, Magnum Capital Partners,
                                       L.L.C., 1996; Managing Director
                                       of Julian J. Studley, Inc., a national
                                       real estate firm, from 1989 through
                                       1996.

William G. Denbo              54       Vice President and General Manager
                                       Maintenance supervision and general
                                       manager of Sarnia Corporation for the
                                       past five years.

James N.Schwarz               52       Director
                                       Partner of Ginsburg, Feldman and Bress, a
                                       chartered law firm in Washington, D.C.,
                                       since February 1996; Senior Vice
                                       President, General Counsel and Corporate
                                       Secretary of Steuart Petroleum Company
                                       from 1991 to 1996.



                                        6

<PAGE>



Item 2.  Properties

         Versar Center is located at the east end of the 6900 block of Hechinger
Drive in Springfield,  Virginia,  one-half mile northwest of the intersection of
the Capital Beltway (I-495) and Shirley Highway  (I-395).  The 6800 Building and
the 6850 Building,  the two four-story  office  buildings in Versar Center,  are
located  on  a  property   encompassing   18.3  acres.  The  6850  Building  has
approximately   108,000   usable   square  feet,   and  the  6800  Building  has
approximately  120,500  usable square feet. The property site is just inside the
Capital Beltway, approximately 14.5 miles southwest of downtown Washington, D.C.

         Springfield  is a major  retail  center with the  Springfield  Regional
Mall,  Springfield  Plaza Shopping  Center and other retail  properties  located
within its boundaries. Major industrial parks are found on both sides of Shirley
Highway inside the Capital Beltway.  Springfield is generally considered a Class
B office location.

         Versar Center is located in an I-5 zoning district, which is defined as
a general  industrial  district;  its permitted uses include the existing office
use. Under existing zoning  regulations,  Sarnia could  construct  approximately
168,000 square feet of additional  office space by right and up to an additional
391,000 square feet of office space by special exception.

         The 6800  Building and the 6850 Building are secured by a first deed of
trust in favor of I.D.S. Life Insurance Company. Refer to Footnote D on Page F-8
for details.

Item 3.  Legal Proceedings

         Sarnia is not a party to any litigation.

Item 4.  Submission of Matters to a Vote of Security Holders

         No matters were submitted to a vote of the Company's  security  holders
during the last quarter of fiscal year 1997.


                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

Common Stock

         At June 30, 1997, the Company had 784 stockholders of record, excluding
stockholders whose shares were held in nominee name.

         The Company's  common stock is traded on the  over-the-counter  market.
There is no established public trading market for the Company's common stock and
trades in the stock are sporadic. The quarterly high and

                                        7

<PAGE>



low actual  trade  prices  without  adjustments  for  mark-ups,  mark-downs,  or
commissions during fiscal years 1996 and 1997 are presented below.

     Fiscal Year                              High              Low
------------------------                      ----              ---
1996      4th Quarter..................    $ 0.5000          $ 0.3125
          3rd Quarter..................      0.3750            0.3125
          2nd Quarter..................      0.5000            0.3125
          1st Quarter..................      0.4375            0.3125

1997      4th Quarter..................    $ 0.3438          $ 0.3125
          3rd Quarter..................      0.5000            0.3125
          2nd Quarter..................      0.3125            0.3125
          1st Quarter..................      0.3125            0.3125


          No dividends  were paid on the  Company's  common stock in fiscal year
1997 or 1996 by  Sarnia.  The Board of  Directors  intends  to retain any future
earnings for use in the Company's  business and does not anticipate  paying cash
dividends in the foreseeable future.



                                        8

<PAGE>



Item 6.  Selected Financial Data

          The  selected  financial  data  set  forth  below  should  be  read in
conjunction with Sarnia's  Financial  Statements and notes thereto  beginning on
page F-1 of this report.

<TABLE>
<CAPTION>

                                                 Years Ended June 30,
                                  ----------------------------------------------------
                                  1997        1996        1995        1994        1993
                                  ----        ----        ----        ----        ----
                                            (In thousands, except per share data)
<S>                             <C>         <C>         <C>         <C>         <C>     

Statement of Operations
 related data:

Real estate rental revenue ..   $  2,911    $  2,771    $  2,676    $  2,446    $  2,341

Net income (loss) before
  cumulative effect of change
  in accounting principle ...         84        (235)       (270)       (684)       (664)

Cumulative effect of
  adoption of SFAS 109 ......         --          --          --        (440)         --

Net income (loss) ...........         84        (235)       (270)     (1,124)       (664)

Net income (loss) applicable
  to common stock ...........          5        (269)       (270)     (1,124)       (664)

Balance Sheet related data:

Total assets ................     12,308      12,762      13,305      13,362      13,799

Short-term debt .............        480         452       1,405         355         860
Long-term debt ..............      9,787      10,287      10,657      12,048      13,432
                                --------    --------    --------    --------    --------
Total debt ..................     10,267      10,739      12,062      12,403      14,292

Total stockholders' deficit .       (792)       (797)     (1,278)     (1,008)     (1,980)

Earnings per share
 information:

Net income (loss) per share
 before cumulative effect
 of change in accounting
 principle ..................   $    ---    $  (0.06)   $  (0.06)   $  (0.15)   $  (0.15)

Net (loss) per share from
  cumulative effect of change
  in accounting principle ...   $    ---    $    ---    $    ---    $  (0.10)   $    ---

Net income (loss) per share
 applicable to common stock .   $    ---    $  (0.06)   $  (0.06)   $  (0.25)   $  (0.15)

Number of shares out-
  standing ..................      4,573       4,573       4,573       4,573       4,573
                                ========    ========    ========    ========    ========

</TABLE>


                                        9

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Forward Looking Statements

The  statements  in this  report that are  forward-looking  are based on current
expectations,  and actual  results may differ  materially.  The  forward-looking
statements  include those regarding cost controls and  reductions,  the expected
annual  rent  escalations,  the  possible  impact of current  and future  claims
against the Company based upon  negligence and other theories of liability,  and
the  possibility  of tenants  continuing to renew their leases.  Forward-looking
statements  involve  numerous  risks and  uncertainties  that could cause actual
results to differ materially,  including,  but not limited to, the possibilities
that the demand for the  Company's  services may decline as a result of possible
changes in general and industry specific economic  conditions and the effects of
competitive  services  and pricing;  one or more  current or future  claims made
against the Company may result in substantial liabilities;  and such other risks
and  uncertainties  as are described in reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission.

         Real estate revenue in 1997 of $2,911,000 was $140,000 (5%) higher than
the $2,771,000 of rental revenue  reported in 1996. The increase is attributable
to rent  escalations  and  higher  occupancy  rate in both  buildings.  The 6850
Building  occupancy  rate  increased  from 93% to 98% while the 6800  Building's
occupancy  rate  increase  from  94% to  97%.  Real  estate  revenue  in 1996 of
$2,771,000  was $95,000 (4%) higher than that reported in 1995.  The increase is
due to rent escalations and increased tenant requested services.

         Real estate expenses in 1997 of $1,289,000 were $19,000 (1%) lower than
the $1,308,000 of expenses reported in 1996. The decrease is attributable to the
lower legal expense incurred in 1997. Real estate expenses in 1996 of $1,308,000
were $100,000 (8%) higher than the $1,208,000 of expenses  reported in 1995. The
increase  is due to Sarnia  receiving  a real  estate  tax  refund of $90,000 in
fiscal year 1995.

         Depreciation/amortization  expenses  in 1997 of $607,000  were  $12,000
(2%) lower than the $619,000  reported in 1996. The decrease is due to the fully
amortized    assets   that   were   placed   in   service   in   prior    years.
Depreciation/amortization expenses in 1996 of $619,000 were $54,000 (10%) higher
than the  $565,000  reported  in 1995.  The  increase  is due to the full year's
depreciation on the leasehold  improvements  that were placed in service for the
new tenants during 1995.

         General and administrative expenses in 1997 were $9,000 (9%) lower than
1996 due to the  decrease  in  insurance  expense.  General  and  administrative
expenses in 1996 of $102,000  were $7,000 (7%) higher than the $95,000  reported
in 1995 due to increased insurance costs. After the spin-off from Versar, Sarnia
entered into separate  insurance coverage on a stand-alone basis, which resulted
in higher insurance  expenses in 1996.  Because the risk  experiencing  rate was
established, the insurance expense decreased in 1997.

         Interest  expense of $838,000 in 1997  decreased by $139,000 (14%) when
compared to 1996.  Interest  expense in 1996 of $977,000 was $101,000 (9%) lower
than that reported in 1995. The decreases are due to the  refinancing of debt at
lower  interest  rates in the middle of 1996 and the principal  payments in 1996
and 1997.

         Sarnia  recorded  $79,000 and $34,000 of preferred  stock  dividends in
fiscal years 1997 and 1996,  respectively.  Preferred  stock  dividends are paid
quarterly, on the first day of March, June, September and December of each year.
Dividends  increased because the preferred equity was issued in January 1996 and
therefore fiscal 1996 had only five months of dividends.



                                       10

<PAGE>



         The net income  applicable  to common  stock was $5,000 in fiscal  year
1997 compared to net loss  applicable to common stock of $269,000 in fiscal year
1996. The significant  improvement is attributable to the combinations of higher
rental  revenue and lower  operating and interest  expenses in fiscal year 1997.
The net loss applicable to common stock of $269,000 in fiscal year 1996 remained
relatively  the same as the net loss of  $270,000  in fiscal  year 1995.  Higher
rental  revenue  and lower  interest  expense  were  offset by  increase in real
estate, depreciation and general and administration expenses.

                         Liquidity and Capital Resources

         Cash flow provided by operating  activities was $735,000,  $508,000 and
$435,000 for fiscal years 1997, 1996 and 1995, respectively.  Principal payments
on the mortgages for fiscal years 1997, 1996 and 1995 were $472,000,  $1,323,000
and  $341,000,  respectively.  In fiscal year 1996,  Sarnia  issued  $750,000 of
preferred stock and received a $250,000 rent deposit from Versar. In fiscal year
1995,  Versar loaned $265,000 to Sarnia,  primarily for leasehold  improvements.
Sarnia  has paid  Versar  $83,000  and  $13,000  in fiscal  years 1996 and 1997,
respectively, leaving the balance of $169,000.

         On January 25,  1996,  Sarnia  obtained a first  mortgage of $9 million
with I.D.S.  Life  Insurance  Company at the fixed rate of 7.75% to be amortized
over  twenty-two  years  and with a balloon  payment  due in 2003.  Sarnia  also
obtained a second mortgage of $500,000 with the Riggs National Bank at the prime
rate reported in the Wall Street Journal plus 2% (currently  10.25%)  payable in
12 equal monthly installments. On June 30, 1996, the maturity date of the second
mortgage was  extended to July 1, 1997.  Sarnia also entered into a $1.5 million
term loan with the Riggs  National  Bank at the prime rate  reported in the Wall
Street  Journal  plus 1%. The term loan was to be  amortized  over  seven  years
payable in 66 equal  monthly  installments  starting  on the 18th month from the
date of  funding.  In  addition,  Sarnia  has  issued,  for  $750,000,  Series A
Cumulative Convertible Preferred Stock to a group of private investors.

         In April 1997,  Sarnia changed its banking  institution  from the Riggs
National Bank to NationsBank  N.A. The $500,000  second  mortgage which was paid
off on July 1, 1997 remained with the Riggs National Bank. The $1.5 million term
loan was terminated  and replaced by a NationsBank  five year term note. The new
note is guaranteed by Versar,  Inc. and bears interest at the Treasury Rate plus
three hundred (300) basis points per annum  (currently 9%), but not to exceed 9%
per annum.  The note matures in five years with $300,000  principal  payment per
year starting July 1, 1997.

         Sarnia expects that it will require $75,000 for capital expenditures to
be made  during  fiscal  year  1998.  It is  anticipated  that of such  $75,000,
approximately   $40,000  will  be  used  for   remodeling   vacant  space,   and
approximately $35,000 will be used for other miscellaneous capital expenditures.

         Management   believes  that  funds   generated  from  rents  should  be
sufficient to meet Sarnia's operating needs,  including capital  expenditures in
the coming years.

                       Impact of New Accounting Standards

         In March 1995, the Financial Accounting Standard Board issued Statement
of Financial  Accounting  Standards No. 121,  "Accounting  for the Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of" ("SFAS  121").
SFAS 121 is effective for fiscal year 1997, and requires that long-lived  assets
be reviewed for impairment whenever events or changes in circumstances  indicate
that the  carrying  amount of an asset may not be  recoverable.  The adoption of
SFAS  121 had no  material  effect  on the  financial  position  or  results  of
operations of the Company.

         Statement of Financial  Accounting  Standards No. 123,  "Accounting for
Stock-Based  Compensation"  ("SFAS  123")  was  issued in  October,  1995 and is
effective for fiscal year 1997. The Statement encourages,  but does not require,
adoption of the fair value based method of accounting for employee stock options
and other

                                       11

<PAGE>



stock  compensation  plans. The Company has opted to continue to account for its
stock option plan in accordance  with APB Opinion No. 25,  "Accounting for Stock
Issued  to  Employees."   However,  the  Company  has  made  certain  pro  forma
disclosures of net income (loss) and per share  information as if the fair value
based method for accounting defined in SFAS 123 had been applied.

         The Financial  Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" in February 1997. SFAS
128 requires a company to present  basic and diluted  earnings per share amounts
on the face of the Consolidated Statement of Operations. The company is required
to adopt the  provisions of the standard  during the second quarter of 1998, and
when adopted,  will require  restatement of prior years' earnings per share. The
standard  will not have a  material  impact  on  historical  earnings  per share
reported by the company.

                               Impact of Inflation

         Sarnia  continually  seeks  to  protect  itself  from  the  effects  of
inflation.  The  majority of its leases  provide for annual  increases  based on
fixed percentages or increases in the Consumer Price Index.

Item 8.  Financial Statements and Supplementary Data

         The consolidated  financial  statements and supplementary data begin on
page F-1 of this report.

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

         Information  required  by this item with  respect to  directors  of the
Company will be contained in the Company's  proxy  statement for its 1997 Annual
Meeting of  Stockholders  which is expected to be filed with the  Commission not
later than 120 days after the  Company's  1997 fiscal  year and is  incorporated
herein by reference.

         Information required by this item with respect to executive officers of
the Company is included in Part I of this report and is  incorporated  herein by
reference.

         For the purpose of calculating the aggregate market value of the voting
stock of  Sarnia  held by  non-affiliates  as shown  on the  cover  page of this
report,  it has been assumed that the directors  and  executive  officers of the
Company and the Versar  Employee  Savings and Stock  Ownership Plan are the only
affiliates  of the  Company.  However,  this is not an  admission  that all such
persons are, in fact, affiliates of the Company.


The information called for in Part III by:

Item 11.  Executive Compensation

Item 12.  Security Ownership of Certain Beneficial Owners and Management

                                       12

<PAGE>




Item 13.  Certain Relationships and Related Transactions

          Information   required  by  these  items  is  incorporated  herein  by
reference  to the  Company's  proxy  statement  for its 1997  Annual  Meeting of
Stockholders,  which is expected to be filed with the  Commission not later than
120 days after the end of the Company's 1997 fiscal year.


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(A)(1)  Financial Statements:

              The  financial  statements  and financial  statement  schedules of
        Sarnia  Corporation  are  filed  as  part  of  this  report and begin on
        page F-1.

                  a)       Report of Independent Public Accountants

                  b)       Balance Sheets as of June 30, 1997 and 1996

                  c)       Statements of Operations for the Years Ended June 30,
                           1997, 1996 and 1995

                  d)       Statements  of Changes in  Stockholders'  Deficit for
                           the Years Ended June 30, 1997, 1996 and 1995

                  e)       Statements of Cash Flows for the Years Ended June 30,
                           1997, 1996 and 1995

                  f)       Notes to Financial Statements

   (2)  Financial Statement Schedules:

              There  are no  financial statement  schedules  applicable  to  the
        Company.

   (3)  Exhibits:

              The  exhibits  to  this  Form  10-K  are  set forth in a  separate
        Exhibit Index which is included on page 14 of this report.

(B)  Reports on Form 8-K

              No  reports  were  filed  on  Form 8-K during the  Company's  last
quarter of fiscal year 1997.



                                       13

<PAGE>



                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

                                                                                                       Page Number/
Item No.                                   Description                                                  Reference
--------                                   -----------                                                  ---------
<S>           <C>                                                                                       <C>
   1          Sarnia Corporation Information Statement for distribution to shareholders of
              Versar, Inc., the outstanding shares of its wholly-owned subsidiary, Sarnia
              Corporation, dated June 30, 1994.....................................................        (A),(B)

   3.1        Articles of Incorporation of Sarnia Corporation, as amended..........................            (D)

   3.2        Bylaws of Sarnia Corporation.........................................................            (A)

  10.5        Amended and Restated Office Lease, dated June 22, 1995, between the Registrant
              and Versar, Inc......................................................................            (C)

  10.6        Office Lease Agreement, dated October 28, 1994, between the Registrant and
              National Capital Preferred Provider Organization, Inc................................            (C)

  10.7        Office Lease Agreement, dated October 28, 1994, between the Registrant and
              Integrated Behavioral Care, Inc......................................................            (C)

  10.8        Sarnia 1994 Stock Option Plan........................................................            (C)

  10.9        The Riggs National Bank of Washington D.C.'s letter dated, September 15, 1995,
              modifying certain provisions of the Revolving Loan and Security Agreement, dated
              April 9, 1994........................................................................            (C)

 10.10        Promissory Note, dated January 25, 1996, between the Registrant and IDS Life
              Insurance Company....................................................................            (D)

 10.11        Term Note, dated January 25, 1996, between the Registrant and The Riggs
              National Bank of Washington, D.C.....................................................            (D)

 10.12        Deed of Trust Note, dated January 25, 1996, between the Registrant and The
              Riggs National Bank of Washington, D.C...............................................            (D)

 10.13        Preferred Stock Purchase Agreement, as amended.......................................            (D)

 10.14        Promissory Note, dated March 27, 1997, between the Registrant and the
              NationsBank N.A......................................................................             17

 11           Statement Re:  Computation of Per Share Earnings.....................................             26

 27           Financial Data Schedule..............................................................

</TABLE>

--------------------------------------------------------------------------------

(A)  Incorporated by reference to similarly numbered exhibit to the Registrant's
     Form 10 Information Statement ("Information Statement"), effective June 30,
     1994 (File No. 0-24108).


                                       14

<PAGE>



(B)  Incorporated  by  reference  to  the  similarly  numbered  exhibit  to  the
     Registrant's  Form 10-K  Annual  Report for the fiscal  year ended June 30,
     1994 ("FY 1994 Form 10-K") filed with the Commission on September 27, 1994.

(C)  Incorporated  by  reference  to  the  similarly  numbered  exhibit  to  the
     Registrant's  Form 10-K  Annual  Report for the fiscal  year ended June 30,
     1995 ("FY 1995 Form 10K") filed with the Commission on September 29, 1995.

(D)  Incorportated  by  reference  to  the  similarly  numbered  exhibit  to the
     Registrant's  Form 10-K  Annual  Report for the fiscal  year ended June 30,
     1996 ("FY 1996 Form 10K") filed with the Commission on September 24, 1996.

                                       15

<PAGE>



                                   SIGNATURES

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


                                                 SARNIA CORPORATION
                                           -----------------------------
                                                    (Registrant)


Date:  September 16, 1997                  /S/ Charles I. Judkins, Jr.
                                           -----------------------------
                                           Charles I. Judkins, Jr.
                                           President & CEO


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the  registrant in
the capacities and on the dates indicated.

SIGNATURES                       TITLE                        DATE
----------                       -----                        ----

/S/ Charles I. Judkins, Jr.      President & CEO              September 16, 1997
---------------------------
Charles I. Judkins, Jr.


/S/ Benjamin M. Rawls            Chairman & Director          September 16, 1997
---------------------------
Benjamin M. Rawls


/S/ Lawrence W. Sinnott          Treasurer and Principal      September 16, 1997
---------------------------      Accounting Officer
Lawrence W. Sinnott


/S/ Michael Markels, Jr.         Director                     September 16, 1997
---------------------------
Michael Markels, Jr.


/S/ Gerald T. Halpin             Director                     September 16, 1997
---------------------------
Gerald T. Halpin


/S/ Thomas G. Hotz               Director                     September 16, 1997
---------------------------
Thomas G. Hotz


/S/ James N. Schwarz             Director                     September 16, 1997
---------------------------
James N. Schwarz



                                       16

<PAGE>

                    Report of Independent Public Accountants




To the Board of Directors and Stockholders of Sarnia Corporation:

We have  audited  the  accompanying  balance  sheets  of Sarnia  Corporation  (a
Virginia  corporation) as of June 30, 1997 and 1996, and the related  statements
of operations,  changes in stockholders' deficit, and cash flows for each of the
three years in the period ended June 30, 1997.  These  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements 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,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Sarnia Corporation as of June
30, 1997 and 1996, and the results of its operations and its cash flows for each
of the three  years in the  period  ended  June 30,  1997,  in  conformity  with
generally accepted accounting principles.



                                                   /S/ Arthur Andersen LLP
                                                   -----------------------
                                                       Arthur Andersen LLP


Washington, D.C.
September 16, 1997


                                       F-1


<PAGE>
                               SARNIA CORPORATION
                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                               June 30,
                                                       --------------------------
                                                          1997           1996
                                                          ----           ----
                                                              (In thousands)
ASSETS
<S>                                                    <C>            <C>        
    Property and equipment .........................   $    17,690    $    17,580
    Accumulated depreciation/amortization ..........        (5,746)        (5,215)
                                                       -----------    -----------
                                                            11,944         12,365

    Cash ...........................................            96             55
    Rents and other receivables ....................            64            145
    Prepaid expenses and other assets ..............           204            197
                                                       -----------    -----------

         Total assets ..............................   $    12,308    $    12,762
                                                       ===========    ===========

LIABILITIES AND STOCKHOLDERS' DEFICIT
    Mortgages ......................................   $    10,267    $    10,739
    Accounts payable ...............................           165            136
    Loan from Versar ...............................           169            182
    Accrued salaries ...............................            17             30
    Deferred income taxes ..........................         1,756          1,756
    Tenant security deposits .......................           468            456
    Other liabilities ..............................           258            260
                                                       -----------    -----------
         Total liabilities .........................        13,100         13,559
                                                       -----------    -----------

    Commitments and contingencies

    Stockholders' Deficit
       Preferred stock, $25 par value;
         Series A cumulative convertible;
         1,000,000    shares authorized; 30,000
         shares issued and outstanding at
         June 30, 1997 and 1996 ....................           750            750

       Common stock, no par value; 20,000,000 shares
         authorized at June 30, 1997 and 1996;
         4,572,545 shares issued and outstanding
         at June 30, 1997 and 1996 .................            --             --

       Accumulated deficit .........................        (1,542)        (1,547)
                                                       -----------    -----------

         Total stockholders'
             deficit ...............................          (792)          (797)
                                                       -----------    -----------

         Total liabilities and
             stockholders' deficit .................   $    12,308    $    12,762
                                                       ===========    ===========

</TABLE>


              The accompanying notes are an integral part of these
                             financial statements.


                                       F-2


<PAGE>
                               SARNIA CORPORATION
                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>


                                                      Years Ended June 30,
                                             ----------------------------------
                                               1997         1996         1995
                                               ----         ----         ----
                                           (In thousands, except per share data)

<S>                                          <C>          <C>          <C>    
Real estate rental revenue ............      $ 2,911      $ 2,771      $ 2,676
Real estate expenses ..................        1,289        1,308        1,208
                                             -------      -------      -------
                                              .1,622        1,463        1,468

Depreciation/amortization .............          607          619          565
General and administrative ............           93          102           95
                                             -------      -------      -------
Income from real estate ...............          922          742          808

Interest expense ......................          838          977        1,078
                                             -------      -------      -------

Net income (loss) before
 income taxes .........................           84         (235)        (270)

Income taxes ..........................           --           --           --
                                             -------      -------      -------

Net income (loss) .....................           84         (235)        (270)

Dividends on preferred stock ..........           79           34           --
                                             -------      -------      -------
Net income (loss) applicable
 to common stock ......................      $     5      $  (269)     $  (270)
                                             =======      =======      =======

Net income (loss) per share
 applicable to common stock ...........      $    --      $ (0.06)     $ (0.06)
                                             =======      =======      =======

Weighted average number of
     shares outstanding ...............        4,573        4,573        4,573
                                             =======      =======      =======

</TABLE>


              The accompanying notes are an integral part of these
                             financial statements.


                                       F-3

<PAGE>
                               SARNIA CORPORATION
                 STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT


<TABLE>
<CAPTION>

                                                                          Common Stock
                                                                    --------------------------                            Total
                                                    Preferred       Number of                         Accumulated      Stockholders'
                                                      Stock          Shares           Amount            Deficit           Deficit
                                                      -----          ------           ------            -------           -------
                                                                       Years Ended June 30, 1997, 1996, 1995
                                                   ---------------------------------------------------------------------------------
                                                                       (In thousands, except share data)

<S>                                                <C>             <C>             <C>                 <C>               <C>       
Balance, June 30, 1994 ......................       $      --       4,572,545       $       --         $  (1,008)        $  (1,008)
                                                    ---------       ---------       ----------         ---------         ---------

Net loss ....................................              --              --               --              (270)             (270)
                                                    ---------       ---------       ----------         ---------         ---------

Balance, June 30, 1995 ......................              --       4,572,545               --            (1,278)           (1,278)
                                                    ---------       ---------       ----------         ---------         ---------
                                                                                                
Issuance of preferred stock .................             750              --               --                --               750
                                                                                                
Net loss ....................................              --              --               --              (235)             (235)
                                                                                                
Preferred stock dividend accrued ............              --              --               --               (34)              (34)
                                                    ---------       ---------       ----------         ---------         ---------
                                                                                                
Balance, June 30, 1996 ......................             750       4,572,545               --            (1,547)             (797)
                                                    ---------       ---------       ----------         ---------         ---------
                                                                                                
Net income ..................................              --              --               --                84                84
                                                                                                
Preferred stock dividend accrued ............              --              --               --               (79)              (79)
                                                    ---------       ---------       ----------         ---------         ---------
                                                                                                
Balance, June 30, 1997 ......................       $     750       4,572,545       $       --         $  (1,542)        $    (792)
                                                    =========       =========       ==========         =========         =========
</TABLE>




              The accompanying notes are an integral part of these
                             financial statements.


                                       F-4

<PAGE>
                               SARNIA CORPORATION
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                         Years Ended June 30,
                                                           --------------------------------------------
                                                                1997            1996             1995
                                                                ----            ----             ----
                                                                           (In thousands)
<S>                                                        <C>              <C>               <C>      
Cash flow from operating activities
    Net income (loss) applicable to common stock.....      $       5        $    (269)        $    (270)
    Adjustments to reconcile net income (loss)
      applicable to common stock to net cash
      provided by operating activities
         Depreciation/amortization...................            607              619               565
         Preferred stock dividend accrued............             79               34               ---
                                                           ----------       ----------        ---------
           Subtotal..................................            691              384               295

         Decrease (increase) in rents and other
           receivables...............................             73               (9)             (102)
         (Increase) decrease in prepaid and other
           assets ...................................            (76)              28               (47)
         Increase in accounts payable................             29               23                26
         (Decrease) increase in accrued salaries.....            (13)               4                 2
         Increase in other liabilities...............             31               78               261
                                                           ----------       ----------        ---------

Net cash provided by operating activities............            735              508               435
                                                           ----------       ----------        ---------

Cash flow from investing activities
    Improvements to real estate......................           (136)             (43)             (359)
    Disposition of property and equipment............             26              ---               ---
                                                           ----------       ----------        ---------

Net cash used in investing activities................           (110)             (43)             (359)
                                                           ----------       ----------        ----------

Cash flow from financing activities
    Mortgage principal payments......................            ---          (12,062)             (341)
    Refinanced new mortgage..........................            ---           11,000               ---
    Principal payments on new mortgage...............           (472)            (261)              ---
    Loan from Versar, net............................            (13)             (83)              265
    Issuance of preferred stock......................            ---              750               ---
    Deposit received.................................            ---              250               ---
    Payment of dividend on preferred stock...........            (99)              (7)              ---
                                                           ----------       ----------        ---------

Net cash used in financing activities................           (584)            (413)              (76)
                                                           ----------       ----------        ----------

Net increase in cash.................................             41               52               ---
Cash at beginning of period..........................             55                3                 3
                                                           ----------       ----------        ---------

Cash at end of period................................      $      96        $      55         $       3
                                                           ==========       ==========        =========


Supplemental disclosure of cash flow information:
  Cash paid during the period for
      Interest.......................................      $     888        $     987         $     979

</TABLE>



              The accompanying notes are an integral part of these
                             financial statements.

                                       F-5

<PAGE>
                               SARNIA CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

NOTE A  GENERAL INFORMATION

         Sarnia Corporation (the "Company"), formerly Versar Virginia, Inc., was
a wholly-owned real estate subsidiary of Versar,  Inc. ("Versar") until June 30,
1994.  The Company owns and operates the 6850  Building and the 6800 Building in
Versar Center.

         On June 30, 1994, Versar distributed to the holders of its common stock
substantially all of the common stock of the Company (the  "Distribution").  The
Distribution  provided Versar  stockholders one share of Sarnia common stock for
every outstanding share of Versar common stock. The Distribution was effected to
separate  two  businesses  with  distinct  financial,  investing  and  operating
characteristics  so  that  each  can  adopt  strategies  and  pursue  objectives
appropriate to its specific business.

NOTE B  SIGNIFICANT ACCOUNTING POLICIES

Basis of  presentation:  These  financial  statements  are  presented  using the
accrual basis of accounting.

         Sarnia  Corporation  has entered into a Master  Corporate  Services and
Support  Agreement  with  Versar,   Inc.  Certain  general  and   administrative
functions,  including general management,  treasury,  financial service,  legal,
benefits and human resources  administration,  investor and public relations and
information  management  are  provided  by Versar for a fixed fee of $36,000 per
annum.  Telephone expenses charged from Versar based on the number of extensions
used by the  Company and its  tenants  are  included  in real  estate  expenses.
Management believes that these charges are made on a reasonable basis;  however,
they do not necessarily  indicate the costs that would have been incurred by the
Company separately.

Accounting 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
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period.

Revenue  recognition:  Rental  revenue is  recognized  based upon  tenant  lease
agreements in accordance with Statement of Financial Accounting Standards No. 13
"Accounting for Leases" ("SFAS 13"). Provisions for any anticipated lease losses
are made in the period that the losses become evident.

Property and  equipment:  Property and equipment are carried at historical  cost
until a decline in value which is other than temporary occurs. At such time, the
property will be reduced by a direct  write-down  for any impairment in value if
it is  probable  that  the  carrying  amount  of the  property  cannot  be fully
recovered.

Depreciation and  amortization:  Depreciation and amortization are computed on a
straight-line  basis over the estimated useful lives of the assets.  Maintenance
and repair costs are expensed while improvements are capitalized.

Net income (loss) per share  applicable  to common stock:  Net income (loss) per
share  applicable  to common  stock is computed by  dividing  net income  (loss)
applicable to common stock by the weighted average number of shares  outstanding
during the applicable period being reported upon.



                                       F-6

<PAGE>


                               SARNIA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS (Continued)

Income  taxes:  The  Company  accounts  for  certain  income and  expense  items
differently  for  financial  reporting  purposes  than for income tax  reporting
purposes.  The Company follows Statement of Financial  Accounting  Standards No.
109,  "Accounting  for Income  Taxes"  ("SFAS  109") which  mandates a liability
method for computing deferred income taxes. Provisions for deferred income taxes
are made in recognition of temporary  differences between the book and tax bases
of accounting.

Impact of accounting standards:  Statement of Financial Accounting Standards No.
123,  "Accounting  for Stock-  Based  Compensation"  ("SFAS  123") was issued in
October,  1995 and is effective for fiscal year 1997. The Statement  encourages,
but does not require,  adoption of the fair value based method of accounting for
employee stock options and other stock compensation plans. The Company has opted
to continue to account for its stock option plan in accordance  with APB Opinion
No. 25,  "Accounting  for Stock Issued to Employees."  However,  the Company has
made  certain  pro  forma  disclosures  of  net  income  (loss)  and  per  share
information as if the fair value based method for accounting defined in SFAS 123
had been applied.

         The Financial  Accounting Standards Board issued Statement of Financial
Accounting  Standards  No. 128,  "Earnings  per Share"  ("SFAS 128") in February
1997.  SFAS 128  requires a company to present  basic and diluted  earnings  per
share  amounts  on the face of the  Statement  of  Operations.  The  Company  is
required to adopt the  provisions of the standard  during the second  quarter of
1998, and when adopted,  will require  restatement of prior years'  earnings per
share.  The standard will not have a material impact on historical  earnings per
share reported by the Company.

NOTE C  PROPERTY AND EQUIPMENT

                                 Estimated               June 30,
                                Useful Life        ------------------
                                  in Years            1997      1996
                              ----------------     -----------------
                                                      (In thousands)
Land.....................         ---            $   650       $   650
Buildings................         40              15,733        15,733
Equipment................          5                 136           136
Leasehold improvements...     Life of Lease        1,171         1,061
                                                  ------        ------
                                                  17,690        17,580
Accumulated depreciation
and amortization.........                         (5,746)       (5,215)
                                                  ------        -------
                                                 $11,944       $12,365


         Depreciation  and  amortization  of property and equipment  included as
expense in the accompanying Statements of Operations was $539,000,  $546,000 and
$506,000  for the  years  ended  June 30,  1997,  1996 and  1995,  respectively.
Amortization of brokerage fees of $68,000,  $73,000 and $59,000 were included in
the Statements of Operations for the fiscal years ended June 30, 1997,  1996 and
1995, respectively.

         Maintenance  and repair  expenses  (included  in real estate  expenses)
approximated $207,000,  $206,000 and $242,000 for the years ended June 30, 1997,
1996 and 1995, respectively.



                                       F-7

<PAGE>


                               SARNIA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE D  MORTGAGES

         On January 25, 1996, the Company  completed the  refinancing of all its
outstanding debt.

         With regard to the refinancing,  Sarnia obtained a first mortgage of $9
million  with  I.D.S.  Life  Insurance  Company at the fixed rate of 7.75% to be
amortized  over  twenty-two  years and with a balloon  payment due in 2003.  The
I.D.S.  mortgage  is  collateralized  by the first deed of trust on the 6800 and
6850  buildings.  Sarnia also  obtained a second  mortgage of $500,000  with the
Riggs  National  Bank at the prime  rate  plus 2%  payable  in 12 equal  monthly
installments.  On June 30, 1996,  the maturity  date of the second  mortgage was
extended to July 1, 1997. Sarnia also entered into a $1.5 million term loan with
the Riggs  National  Bank at the prime rate plus 1%. The term loan is  amortized
over seven years payable in 66 equal monthly  installments  starting on the 18th
month from the date of funding.  Versar  guarantees  Sarnia's  $1.5 million term
loan. In addition, Sarnia issued $750,000 of its Series A Cumulative Convertible
Preferred Stock to a group of private investors.  Sarnia received a rent deposit
of  $250,000  from  Versar  and repaid the  majority  of the  amounts it owed to
Versar.

         In April 1997,  Sarnia changed its banking  institution  from the Riggs
National Bank to NationsBank  N.A. The $500,000  second  mortgage which was paid
off on July 1, 1997 remained with the Riggs National Bank. The $1.5 million term
loan was terminated  and replaced by a NationsBank  five year term note. The new
note is  guaranteed  by Versar,  Inc. and bears an interest at the Treasury Rate
plus three hundred (300) basis points per annum, but not to exceed 9% per annum.
The note matures in five years with $300,000 principal payment per year starting
July 1,  1997.  The  Company  was in  compliance  with  the  modified  financial
covenants at June 30, 1997.

         Outstanding balances at June 30, are as follows:


                                                              June 30,
                                                      --------------------------
                                                        1997              1996
                                                        ----              ----
                                                            (In thousands)
I.D.S. mortgage ..........................            $ 8,767            $ 8,947
Riggs mortgage ...........................                 --                292
Riggs term loan ..........................                 --              1,500
NationsBank note .........................              1,500                 --
                                                      -------            -------
     Total debt ..........................            $10,267            $10,739
                                                      =======            =======

         Maturity of the loans is as follows:

                  Years Ending June 30,                         Amount
                  ---------------------                         ------
                                                            (In thousands)
                  1998                                        $  480
                  1999                                           495
                  2000                                           510
                  2001                                           527
                  2002                                           546
                  2003 and after                               7,709
                                                              ------
                                                             $10,267
                                                             =======


                                       F-8

<PAGE>


                               SARNIA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE E  STOCK OPTIONS

         The Sarnia  1994 Stock  Option  Plan (the  "Plan") is  compensatory  in
nature and  provides  employees  of the  Company and  certain  other  persons an
incentive  to  remain in the  employ  of the  Company  and  encourages  superior
performance for the Company's benefit. The Company has segregated 300,000 shares
of stock for inclusion in the Plan. During fiscal year 1996, options to purchase
an aggregate of 262,500 shares of common stock with exercise prices ranging from
$0.1875  to $0.375  were  granted to seven  directors  (175,000  shares),  three
officers (62,500 shares) and one service provider (25,000 shares) as required by
the 1994 Plan on their  first  anniversary  of  membership.  There were no stock
options granted in fiscal year 1997.

         Under the Plan,  options  may be granted to key  employees  at the fair
market value on the date of grant and vesting varies depending on the discretion
of the Compensation  Committee.  Unexercised  options are cancelled on the tenth
anniversary of the grant.

         The Company  applies APB 25 and related  interpretations  in accounting
for its Plan.  Accordingly,  no compensation  cost has been recognized for stock
options.  Had  compensation  cost for stock options been determined based on the
fair value at the grant  dates for awards  under this Plan  consistent  with the
method of SFAS 123, the  Company's  net income  (loss) and net income (loss) per
share would have been reduced to the pro forma amounts indicated as follows:


                                                  1997         1996
                                                  ----         ----
                                                (In thousands, except
                                                    per share data)

Net Income (Loss):             As Reported       $   5       $ (269)
                                Pro Forma           (1)        (275)

Net Income (Loss) Per Share:   As Reported       $ ---       $(0.06)
                                Pro Forma          ---        (0.06)

         In accordance  with SFAS 123, the fair value  approach to valuing stock
options used for pro forma  presentation  has not been applied to stock  options
granted prior to July 1, 1995. The  compensation  cost calculated under the fair
value approach is recognized over the vesting period of the stock options.

         The  weighted  average  fair value of options  granted was $0.12 during
1996.  The fair value is estimated on the date of grant using the  Black-Scholes
option pricing model with the following  weighted  average  assumptions used for
grants in 1996: expected volatility of 34 percent;  risk-free interest rate of 6
percent; and expected lives of five years from the grant date.

NOTE F  PREFERRED STOCK

         On January 25, 1996, 30,000 shares of the Series A preferred stock were
issued by the Company for an aggregate price of $750,000. The Series A preferred
stock bears a $25 par value and is entitled to receive  preferential  cumulative
dividends at the annual rate of $2.625 per share.  Also,  the Series A preferred
stock is redeemable at the option of the Company and is convertible  into common
stock, at the option of the holders, at a conversion price of $0.40 per share.

                                       F-9

<PAGE>


                               SARNIA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE G  INCOME TAXES

         At  June  30,  1997,  the  Company  had,  for tax  reporting  purposes,
approximately $2,786,000 of net operating loss carryforwards available to offset
future taxable income through 2012.

Deferred tax (liabilities) assets are comprised of the following:


                                                        June 30,
                                                   -------------------
                                                     1997        1996
                                                     ----        ----
                                                      (In thousands)
Deferred tax liabilities
  Depreciation ...............................     $(2,292)    $(2,188)
  Other ......................................         (21)         --
Deferred tax assets
  Net operating loss
    carryforwards ............................       1,059         941
  Other ......................................           8          32
                                                   -------     -------

                                                    (1,246)     (1,215)

  Valuation allowance ........................        (510)       (541)
                                                   -------     -------

Net deferred tax liabilities .................     $(1,756)    $(1,756)
                                                   =======     =======


The tax provision was composed
 of the following:
                                                      Years ended June 30,
                                                   -----------------------------
                                                   1997        1996        1995
                                                   ----        ----        ----
                                                         (In thousands)
Expected (provision) benefit at
 Federal statutory rate ....................       $(28)       $ 80        $ 92

Utilization (limitation on use)
 of net operating losses ...................         28         (80)        (92)
                                                   ----        ----        ----

Tax provision ..............................       $ --        $ --        $ --
                                                   ====        ====        ====




                                      F-10

<PAGE>


                               SARNIA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE H  LOAN FROM VERSAR

         In fiscal year 1995,  Versar  loaned  $265,000 to Sarnia  primarily for
leasehold  improvements.  Sarnia paid Versar $13,000 and $83,000 in fiscal years
1997 and 1996,  respectively,  leaving the loan  balance at $169,000 on June 30,
1997.

NOTE I  RENTAL UNDER OPERATING LEASES

         Leases between Sarnia and its tenants expire from 1997 to 2009.  During
the years ended June 30, 1997,  1996 and 1995,  rentals to major tenants were as
follows:


                                                        Years ended June 30,
                                                   -----------------------------
                                                    1997       1996        1995
                                                    ----       ----        ----
                                                         (In thousands)
Versar .....................................      $1,037      $1,111      $1,415
General Services Administration ............         196         170         208
RGE Engineering ............................         319         300         286
C-Cubed Corporation ........................         219         216         210
NCPPO ......................................         350         236          --


         Noncancellable  leases provide for approximate  minimum rental payments
during each of the next five years as set forth below.  As to the Versar leases,
it is assumed that the payments for the second and third five-year  periods (the
actual  amounts of which will depend upon fair values at the  adjustment  dates)
will be the same as the payments for the first five years.  Certain of the other
rentals may  increase in future  years  based on changes in the  Consumer  Price
Index and other rental increase factors.  At July 1, 1997, 98% of Sarnia's space
was leased.


  Years ending June 30,                          Versar            Total
  ---------------------                          ------            -----
                                                     (In thousands)
           1998                               $   1,077        $    2,848
           1999                                   1,119             2,738
           2000                                     987             2,174
           2001                                   1,025             1,339
           2002                                   1,065             1,065
           Beyond 2002                            7,586             7,586
                                              ---------        ----------
                                              $  12,859        $   17,750
                                              =========        ==========




                                      F-11

<PAGE>


                               SARNIA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE J QUARTERLY  FINANCIAL INFORMATION (UNAUDITED)

         Quarterly  financial  information  for fiscal years 1997 and 1996 is as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                                  Fiscal Year 1997                                    Fiscal Year 1996
                                 ---------------------------------------------       -----------------------------------------------
 Quarter ending                  Jun 30       Mar 31       Dec 31      Sept 30       Jun 30       Mar 31       Dec 31       Sept 30
 --------------                  ------       ------       ------      -------       ------       ------       ------       -------
<S>                             <C>          <C>          <C>          <C>           <C>          <C>          <C>          <C>    
Real estate rental revenue..    $   746      $   724      $   716      $   725       $   718      $   685      $   672      $   696
                                                                                            
Net income (loss)...........         34           15           10           25           (47)         (46)         (59)         (83)
                                                                                            
Net income (loss) applicable                                                                
  to common stock...........         14           (4)         (10)           5           (74)         (53)         (59)         (83)
                                                                                            
Net income (loss) per share                                                                 
  applicable to common                                                                      
  stock.....................    $   ---      $   ---      $   ---      $   ---       $ (0.02)     $ (0.01)     $ (0.01)     $ (0.02)
                                =======      =======      =======      =======       =======      =======      =======      =======
                                                                                            
Weighted average number of                                                                  
  shares outstanding........      4,573        4,573        4,573        4,573         4,573        4,573        4,573        4,573
                                =======      =======      =======      =======       =======      =======      =======      =======
</TABLE>




                                      F-12