##### 



SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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
June 30, 2002 |  | Commission File
No. 1-9309



---




(Exact name of registrant as specified in its charter)

|                                          |  |                                     
|----------------------------------------- |  | ------------------------------------
|DELAWARE                                  |  | 54-0852979                          
|(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) 750-3000
(Registrants telephone number, including area code)

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

Common Stock, $.01 par value
(Title of Class)

American Stock Exchange
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of Act: NONE

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 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 3, 2002 was
approximately $15,185,406.

The number of shares of Common Stock outstanding as of
September 3, 2002 was 7,226,066.

The Exhibit Index required by 17 CFR Part 240.0-3(c) is located
on Pages 18 through 21 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 2002
Annual Meeting of Stockholders are incorporated by reference into
Part III hereof.





---



##### 



PART I

Item 1. Business

Forward-Looking Statements

This report contains certain forward-looking statements which are based on
current expectations. Actual results may differ materially. The
forward-looking statements include those regarding the continued award of
future work or task orders from government and private clients, cost controls
and reductions, the expected resolution of delays in billing of certain
projects, the possible impact of current and future claims against the Company
based upon negligence and other theories of liability, and the possibility of
the Company making acquisitions during the next 12 to 18 months.
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; the possibility the
Company will not be able to perform work within budget or contractual
limitations; one or more current or future claims made against the Company may
result in substantial liabilities; the possibility that acquired entities may
not perform as well as expected; the possibility the Company will not be able
to attract and retain key professional employees; 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.

Versar is a leading professional services firm that provides the
government and the private sector with value-added, high quality and
innovative solutions for their infrastructure, facilities management ,
environmental quality and security needs. Versar has three primary business
segments: (1) Environmental Servicesincluding pollution prevention and
compliance management and the environmental restoration of industrial and
commercial facilities, sites and military bases, (2) Architectural Engineering
and Construction Servicesin support of industrial, commercial, and government
infrastructure and sustainable energy projects, and (3) Defense Systems
including personal protection equipment and technology development efforts in
support of chemical and biological agent detection, and protection in response
to terrorist events involving weapons of mass destruction.

The combination of expertise in architectural engineering/construction,
environmental consulting, and chemical and biological weapons capabilities
enables Versar to provide customers with a comprehensive set of services, which
we believe very few companies have. In response to market demands in fiscal
year 2002 following the terrorists attack on the World Trade Center, the
Pentagon, and the subsequent anthrax attacks through the United States mail
system, Versar has integrated these capabilities to provide a wide range of
services to our customers in Homeland Defense and Threat Reduction. This new
market accounted for more than 10 percent of our revenue and 15 percent of our
new engagements in fiscal year 2002. For example, we added the Defense Threat
Reduction Agency as a new customer and are currently providing A/E and
environmental services to them in support of Russias program for the
destruction of Solid Rocket Motors in compliance with the Start II Treaty.
Versar has also responded to over 200 customers requests for support during
and following the anthrax terrorism event. Customers included many federal
agencies, most news and media firms, as well as financial services firms.
Versar used its own biological laboratory facilities to test for anthrax and
provided engineering and operational support to maintain business continuity
and provided decontamination services using advanced sterilization technology
developed in the pharmaceutical industry. Versar also performed vulnerability
assessments of major municipal water supply systems as well as vulnerability
assessment of military installations as part of the Department of Defense (DOD)
Force Protection Program.

Versar is continuously focusing more on large technical support contracts
for the federal government that further enhance the Companys business base.
Examples of these major programs include military range management support
services and broad based technical support contracts. In fiscal year 2002,
Versar was selected by the Air Force as part of a team led by Dyncorp to
provide range management services at Nellis AFB. Versars role will be to
provide environmental engineering, unexploded ordinance (UXO) and range target
residue disposition services. Versar has also developed a Range Management
Information System, NEXMIS, which will be used to support the Navy Atlantic
Fleet in managing their operations. Versar is also part of a team led by
Sverdrup Engineers that will support base operation,

2



---



##### 



logistics and weapons acquisitions for the Marine Corps at Quantico. In
addition, Versar won a GSA MOBIS Contract to provide management consulting
services government-wide. The contract has no dollar ceiling and a potential
period of performance up to 20 years.

Environmental Services

Environmental health and safety servicesinclude the full range of
scientific, engineering and program management services addressing prevention,
detection, control, management, and cleanup of toxic substances and hazardous
waste releases to the environment. Versar emphasizes innovation in process and
technology applications to achieve better results more quickly and at less cost
in todays highly competitive market. Versar has specialized skills in
technology and the design of industrial and public infrastructure to help our
clients build environmental performance into their plant operations and improve
their bottom line. Our objective is to provide designs that help our clients
become more active in preventing pollution by applying innovative and
cost-effective approaches to achieving sustainable growth, while maintaining
compliance and taking corrective actions to clean up past problems.

Achieving Compliance through Pollution Prevention.Todays business
challenges require viewing environmental management as an integral part of
customers day-to-day operations, so that informed decisions can be made based
on the economics of alternate solutions and their impact on productivity and
profitability. Versar helps its customers manage compliance as part of
operations and encourages recognition that pollution prevention and waste
minimization are necessary parts of the long-term solution to local and
national environmental challenges. This approach recognizes that there is
competition for limited resources and a need for new and better technology to
eliminate waste and reduce emissions, and to implement more cost effective
corrective actions. Versars combined strengths in regulatory policy, risk
assessment, information management, pollution control, and treatment technology
emphasize pollution prevention and waste reduction. Versar provides nationally
recognized expert services in the areas of air and water quality, waste
management, natural resources management, ecological assessments, asbestos and
lead paint abatement, industrial hygiene and a wide range of corrective and
remedial action technologies. Versar also provides consulting and engineering
services to industry and government agencies in assessing alternative
compliance strategies and their impacts on our customers operations and
profits. We help develop plans for customer implementation, obtain necessary
permits, evaluate performance, and take any corrective action required. In
fiscal year 2002, Versar performed over $5M in environmental and energy
engineering support for the Defense Energy Supply Center (DESC) bulk fuel
transfer stations and military facilities world-wide. Such services are
focused on compliance and pollution prevention. In addition, Versar won a
re-bid of its support contract for Wright Patterson AFB and Aeronautical
Systems Center. This five-year contract valued at $8.3M requires the Company
to provide comprehensive environmental services to Air Force installations
nationwide.

Clean Technology.Versar is a leader in the development of clean
technology to solve complex environmental problems. For example, Versar
applied an alternative technology and paint formulation for coating mass
transit vehicles eliminating the need to install a $6M vapor collection system.
Over the last three years, Versar has assisted the U.S. military in the
complete redesign of a system to clean oxygen converters and oxygen lines used
by military aircraft. The system has eliminated the use of toxic materials,
increased the efficiency of the cleaning process, increased the life of
equipment, and saved our customers millions of dollars in maintenance costs.
In fiscal year 2001, Versar patented the technology developed as part of this
project.

Ecological Restoration.Water quality is one of the emerging global
environmental issues of the 21st century. Excessive nutrients and non-point
source pollution is severely impacting the natural filtering capability of our
aquatic ecosystem, which affects our water quality. Versar has developed
specialized expertise in ecological assessment and restoration. For more than
25 years we have supported the States of Maryland, Virginia and Delaware, the
U.S. Environmental Protection Agency (EPA), and U.S. Army Corps of Engineers
(USACE) in the assessment of the ecological health of the Chesapeake Bay and
the development of management practices to restore this endangered ecosystem
and to protect it from further harm due to increased development in this
region. Versar manages the Chesapeake Bay Monitoring Program that provides
scientific support to state regulatory agencies in the development of
guidelines for development for protecting the bay. We also have major
contracts with the Philadelphia and Baltimore

3



---



##### 



Districts of the USACE for the conduct of ecological assessments in support of
the disposal of dredge material in the redevelopment of ports and harbors and the restoration of our nations beaches.
In fiscal year 2000, Versar won the follow-on contract of our Philadelphia
District USACE contract valued at $10M and also won a new contract for the
Wilmington District of the USACE for similar work valued at $6M.

Remediation of Industrial Facilities/Military Bases.Versar provides the
full range of services in remediation/corrective action, from site
investigation and remedial design, to construction, operation and maintenance
of remedial systems. One of our major accomplishments in fiscal year 2001 was
the award of a new Environmental Remediation and Construction Contract (ENRAC)
for the Air Force Center for Environmental Excellence, which is a follow-on to
our existing Worldwide Full Service Remedial Action Contract. This contract
has an estimated value of $54M over 5 years and we believe constitutes
recognition of Versars accomplishments as a remedial construction contractor.
In fiscal year 2002, Versar received approximately $8M, under this new contract
for remedial construction projects. This includes a $4.5M task order to
support the Defense Threat Reduction Agency with the Russian weapons
destruction program as well as force protection services for the military.

Versar brings to its customers innovative cleanup solutions that are cost
effective and permanent. For example, Versar has successfully demonstrated the
effectiveness of a passive reactive barrier consisting of iron fillings placed
in a trench to remove halogenated organic compounds from groundwater at Lowry
Air Force Base. This eliminated the need to pump and treat the groundwater.

Outsourcing.Versar is increasingly providing on-site and off-site
professional support to help customers manage their environmental programs.
Over the last seven years, the Company has provided a full range of pollution
prevention, compliance management, cleanup, and O&M services for the
Washington, D.C. Metropolitan Area Transit Authority (WMATA). This model
project demonstrates how environmental management can be integrated with the
customers operations on an outsourced basis. Versar has over 50 professional
and administrative on-site support staff at various DoD installations and
industrial facilities across the country managing a wide spectrum of customers
environmental management functions ranging from underground storage tanks,
asbestos abatement programs, air compliance/permitting, real property
transfers, to on-site hazardous material pharmacies.

Architectural and Engineering Services

Versar has successfully leveraged its environmental technology expertise
in designing industrial, commercial, and government facilities for sustainable
operations preserving our natural resources. Versar has grown this business
from $8M in revenue in fiscal year 2000 to $15M in revenue in fiscal year 2002.
This growth is driven by the demand for infrastructure and a shift toward more
design build projects. Versar is making the transition from being solely an
engineering services company to a general contractor to address market needs
for turnkey design-build projects. Of the $15M in revenue earned by this
segment in fiscal year 2002, Versar performed over $8M in infrastructure
design/construction services.

Industrial and Public Infrastructure Servicesis a growing part of our
business. This service area includes providing a full range of architectural,
engineering, and construction management services in the site development, and
design of industrial/commercial facilities and public infrastructure projects.
Key industrial sectors that the Company serves include the pharmaceuticals,
semi-conductor/internet services, biotechnology, food processing, paper
products, film, plastics and fiber industries. Services include architectural
design, site development, design, construction or design-build of plant
facility, and supporting utility, material handling, and waste management
systems.

Versar provides design expertise in plant structures and associated
utilities, fuel handling, chemical treatment, distribution, piping systems
instrumentation and controls, substations and electric power distribution
systems. Systems are designed to optimize performance, environmental
compliance, safety, energy use, and utilization of space. Economic
evaluations of alternative designs, fuels, and operating parameters are
conducted to produce bottom line savings for our customers throughout the life
cycle of heating, cooling and electric power systems.

4



---



##### 



Services are performed for a wide range of corporate, industrial,
commercial, state, federal, health care and educational customers. Specific
services include:



| |  |  | Retrofit and Renovations                
| | - |  | ----------------------------------------
|
| |  |  | Energy Management Studies and Audits    
|
| |  |  | Fire Protection                         
|
| |  |  | Life Safety                             
|
| |  |  | Performance Contracting                 
|
| |  |  | Life-Cycle Analysis                     
|
| |  |  | Heating and Cooling Distribution Systems
|
| |  |  | Electrical Power and Lighting           
|
| |  |  | Building HVAC Systems                   

Public Infrastructure Services include industrial and commercial buildings , municipal storm water, water and wastewater design, and recreational
facilities including water parks and skateboard parks.

Versar was just awarded its third consecutive contract to support the Army
on public works projects at Ft. Monmouth, New Jersey and other Army
installations in the mid-Atlantic region. The Company recently completed the
installation of a major water main at Beale AFB.

We believe Versars Arizona Office has about 95 percent of the Arizona
market for designing public recreational water parks. This market also
continues to grow rapidly as a result of strong population expansion in the
region. Versar also designs other recreational facilities such as skateboard
parks.

Green Energy Services. Energy conservation services not only help
diversify the Companys business, they also provide an entry to new customers
in the emerging energy resources management growth market. Versar provides
engineering, design, and construction management expertise in the upgrade of
plant infrastructure to reduce energy consumption. In addition, Versar has
for many years provided demand side management support to utilities in the
identification and implementation of efforts to reduce energy consumption.
Versar has provided energy auditing and energy conservation services for a
variety of clients.

Major utilities in the ESPC market are driven by the opportunity to
develop alliances with government and industry customers as deregulation of
this industry occurs in the U.S. The current market in the federal sector is
driven by Executive Order 12902 that requires government facilities to reduce
energy consumption by 30% by 2005. This has been augmented by a new Executive
Order 13123 issued last year requiring that government facilities reduce the
amount of green house gases they generate by 50% over the next decade. While
energy is still relatively inexpensive, the government will clearly set the
example for cost-effective energy investment. However, it is generally
believed that over the long term the larger market for energy conservation
services will grow in the private and commercial sectors.

Defense Systems

Personal Protection Equipment/Chemical Demilitarization. A specialty area
for the Company is its Chemical Surety Laboratory, and the development of
personal protection equipment to support counter-terrorism and the Nations
Chemical Weapons Demilitarization programs. These programs address significant
public health and safety issues and are an important business area for Versar.

Versars subsidiary, GEOMET Technologies, Inc. (GEOMET) is a leader in
developing, testing and manufacturing personal protection equipment (PPE).
Current projects include development of two PPE ensembles for use in the depots
where chemical weapons are stockpiled, and in activities where exposure to
chemical agents is likely, such as laboratory work and emergency response. The
ensembles include a protective suit, clean air source, radio communications,
and a Personal Ice Cooling System (PICS). In July 1998, GEOMET was awarded a
$29M contract for the production and fielding of the Armys Self-Contained
Toxic Environment Protection Outfit (STEPO) System

5



---



##### 



for 73 installations through
the calendar year 2002. GEOMET started production in late fiscal year 1999 and was
funded the remaining balance for full-scale production in fiscal year
2000. These protective suits will be used to recover, render safe, store and
dispose of unexploded chemical and biological weapons.

GEOMET is also a commercial supplier of PPE to remedial action contractors
and emergency responders, which are qualified for chemical protection. Driven
in part by the sarin nerve gas attack on the Tokyo subway in 1995, Versar has
significantly expanded GEOMETs offering of services to local, state, federal,
and foreign governments in support of counter-terrorism. Since fiscal year
1998, the Company has been selling protective suits to the National Guard as
part of the nations counter-terrorism civil defense program. Management
believes the opportunities for commercial application of its products and
services will continue to grow in this area. In fiscal year 2000, the Company
expanded its laboratory capabilities to include biological agents and to
broaden our service capability in Homeland Defense. In addition, we have PPE
products and services available through the Internet at www.nbcprotect.com and
are working with foreign manufacturers and vendors to expand our capabilities
in this emerging market. In fiscal year 2002, the Company further expanded the
biological laboratory operations to respond to the increasing demand as a
result of the terrorist biological threats to our nation.

GEOMET is also involved in the disposal of residual chemical weapons
material at sites throughout the United States. GEOMETs program, which was
rebid in fiscal year 2001, includes outfitting and operating a mobile
laboratory, which will support the disposal operations, design of air
monitoring and warning systems, specification of the PPE to be used, and other
assignments dealing with environmental compliance, development of operational
procedures, and program management. GEOMET has also recently mobilized support
of a chemical demilitarization project in Japan, and we expect other overseas
opportunities to result from this initiative.

Information Technology.Versar is a leader in the architectural and
engineering services industry in the application of information technology in
enhancing our existing services to our customers and establishing new
web-enabled services for the future. We have in place a corporate intranet to
manage major projects on-line where project deliverables, drawings, minutes of
meetings and threaded discussions are made accessible for the project team and
customer. Versar has in-place licensing agreements where we are a reseller of
application services to our customers to help them become web-enabled. This
technology will allow Versar to be more competitive and provide a platform for
the development of new web-based services.

Versar is currently supporting DTRA in the management of the Russian Solid
Rocket Destruction program where we are managing over 6000 documents, drawings
and reports with the ability to record and search in the Russian Cyrillic
language. Versar is supporting the State of Maryland in the management of the
Chesapeake Bay Monitoring Program. Versar hosts the website and links to
program technical databases for this program. We have also developed and
manage a website for the State of Maryland that collects and displays
information on ozone pollution in the atmosphere. We are currently developing
a website for an industry trade group which will provide a wide range of
environmental information to building managers to help them better manage
their energy resources and enhance the comfort of commercial facilities.

Markets

Versars services are evolving in response to clients changing needs, and
our market opportunities are being driven by the availability of technology
aimed at enhancing operating performance and profitability. We have
diversified its business over the past few years with a much greater emphasis
on (1) environmental services which help our customers bottom line, such as
pollution prevention initiatives with short paybacks, redevelopment of industry
properties and conversion of military bases for alternative productive uses and
hands-on remediation and construction services; (2) the emerging energy
conservation services markets with alliances and core capabilities to enter
this new market; and (3) industrial and public infrastructure services to
respond to our clients increasing need to expand or upgrade plant and
equipment to improve their operating performance.

6



---



##### 



Versar also provides a wide range of services to the financial, real
estate and insurance business sector, transportation and communications sector,
services industries and others.

The Department of Defense (DoD) is Versars largest government client,
making up 57 percent of its revenues. Versar is a major support contractor to
DoD, offering it the same range of services as in the private sector. DoD is
going through many of the same issues faced by private industry including
restructuring and cost reduction in response to increasing budget limitations.
DoD also has an aggressive environmental program to cleanup, realign, and close
bases worldwide as it continues to restructure to a smaller force. DoDs major
focus over the next few years will be to reduce its infrastructure. Congress
is considering additional base consolidation, which will drive more base
realignment and closure activity, including cleanup. The EPA constitutes
approximately 5 percent of Versars revenue, which is growing in new areas such
as water quality, risk assessment, and natural resources management. Other
Federal clients make up 6 percent of our revenue and include NASA, the
Departments of Energy and the Interior, Federal Housing Authority, and
Intelligence Agencies. State and local governments comprise 13 percent of
Versars revenue.

Competition

Versar traditionally has faced substantial competition in each market in
which it operates and expects to continue to face substantial competition as it
diversifies its business. Many times, its competitors are larger and have
greater financial resources than Versar. In the past few years, there has been
major consolidation in the environmental services market. A number of
companies have restructured to become private. Versar has historically
competed primarily on its scientific, technological, and engineering
expertise. As Versars business mix shifts more toward providing turnkey
infrastructure and resources management support services, Versar will compete
with more facility operations and maintenance and engineering and construction
contractors on projects that lend themselves to competition based on innovation
in approach, technology application, and project financing areas where Versars
senior management is skilled in packaging responses to new and different
opportunities. The market is changing rapidly, and Versar is taking advantage
of these changes to position itself for growth in new and emerging markets by
providing much needed infrastructure support to industry and government as we
enter the 21st century. However, no assurances can be given that Versar will
be able to achieve such growth or successfully compete in such new areas.

Backlog

As of June 30, 2002, total backlog for Versar, including unfunded
government tasks and orders, was approximately $287 million, as compared to
approximately $300 million as of June 30, 2001, a decrease of four percent.
Funded backlog for Versar was approximately $35 million, a decrease of 17
percent compared to approximately $42 million as of June 30, 2001. The
decrease is due to the winding down of the Companys STEP contract in the
Defense segment. Approximately $200 million of the contract backlog is not
expected to be funded in fiscal year 2003. Funded backlog is the incremental
funding authorization of contracts and task orders based on firm contractual
obligations. Unfunded backlog includes contracts and contract vehicles,
including option periods, in which specific work tasks and funding have not
been authorized. Funded backlog amounts have historically resulted in
revenues; however, no assurance can be given that all amounts included in
funded backlog will ultimately be realized as revenue.

Employees

At June 30, 2002, Versar has approximately 352 full-time employees, of
which seventy-eight percent are engineers, scientists, and other professionals.
Seventy percent of the Companys professional employees have a bachelors
degree, twenty-five percent have a masters degree, and five percent have a
doctorate degree.

7



---



##### 



Item 2. Properties

The Companys executive office is located in Springfield, Virginia; a
suburb of Washington, D.C. Versar currently leases 68,934 square feet in two
buildings from Sarnia Corporation. The rent is subject to a two-percent
escalation per year through May 31, 2009.

As of September 1, 2002, the Company had under lease an aggregate of
approximately 185,000 square feet of office and laboratory space in the
following locations: Springfield, Lynchburg, Norfolk and Williamsburg, VA;
Tempe, AZ; Fair Oaks, CA; Northglenn, CO; Lombard, IL; Columbia, Gaithersburg,
Germantown and Williamsport, MD; Oklahoma City, OK; San Antonio, TX; and
Horsham and King of Prussia, PA.

Item 3. Legal Proceedings

In August 1997, Versar entered into a contract with the Trustees for the
Environ-Chem Superfund Site that, based upon an existing design, Versar would
perform a detailed design, construct and operate a soil vapor extraction
system. Subsequently, during the operation phase, Versar was terminated by the
Trustees for convenience. The Trustees failed to pay certain invoices and
retention due Versar.

On March 19, 2001, Versar instituted a lawsuit against Roy O. Ball,
Trustee of the Environmental Conservation and Chemical Corporation Site Trust
Fund and three environmental consulting companies in the U.S. District Court of
the Eastern District of Pennsylvania, entitled Versar, Inc. v. Roy O. Ball,
Trustee, URS Corporation, Environmental Resources Management and Environ Corp.,
No. 01CV1302. Versar, in seeking to recover amounts due under a remediation
contract from the Trustees of a Superfund site, claiming breach of contract,
interference with contractual relationships, negligent misrepresentations,
breach of good faith and fair dealing, unjust enrichment and implied contract.
Mr. Ball and several defendants moved to dismiss the action or, in the
alternative, transfer the action to the U.S. District Court for the Southern
District of Indiana. At the same time, on April 20, 2001, the two Trustees
filed suit against Versar in the U.S. District Court for the Southern District
of Indiana, entitled, Roy O. Ball and Norman W. Berstein, Trustees v. Versar,
Inc., Case No. IPO1-0531 C H/G. The Trustees alleged breach of contract and
breach of warranty with respect to the remediation contract and asked for a
declaratory judgement on a number of the previously stated claims.

On July 12, 2001, the Federal District Court in Pennsylvania granted
defendants motion to transfer the Pennsylvania lawsuit and consolidate the two
legal actions in Indiana. The Company has filed an answer to the Indiana
lawsuit and the plaintiffs and third-party defendants have filed Motions to
Dismiss the Companys counter-claim. The motion is still pending. In the
meantime, plaintiffs have filed a Motion for Partial Summary Judgement to which
the Company has responded. It too is pending. Written and oral discovery has
commenced and is expected to be completed by the end of the year. Trial is
scheduled for February 2003. Based upon discussions with outside counsel,
management does not believe that any adverse determination under the Trustees
lawsuit will have a materially adverse effect on the Companys consolidated
financial condition and results of operations.

Versar and its subsidiaries are parties from time to time to various other
legal actions arising in the normal course of business. The Company believes
that any ultimate unfavorable resolution of these legal actions will not have a
material adverse effect on its consolidated financial condition and results of
operations.

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 2002.

8



---



##### 



EXECUTIVE OFFICERS

The current executive officers of Versar, and their ages as of September 1,
2002, their current offices or positions and their business experience for at
least the past five years are set forth below.

|                    |  |     |    |                           |  |                                                               
|------------------- |  | --- | -- | ------------------------- |  | --------------------------------------------------------------
|NAME                |  | AGE |    | POSITION WITH THE COMPANY
|                    |  |     |    |                          
|Benjamin M. Rawls   |  |     | 61 |                           |  | Chairman                                                      
|                   
|Theodore M. Prociv  |  |     | 54 |                           |  | President and Chief Executive Officer                         
|                   
|Robert L. Durfee    |  |     | 66 |                           |  | Executive Vice President,
President, GEOMET Technologies, Inc.
|                   
|Gayaneh Contos      |  |     | 66 |                           |  | Executive Vice President, Environmental Pillar                
|                   
|Lawrence A. White   |  |     | 59 |                           |  | Executive Vice President,
Corporate Development               
|                   
|George J. Anastos   |  |     | 54 |                           |  | Executive Vice President, Architect and Engineering Pillar    
|                   
|Lawrence W. Sinnott |  |     | 40 |                           |  | Senior Vice President,
Chief Financial Officer and Treasurer  
|                   
|James C. Dobbs      |  |     | 57 |                           |  | Senior Vice President, General Counsel and
Secretary          

Benjamin M. Rawls, M.B.A., joined Versar as President and Chief Executive
Officer in April 1991. He became Chairman of the Board in November 1993. Mr.
Rawls relinquished the position of President in November 1999 and Chief
Executive Officer in July 2000.

Theodore M. Prociv,Ph.D., joined Versar as President on November 1, 1999
and was elected Chief Executive Officer on July 1, 2000. From 1995 to August
1998, Dr. Prociv served as the Deputy Assistant to the Secretary of Defense for
Chemical and Biological Matters, and subsequently as the Deputy Assistant
Secretary of Army for Chemical Demilitarization. Before joining the Department
of Defense, Dr. Prociv was Corporate Vice President of Environmental Business
at Science Applications International Corporation, (SAIC) 1993-1994, and served
as the Vice President for Government Systems at Battelle Memorial Institute
1979-1993.

Robert L. Durfee, Ph.D., is a co-founder of Versar and has been President
of GEOMET Technologies, Inc., a subsidiary of the Company, since 1991.

Gayaneh Contos, B.S., joined Versar in 1974, was elected Vice President in
1985 and Senior Vice President in 1989. Since 1980, she has been responsible
for supervising the majority of the Companys contracts with EPA. In 2000, she
was promoted to Executive Vice President in charge of the Environmental Pillar.

9



---



##### 



Lawrence A. White, P.E., M.E.A., joined Versar in 1992 as Executive Vice
President, Corporate Development. From 1990 to 1992, Mr. White was the Senior
Vice President, Corporate Development for Dynamac Corporation in the firms marketing, sales, proposals, and client
development areas and between 1983 and 1990 was Group Vice President of Roy F.
Weston, Inc., where he managed major programs and served as principal
consultant to numerous government and industrial clients.

George J. Anastos, Ph.D., P.E. joined Versar in 1996 as a Vice President
in charge of Northeast Operations. In 2000, he was promoted to Executive Vice
President in charge of the Companys Architect and Engineering Pillar. From
1992 to 1996, Dr. Anastos was Senior Vice President of Environmental Science &
Engineering of Gainesville, Florida responsible for Southeast Group Operations,
Laboratories and Remedial Technology & Construction Group. Between 1984 and
1992, he was Vice President of Roy F. Weston, Inc. in charge of Weston Services
(Construction Group) and Engineering Group Operations Manager, in West Chester,
Pennsylvania.

Lawrence W. Sinnott, CPA, B.S., joined Versar in 1991 as Assistant
Controller. In 1992, he became Corporate Controller. In 1993, he was elected
Treasurer and Corporate Controller. In 1994, he became Vice President, Chief
Financial Officer and Treasurer. In October 1999, he was elected Senior Vice
President. From 1989 to 1991, he was Controller of a venture capital company,
Defense Group, Inc.

James C. Dobbs, J.D., L.L.M., joined Versar in 1992 as Vice President,
General Counsel, and Secretary. In October 1999, he was elected Senior Vice
President. From 1984 to 1992, Mr. Dobbs was employed by Metcalf & Eddy, Inc.
as Vice President and General Counsel where he was responsible for providing
legal and regulatory advice to senior management.

10



---



##### 



PART II

Item 5. Market for Registrants Common Stock and Related Stockholder Matters

Common Stock

The Companys common stock is traded on the American Stock Exchange
(AMEX), under the symbol VSR. At June 30, 2002, the Company had 838
stockholders of record, excluding stockholders whose shares were held in
nominee name. The quarterly high and low sales prices as reported on the AMEX
during fiscal years 2002 and 2001 are presented below.

|            |  |             |  |     |      |  |  |   |      | 
|----------- |  | ----------- |  | --- | ---- |  |  | - | ---- | 
|Fiscal Year |  | High        |  | Low
|            |  |             |  |    
|2002        |  | 4th Quarter |  | $   | 5.49 |  |  | $ | 2.64 | 
|            |  | 3rd Quarter |  |     | 5.20 |  |  |   | 3.30 | 
|            |  | 2nd Quarter |  |     | 6.20 |  |  |   | 2.65 | 
|            |  | 1st Quarter |  |     | 3.89 |  |  |   | 2.10 | 

|            |  |             |  |     |      |  |  |   |      | 
|----------- |  | ----------- |  | --- | ---- |  |  | - | ---- | 
|Fiscal Year |  | High        |  | Low
|            |  |             |  |    
|2001        |  | 4th Quarter |  | $   | 2.39 |  |  | $ | 1.75 | 
|            |  | 3rd Quarter |  |     | 2.44 |  |  |   | 1.75 | 
|            |  | 2nd Quarter |  |     | 2.13 |  |  |   | 1.50 | 
|            |  | 1st Quarter |  |     | 2.19 |  |  |   | 1.50 | 

No cash dividends have been paid by Versar since it began public trading
of its stock in 1986. 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. Under the terms of the Companys
revolving line of credit, approval would be required from the Companys primary
bank for the payment of any dividends.

11



---



##### 



Item 6. Selected Financial Data (unaudited)

The selected consolidated financial data set forth below should be read in
conjunction with Versars consolidated financial statements and notes thereto
beginning on page F-2 of this report. The financial data is as follows:

|                                                               |  |                                       |        |      |  |                              |        |      |  |      |        |  |  |   |        |  |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---------------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------- | -
|                                                               |  |                                       |        |      |  | For the Years Ended June 30, |        |      |  |     
|                                                               |  |                                      
|                                                               |  | 2002                                  |        | 2001 |  | 2000                         |        | 1999 |  | 1998
|                                                               |  |                                       |        |      |  |                              |        |      |  |     
|                                                               |  | (In thousands, except per share data) |       
|Consolidated Statement of Operations
related data:             |  |                                       |        |      |  |                              |        |      |  |      |        |  |  |   |        |  |  |   |         |  
|Gross Revenue                                                  |  | $                                     | 67,988 |      |  | $                            | 65,816 |      |  | $    | 56,149 |  |  | $ | 58,886 |  |  | $ | 50,420  |  
|Net Service Revenue                                            |  |                                       | 38,189 |      |  |                              | 39,481 |      |  |      | 37,787 |  |  |   | 38,721 |  |  |   | 34,895  |  
|Operating Income (Loss)                                        |  |                                       | 619    |      |  |                              | (352   | )    |  |      | 728    |  |  |   | 2,072  |  |  |   | 378     |  
|Income (Loss) from Continuing Operations                       |  |                                       | 159    |      |  |                              | (1,030 | )    |  |      | 340    |  |  |   | 1,837  |  |  |   | 276     |  
|(Loss) Income from Discontinued
Operations                     |  |                                       | (80    | )    |  |                              | 243    |      |  |      |       |  |  |   |       |  |  |   | (10,929 | )
|Net Income (Loss)                                              |  |                                       | 79     |      |  |                              | (787   | )    |  |      | 340    |  |  |   | 1,837  |  |  |   | (10,653 | )
|Income (Loss) per share from Continuing
Operations  Diluted   |  | $                                     | .02    |      |  | $                            | (.16   | )    |  | $    | .05    |  |  | $ | .29    |  |  | $ | .05     |  
|(Loss) Income per share from Discontinued
Operations  Diluted |  | $                                     | (.01   | )    |  | $                            | .04    |      |  | $    |       |  |  | $ |       |  |  | $ | (1.92   | )
|Net Income (Loss) per share  Diluted                          |  | $                                     | .01    |      |  | $                            | (.12   | )    |  | $    | .05    |  |  | $ | .29    |  |  | $ | (1.87   | )
|Weighted
Average Shares Outstanding  Diluted                  |  |                                       | 6,998  |      |  |                              | 6,470  |      |  |      | 6,487  |  |  |   | 6,283  |  |  |   | 5,695   |  
|Consolidated Balance Sheet related data:                       |  |                                       |        |      |  |                              |        |      |  |      |        |  |  |   |        |  |  |   |         |  
|Working Capital                                                |  | $                                     | 6,600  |      |  | $                            | 7,073  |      |  | $    | 7,801  |  |  | $ | 8,403  |  |  | $ | 3,120   |  
|Current Ratio                                                  |  |                                       | 1.70   |      |  |                              | 1.86   |      |  |      | 1.94   |  |  |   | 1.90   |  |  |   | 1.23    |  
|Total Assets                                                   |  |                                       | 21,273 |      |  |                              | 20,117 |      |  |      | 21,387 |  |  |   | 22,687 |  |  |   | 21,795  |  
|Current Portion of Long-Term Debt                              |  |                                       | 205    |      |  |                              | 170    |      |  |      | 480    |  |  |   | 1,135  |  |  |   | 1,114   |  
|Long-Term Debt                                                 |  |                                       |       |      |  |                              |       |      |  |      |       |  |  |   |       |  |  |   | 688     |  
|                                                               |  |                                       |        |      |  |                              |        |      |  |      |        |  |  |   |        |  |  |   |         |  
|Total Debt, excluding bank line of credit                      |  |                                       | 205    |      |  |                              | 170    |      |  |      | 480    |  |  |   | 1,135  |  |  |   | 1,802   |  
|Stockholders Equity                                           |  | $                                     | 8,324  |      |  | $                            | 6,013  |      |  | $    | 6,402  |  |  | $ | 5,623  |  |  | $ | 2,891   |  

12



---



##### 



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

This report contains certain forward-looking statements which are based on
current expectations. Actual results may differ materially. The
forward-looking statements include those regarding the continued award of
future work or task orders from government and private clients, cost controls
and reductions, the expected resolution of delays in billing of certain
projects, the possible impact of current and future claims against the Company
based upon negligence and other theories of liability, and the possibility of
the Company making acquisitions during the next 12 to 18 months.
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; the failure of the Federal
Government to fund certain defense, homeland defense, and environmental
programs; a general economic slowdown; the ability to perform work within
budget or contractual limitations; one or more current or future claims made
against the Company may result in substantial liabilities; the possibility that
acquired entities may not perform as well as expected; the ability to attract
and retain key professional employees; 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.

Versars gross revenue for fiscal year 2002 totaled $67,988,000, a
$2,172,000 (3%) increase compared to gross revenue of $65,816,000 for fiscal
year 2001. Gross revenue for fiscal year 2001 increased by $9,667,000 (17%)
over that reported in fiscal year 2000. The increase in gross revenues in
fiscal year 2002 is due to increased revenues in the Companys Defense segment
of approximately $2,600,000 and increased revenues of approximately $3,300,000
in the Companys Architecture and Engineering segment offset by a reduction in
gross revenues in the Companys Environmental segment of approximately
$3,800,000. The decrease is due to the completion of remedial construction
work that had no follow on replacement work for that customer. The increase in
the Defense segment is attributable to the growth in the Companys Homeland
Defense business activities. The increase in the Architecture and Engineering
segment is attributable to increased design and construction work. The
increase in gross revenue in fiscal year 2001 was primarily in the
environmental segment due to increases in remedial construction and U.S.
Environmental Protection Agency work.

Purchased services and materials for fiscal year 2002 totaled $29,799,000
(13%) higher than fiscal year 2001 purchased services. Purchased services and
materials for fiscal year 2001 increased by $7,973,000 (43%) over fiscal year
2000. The increase in purchased services in fiscal year 2002 is attributable
to the increased construction activities in the Architecture and Engineering
segment during the year. The increase in fiscal year 2001 was primarily due to
increased environmental remedial construction work during the year.

Net service revenue is derived by deducting the costs of purchased
services from gross revenue. Versar considers it appropriate to analyze
operating margins and other ratios in relation to net service revenue, because
such revenues reflect the actual work performed by the Companys labor force.
Net service revenues decreased by 3% in fiscal year 2002 due to the decrease in
gross revenue as mentioned above in the Companys Environmental segment, which
carried higher profits on purchased services.

Direct costs of service and overhead include the cost to Versar of direct
and overhead staff, including recoverable and unallowable costs that are
directly attributable to contracts. The percentage of these costs to net
service revenue increased to 81.8% in fiscal year 2002 compared to 81.2% in
fiscal year 2001 and 81.4% in fiscal year 2000. The increase in the percentage
in fiscal year 2002 is due to additional project reserves that were required
due to disputed receivables and worsening economic conditions in the commercial
sector. These reserves caused the Company to incur a loss in the fourth
quarter of fiscal year 2002. The decrease in direct costs of services and
overhead in fiscal year 2002 was due to the higher net service revenues from
fiscal year 2001.

13



---



##### 



Selling, general and administrative expenses approximated 16.5% of net
service revenue in fiscal year 2002, compared to 16.3% in fiscal year 2001 and 16.7% in fiscal year 2000. The
slight increase in 2002 is attributable to the reduction of net service revenue
in fiscal year 2002 as mentioned above. The decrease in fiscal year 2001 was
attributable to the 4% increase in net service revenue in fiscal year 2001.
Selling, general and administrative expenses have been relatively stable for
the past three fiscal years and have had minimal fluctuations with the
Companys business volume.

In fiscal year 2001, the Company recorded a non-recurring charge against
income of $1,320,000 as a result of a settlement of a lawsuit with TAMS
Consultants, Inc. The non-recurring charge consists of a $1,000,000 settlement
and legal costs of $320,000. (Refer to Note K of the Notes to Financial
Statements for further information).

Operating income for fiscal year 2002 was $619,000, compared to an
operating loss of $352,000 in fiscal year 2001. Without the non-recurring
charge, operating income for fiscal year 2001 would have been $968,000. The
decrease in fiscal year 2002 operating income when compared to fiscal year
2001, as adjusted, is attributable to lower net service revenue and higher
percentage of direct costs of services and overhead in fiscal year 2002 as
mentioned above. Adjusted fiscal year 2001 operating income of $968,000 was
$240,000 higher than operating income of $728,000 in fiscal year 2000 as a
result of higher net service revenue in fiscal year 2001.

Interest expense during fiscal year 2002 was $203,000, a decrease of
$235,000 from fiscal year 2001. The decrease is attributable to lower interest
rates, decreased utilization of the Companys line of credit during the year
and proceeds the Company received from the exercise of stock options and new
equity. (Refer to Note G of the Notes to Financial Statements). In fiscal
year 2001, interest expense decreased by $88,000 compared to fiscal year 2000.
The decrease is due to lower interest rates in fiscal year 2001.

Versars tax expense for fiscal year 2002 was $257,000 compared to
$240,000 for the prior fiscal year. The companys effective tax rate for
fiscal year 2002 was 46.7%. In fiscal year 2001, the Company increased its tax
valuation allowance by approximately $557,000 as a result of the reduced
financial performance for the past two fiscal years. The Company carries a
substantial valuation allowance of approximately $3,105,000, on deferred tax
assets. The Company had released $200,000 of the valuation allowance in fiscal
year 2000, when the Companys earnings were at higher levels. (Refer to Note I
of the Notes to Financial Statements for further information).

In fiscal year 2002, the Company recorded a loss from discontinued
operations of $80,000, net of tax of $50,000 due to a requirement for
additional accruals in order to wind down a benefit plan of Science Management
Corporation (SMC), former subsidiary of the Company. In fiscal year 2001, the
Company reversed $243,000 (net of tax of $150,000) of reserves that had been
set up in fiscal year 1998 associated with the discontinuance of SMC.

In summary, Versars net income for fiscal year 2002 was $79,000, compared
to a net loss of $787,000 in fiscal year 2001 and net income of $340,000 in
fiscal year 2000.

14



---



##### 



REVENUE

Versar provides professional services to various industries, government
and commercial clients. A summary of revenue generated from the Companys client base is as follows:

|              |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |    |  
|------------- | --------------------- | - | -------------------------------------- | ------ | ---- |  | ---- | -- | - | - | ------ | ------ |  |  | --- | -- | - | - | ------ | ------ |  |  | --- | -- | -
|              |                       |   | For the Years Ended June 30,          
|              |                       |   |                                       
|              |                       |   | 2002                                   |        | 2001 |  | 2000
|              |                       |   |                                        |        |      |  |     
|              |                       |   | (In thousands, except for percentages)
|Government    |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   
|              | EPA                   |   | $                                      | 3,495  |      |  |      | 5  | % |   | $      | 2,734  |  |  |     | 4  | % |   | $      | 3,245  |  |  |     | 6  | %
|              | State & Local         |   |                                        | 9,075  |      |  |      | 13 | % |   |        | 7,859  |  |  |     | 12 | % |   |        | 7,073  |  |  |     | 12 | %
|              | Department
of Defense |   |                                        | 38,576 |      |  |      | 57 | % |   |        | 38,157 |  |  |     | 58 | % |   |        | 28,021 |  |  |     | 50 | %
|              | Other                 |   |                                        | 3,906  |      |  |      | 6  | % |   |        | 5,202  |  |  |     | 8  | % |   |        | 2,158  |  |  |     | 4  | %
|Commercial    |                       |   | 12,936                                 |        |      |  | 19   | %  |   |   | 11,864 |        |  |  | 18  | %  |   |   | 15,652 |        |  |  | 28  | % 
|              |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   
|Gross Revenue |                       | $ | 67,988                                 |        |      |  | 100  | %  |   | $ | 65,816 |        |  |  | 100 | %  |   | $ | 56,149 |        |  |  | 100 | % 
|              |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   

Liquidity and Capital Resources

The Companys continuing operations generated $1,176,000 in cash in fiscal
year 2002. In addition, the Company received aggregate proceeds from the
issuance of stock due to the exercise of options and a private placement of
common stock of $1,875,000. Of the $3,051,000 aggregate cash, approximately
$724,000 was used to invest in property, plant and equipment with a majority of
the balance used to pay down the Companys line of credit by $1,904,000.

During fiscal year 2002, the Company used long-term bank financing to
supplement its day to day operating cash requirements. At June 30, 2002, the
Company had $6,600,000 of working capital, compared to $7,073,000 in fiscal
year 2001. Working capital decreased primarily due to improved collections of
receivables, which proceeds were used to reduce the Companys long-term line of
credit.

Versars line of credit with the Bank of America (Bank) provides for
advances up to $6,500,000 based on qualifying receivables. Interest on the
borrowings is based on the lower of the 30 day London Interbank Offered Rate
(LIBOR) plus two hundred and seventy-five basis points (4.59% at June 28,
2002). A commitment fee of 1/4% on the unused portion of the line of credit is
also charged. The line is guaranteed by the Company and each subsidiary
individually and is collectively secured by accounts receivable, equipment and
intangibles, plus all insurance policies on property constituting collateral.
Unused borrowing availability at June 30, 2002 was approximately $4,641,000.
Advances under the line are due upon demand or on November 30, 2003. The loan
has certain covenants related to maintenance of financial ratios. In June
2002, the Company had to obtain a waiver of its financial covenants under its
line of credit as a result of a loss incurred in the fourth quarter of fiscal
year 2002. Management believes that cash generated by operations and
borrowings available from the Bank line of credit will be adequate to meet the
working capital needs for fiscal year 2003.

Impact of Inflation

Versar seeks to protect itself from the effects of inflation. The
majority of contracts the Company performs are for a period of a year or less
or are cost plus fixed-fee type contracts and, accordingly, are less
susceptible to the effects of inflation. Multi-year contracts provide for
projected increases in labor and other costs.

15



---



##### 



Business Segments

Versar currently has three business segments: environmental services,
architecture and engineering, and defense. The details on these segments is in
Note B of the Notes to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company has not entered into any transactions using derivative
financial instruments or derivative commodity instruments and believes that its
exposure to interest rate risk and other relevant market risk is not material.

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements and supplementary data begin on page
F-2 of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Form 8-K, which terminated the Companys audit relationship with Arthur
Andersen LLP and appointed Grant Thornton LLP as the Companys auditors filed
on June 14, 2002.

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 2002 Annual Meeting
of Stockholders, which is expected to be filed with the Commission not later
than 120 days after the Companys 2002 fiscal year end 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 Versar 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 Companys 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.

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

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 2002 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 2002 fiscal year.

16



---



##### 



PART IV

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

(A)(1) Financial Statements:



The consolidated financial statements and financial statement
schedules of Versar, Inc. and Subsidiaries are filed as part of this
report and begin on page F-1.



| | a) |  | Report of Independent Public Accountants                                                                    
| | -- |  | ------------------------------------------------------------------------------------------------------------
|
| | b) |  | Consolidated Balance Sheets as of June 30, 2002 and 2001                                                    
|
| | c) |  | Consolidated Statements of Operations for the Years Ended June 30,
2002, 2001, and 2000                     
|
| | d) |  | Consolidated Statements of Changes in Stockholders Equity for
the Years Ended June 30, 2002, 2001, and 2000
|
| | e) |  | Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2001, and 2000                     
|
| | f) |  | Notes to Consolidated Financial Statements                                                                  

(2)  Financial Statement Schedules:



| | a) |  | Schedule II  Valuation and Qualifying Accounts for the Years
Ended June 30, 2002, 2001, and 2000
| | -- |  | -------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules, except those listed above, are omitted because
they are not applicable or the required information is shown        in the
consolidated financial statements or notes thereto.

(3)  Exhibits:



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | The exhibits to this Form 10-K are set forth in a separate Exhibit
Index which is included on pages 18 through 21 of this report.

(B)  Reports on Form 8-K

Form 8-K, which reported the termination of the Companys audit
relationship with Arthur Andersen LLP and the appointment of Grant Thornton LLP
as the Companys auditors filed on June 14, 2002.

17



---



##### 



Exhibit Index

|        |  |                                                                                                                                                                              |  |                       
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------
|Item No |  | Description                                                                                                                                                                  |  | Page Number/
Reference
|        |  |                                                                                                                                                                              |  |                       
|3.1     |  | Restated Articles of Incorporation of Versar, Inc. filed as an
exhibit to the Registrants Registration Statement on Form S-1 effective November 20, 1986
(File No. 33-9391) |  | (A)                   
|       
|3.2     |  | Bylaws of Versar, Inc.                                                                                                                                                       |  | (A)                   
|       
|4       |  | Specimen of Certificate of Common Stock of Versar, Inc.                                                                                                                      |  | (A)                   
|       
|10.10   |  | Incentive Stock Option Plan *                                                                                                                                                |  | (B)                   
|       
|10.11   |  | Executive Tax and Investment Counseling Program                                                                                                                              |  | (A)                   
|       
|10.12   |  | Nonqualified Stock Option Plan *                                                                                                                                             |  | (B)                   
|       
|10.13   |  | Employee Incentive Plan, as amended *                                                                                                                                        |  | (E)                   
|       
|10.17   |  | Deferred Compensation Agreements dated as follows:                                                                                                                           |  |                       
|        |  | July 1, 1988 between the Registrant and Gayaneh Contos                                                                                                                       |  | (F)                   
|       
|10.26   |  | Executive Medical Plan dated August 21, 1991, effective July 1, 1991                                                                                                         |  | (G)                   
|       
|10.40   |  | Option Exchange Offer dated April 16, 1991 between the Registrant and
participants of the Incentive Stock Option Plan and the Nonqualified
Stock Option Plan                 |  | (G)                   
|       
|10.41   |  | Securities and Exchange Commission response dated September 23, 1991
to certain question regarding the Registrants Option Exchange Offer                                    |  | (G)                   
|       
|10.52   |  | Incentive Stock Option Plan of Versar, Inc. dated December 1, 1992 *                                                                                                         |  | (I)                   
|       
|10.65   |  | Information Statement for the Distribution to Shareholders of Versar, Inc., the
Outstanding Shares of its Wholly-owned Subsidiary, Sarnia Corporation,
dated June 30, 1994   |  | (J)                   
|       
|10.66   |  | Agreement dated January 13, 1994 between the Registrant and the Department of
the Air Force                                                                                  |  | (K)                   
|       
|10.83   |  | Agreement and Plan of Merger dated July 29, 1997 between the Registrant
and Science Management Corporation                                                                   |  | (O)                   
|       
|10.84   |  | Acquisition Promissory Note, dated April 30, 1997, between the Registrant and
NationsBank, N.A                                                                               |  | (P)                   

18



---



##### 



|         |  |                                                                                                                  |  |             
|-------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ------------
|         |  |                                                                                                                  |  | Page Number/
|Item No. |  | Description                                                                                                      |  | Reference   
|         |  |                                                                                                                  |  |             
|        
|10.85    |  | Revolving Promissory Note, dated March 27, 1997, between the
Registrant and NationsBank, N.A                     |  | (P)         
|        
|10.86    |  | Financing and Security Agreement, dated March 27, 1997, between the Registrant and
NationsBank, N.A              |  | (P)         
|        
|10.87    |  | Amendment to Financing and Security Agreement, dated April 30, 1997, between the
Registrant and NationsBank, N.A |  | (P)         
|        
|10.88    |  | The Greenwood Partnership Asset Acquisition Agreement                                                            |  | (Q)         
|        
|10.89    |  | Modification to NationsBank loan to increase to $5M                                                              |  | (Q)         
|        
|10.90    |  | AFCEE RAC Contract                                                                                               |  | (Q)         
|        
|10.93    |  | Change of Control Severance Agreement dated January 30, 1999 between the
Registrant and Lawrence W. Sinnott*     |  | (R)         
|        
|10.94    |  | Change of Control Severance Agreement dated January 30, 1999 between the
Registrant and James C. Dobbs*          |  | (R)         
|        
|10.95    |  | Financing and Security Agreement, dated May 24, 1999, between the Registrant and
NationsBank, N.A                |  | (R)         
|        
|10.96    |  | Revolving Promissory Note, dated May 24, 1999, between the Registrant and
NationsBank, N.A                       |  | (R)         
|        
|10.97    |  | Revolving Promissory Note, dated December 20, 1999, between the Registrant and
Bank of America, N.A              |  | (T)         
|        
|10.98    |  | Employment Agreement dated November 1, 1999 between Registrant and
Benjamin M. Rawls*                            |  | (T)         
|        
|10.99    |  | Employment Agreement dated November 1, 1999 between Registrant and
Theodore M. Prociv*                           |  | (T)         
|        
|10.100   |  | AFCEE ENRAC Contract                                                                                             |  | (U)         
|        
|10.101   |  | Revolving Promissory Note, dated August 31, 2001 between Registrant and
Bank of America, N.A                     |  | (U)         
|        
|10.102   |  | Financing and Security Agreement, dated April 22, 2002 between Registrant and
Bank of America, N.A               |  | 26          

19



---



##### 



|         |  |                                                                                                                                                                                                                                    |  |              |     | 
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --- | 
|         |  |                                                                                                                                                                                                                                    |  | Page Number/
|Item No. |  | Description                                                                                                                                                                                                                        |  | Reference   
|         |  |                                                                                                                                                                                                                                    |  |             
|        
|10.103   |  | Securities Purchase Agreement, dated June 14, 2002 between Registrant and
Radyr Investments Limited                                                                                                                                |  |              | 105
|        
|22       |  | Subsidiaries of the Registrant                                                                                                                                                                                                     |  |              | (Q)
|        
|99.1     |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, for the period ending June 30, 2002 by Theodore
M. Prociv, CEO and President                               |  |              | 127
|        
|99.2     |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, for the period ending June 30, 2002 by Lawrence
W. Sinnott, Sr. Vice President and Chief Financial Officer |  |              | 128



---

|* |  | Indicates management contract or compensatory plan or arrangement
|- |  | -----------------------------------------------------------------



|(A) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form S-1 Registration Statement (Registration Statement)
effective November 20, 1986 (File No. 33-9391).                            
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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,
1987 (FY 1987 Form 10-K) filed with the Commission on September 28,
1987.
|   
|(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,
1988 (FY 1988 Form 10-K) filed with the Commission on September 28,
1988.
|   
|(D) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for the Fiscal Year Ended June 30,
1989 (FY 1989 Form 10-K) filed with the Commission on September 28,
1989.
|   
|(E) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for the Fiscal Year Ended June 30,
1990 (FY 1990 Form 10-K) filed with the Commission on September 28,
1990.
|   
|(F) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-Q for the quarter ended September 30, 1989 (1st
Quarter FY 1990 Form 10-Q).                                                 
|   
|(G) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for the Fiscal Year Ended June 30,
1991 (FY 1991 Form 10-K) filed with the Commission on October 15, 1991.  
|   
|(H) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1992
(FY 1992 Form 10-K) filed with the Commission on September 28, 1992.    

20



---



##### 





|(I) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1993
(FY 1993 Form 10-K) filed with the Commission on September 22, 1993.    
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(J) |  | Incorporated by reference Sarnia Corporation Information Statement for
distribution to shareholders of Versar, Inc. of the outstanding shares of
its wholly-owned subsidiary, Sarnia Corporation, dated June 30, 1994.
|   
|(K) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1994
(FY 1994 Form 10-K) filed with the Commission on September 27, 1994.    
|   
|(L) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K/A Annual Report for Fiscal Year Ended June 30, 1994
(FY 1994 Form 10-K/A) filed with the Commission on May 31, 1995.      
|   
|(M) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1995
(FY 1995 Form 10-K) filed with the Commission on September 28, 1995.    
|   
|(N) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1996
(FY 1996 Form 10-K) filed with the Commission on September 24, 1996.    
|   
|(O) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form S-4 registration number 333-33167.                                                                                               
|   
|(P) |  | Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1997
(FY 1997 Form 10-K) filed with the Commission on September 29, 1997.        
|   
|(Q) |  | Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1998
(FY1998 Form 10-K) filed with the Commission on September 28, 1998.         
|   
|(R) |  | Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1999
(FY1999 Form 10-K) filed with the Commission on September 17, 1999.         
|   
|(S) |  | Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K/A Annual Report for Fiscal Year Ended June 30, 1999
(FY1999 Form 10K/A) filed with the Commission on September 1, 2000.       
|   
|(T) |  | Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 2000
(FY2000 Form 10-K) filed with the Commission on September 26, 2000.         
|   
|(U) |  | Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 2001
(FY2001 Form 10-K) filed with the Commission on September 28, 2001.         

21



---



##### 



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.

|                          |  |                                                              | 
|------------------------- |  | ------------------------------------------------------------ | 
|                          |  | VERSAR, INC.(Registrant)                                     | 
|                         
|Date:  September 16, 2002 |  | /S/ Benjamin M. RawlsBenjamin M. Rawls
Chairman and Director | 

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/ Benjamin M. RawlsBenjamin M. Rawls       |  | Chairman and Director                                                                       |  | September 16, 2002
|                                            
|/S/ Theodore M. ProcivTheodore M. Prociv     |  | Chief Executive Officer, President, and
Director                                            |  | September 16, 2002
|                                            
|/S/ Robert L. DurfeeRobert L. Durfee         |  | Executive Vice President and
Director                                                       |  | September 16, 2002
|                                            
|/S/ Lawrence W. SinnottLawrence W. Sinnott   |  | Senior Vice President, Chief Financial
Officer, Treasurer, and
Principal Accounting Officer |  | September 16, 2002
|                                            
|/S/ Michael Markels, Jr.Michael Markels, Jr. |  | Chairman Emeritus and Director                                                              |  | September 16, 2002
|                                            
|/S/ Thomas J. ShieldsThomas J. Shields       |  | Director                                                                                    |  | September 16, 2002
|                                            
|/S/ James L. GallagherJames L. Gallagher     |  | Director                                                                                    |  | September 16, 2002

22



---



##### 



|                                           |  |          |  |                   
|------------------------------------------ |  | -------- |  | ------------------
|                                          
|/S/ Fernando V. GalavizFernando V. Galaviz |  | Director |  | September 16, 2002
|                                          
|/S/ Amoretta M. HoeberAmoretta M. Hoeber   |  | Director |  | September 16, 2002
|                                          
|/S/ Paul J. HoeperPaul J. Hoeper           |  | Director |  | September 16, 2002
|                                          
|/S/ Amir MetryAmir Metry                   |  | Director |  | September 16, 2002

23



---



##### 



Section 302 Certification

I, Theodore M. Prociv, certify that:

1.     I have reviewed this annual report on Form 10-K of Versar, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.

|                                                            | 
|----------------------------------------------------------- | 
|/S/  Theodore M. ProcivTheodore M. Prociv
CEO and President | 

September 6, 2002

24



---



##### 



Section 302 Certification

I, Lawrence W. Sinnott, certify that:

1.     I have reviewed this annual report on Form 10-K of Versar, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.

|                                                                         | 
|------------------------------------------------------------------------ | 
|/S/ Lawrence W. SinnottSenior Vice President and Chief Financial Officer | 

September 6, 2002

25



---



##### 



Report of Independent Certified Public Accountants

Board of Directors
Versar, Inc.

We have audited the accompanying consolidated balance sheet of Versar, Inc. (a
Delaware corporation) and subsidiaries as of June 30, 2002, and the related
consolidated statements of operations, changes in stockholders equity and cash
flows for the year then ended. 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 audit. The consolidated
financial statements of Versar, Inc. and subsidiaries as of June 30, 2001, and
for the years ended June 30, 2001 and 2000, were audited by other auditors
whose report dated September 7, 2001, expressed an unqualified opinion on those
statements.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated 2002 financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Versar, Inc. and subsidiaries as of June 30, 2002, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States
of America.

We have also audited Schedule II for the year ended June 30, 2002. In our
opinion, this schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information therein.

| |  |  |  |                                           
| |  |  |  | ------------------------------------------
| |  |  |  | /S/ Grant Thornton, LLPGrant Thornton, LLP

Vienna, Virginia
September 6, 2002

F-1



---



##### 



Report of Independent Public Accountants

To the Board of Directors and Stockholders of Versar, Inc.:

We have audited the accompanying consolidated balance sheets of Versar, Inc. (a
Delaware corporation) and its subsidiaries as of June 30, 2001 and 2000, and
the related consolidated statements of operations, changes in stockholders
equity, and cash flows for the three years ended June 30, 2001. 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 auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Versar, Inc. and
its subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for the three years ended June 30, 2001, in
conformity with accounting principles generally accepted in the United States.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II, as listed in Item 14 of the Form
10-K, is presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audit of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole and the financial data required to be set forth therein.

| |  |  |  |                                           
| |  |  |  | ------------------------------------------
| |  |  |  | /S/ Arthur Andersen LLPArthur Andersen LLP

Vienna, Virginia
September 7, 2001

This Report of Independent Certified Public Accountants is a copy of a
previously issued Arthur Andersen LLP (Andersen) report and has not been
reissued by Andersen. The inclusion of this previously issued Andersen report
is pursuant to the Temporary Final Rule and Final Rule: Requirements for
Arthur Andersen LLP Auditing Clients, issued by the U.S. Securities and
Exchange Commission in March 2002. Note that this previously issued Andersen
report includes references to certain fiscal years, which are not required to
be presented in the accompanying consolidated financial statements as of and
for the fiscal years ended March 31, 2002.

F-2



---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)

|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |       |         |        |        | 
|------------------------------------ | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------ | ------- | -------- | ------ | ----- | ------- | ------ | ------ | 
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         | June 30,
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |         
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         | 2002     |        | 2001 
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|ASSETS                               |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|                                     | Current assets                              |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |       |        
|                                     |                                             |                                                                                                                                                                                                                                          | Cash and cash equivalents                 |                                            | $       | 113      |        |       | $       | 58     |       
|                                     |                                             |                                                                                                                                                                                                                                          | Accounts receivable, net                  |                                            |         | 14,520   |        |       |         | 13,518 |       
|                                     |                                             |                                                                                                                                                                                                                                          | Prepaid expenses and other current assets |                                            |         | 1,038    |        |       |         | 1,269  |       
|                                     |                                             |                                                                                                                                                                                                                                          | Deferred income taxes                     |                                            |         | 419      |        |       |         | 449    |       
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |                                           | Total current assets                       |         |          | 16,090 |       |         |        | 15,294 | 
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |       |         |        |        | 
|                                     | Property and equipment, net                 |                                                                                                                                                                                                                                          |                                           | 2,474                                      |         |          |        | 2,515 |        
|                                     | Deferred income taxes                       |                                                                                                                                                                                                                                          |                                           | 1,280                                      |         |          |        | 1,251 |        
|                                     | Goodwill                                    |                                                                                                                                                                                                                                          |                                           | 776                                        |         |          |        | 849   |        
|                                     | Other assets                                |                                                                                                                                                                                                                                          |                                           | 653                                        |         |          |        | 208   |        
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |                                           | Total assets                               |         | $        | 21,273 |       |         | $      | 20,117 | 
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|LIABILITIES AND STOCKHOLDERS EQUITY |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|                                     | Current liabilities                         |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |       |        
|                                     |                                             |                                                                                                                                                                                                                                          | Accounts payable                          |                                            | $       | 4,426    |        |       | $       | 3,658  |       
|                                     |                                             |                                                                                                                                                                                                                                          | Current portion of long-term debt         |                                            |         | 205      |        |       |         | 170    |       
|                                     |                                             |                                                                                                                                                                                                                                          | Accrual Income Taxes                      |                                            |         | 57       |        |       |         |       |       
|                                     |                                             |                                                                                                                                                                                                                                          | Billing in excess of revenue              |                                            |         | 1,000    |        |       |         |       |       
|                                     |                                             |                                                                                                                                                                                                                                          | Accrued salaries and vacation             |                                            |         | 2,195    |        |       |         | 2,346  |       
|                                     |                                             |                                                                                                                                                                                                                                          | Other liabilities                         |                                            |         | 1,607    |        |       |         | 2,047  |       
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |                                           | Total current liabilities                  |         |          | 9,490  |       |         |        | 8,221  | 
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |       |         |        |        | 
|                                     | Bank line of credit                         |                                                                                                                                                                                                                                          |                                           | 1,859                                      |         |          |        | 3,763 |        
|                                     | Other long-term liabilities                 |                                                                                                                                                                                                                                          |                                           | 1,239                                      |         |          |        | 1,292 |        
|                                     | Liabilities of discontinued operations, net |                                                                                                                                                                                                                                          |                                           | 361                                        |         |          |        | 528   |        
|                                     | Reserve on guarantee of real estate debt    |                                                                                                                                                                                                                                          |                                           |                                           |         |          |        | 300   |        
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |                                           | Total liabilities                          |         |          | 12,949 |       |         |        | 14,104 | 
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|                                     | Commitments and contingencies (Note K)      |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |       |        
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |       |         |        |        | 
|                                     | Stockholders equity                        |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |       |        
|                                     |                                             | Common stock, $.01 par value; 30,000,000 shares
authorized; 7,226,546 shares and 6,475,052
shares issued June 30, 2002 and 2001,
respectively; 7,213,896 shares and 6,437,814
shares outstanding at June 30, 2002 and 2001,
respectively |                                           |                                            | 72      |          |        |       | 65      |       
|                                     |                                             | Capital in excess of par value                                                                                                                                                                                                           |                                           |                                            | 20,270  |          |        |       | 18,359  |       
|                                     |                                             | Accumulated deficit                                                                                                                                                                                                                      |                                           |                                            | (11,959 | )        |        |       | (12,338 | )     
|                                     |                                             | Treasury stock                                                                                                                                                                                                                           |                                           |                                            | (59     | )        |        |       | (73     | )     
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |                                           | Total stockholders equity                 |         |          | 8,324  |       |         |        | 6,013  | 
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |                                           | Total liabilities and stockholders equity |         | $        | 21,273 |       |         | $      | 20,117 | 
|                                     |                                             |                                                                                                                                                                                                                                          |                                           |                                            |         |          |        |      

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

F-3



---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)

|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |        |  
|------------------------------------------------------------------------ | -------------------------------------------- | - | -------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | -
|                                                                         |                                              |   | Years Ended June 30,
|                                                                         |                                              |   |                     
|                                                                         |                                              |   | 2002                 |        | 2001 |   | 2000  
|                                                                         |                                              |   |                      |        |      |   |       
|GROSS REVENUE                                                            |                                              | $ | 67,988               |        |      | $ | 65,816 |        |  | $ | 56,149 |       
|                                                                         | Purchased services and materials, at cost    |   |                      | 29,799 |      |   |        | 26,335 |  |   |        | 18,362 |  
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|NET SERVICE REVENUE                                                      |                                              |   | 38,189               |        |      |   | 39,481 |        |  |   | 37,787 |       
|                                                                         | Direct costs of services and overhead        |   |                      | 31,254 |      |   |        | 32,071 |  |   |        | 30,742 |  
|                                                                         | Selling, general and administrative expenses |   |                      | 6,316  |      |   |        | 6,442  |  |   |        | 6,317  |  
|                                                                         | Non-recurring charge                         |   |                      |       |      |   |        | 1,320  |  |   |        |       |  
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|OPERATING INCOME (LOSS)                                                  |                                              |   | 619                  |        |      |   | (352   | )      |  |   | 728    |       
|OTHER EXPENSE                                                            |                                              |   |                      |        |      |   |        |        |  |   |        |       
|                                                                         | Interest expense                             |   |                      | 203    |      |   |        | 438    |  |   |        | 526    |  
|                                                                         | Income tax expense (benefit)                 |   |                      | 257    |      |   |        | 240    |  |   |        | (138   | )
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|INCOME (LOSS) FROM CONTINUING
OPERATIONS                                 |                                              |   | 159                  |        |      |   | (1,030 | )      |  |   | 340    |       
|(LOSS) INCOME FROM DISCONTINUED
OPERATIONS (net of tax)                  |                                              |   | (80                  | )      |      |   | 243    |        |  |   |       |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|NET INCOME (LOSS)                                                        |                                              | $ | 79                   |        |      | $ | (787   | )      |  | $ | 340    |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS  BASIC
AND DILUTED   |                                              | $ | .02                  |        |      | $ | (.16   | )      |  | $ | .05    |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|(LOSS) INCOME PER SHARE FROM DISCONTINUED
OPERATIONS  BASIC AND DILUTED |                                              | $ | (.01                 | )      |      | $ | .04    |        |  | $ |       |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|NET INCOME (LOSS) PER SHARE  BASIC
AND DILUTED                          |                                              | $ | .01                  |        |      | $ | (.12   | )      |  | $ | .05    |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING  BASIC                    |                                              |   | 6,709                |        |      |   | 6,470  |        |  |   | 6,400  |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING  DILUTED                  |                                              |   | 6,998                |        |      |   | 6,470  |        |  |   | 6,487  |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       

The accompanying notes are an integral part of these consolidated inancial statements.

F-4



---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
(In thousands)

|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |       |  
|---------------------------------------------------- |  | ----------------------------------------- | ----- | ------ |  | --------- | -- | ---------- |  | -------- | ------ | -------- |  | - | ------- | ------ |  | - | ---- | - |  | ----- | ----- | -
|                                                     |  | Years Ended June 30, 2002, 2001, and 2000
|                                                     |  |                                          
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  | Total
|                                                     |  | Number                                    |       |        |  |           |    | Capital in |  | Accumu-  |        |          |  |   |         | Stock-
|                                                     |  | of                                        |       | Common |  | Excess of |    | lated      |  | Treasury |        | holders'
|                                                     |  | Shares                                    |       | Stock  |  | Par Value |    | Deficit    |  | Stock    |        | Equity  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |         
|Balance, June 30, 1999                               |  |                                           | 6,337 |        |  | $         | 63 |            |  | $        | 18,051 |          |  | $ | (12,491 | )      |  | $ |     |   |  | $     | 5,623 |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |       |  
|Exercise of stock options                            |  |                                           | 5     |        |  |           |   |            |  |          | 9      |          |  |   |        |        |  |   |     |   |  |       | 9     |  
|Common stock issued to ESSOP                         |  |                                           | 69    |        |  |           | 1  |            |  |          | 163    |          |  |   |        |        |  |   |     |   |  |       | 164   |  
|Treasury stock issued to ESSOP                       |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | 100  |   |  |       | 100   |  
|Purchase of Treasury stock                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | (134 | ) |  |       | (134  | )
|Decrease in reserve on guarantee of
real estate debt |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 300     |        |  |   |     |   |  |       | 300   |  
|Net income                                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 340     |        |  |   |     |   |  |       | 340   |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |       |  
|Balance, June 30, 2000                               |  |                                           | 6,411 |        |  |           | 64 |            |  |          | 18,223 |          |  |   | (11,851 | )      |  |   | (34  | ) |  |       | 6,402 |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |       |  
|Common stock issued to ESSOP                         |  |                                           | 64    |        |  |           | 1  |            |  |          | 136    |          |  |   |        |        |  |   |     |   |  |       | 137   |  
|Treasury stock issued to ESSOP                       |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | 916  |   |  |       | 916   |  
|Purchase of Treasury stock                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | (955 | ) |  |       | (955  | )
|Decrease in reserve on guarantee of
real estate debt |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 300     |        |  |   |     |   |  |       | 300   |  
|Net loss                                             |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | (787    | )      |  |   |     |   |  |       | (787  | )
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |       |  
|Balance, June 30, 2001                               |  |                                           | 6,475 |        |  |           | 65 |            |  |          | 18,359 |          |  |   | (12,338 | )      |  |   | (73  | ) |  |       | 6,013 |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |       |  
|Exercise of stock options                            |  |                                           | 392   |        |  |           | 4  |            |  |          | 1,019  |          |  |   |        |        |  |   |     |   |  |       | 1,023 |  
|Treasury stock issued to ESSOP                       |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | 250  |   |  |       | 250   |  
|Purchase of Treasury stock                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | (236 | ) |  |       | (236  | )
|Decrease in reserve on guarantee of
real estate debt |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 300     |        |  |   |     |   |  |       | 300   |  
|Common stock issued to private
placement             |  |                                           | 359   |        |  |           | 3  |            |  |          | 849    |          |  |   |        |        |  |   |     |   |  |       | 852   |  
|Tax benefit from exercise of stock
options           |  |                                           |      |        |  |           |   |            |  |          | 43     |          |  |   |        |        |  |   |     |   |  |       | 43    |  
|Net income                                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 79      |        |  |   |     |   |  |       | 79    |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |       |  
|Balance, June 30, 2002                               |  |                                           | 7,226 |        |  | $         | 72 |            |  | $        | 20,270 |          |  | $ | (11,959 | )      |  | $ | (59  | ) |  | $     | 8,324 |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |       |  

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

F-5



---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)

|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |   |        |       |        |  
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------ | ------ | -------------------- | ----- | ---- | ---- | ----- | ------ | - | ------ | ----- | ------ | -
|                                                       |  |                                                                                          |                                                              |                                            |        | Years Ended June 30,
|                                                       |  |                                                                                          |                                                              |                                            |        |                     
|                                                       |  |                                                                                          |                                                              |                                            |        | 2002                 |       | 2001 |      | 2000 
|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |      
|Cash flows from operating activities                   |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|                                                       |  | Net income (loss)                                                                        |                                                              | $                                          | 79     |                      |       | $    | (787 | )     |        | $ | 340    |      
|                                                       |  | Adjustments to reconcile net income (loss) to
net cash provided by continuing operations |                                                              |                                            |        |                      |       |      |      |       |        |   |        |      
|                                                       |  |                                                                                          | Depreciation and amortization                                |                                            |        | 766                  |       |      |      | 751   |        |   |        | 748   |       
|                                                       |  |                                                                                          | Loss on sale of property and
equipment                       |                                            |        | 72                   |       |      |      |      |        |   |        | 1     |       
|                                                       |  |                                                                                          | Provision for doubtful accounts receivable                   |                                            |        | 732                  |       |      |      | 179   |        |   |        | 231   |       
|                                                       |  |                                                                                          | Stock issued to ESSOP                                        |                                            |        | 250                  |       |      |      | 1,053 |        |   |        | 264   |       
|                                                       |  |                                                                                          | Deferred tax expense (benefit)                               |                                            |        | 1                    |       |      |      | 317   |        |   |        | (138  | )     
|                                                       |  | Changes in assets and liabilities                                                        |                                                              |                                            |        |                      |       |      |      |       |        |   |        |      
|                                                       |  |                                                                                          | (Increase) decrease in accounts receivable                   |                                            |        | (1,734               | )     |      |      | 223   |        |   |        | 1,788 |       
|                                                       |  |                                                                                          | (Increase) decrease in prepaid expenses
and other assets     |                                            |        | (171                 | )     |      |      | 535   |        |   |        | (680  | )     
|                                                       |  |                                                                                          | Increase (decrease) in accounts payable                      |                                            |        | 768                  |       |      |      | 29    |        |   |        | (661  | )     
|                                                       |  |                                                                                          | (Decrease) increase in accrued salaries and
vacation         |                                            |        | (151                 | )     |      |      | (182  | )      |   |        | 348   |       
|                                                       |  |                                                                                          | Increase (decrease) in other liabilities                     |                                            |        | 564                  |       |      |      | 225   |        |   |        | (432  | )     
|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|                                                       |  |                                                                                          |                                                              | Net cash provided by continuing
operations |        |                      | 1,176 |      |      |       | 2,343  |   |        |       | 1,809  |  
|                                                       |  |                                                                                          | Changes in net assets/liabilities of discontinued
operations |                                            |        | (167                 | )     |      |      | (393  | )      |   |        | 16    |       
|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|                                                       |  |                                                                                          |                                                              | Net cash provided by operating activities  |        |                      | 1,009 |      |      |       | 1,950  |   |        |       | 1,825  |  
|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|Cash flows from investing activities                   |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|                                                       |  | Purchases of property and equipment                                                      |                                                              |                                            | (724   | )                    |       |      | (732 | )     |        |   | (653   | )    
|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|Cash flows from financing activities                   |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|                                                       |  | Net (payment) borrowing on bank line of credit                                           |                                                              |                                            | (1,904 | )                    |       |      | 50   |       |        |   | (395   | )    
|                                                       |  | Principal borrowing (payments) on long-term debt                                         |                                                              |                                            | 35     |                      |       |      | (310 | )     |        |   | (1,135 | )    
|                                                       |  | Borrowings on long-term debt                                                             |                                                              |                                            |       |                      |       |      |     |       |        |   | 480    |      
|                                                       |  | Purchase of treasury stock                                                               |                                                              |                                            | (236   | )                    |       |      | (955 | )     |        |   | (134   | )    
|                                                       |  | Proceeds from issuance of common stock                                                   |                                                              |                                            | 1,023  |                      |       |      |     |       |        |   | 9      |      
|                                                       |  | Net proceeds from private placement                                                      |                                                              |                                            | 852    |                      |       |      |     |       |        |   |       |      
|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|                                                       |  |                                                                                          |                                                              | Net cash used in financing
activities      |        |                      | (230  | )    |      |       | (1,215 | ) |        |       | (1,175 | )
|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|Net increase (decrease) in cash and cash equivalents   |  |                                                                                          | 55                                                           |                                            |        |                      | 3     |      |      |       | (3     | )
|Cash and cash equivalents at the beginning of
the year |  |                                                                                          | 58                                                           |                                            |        |                      | 55    |      |      |       | 58     |  
|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  
|Cash and cash equivalents at the end of
the year       |  | $                                                                                        | 113                                                          |                                            |        | $                    | 58    |      |      | $     | 55     |  
|                                                       |  |                                                                                          |                                                              |                                            |        |                      |       |      |      |       |        |  

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

F-6



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation: The accompanying consolidated financial
statements include the accounts of Versar, Inc. and its wholly-owned
subsidiaries (Versar or the Company). All significant intercompany balances
and transactions have been eliminated in consolidation. The Companys major
business segments are environmental, defense, and architecture/engineering
services.

Accounting estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America 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. Actual results
may differ from those estimates.

Contract accounting: Contracts in process are stated at the lower of
actual cost incurred plus accrued profits or net estimated realizable value of
incurred costs, reduced by progress billings. The Company records income from
major fixed-price contracts, extending over more than one accounting period,
using the percentage-of-completion method. During performance of such
contracts, estimated final contract prices and costs are periodically reviewed
and revisions are made as required. The effects of these revisions are
included in the periods in which the revisions are made. On cost-plus-fee
contracts, revenue is recognized to the extent of costs incurred plus a
proportionate amount of fee earned, and on time-and-material contracts, revenue
is recognized to the extent of billable rates times hours delivered plus
material and other reimbursable costs incurred. Losses on contracts are
recognized when they become known. Disputes arise in the normal course of the
Companys business on projects where the Company is contesting with customers
for collection of funds because of events such as delays, changes in contract
specifications and questions of cost allowability or collectibility. Such
disputes, whether claims or unapproved change orders in the process of
negotiation, are recorded at the lesser of their estimated net realizable value
or actual costs incurred and only when realization is probable and can be
reliably estimated. Claims against the Company are recognized where loss is
considered probable and reasonably determinable in amount. It is the Companys
policy to provide reserves for the collectibility of accounts receivable when
it is determined that it is probable that the Company will not collect all
amounts due and the amount of reserve requirements can be reasonably estimated.

Depreciation and amortization: Depreciation and amortization are computed
on a straight-line basis over the estimated useful lives of the assets.

Goodwill:On January 30, 1998, Versar completed the acquisition of The
Greenwood Partnership, P.C. subsequently renamed (Versar Global Solutions, Inc.
or VGSI). The transaction was accounted for as a purchase. Goodwill recorded
as part of the transaction was approximately $1.1 million. Versar is
amortizing the goodwill related to the acquisition over 15 years, which was
determined to be reasonable based on the mature business of VGSI.

Direct costs of services and overhead:These expenses represent the cost
to Versar of direct and overhead staff, including recoverable overhead costs
and unallowable costs that are directly attributable to contracts.

Warranty estimates:The Company has certain warranty obligations under
the sale of personal protective equipment. As such, the Company accrues for
such costs based upon volume outstanding, historical performance and time
remaining under the warranty. Such costs are either increased or decreased
based upon the above factors and current year performance.

F-7



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Income taxes:The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of certain assets and liabilities. A
valuation allowance against deferred tax assets has been established until such
assets are expected to be realized in future periods.

Discontinued operations:In fiscal year 1998, the Company discontinued a
significant portion of the operations of Science Management Corporation (SMC).
As such, the Company disposed of portions of SMC and wound down the remaining
assets and liabilities. The remaining liability of June 30, 2002 of $361,000
is primarily reserved to wind down the remaining benefit plans of SMC. During
the fiscal year the liability was increased by $130,000 due to the requirement
of an additional accrual.

Net income (loss) per share: The Company presents basic earnings per
share and diluted earnings per share. Diluted earnings per share assumes
exercise of dilutive stock options using the treasury stock method.

The following is a reconciliation of weighted average outstanding shares
for basic net income per share to diluted net income per share, in thousands:

|                                              |           |  |                      |       |      |  |      |       |  |  |    |       | 
|--------------------------------------------- | --------- |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  | -- | ----- | 
|                                              |           |  | Years Ended June 30,
|                                              |           |  |                     
|                                              |           |  | 2002                 |       | 2001 |  | 2000
|                                              |           |  |                      |       |      |  |     
|                                              |           |  | (In thousands)      
|Weighted average number of shares outstanding |           |  |                      |       |      |  |      |       |  |  |    |      
|                                              | - basic   |  |                      | 6,709 |      |  |      | 6,470 |  |  |    | 6,400 | 
|Effect of assumed exercise of options         |           |  | 289                  |       |      |  |     |       |  |  | 87 |      
|                                              |           |  |                      |       |      |  |      |       |  |  |    |      
|Weighted average number of shares outstanding |           |  |                      |       |      |  |      |       |  |  |    |      
|                                              | - diluted |  |                      | 6,998 |      |  |      | 6,470 |  |  |    | 6,487 | 
|                                              |           |  |                      |       |      |  |      |       |  |  |    |      

Recently issued accounting standards:In June 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. The
provisions of SFAS No. 142 eliminate amortization of goodwill and identifiable
intangible assets with indefinite lives and require an impairment assessment at
least annually by applying a fair-value based test. Versar was required to
adopt SFAS No. 142 on July 1, 2002. The Company anticipates an annual increase
to net income of $73,293, or $.01 per share, from the elimination of goodwill
amortization. Management does not expect the other provisions of the
statements to have a material impact on Versars results of operations or
financial condition.

In July 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. The new statement provides accounting standards for retirement
obligations associated with tangible long-lived assets, with adoption required
by January 1, 2003. SFAS 143 requires that the fair value of a liability for
an asset retirement obligation be recorded in the period in which it is
incurred. The associated asset retirement cost is capitalized as part of the
carrying amount of the long-lived asset. Over time the capitalized costs are
depreciated and the present value of the asset retirement liability increases,
resulting in a period expense. Upon retirement, a gain or loss will be
recorded if the cost

F-8



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

to settle the retirement obligation differs from the carrying amount. The
Company does not believe there will be a material effect from the adoption of
this standard.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets which addresses the accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144
supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of but retains many of the
fundamental provisions of SFAS 121. SFAS 144 also supercedes the accounting
and reporting provisions of Accounting Principles Board Opinion (APB) No. 30,
Reporting the Results of Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions for the disposal of a segment of a business. However,
SFAS 144 retains the requirements of APB 30 to report discontinued operations
separately and extends that reporting requirement to components of an entity
that has either been disposed of or is classified as held for sale. SFAS 144
excludes goodwill and other intangibles that are not amortized from its scope.
For assets to be held and used, SFAS 144 addresses how cash flows should be
estimated to test the recoverability of an asset or group of assets, clarifies
how an impairment loss should be allocated, and creates a requirement to use an
expected present value technique to estimate fair value if market prices are
not available and uncertainties exist about the timing and amount of future
cash flows. For long-lived assets to be disposed of by sale, SFAS 144
establishes the criteria to be met to qualify for this classification, defines
the timing of when the related sale must be consummated, eliminates the net
realizable value measurement approach for segments of a business and certain
acquired assets in a business combination, and defines costs to sell the asset.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001 and are generally to be applied prospectively. The Company
does not believe there will be a material effect from the adoption of this
standard.

In April 2002, the FASB issued FAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
FAS 145 rescinds FAS 4 and FAS 64, which addressed the accounting for gains and
losses from extinguishment of debt, rescinds FAS 44 which set forth
industry-specific transitional guidance, amends FAS 13 to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions
and makes technical corrections to certain existing pronouncements that are not
substantive in nature. The Company does not believe there will be a material
effect from the adoption of this standard.

In July 2002, the FASB issued FAS 146, Accounting for Exit or Disposal
Activities. FAS 146 addresses the recognition, measurement and reporting of
costs associated with exit and disposal activities, including restructuring
activities that are currently accounted for pursuant to the guidance set forth
in Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The scope of FAS 146
includes costs related to terminating a contract that is not a capital lease,
costs to consolidate facilities or relocate employees, and certain termination
benefits provided to employees who are involuntarily terminated. FAS146 is
effective for exit or disposal activities initiated after December 31, 2002.
The Company does not believe there will be a material effect from the adoption
of this standard.

Deferred compensation: The Company permitted employees to defer a portion
of their compensation, during fiscal years 1988 through 1991, to provide for
future annual payments, including interest. Interest is accrued on a monthly
basis at the amount stated in each employees agreement. The Company has
liabilities for deferred compensation of $998,000 and $1,027,000 at June 30,
2002 and 2001, respectively, included in other long-term
liabilities on the accompanying consolidated balance sheets. Versar purchased
key-man life insurance policies to fund the amounts due under the deferred
compensation agreements. The cash surrender value of the policies, net of
loans, is $326,000 and $363,000 at June 30, 2002 and 2001, respectively.

F-9



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Cash and cash equivalents: All investments with an original maturity of
three months or less are considered to be cash equivalents.

Classification:Certain prior year information has been reclassified to
conform to current year presentation.

NOTE B BUSINESS SEGMENTS

The Companys business segments are Environmental Services,
Architecture/Engineering and Defense Systems. The Environmental Services
segment provides a full range of services including remediation/corrective
actions, site investigations, remedial designs, and construction, operation and
maintenance of remedial systems. The Architecture/Engineering segment provides
engineering, design and construction management to industrial and commercial
facilities. The Defense Systems segment provides expertise in developing,
testing and providing personal protection equipment.

In April 2002, the A&E business segment sold its Utah operations to its
former employees. Buyer purchased the existing capital assets, on-going
contracts and remaining accounts receivables at book value. Buyer also assumed
the liabilities of certain leased office equipments. Versar retained all other
liabilities. The sale does not have a material impact on the business segment
or consolidated operations of the Company.

The Company evaluates and measures the performance of its business
segments based on net service revenue and operating income. As such, selling,
general and administrative expenses, interest and income taxes have not been
allocated to the Companys business segments.

Summary financial information for each of the Companys segments follows:

|                           |                                              |   |                      |        |      |   |                |        |   |   |        |        |  
|-------------------------- | -------------------------------------------- | - | -------------------- | ------ | ---- | - | -------------- | ------ | - | - | ------ | ------ | -
|                           |                                              |   | Years Ended June 30,
|                           |                                              |   |                     
|                           |                                              |   | 2002                 |        | 2001 |   | 2000          
|                           |                                              |   |                      |        |      |   |               
|                           |                                              |   |                      |        |      |   | (In thousands) |        |   |   |       
|NET SERVICE REVENUE        |                                              |   |                      |        |      |   |                |        |   |   |        |       
|                           | Environmental Services                       |   | $                    | 21,765 |      |   | $              | 24,083 |   |   | $      | 23,885 |  
|                           | Architecture/Engineering                     |   |                      | 8,889  |      |   |                | 8,921  |   |   |        | 8,202  |  
|                           | Defense Systems                              |   |                      | 7,535  |      |   |                | 6,477  |   |   |        | 5,700  |  
|                           |                                              |   |                      |        |      |   |                |        |   |   |        |       
|                           |                                              | $ | 38,189               |        |      | $ | 39,481         |        |   | $ | 37,787 |       
|                           |                                              |   |                      |        |      |   |                |        |   |   |        |       
|OPERATING INCOME/(LOSS)(A) |                                              |   |                      |        |      |   |                |        |   |   |        |       
|                           | Environmental Services                       |   | $                    | 3,783  |      |   | $              | 4,420  |   |   | $      | 4,571  |  
|                           | Architecture/Engineering                     |   |                      | 241    |      |   |                | 797    |   |   |        | 750    |  
|                           | Defense Systems                              |   |                      | 2,911  |      |   |                | 2,193  |   |   |        | 1,724  |  
|                           |                                              |   |                      |        |      |   |                |        |   |   |        |       
|                           |                                              | $ | 6,935                |        |      | $ | 7,410          |        |   | $ | 7,045  |       
|                           | Selling, general and administrative
expenses |   |                      | (6,316 | )    |   |                | (6,442 | ) |   |        | (6,317 | )
|                           | Non-recurring charge                         |   |                      |       |      |   |                | (1,320 | ) |   |        |       |  
|                           |                                              |   |                      |        |      |   |                |        |   |   |        |       
|                           |                                              | $ | 619                  |        |      | $ | (352           | )      |   | $ | 728    |       
|                           |                                              |   |                      |        |      |   |                |        |   |   |        |       

(A)Operating income is defined as net service revenue less direct costs of services and overhead.

F-10



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|                    |                          |   |                      |       |      |   |        |       | 
|------------------- | ------------------------ | - | -------------------- | ----- | ---- | - | ------ | ----- | 
|                    |                          |   | Years Ended June 30,
|                    |                          |   |                     
|                    |                          |   | 2002                 |       | 2001
|                    |                          |   |                      |       |     
|                    |                          |   | (In thousands)      
|IDENTIFIABLE ASSETS |                          |   |                      |       |      |   |        |      
|                    | Environmental Services   |   | $                    | 7,780 |      |   | $      | 8,008 | 
|                    | Architecture/Engineering |   |                      | 5,346 |      |   |        | 5,229 | 
|                    | Defense Systems          |   |                      | 3,565 |      |   |        | 3,011 | 
|                    | Corporate and Other      |   |                      | 4,582 |      |   |        | 3,869 | 
|                    |                          |   |                      |       |      |   |        |      
|                    |                          | $ | 21,273               |       |      | $ | 20,117 |      
|                    |                          |   |                      |       |      |   |        |      

NOTE C ACCOUNTS RECEIVABLE

|                                |                 |   |                |       |      |   |        |       | 
|------------------------------- | --------------- | - | -------------- | ----- | ---- | - | ------ | ----- | 
|                                |                 |   | June 30,      
|                                |                 |   |               
|                                |                 |   | 2002           |       | 2001
|                                |                 |   |                |       |     
|                                |                 |   | (In thousands)
|Billed receivables              |                 |   |                |       |      |   |        |      
|                                | U.S. Government |   | $              | 4,508 |      |   | $      | 2,737 | 
|                                | Commercial      |   |                | 5,037 |      |   |        | 5,185 | 
|Unbilled receivables            |                 |   |                |       |      |   |        |      
|                                | U.S. Government |   |                | 3,478 |      |   |        | 4,178 | 
|                                | Commercial      |   |                | 2,365 |      |   |        | 1,740 | 
|                                |                 |   |                |       |      |   |        |      
|                                |                 |   | 15,388         |       |      |   | 13,840 |      
|Allowance for doubtful accounts |                 |   | (868           | )     |      |   | (322   | )    
|                                |                 |   |                |       |      |   |        |      
|                                |                 | $ | 14,520         |       |      | $ | 13,518 |      
|                                |                 |   |                |       |      |   |        |      

Unbilled receivables represent amounts earned which have not yet been
billed and other amounts which can be invoiced upon completion of fixed-price
contracts, attainment of certain contract objectives, or completion of Federal
and state governments incurred cost audits. Management anticipates that the
June 30, 2002 unbilled receivables will be substantially billed and collected
in fiscal year 2003.

NOTE D PROPERTY AND EQUIPMENT

|                                          |  |               |    |          |       |                |        |      |       |   |        |  
|----------------------------------------- |  | ------------- | -- | -------- | ----- | -------------- | ------ | ---- | ----- | - | ------ | -
|                                          |  | Estimated     |    |          |       |                |        |      |       |  
|                                          |  | Useful Life   |    |          |       |                |        |      |       |  
|                                          |  | in Years      |    | June 30,
|                                          |  |               |    |         
|                                          |  |               |    |          |       | 2002           |        | 2001
|                                          |  |               |    |          |       |                |        |     
|                                          |  |               |    |          |       | (In thousands)
|Furniture and fixtures                    |  |               | 10 |          |       | $              | 773    |      |       | $ | 1,334  |  
|Equipment                                 |  | 3 to 10       |    |          | 5,114 |                |        |      | 6,000 |  
|Leasehold improvements                    |  | Life of lease |    |          | 1,793 |                |        |      | 1,926 |  
|                                          |  |               |    |          |       |                |        |      |       |   |        |  
|                                          |  |               |    |          |       |                | 7,680  |      |       |   | 9,260  |  
|Accumulated depreciation
and amortization |  |               |    |          |       |                | (5,206 | )    |       |   | (6,745 | )
|                                          |  |               |    |          |       |                |        |      |       |   |        |  
|                                          |  |               |    |          |       | $              | 2,474  |      |       | $ | 2,515  |  
|                                          |  |               |    |          |       |                |        |      |       |   |        |  

F-11



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Depreciation and amortization of property and equipment included as
expenses in the accompanying Consolidated Statements of Operations was
$692,000, $678,000, and $674,000 for the years ended June 30, 2002, 2001, and
2000, respectively.

Maintenance and repair expenses approximated $307,000, $303,000, and
$312,000 for the years ended June 30, 2002, 2001, and 2000, respectively.

NOTE E RELATED PARTY TRANSACTIONS

In February 2002, the Company advanced approximately $59,000 to an
employee of the Company. The advance does not bear interest and is scheduled
to be re-paid 18 months from the date of the advance. Such advance has been
included in pre-paid expenses and other current assets in the accompanying
consolidated financial statements.

NOTE F DEBT

|                                     |            |   |                |       |      |   |       |       | 
|------------------------------------ | ---------- | - | -------------- | ----- | ---- | - | ----- | ----- | 
|                                     |            |   | June 30,      
|                                     |            |   |               
|                                     |            |   | 2002           |       | 2001
|                                     |            |   |                |       |     
|                                     |            |   | (In thousands)
|Bank line of credit, Bank of America |            | $ | 1,859          |       |      | $ | 3,763 |      
|Other                                |            |   | 205            |       |      |   | 170   |      
|                                     |            |   |                |       |      |   |       |      
|                                     | Total debt |   |                | 2,064 |      |   |       | 3,933 | 
|Current portion of long-term debt    |            |   | (205           | )     |      |   | (170  | )    
|                                     |            |   |                |       |      |   |       |      
|Long-term debt                       |            | $ | 1,859          |       |      | $ | 3,763 |      
|                                     |            |   |                |       |      |   |       |      

Versars line of credit with the Bank of America (Bank) provides for
advances up to $6,500,000 based on qualifying receivables. Interest on the
borrowings is based on the lower of the 30 day London Interbank Offered Rate
(LIBOR) plus two hundred and seventy-five basis points (4.59% at June 28,
2002). A commitment fee of 1/4% on the unused portion of the line of credit is
also charged. The line is guaranteed by the Company and each subsidiary
individually and is collectively secured by accounts receivable, equipment and
intangibles, plus all insurance policies on property constituting collateral.
Unused borrowing availability at June 30, 2002 was approximately $4,641,000.
Advances under the line are due upon demand or on November 30, 2003. The loan
has certain covenants related to maintenance of financial ratios. In June
2002, the Company obtained a waiver of defaults of its financial covenants
under the line of credit as a result of the loss incurred in the fourth quarter
of fiscal year 2002. Management believes that cash generated by operations and
borrowings available from the Bank line of credit will be adequate to meet the
working capital needs for fiscal year 2003.

The revolving Bank line of credit amount based on average daily balances
outstanding for the years ended June 30, 2002, 2001, and 2000, approximated
$3,164,000, $3,973,000, and $4,180,000, respectively, and the weighted average
interest rates for such periods were 5.1%, 8.3%, and 8.5%, respectively. The
maximum amount outstanding approximated $5,400,000, $6,264,000, and $6,086,500
during fiscal years 2002, 2001, and 2000, respectively. Weighted average
interest rates are computed by relating the interest expense to the average
month-end balance.

Interest payments were $205,000, $418,000, and $414,000 for the fiscal
years ended June 30, 2002, 2001, and 2000, respectively.

F-12



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

At June 30, 2001, Versar guaranteed a term loan for Sarnia Corporation, a
former wholly-owned real estate subsidiary of Versar, that was spun-off to
Versar shareholders on June 30, 1994. As the loan was being repaid, Versars
reserve was added to Versars equity. In January 2002, the entire term loan
was repaid by Sarnia Corporation and Versars guarantee was removed and added
back into equity.

NOTE G NEW EQUITY

In June 2002, the Company sold 359,183 shares of its Common Stock at $2.78
per share to an institutional investor in a private placement. The Company
also issued warrants to purchase 359,183 shares of Common Stock, one-half with
an exercise price of $3.48 and the other half with an exercise price of $4.00.

The securities sold in the private placement were not registered under the
Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from the registration
requirements. The Company has agreed, however, to provide a shelf registration
statement registering resale of the shares sold and the shares underlying the
warrants with the Securities and Exchange Commission no later than September
15, 2002.

NOTE H STOCK OPTIONS

In November 1996, the stockholders approved the Versar 1996 Stock Option
Plan (the 1996 Plan) to provide employees and directors of the Company and
certain other persons an incentive to remain as employees of the Company and to
encourage superior performance. The Company also maintains the Versar 1992
Stock Option Plan (the 1992 Plan), and a Non-Qualified Stock Option Plan
adopted on April 30, 1987 (the 1987 Plan). Options have been granted from
these plans to purchase the Companys common stock.

Under the 1996 Stock Option Plan, options may be granted to key employees,
directors and service providers at the fair market value on the date of grant.
The vesting of each option will be determined by the Administrator of the Plan.
Each option expires on the earlier of the last day of the tenth year after the
date of grant or after expiration of a period designated in the plan.

Under the 1992 Plan, options may be granted to key employees at the fair
market value on the date of grant and become exercisable during the five-year
period from the date of the grant at 20% per year. Certain unexercised options
are cancelled on the tenth anniversary of the grant under the 1992 Plans.

F-13



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Options under the Stock Option 1982, 1992, and 1996 Plans are as follows:

|                             |           |  |          |                                        |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   |  | 
|---------------------------- | --------- |  | -------- | -------------------------------------- | ------------ | - | ----- | ----- |  | -- | -- | - | ----- | ----- |  | - | ----- | ------ | - |  | 
|                             |           |  | Optioned |                                        | Option Price |   |       |       | 
|                             |           |  | Shares   |                                        | Per Share    |   | Total
|                             |           |  |          |                                        |              |   |      
|                             |           |  |          | (In thousands, except per share price) |             
|Outstanding at June 30, 1999 |           |  | 1,405    |                                        |              | $ | 1.750 |       |  | to |    | $ | 5.375 |       |  | $ | 4,272 |       
|                             | Granted   |  |          | 271                                    |              |   |       | 2.375 |  |    | to |   |       | 2.813 |  |   |       | 650    |  
|                             | Exercised |  |          | (5                                     | )            |   |       | 1.750 |  |    | to |   |       | 1.750 |  |   |       | (9     | )
|                             | Cancelled |  |          | (80                                    | )            |   |       | 1.750 |  |    | to |   |       | 4.500 |  |   |       | (234   | )
|                             |           |  |          |                                        |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   | 
|Outstanding at June 30, 2000 |           |  | 1,591    |                                        |              | $ | 1.750 |       |  | to |    | $ | 5.375 |       |  | $ | 4,679 |       
|                             | Granted   |  |          | 35                                     |              |   |       | 1.938 |  |    | to |   |       | 2.060 |  |   |       | 69     |  
|                             | Cancelled |  |          | (345                                   | )            |   |       | 1.750 |  |    | to |   |       | 5.375 |  |   |       | (1,059 | )
|                             |           |  |          |                                        |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   | 
|Outstanding at June 30, 2001 |           |  | 1,281    |                                        |              | $ | 1.750 |       |  | to |    | $ | 5.375 |       |  | $ | 3,689 |       
|                             | Granted   |  |          | 40                                     |              |   |       | 2.050 |  |    | to |   |       | 3.750 |  |   |       | 120    |  
|                             | Exercised |  |          | (282                                   | )            |   |       | 1.750 |  |    | to |   |       | 3.940 |  |   |       | (729   | )
|                             | Cancelled |  |          | (69                                    | )            |   |       | 1.750 |  |    | to |   |       | 4.500 |  |   |       | (225   | )
|                             |           |  |          |                                        |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   | 
|Outstanding at June 30, 2002 |           |  | 970      |                                        |              | $ | 1.750 |       |  | to |    | $ | 5.375 |       |  | $ | 2,855 |       
|                             |           |  |          |                                        |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   | 

At June 30, 2002, 2001, and 2000, options aggregating 807,000, 943,000 and
1,066,000 shares were exercisable under the 1982, 1992 and 1996 Plans.

Participants in the 1987 Plan include employees, independent contractors,
and, in certain circumstances, Directors of the Company. This Plan has
expired and no additional options may be granted under its terms. The Company
will continue to maintain the 1987 Plan until all options previously granted
under it have been exercised or have expired without exercise.

F-14



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Options under the 1987 Plan are as follows:

|                             |  |           |     |          |      |              |                                        |  |       |           |  |    |       |   |        |       |     |  |      |   |  | 
|---------------------------- |  | --------- | --- | -------- | ---- | ------------ | -------------------------------------- |  | ----- | --------- |  | -- | ----- | - | ------ | ----- | --- |  | ---- | - |  | 
|                             |  |           |     | Optioned |      | Option Price |                                        |  |       |          
|                             |  |           |     | Shares   |      |              |                                        |  |       | Per Share |  |    |       |   |        | Total
|                             |  |           |     |          |      |              |                                        |  |       |           |  |    |       |   |        |      
|                             |  |           |     |          |      |              | (In thousands, except per share price) |  |      
|Outstanding at June 30, 1999 |  |           | 304 |          |      | $            | 2.375                                  |  |       | to        |  | $  | 4.750 |   |        | $     | 877 | 
|                             |  | Cancelled |     |          | (5   | )            |                                        |  | 2.437 |           |  | to |       |   | 3.563  |       |     |  | (15  | )
|                             |  |           |     |          |      |              |                                        |  |       |           |  |    |       |   |        |       |     |  |      |  
|Outstanding at June 30, 2000 |  |           | 299 |          |      | $            | 2.375                                  |  |       | to        |  | $  | 4.750 |   |        | $     | 862 | 
|                             |  |           |     |          |      |              |                                        |  |       |           |  |    |       |   |        |       |     |  |      |  
|Outstanding at June 30, 2001 |  |           | 299 |          |      | $            | 2.375                                  |  |       | to        |  | $  | 4.750 |   |        | $     | 862 | 
|                             |  | Granted   |     |          | 71   |              |                                        |  | 1.750 |           |  | to |       |   | 6.500  |       |     |  | 318  |  
|                             |  | Exercised |     |          | (110 | )            |                                        |  | 2.375 |           |  | to |       | $ | 4.750  |       |     |  | (295 | )
|                             |  | Cancelled |     |          | (8   | )            |                                        |  | 2.500 |           |  | to |       |   | 3.5625 |       |     |  | (23  | )
|                             |  |           |     |          |      |              |                                        |  |       |           |  |    |       |   |        |       |     |  |      |  
|Outstanding at June 30, 2002 |  |           | 252 |          |      | $            | 1.750                                  |  |       | to        |  | $  | 6.500 |   |        | $     | 862 | 
|                             |  |           |     |          |      |              |                                        |  |       |           |  |    |       |   |        |       |     |  |      |  

Non-Qualified stock options of 222,000, 299,000, and 299,000 shares were
exercisable at June 30, 2002, 2001, and 2000, respectively.

The Company applies Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for its stock option granted to employees
and directors. 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 these plans consistent with the
method of SFAS No. 123, Accounting for Stock-Based Compensation, the
Companys net income and net income per share would have been reduced to the
pro forma amounts indicated as follows:

|                            |  |             |  |   |      |      |  |      |      |                       |  |   |     |  |  | 
|--------------------------- |  | ----------- |  | - | ---- | ---- |  | ---- | ---- | --------------------- |  | - | --- |  |  | 
|                            |  |             |  |   |      | 2002 |  | 2001 |      | 2000                 
|                            |  |             |  |   |      |      |  |      |      |                      
|                            |  |             |  |   |      |      |  |      |      | (In thousands, except |  |   |     | 
|                            |  |             |  |   |      |      |  |      |      | per share data)       |  |   |     | 
|Net (Loss) Income:          |  | As Reported |  | $ | 79   |      |  | $    | (787 | )                     |  | $ | 340 | 
|                            |  | Pro Forma   |  |   | (108 | )    |  |      | (921 | )                     |  |   | 185 | 
|Net (Loss) Income Per Share |  |             |  |   |      |      |  |      |      |                       |  |   |     |  |  | 
|- Basic:                    |  | As Reported |  | $ | .01  |      |  | $    | (.12 | )                     |  | $ | .05 | 
|                            |  | Pro Forma   |  |   | (.02 | )    |  |      | (.14 | )                     |  |   | .03 | 
|Net (Loss) Income Per Share |  |             |  |   |      |      |  |      |      |                       |  |   |     |  |  | 
|- Diluted:                  |  | As Reported |  | $ | .01  |      |  | $    | (.12 | )                     |  | $ | .05 | 
|                            |  | Pro Forma   |  |   | (.02 | )    |  |      | (.14 | )                     |  |   | .03 | 

F-15



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As permitted by SFAS No. 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 $2.59, $0.93 and
$1.22 during 2002, 2001 and 2000, respectively. 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 2002, 2001 and 2000:
expected volatility of 88.7%, 47% and 49% for 2002, 2001 and 2000,
respectively; risk-free interest rate of 4.57%, 4.97% and 6.18% for 2002, 2001
and 2000, respectively; and expected lives of five years after the grant date.

NOTE I INCOME TAXES

The expense (benefit) for income taxes applicable to income from
continuing operations consists of the following:

|         |         |   |                      |     |      |   |      |     |  |   |      |      |  
|-------- | ------- | - | -------------------- | --- | ---- | - | ---- | --- |  | - | ---- | ---- | -
|         |         |   | Years Ended June 30,
|         |         |   |                     
|         |         |   | 2002                 |     | 2001 |   | 2000
|         |         |   |                      |     |      |   |     
|         |         |   | (In thousands)      
|Current  |         |   |                      |     |      |   |      |     |  |   |      |     
|         | Federal |   | $                    |    |      |   | $    |    |  |   | $    |     |  
|         | State   |   |                      | 206 |      |   |      | 73  |  |   |      |     |  
|         |         |   |                      |     |      |   |      |     |  |   |      |      |  
|Deferred |         |   |                      |     |      |   |      |     |  |   |      |     
|         | Federal |   |                      | 1   |      |   |      | 283 |  |   |      | (188 | )
|         | State   |   |                      |    |      |   |      | 34  |  |   |      | 50   |  
|         |         |   |                      |     |      |   |      |     |  |   |      |     
|         |         | $ | 207                  |     |      | $ | 390  |     |  | $ | (138 | )   
|         |         |   |                      |     |      |   |      |     |  |   |      |     

F-16



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| |                        |                                            |   |          |       |          |   |        |       | 
| | ---------------------- | ------------------------------------------ | - | -------- | ----- | -------- | - | ------ | ----- | 
| |                        |                                            |   | June 30, |       | June 30,
| |                        |                                            |   | 2002     |       | 2001    
| |                        |                                            |   |          |       |         
| | Deferred Tax Assets:   |                                            |   |          |       |          |   |        |      
| |                        | Employee benefits                          |   | $        | 684   |          |   | $      | 685   | 
| |                        | Accrued warranty costs                     |   |          | 184   |          |   |        |      | 
| |                        | Bad debt reserves                          |   |          | 347   |          |   |        | 122   | 
| |                        | All other reserves                         |   |          | 100   |          |   |        | 149   | 
| |                        | Discontinued operations reserves           |   |          | 143   |          |   |        | 157   | 
| |                        | Alternative minimum tax credits            |   |          | 117   |          |   |        | 117   | 
| |                        | Net operating losses                       |   |          | 1,646 |          |   |        | 2,078 | 
| |                        | Net operating losses of purchased
business |   |          | 1,000 |          |   |        | 1,000 | 
| |                        | State tax net operating losses             |   |          | 436   |          |   |        | 280   | 
| |                        | Depreciation                               |   |          | 184   |          |   |        | 164   | 
| |                        | Other                                      |   |          | 14    |          |   |        | 4     | 
| |                        |                                            |   |          |       |          |   |       
| |                        | Total Deferred Tax Assets                  |   |          | 4,855 |          |   |        | 4,756 | 
| | Valuation Allowance    |                                            |   | (3,156   | )     |          |   | (3,056 | )    
| |                        |                                            |   |          |       |          |   |       
| | Net Deferred Tax Asset |                                            | $ | 1,699    |       |          | $ | 1,700  |      
| |                        |                                            |   |          |       |          |   |       

Realization of deferred tax assets is dependent upon generation of
sufficient income by Versar and in some cases sufficient income in specific
jurisdictions and by specific office locations. At June 30, 2002, the Company
had $117,000 of alternative minimum tax credit carryforwards which can be
carried forward indefinitely. The alternative minimum tax credit carryforward
may be used to offset regular tax liability in future years to the extent it
exceeds the alternative minimum tax liability. These carryforwards are
reflected as deferred tax assets. The Company has established a valuation
allowance until the probability of realization of these assets becomes more
certain.

SMC has net operating loss carryforwards of approximately $9.3 million for
federal income tax purposes, which will expire in the years 2002 through 2012.
Due to the substantial changes in SMCs ownership, there are annual limitations
on the amount of the carryforwards that can be utilized. The utilization of the net operating losses is limited to approximately $300,000
per year for the 8 remaining years. If the net operating losses are utilized,
they will favorably impact the results of operations as the related deferred
tax asset is fully reserved.

F-17



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A reconciliation of the Companys income tax expense (benefit) for the
federal statutory rate is as follows:

|                                                   |  |                      |     |      |                |      |      |   |  |   |      |  
|-------------------------------------------------- |  | -------------------- | --- | ---- | -------------- | ---- | ---- | - |  | - | ---- | -
|                                                   |  | Years Ended June 30,
|                                                   |  |                     
|                                                   |  | 2002                 |     | 2001 |                | 2000
|                                                   |  |                      |     |      |                |     
|                                                   |  |                      |     |      | (In thousands) |      |      |  
|Expected provision at federal
statutory rate       |  | $                    | 97  |      |                | $    | (135 | ) |  | $ | 55   |  
|Change in valuation allowance                      |  |                      | 100 |      |                |      | 421  |   |  |   | (200 | )
|State income tax expense                           |  |                      | 11  |      |                |      | 68   |   |  |   | 33   |  
|Permanent items                                    |  |                      | (38 | )    |                |      | 56   |   |  |   | 5    |  
|Tax effect of non-qualified stock
option exercised |  |                      | 43  |      |                |      |     |   |  |   |     |  
|Other                                              |  |                      | (6  | )    |                |      | (20  | ) |  |   | (31  | )
|                                                   |  |                      |     |      |                |      |      |   |  |   |      |  
|                                                   |  | $                    | 207 |      |                |      | 390  |   |  | $ | (138 | )
|                                                   |  |                      |     |      |                |      |      |   |  |   |      |  

Income taxes paid for the years ended June 30, 2002, 2001, and 2000 were
$121,000, $105,000, and $91,000, respectively.

NOTE J EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN

The Company had established an Employee Savings and Stock Ownership Plan
(ESSOP) for the benefit of its employees and those of its subsidiaries. The
plan includes an Employee Stock Ownership Plan (ESOP) and an Employee Savings
Plan (401(k)). The plan permits voluntary participation in the 401(k) Plan
upon employment. All employees with at least 1,000 hours of service are
eligible to participate in the ESOP.

Contributions to the ESOP are made at the discretion of the Company in the
form of the Companys stock or cash, which is invested by the plans Trustees
in the Companys stock. No contributions were made in fiscal years 2002
through 2000.

The Employee Savings Plan was adopted in accordance with Section 401(k) of
the Internal Revenue Code. Under the plan, participants may elect to defer up
to 15% of their salary through contributions to the plan, which are invested in
selected mutual funds or used to buy insurance. The Company will match
qualified contributions with a contribution of 100% of each employees
contribution up to 4% of the employees salary. This contribution may be in the
Companys stock or cash. In fiscal year 2002, the Company matched $293,000 in
stock and $369,000 in cash for a total of $662,000. For fiscal years 2001 and
2000, the Company made stock contributions approximated at $1,067,000 and
$164,000, respectively.

All contributions to the 401(k) Plan vest immediately. Contributions to
the ESOP vest ratably with years of service such that full vesting occurs after
five years of credited service.

Effective July 1, 2002, the 401(k) Plan was restated to be in compliance
with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
Furthermore, the Company spun out the ESOP to be a separate plan from the
401(k) plan. The Company also changed the plan year from June 30 to a calendar
year end. Restated plan documents and changes for both the 401(k) and ESOP
plans have been submitted to the IRS for determination and approval.

F-18



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

GEOMET, a wholly-owned subsidiary of Versar, has a profit-sharing
retirement plan for the benefit of its employees. Contributions are made at
the discretion of GEOMETs Board of Directors. There were no contributions
made in fiscal years 2002 and 1999. Contributions of approximately $35,000
were made in fiscal year 2001. Vesting occurs over time, such that an employee
is 100% vested after seven years of participation.

NOTE K COMMITMENTS AND CONTINGENCIES

Versar has a substantial number of U.S. Government contracts, the costs of
which are subject to audit by the Defense Contract Audit Agency. All fiscal
years through 2000 have been audited and closed. Management believes that the
effect of disallowed costs, if any, for the periods not yet audited will not
have a material adverse effect on the Companys consolidated financial position
and results of operations.

The Company leases approximately 185,000 square feet of office space, as
well as data processing and other equipment under agreements expiring through
2020. Minimum future obligations under operating leases are as follows:

|                      |  |                |        | 
|--------------------- |  | -------------- | ------ | 
|                      |  | Total         
|Years Ending June 30, |  | Amount        
|                      |  | (In thousands)
|2003                  |  | $              | 3,304  | 
|2004                  |  |                | 2,869  | 
|2005                  |  |                | 2,671  | 
|2006                  |  |                | 1,789  | 
|2007                  |  |                | 1,598  | 
|2008 and thereafter   |  |                | 3,724  | 
|                      |  |                |        | 
|                      |  | $              | 15,955 | 
|                      |  |                |        | 

Certain of the lease payments are subject to adjustment for increases in
utility costs and real estate taxes. Total office rental expense approximated
$2,867,000, $2,637,000 and $2,627,000, for 2002, 2001 and 2000, respectively.

In August 1997, Versar entered into a contract with the Trustees for the
Environ-Chem Superfund Site that, based upon an existing design, Versar would
perform a detailed design, construct and operate a soil vapor extraction
system. Subsequently, during the operation phase, Versar was terminated by the
Trustees for convenience. The Trustees failed to pay certain invoices and
retention due Versar.

On March 19, 2001, Versar instituted a lawsuit against Roy O. Ball,
Trustee of the Environmental Conservation and Chemical Corporation Site Trust
Fund and three environmental consulting companies in the U.S. District Court of
the Eastern District of Pennsylvania, entitled Versar, Inc. v. Roy O. Ball,
Trustee, URS Corporation, Environmental Resources Management and Environ Corp.,
No. 01CV1302. Versar, in seeking to recover amounts due under a remediation
contract from the Trustees of a Superfund site, claiming breach of contract,
interference with contractual relationships, negligent misrepresentations,
breach of good faith and fair dealing, unjust enrichment and implied contract.
Mr. Ball and several defendants moved to dismiss the action or, in the
alternative, transfer the action to the U.S. District Court for the Southern
District of Indiana. At the same time, on April 20, 2001, the two Trustees
filed suit against Versar in the U.S. District Court for the Southern District
of Indiana, entitled, Roy O. Ball and Norman W. Berstein, Trustees v. Versar,
Inc., Case No. IPO1-0531 C H/G. The Trustees alleged breach of contract and
breach of warranty with respect to the remediation contract and asked for a
declaratory judgement on a number of the previously stated claims.

F-19



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On July 12, 2001, the Federal District Court in Pennsylvania granted
defendants motion to transfer the Pennsylvania lawsuit and consolidate the two
legal actions in Indiana. The Company has filed an answer to the Indiana
lawsuit and the plaintiffs and third-party defendants have filed Motions to
Dismiss the Companys counter-claim. The motion is still pending. In the
meantime, plaintiffs have filed a Motion for Partial Summary Judgement to which
the Company has responded. It too is pending. Written and oral discovery has
commenced and is expected to be completed by the end of the year. Trial is
scheduled for February 2003. Based upon discussions with outside counsel,
management does not believe that any adverse determination under the Trustees
lawsuit will have a materially adverse effect on the Companys consolidated
financial condition and results of operations.

Versar and its subsidiaries are parties from time to time to various other
legal actions arising in the normal course of business. The Company believes
that any ultimate unfavorable resolution of these legal actions will not have a
material adverse effect on its consolidated financial condition and results of
operations.

NOTE L CUSTOMER INFORMATION

A substantial portion of the Companys service revenue is derived from
contracts with the U.S. Government as follows:

|                                     |                       |   |                      |        |      |   |                |        |  |   |        |        | 
|------------------------------------ | --------------------- | - | -------------------- | ------ | ---- | - | -------------- | ------ |  | - | ------ | ------ | 
|                                     |                       |   | Years Ended June 30,
|                                     |                       |   |                     
|                                     |                       |   | 2002                 |        | 2001 |   | 2000          
|                                     |                       |   |                      |        |      |   |               
|                                     |                       |   |                      |        |      |   | (In thousands) |        |  |   |       
|U.S. Department of Defense           |                       | $ | 38,576               |        |      | $ | 38,157         |        |  | $ | 28,021 |       
|U.S. Environmental Protection Agency |                       |   | 3,495                |        |      |   | 2,734          |        |  |   | 3,245  |       
|Other U.S. Government agencies       |                       |   | 3,906                |        |      |   | 5,202          |        |  |   | 2,158  |       
|                                     |                       |   |                      |        |      |   |                |        |  |   |        |       
|                                     | Total U.S. Government |   | $                    | 45,977 |      |   | $              | 46,093 |  |   | $      | 33,424 | 
|                                     |                       |   |                      |        |      |   |                |        |  |   |        |       

The Companys two major contracts with the Department of Defense generated
revenues of approximately $20,353,000 and $23,150,000 in fiscal years 2002 and
2001, respectively.

F-20



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE M QUARTERLY FINANCIAL INFORMATION(UNAUDITED)



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Quarterly financial information for fiscal years 2002 and 2001 is as
follows (in thousands, except per share amounts):

|                                                        |  |                  |        |        |                  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |   |  |   |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------------- |  | ---------------- | ------ | ------ | ---------------- | ------ | ------ | ------- |  | ------ | ------ | ------ |  | ------ | ------ | ------- |  | - | ------ | - |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                        |  | Fiscal Year 2002 |        |        | Fiscal Year 2001 |       
|                                                        |  |                  |        |       
|Quarter ending                                          |  | Jun 30           |        | Mar 31 |                  | Dec 31 |        | Sept 30 |  | Jun 30 |        | Mar 31 |  | Dec 31 |        | Sept 30
|                                                        |  |                  |        |        |                  |        |        |         |  |        |        |        |  |        |        |        
|Gross Revenue                                           |  | $                | 17,486 |        |                  | $      | 17,225 |         |  | $      | 18,275 |        |  | $      | 15,002 |         |  | $ | 15,107 |   |  | $ | 16,789 |  |  | $ | 17,745 |  |  | $ | 16,175 | 
|Net Service Revenue                                     |  |                  | 9,703  |        |                  |        | 9,339  |         |  |        | 10,244 |        |  |        | 8,903  |         |  |   | 9,592  |   |  |   | 9,947  |  |  |   | 10,259 |  |  |   | 9,683  | 
|Operating (loss) income                                 |  |                  | (531   | )      |                  |        | 182    |         |  |        | 1,134  |        |  |        | (166   | )       |  |   | (1,697 | ) |  |   | 241    |  |  |   | 563    |  |  |   | 541    | 
|Net (loss) income                                       |  | $                | (425   | )      |                  | $      | 91     |         |  | $      | 661    |        |  | $      | (248   | )       |  | $ | (1,377 | ) |  | $ | 70     |  |  | $ | 261    |  |  | $ | 259    | 
|                                                        |  |                  |        |        |                  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |   |  |   |        |  |  |   |        |  |  |   |        | 
|Net (loss) income per
share  diluted                   |  | $                | (0.06  | )      |                  | $      | 0.01   |         |  | $      | 0.09   |        |  | $      | (0.04  | )       |  | $ | (0.21  | ) |  | $ | 0.01   |  |  | $ | 0.04   |  |  | $ | 0.04   | 
|                                                        |  |                  |        |        |                  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |   |  |   |        |  |  |   |        |  |  |   |        | 
|Weighted average number of
shares outstanding  diluted |  |                  | 6,901  |        |                  |        | 7,195  |         |  |        | 7,006  |        |  |        | 6,476  |         |  |   | 6,475  |   |  |   | 6,518  |  |  |   | 6,486  |  |  |   | 6,482  | 
|                                                        |  |                  |        |        |                  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |   |  |   |        |  |  |   |        |  |  |   |        | 

Quarterly earnings per share data may not equal annual total due to
fluctuations in common shares outstanding.

F-21



---



##### 



Schedule II

VERSAR, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts

|                                |  |              |         |            |  |            |         |      |  |            |          |   |  |  |         | 
|------------------------------- |  | ------------ | ------- | ---------- |  | ---------- | ------- | ---- |  | ---------- | -------- | - |  |  | ------- | 
|                                |  |              |         |            |  | ADDITIONS  |         |      |  |            |          |   |  | 
|                                |  | BALANCE      |         | CHARGED TO |  |            |         |      |  | BALANCE AT
|                                |  | BEGINNING OF |         | COSTS AND  |  |            |         |      |  | END OF    
|                                |  | YEAR         |         | EXPENSES   |  | CHARGE OFF |         | YEAR
|                                |  |              |         |            |  |            |         |     
|ALLOWANCE FOR DOUBTFUL ACCOUNTS |  |              |         |            |  |            |         |      |  |            |          |   |  |  |         | 
|2000                            |  |              | 608,547 |            |  |            | 230,869 |      |  |            | (291,012 | ) |  |  | 548,404 | 
|2001                            |  |              | 548,404 |            |  |            | 179,017 |      |  |            | (405,733 | ) |  |  | 321,688 | 
|2002                            |  |              | 321,688 |            |  |            | 732,173 |      |  |            | (185,610 | ) |  |  | 868,251 | 

F-22