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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended
    
    Commission FileJune 30, 2004
    
    No. 1-9309
  
 
   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
 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.  Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. (  ) Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).  The aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 31, 2003 was
approximately $16,304,115. The number of shares of Common Stock outstanding as of
September 3, 2004 was 7,842,983.   DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants Proxy Statement to be filed with
the Securities and Exchange Commission with respect to the 2004
Annual Meeting of Stockholders are incorporated by reference into
Part III hereof.




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PART I Item 1. Business Forward-Looking Statements This report contains certain forward-looking statements that 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 changes to or
failure of the Federal government to fund certain programs in which the Company
participates. 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. Business Overview Versar,
Inc., a Delaware corporation organized in 1969, (the
Company
or Versar), is a professional services firm that provides the government and the
private sector with value-added, high quality and innovative solutions for
their infrastructure, facilities management, construction, environmental
quality, defense and homeland security needs. Versar operates three primary
business segments: (1) Environmental Services including environmental
compliance management, environmental restoration in the private and federal
sectors, and environmental conservation; (2) Architectural,Engineering, and
Construction Services in support of industrial, commercial, and government
design/build infrastructure projects, and (3) Defense Systems including
homeland security programs and Department of Defense (DoD) projects. Versar operates a wholly owned subsidiary, GEOMET Technologies LLC
(GEOMET). GEOMET operates in the Companys Defense Systems segment and
provides a comprehensive range of services including test and evaluation,
systems integration, science and technology, and field support services in the
chemical/biological domain. Capabilities include systems testing and
evaluation; development and evaluation of detection technologies; development
and production of personal protective systems; counter-terrorism planning; air
quality analysis; and innovative information technology support. In fiscal year 2004, Versar expanded support to the federal sector, and
capitalized on the increased awareness of homeland security and critical
infrastructure protection capabilities. In addition, management continued to
improve financial performance and reduce overhead and facility costs, and
refocused marketing and sales efforts on core and new strategic business
targets. Versar seeks to capitalize on our recent experience in the homeland
security arena, and the design/build or construction, while developing more
multi-year level-of-effort projects that will create a stable business base for
the Company. These efforts have resulted in five consecutive profitable
quarters and a record total contract backlog. Management remains committed to continued improvement in financial
performance. Versar is transforming itself from a small project company to a
company focused on larger turnkey projects, and systems engineering oriented
company with greater emphasis on using the skills of the total company, to
increase growth and profitability. 2




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Environmental Services Versars customers are in the process of incorporating environmental
health and safety activities into their management systems and day-to-day
operations. Versar supports our customers by providing the full range of
scientific, engineering and program management services to address prevention,
detection, control, management, and clean-up of toxic substances and hazardous
waste releases to the environment. The environmental business segment
continues to be a major component of Versars business base. Environmental
support to the DoD, the U.S. Environmental Protection Agency and state and
local governments comprise the majority of this work. Programs generally focus
on four major service areas, including compliance with environmental
regulations, restoration of contaminated sites, prevention of pollution at the
source, and conservation of natural resources. Versar capabilities focus on
each of these areas: Compliance:Versar provides support for regulatory compliance programs
involving air, water and other media. The trend in DoD compliance services is
to use the capabilities of personnel from professional services firms to
support on-site activity at DoD facilities, and in 2004 Versar had exceptional
growth in its professional services division providing on-site environmental
management and compliance services. Our outsourcing services are an
increasingly attractive alternative as DoD shifts emphasis to its core mission
of defense of the nation. Versars company-wide federal outsourcing technical
support business revenue increased by 44% providing technical and professional
staff primarily to the U. S. Army and Air Force. Versar in 2004 added over 20
professional and administrative on-site support staff at various DoD
installations and industrial facilities across the country. The current
Administrations public commitment to utilize the resources of the private
sector to meet its personnel needs is another factor that has driven this
segment of the business. Compliance and scientific support for the U.S. Environmental Protection
Agency (EPA) continued to show stable revenue in fiscal year 2004, with the
award of a new contract by the Office of Pollution Prevention and Toxics
(OPPT). This new contract, for approximately $10 million over 5 years, is one
of five major EPA contracts currently managed by Versars Exposure and Risk
Assessment Division. Under this contract, Versar will conduct exposure and
risk assessments for toxic chemicals, develop exposure assessment methodologies
and support OPPTs review of new and existing chemicals. Environmental Restoration:Federal restoration program revenue generally
stayed stable in fiscal year 2004 as DoD restoration budgets were delayed due
to late funding cycles and the uncertainty of funding related to the war in
Iraq or in some cases the diversion of funding to support the war in Southwest
AsiaIraq and Afghanistan. In order to contain remediation costs, the DoD is
shifting emphasis from traditional, cost plus fee remediation programs to
performance based contracts. Such contracts are fixed price, results-based
solution which guarantees regulatory closure of the site. Versar has met the
challenge and transformed itself by now holding two such contracts. Versar
recognized this shift in contract needs and adjusted it bidding process to
accommodate the new terms desired. As a result, Versar was awarded three such
contracts during fiscal year 2004. The first is a contract for remediation of
chlorinated solvents and hydrocarbons at Charleston AFB, SC, and will result in
payments aggregating $4 million over a four-year period. The second, is a $2.8
million performance-based contract to close a missile launch control facility
and a fire training facility at Vandenberg AFB, CA. Third, Versar was awarded
a $3 million contract from the Baltimore District of the Corps of Engineers to
provide architect/engineering and environmental support services at Ft. Meade,
Maryland and other mid-Atlantic Military installations. The contract has an
initial term of one year with two one year options. The Army has issued its
first task order under this contract to conduct an environmental investigation
of the former NIKE Missile Fire Control Site Building at Ft. Meade. Another significant development in the restoration arena in 2004 was the
award of the U.S. Air Force Center for Environmental Excellence (AFCEE)
Worldwide Environmental Restoration and Construction (WERC) contract. This is a
five year contract with a potential contract value of $54 million. In fiscal
year 2004, Versar received approximately $13 million of funding under this
contract. The WERC contract is designed to provide a full range of
construction and engineering solutions as well as antiterrorism/force
protection (AT/FP) solutions to meet all Air Force 3




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base requirements worldwide. Requirements are primarily environmental but will
also include traditional engineering and construction as well as AT/FP needs.
WERC also offers demolition, repair, emergency response, and operation and
maintenance opportunities for both environmental and traditional engineering
activities. Versar recently received an award of another contract with Fairfax County,
Virginia for approximately $250,000 per year which includes inspection
services, remediation design and oversight services for buildings and
properties throughout the county. These services will address
asbestos-containing materials, lead-based paint, polychlorinated biphenyls,
underground and above ground storage tanks, indoor air quality, water quality,
ambient air emissions, waste management, and indoor mold problems. Major
projects completed for Fairfax County include asbestos-containing materials
inspections, designing abatement plans and specifications, and abatement
oversight, at the Laurel Hills sites in Lorton, Virginia and indoor air quality
assessments for county operations. Not withstanding the contracts described above, the Air Force, however,
continues to be our largest remediation customer, and through our existing
AFCEE contracts we continue to bid and win task efforts at bases worldwide. In
2004, Versar was awarded restoration support projects at Vandenberg AFB, Beale
AFB, and Buckley AFB, in the U.S., and Ramstein and Moron AFB, in Europe. Work at military training ranges is also expanding, through subcontracting
opportunities with large DoD operations and maintenance firms. We have
increased our staff of field personnel at Nellis AFB, Nevada, on a 15-year
contract, and expect to provide more personnel at Nellis AFB and other ranges
in fiscal year 2005. At Nellis AFB, Versar is saving and recycling UXO
residue. The residue is sold as scrap and the resultant funds turned over to
the installation for further range cleaning. Remediation
of mold has also been a growth area for Versar. Versars
indoor air quality business has increased dramatically in the past year led by
an expansion in mold investigation and remedial services. Over $9 million in
gross revenue was recorded in 2004 for mold remediation services. Major
projects include mold remediation, moisture infiltration mitigation and
engineering management services for a national real estate development company,
John Laing Homes, a nationwide home builder; emergency indoor air quality
response services to one of the largest apartment management companies for
apartments involved in flood, fires and other disasters; indoor air quality
remediation for a library; and mold investigation and mitigation services for a
large university in the midwest. Pollution Prevention:Versar has been involved with innovative pollution
prevention (P2) programs since the 1980s. The market has shifted from the
assessment of opportunities for P2 to engineering solutions that use
sustainable, low impact technology to replace traditional processes. Our premiere P2 program continues to revolve around the technology
associated with cleaning oxygen systems aboard military aircraft. The Aircraft
Oxygen Line Cleaning System (OLCS) development project is complete, and has
successfully been demonstrated on a number of aircraft platforms in the DoD
inventory, including the B-1 bomber, the F-15 and F-16 fighter aircraft, and
the C-130 transport. In 2004, a smaller-scale Oxygen Cart Cleaning System was
developed and tested. Work will continue in fiscal year 2005 to demonstrate
the systems for other organizations, including NASA, and the B-52 Special
Projects Office. Conservation of Natural Resources:Versar continues to grow our
specialized expertise in ecological assessment and restoration. For more than
25 years we have supported the states of Maryland, Virginia and Delaware, 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. Versar supports the Chesapeake Bay
Monitoring Program which provides scientific support to state regulatory
agencies in the development of guidelines for protecting the bay. We also have
major contracts with the Philadelphia and Wilmington Districts of the U.S. Army
Corps of Engineers 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. 4




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Our natural resources support services recently have expanded into
stormwater management and watershed support for a number of counties, including
Fairfax County, Virginia and Frederick County, Maryland. These projects will
use water quality models to develop and evaluate various watershed management
strategies to achieve the countys water quality management objectives. Architectural, Engineering and Construction Services Versar continues to successfully develop its Architectural, Engineering
and Construction Services segment. This growth is driven by the demand for
infrastructure replacement and modernization as well as a shift toward more
design/build projects. Over the past three years, Versar has made the
transition from an engineering services provider to a full-service design/build
construction contractor to address the market needs for turnkey design/build
projects. Versars Architectural, Engineering, and Construction Group is focused on
providing solutions to industrial, government and commercial clients. We have
licensed professionals in civil, structural, electrical, mechanical and
chemical engineering, as well as architecture and construction, which allow us
to develop both design and design/build projects of moderate size, in the $2 to
$10 million range. Design/Build:Versar completed three design/build projects in fiscal year
2004 including the renovation of a 28,000 square foot new office and
telecommunication complex for the National Center for State Courts in
Williamsburg, Virginia; new construction of a four-story parking garage for
Sarnia Corporation in Springfield, Virginia; and a security screening facility
upgrade for a confidential federal client in the metropolitan Washington, DC
area. In addition, Versar was awarded a fourth design/build contract that will
be completed in the fall of 2004 to complete the renovation and security
upgrades of a materials processing center for a confidential federal client in
the metropolitan Washington, DC area which includes 76,000 square feet of
renovation and fit-out. This state-of-the-art facility will provide worker and
facility protection, including protect explosive, radiological, biological and
chemical agent exposure, which is technically superior to that currently being
utilized by other similar facilities in the public and private sectors. Construction:Versar has three ongoing construction projects that were
initiated in late fiscal year 2004 including a roofing systems
repair/replacement project for the Defense Logistics Agency (DLA) for two
buildings at the DLA Defense Distribution Center in San Diego, California; a
modular infectious disease laboratory for the Air Force Surgeon General at
Lackland AFB, Texas; and a demolition and remediation project at Vandenberg
AFB, California. Design:Versar has completed design services and performed construction
inspection for infrastructure projects at industrial process facilities,
cleanrooms, laboratories (e.g., BSL-3 and Entomology), and weapons destruction
facilities, for example, at Merck, Printpack, Barr Laboratories, Newport News
Shipbuilding, Dynax, U.S. Air Force, U.S. Army and the Defense Threat Reduction
Agency. Versars
Architectural, Engineering and Construction Groups repeat
federal and state clients in fiscal year 2004 included U.S. Air Force, U.S.
Army, General Services Administration, U.S. Department of State, Virginia
Department of Transportation, Virginia Department of Mental Health, Virginia
Tech, University of Virginia, and Virginia Commonwealth University. For these
customers, Versar has provided a wide variety of services including those
described above, ranging from new facility design, facility renovations, energy
improvement projects, infrastructure evaluation, and related support services. Versar is recognized by our clients for providing sole-source solutions.
We differentiate ourselves by providing vulnerability assessment, environmental
health and safety systems integration and facility hardening, along with
innovative design/build services. Versar has the expertise to cost-effectively
design/construct facilities on an expedited basis, including those with
homeland defense and anti-terrorism/force protection considerations. 5




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Defense Systems The Defense Systems segment consists primarily of the operations of GEOMET
Technologies, LLC. The Defense Systems segment operates in several defense
markets: Personal Protection Equipment: GEOMET, is a leader in developing, testing
and manufacturing personal protection equipment (PPE). Completion of the
contract for the Armys Self-Contained Toxic Environment Protection Outfit
(STEPO) System was completed in fiscal year 2004. Through work on the STEPO
contract the Company developed an infrastructure which in 2004 enabled us to
respond to the increased demand for PPE from the emergency response sector. In
response to this demand, GEOMET announced its DTAPS® (Disposable Toxicological
Agent Protective System) Level B coverall chemical/biological protective suits,
which are the first in the industry to be certified by the Safety Equipment
Institute (SEI) to the National Fire Protection Association (NFPA) 1994, Class
2 standards. This certification, called the NFPA 1994, Standard on Protective
Ensembles for Chemical/Biological Terrorism Incidents, will help fire and
emergency services personnel select the proper personal protective equipment to
use when conducting assessment, extrication, rescue, triage, and treatment
operations at domestic terrorism incidents involving dual-use industrial
chemicals, chemical terrorism agents, or biological terrorism agents. The
DTAPS® Level B coverall ensemble is a fully integrated and chemical warfare
agent tested protective system including a coverall suit, a reusable chemical
splash hood, boots, and breathing system. The U.S. Department of Homeland
Security recently adopted a number of standards concerning personal protective
equipment for first responders, one of which is NFPA 1994. These standards
were specifically developed to enhance the safety of first responders during
chemical, biological, radiological and nuclear incidents. GEOMET was awarded a contract by the Greek government to supply DTAPS®
Level A chemical protective suits and associated equipment plus training to the
Greek military forces as part of their preparation to respond to possible
terrorist incidents at the 2004 Olympic Games held in the summer of 2004 in
Athens, Greece. Over the past eight years, Versar has provided chemical
protective suits and associated equipment to United States and Australian
military services to strengthen their chemical and biological capabilities to
respond to terrorist incidents at both Summer and Winter Olympic Games. Additional efforts are underway to develop new products such as the Next
Generation Modular Chem-Bio Ensemble for the Marine Corps. The PPE marketplace
will continue to be highly competitive, with decisions often based on price.
Our strategy is to continue to work with customers to become a
one stop supplier for protection needs, and to assist the customer in determining what
systems are needed and how many to purchase. The Company continues to be successful with submittals to the Technical
Support Working Group (TSWG). TSWG is the U.S. national forum that identifies,
prioritizes, and coordinates interagency and international research and
development (R&D) requirements for combating terrorism. TSWG has awarded the
Company an R&D task, for example, to develop a heat stress calculation system
for personal protection system use which accurately predicts how
long an individual can operate in specific conditions. The system, based on a
personal data assistant device, allows the user to rapidly assess and calculate
the heat stress on an individual outfitted with PPE, and how long they can
operate safely. Work continues in 2004 towards deployment of an operational
system for TSWG under this contract. Chemical Surety Laboratory: Versar owns and operates one of seven DoD
Surety Laboratories in the U.S. The laboratory provides cost-effective
materials testing services to the U.S. Government and to private industries,
particularly manufacturers of chemical protective equipment and clothing. Other
laboratory services include evaluation of new chemical agent detection
instrumentation, chemical agent decontamination and destruction techniques,
site remediation/environmental cleanup support, analysis of environmental
samples (air, soil, water, and sludge) for the presence of chemical and
biological agents and degradation products, and testing of personal protective
systems for component survivability. Laboratory operations in fiscal year 2004
were highlighted by an increase in work load from private sector manufacturers
responding to market demands for chemical protection systems. GEOMET was also
selected to be the lead subcontractor, providing nuclear, chemical and
biological test and evaluation services to the West Desert Test Center (WDTC)
located on the U.S. Army Dugway Proving Ground (DPG), Utah. The prime contract
is 6




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a cost plus fixed fee contract with a value of $285 million and a one-year
basic period of performance along with fourteen options and award terms, making
the potential total contract period 15 years. Versars estimated portion of
this contract is $35 million over the 15 year period of performance. The WDTC
test programs include evaluation of munitions, chemical/biological detection
and protection devices, testing to determine nuclear/biological/chemical
contamination/decontamination survivability of various Department of Defense
material and equipment, and a wide range of developmental testing and applied
research related to tactics, techniques, and procedures. The Chemical Surety
laboratory worked in fiscal year 2004 to improve its compliance with required
regulations promulgated by the U.S. Army and the U.S. Department of Commerce,
which are the agencies that provide oversight of operations and inspections of
the facility. The Company passed rigorous inspections by the Army and the
Organization for the Prevention of Chemical Weapons (OPCW) during fiscal year
2004. Biological
Defense Laboratory:The Companys biological defense laboratory
was expanded in fiscal year 2004 to respond to the anticipated increase in
demand for biological agent testing and identification services. Current
projects include support for the Defense Advanced Research Projects Agency
(DARPA) Biocomputational program, an award as a subcontractor from the U.S.
Department of Homeland Security Advanced Research Projects Agency (HSARPA) for
biological detection systems testing and evaluation, testing of a new,
comprehensive filtration system for high security facilities worldwide,
continued testing for bacillus anthracis in the environment, and research and
development programs. The Biological Defense Laboratory currently operates at
Biosafety Level 2 (BSL-2). During fiscal year 2004, planned upgrades to the
laboratory were completed to allow Biosafety Level 3 operations under
regulations from the Center for Disease Control (CDC), which will allow the
Company in fiscal year 2005 to enter new markets that require the ability to
handle live pathogens in real time. Versar/GEOMET Collaboration Programs Navy Systems Engineering Support:The Company was selected as a team
member on two teams for a major Navy Contract Vehicle, called
SEAPORT II.
These teams are headed by Lockheed Martin Corp and ELS, Inc., and will compete
for naval ship and weapon systems support services awarded by the Naval Sea
Systems Command. Versar will support each team with vulnerability assessments,
systems engineering, test and evaluation, science and technology, field
support, Base Realignment and Closure (BRAC) support services, and
environmental services. The Navy estimates the value to all contractors of
this 15 year program will be worth up to $19.5 billion for the design, building
and maintenance of the Navys ships and combat systems. This is an opportunity
to provide Versars unique defense services to the Navys ship and weapons
program for the next 15 years. GSA IT:In fiscal year 2004, GEOMET was awarded a General Services
Administration (GSA) Information Technology (IT) schedule contract which
simplifies the process for government agencies to obtain Versar IT services.
Versar will now be able to support homeland security and e-government type
initiatives and extend existing corporate IT capabilities in the area of
processing real-time data. The five-year base contract (with five years of
options) allows for a wide-range of IT services to the government including:
database management, systems engineering, programming, web design/hosting,
training, IT needs determination, modeling & simulation and scenario
development. Vulnerability Assessments:During fiscal year 2004, Versar continued to
build a track record involving the assessment of critical infrastructure for
vulnerability to terrorist attack. Versar is a licensee of Sandia National
Laboratories (SNL) Risk Assessment Methodology for the execution of
vulnerability assessments. Contracts were awarded by over 80 cities for water
utility vulnerability assessments across the nation. The firm holds SNL
licenses for Risk Assessment Methodology in the following areas: Water (W),
Chemical Facilities (CF), Communities (C), Transmission Lines (T), and Dams
(D). Versar has trainers in RAM-W, RAM-CF, and RAM-C, and has offered
training sessions from Atlanta to Honolulu. There are less than 100 trainers
for these approaches in the U.S.. Versar completed a $725,000 contract with
the Illinois Department of Transportation (IDOT) for consulting services on
deterrence, surveillance, protection, and response to potential terrorist
threats. Under this contract, Versar developed the methodology to plan and
conduct vulnerability assessments for all of IDOTs facilities: roads,
bridges, buildings, pumping stations, communications facilities, rest areas,
weigh stations, and the infrastructure backbone. The scope included reviews
and design concept recommendations on transportation issues related to
infrastructure, (information 7




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technology), emergency incident prevention,
preparedness, response, and recovery from potential terrorist threats. The
project also included reviewing all the operational plans and the emergency
response plans for the State of Illinois. The State tasked Versar to develop a
unique vulnerability assessment methodology to use in the evaluation of its
critical facilities and assets. The focus of the work was on the
IDOT-controlled highway network and related intermodal linkages, and on
IDOT-controlled infrastructure systems. Management feels this contract will be
replicated in other states, and has initiated an aggressive campaign to sell
these focused vulnerability assessment services nationally. USAF Vulnerability Assessments:Versar was awarded a $1.1M contract by
the Air Force Institute of Operational Health to perform food vulnerability
assessments at over 90 Air Force installations around the country. The food
vulnerability assessments check the food supply chain from the vendors (both
prime vendor and other vendors) to the fork of the airmens mouths.
Recommendations are made in the vulnerability assessments to improve protection
of the food supply chain. Versars position in the marketplace offers the Air
Force a one stop shopping solution wherein the Air Force only has to go to one
firm to mitigate potential problems. DoD Contract Support:The Company was successful as a sub on the ECBC
(Edgewood Chemical Biological Center) engineering support Contract awarded by
the Edgewood Chemical Biological Center in Edgewood, MD. The Company will
market this contract vehicle during fiscal year 2005 to secure task orders
involving chemical and biological warfare agents, support systems and programs.
Versar believes this contract will become an important foundation for future
work in this arena. Management Reorganization Effective beginning fiscal year 2005 on July 1, 2005, Versar implemented a
reorganization of its operating units into three separate business segments:
Infrastructure and Management Services Group; Engineering and Construction
Group and National Security Group. The Information and Management Services Group includes environmental
sciences engineering, facilities security, professional services, policy
analyses, training and facilitation and program management. The Engineering
and Construction Group includes large project implementation, design
engineering and construction and design build. The National Security Group
will provide chemical and biological testing and evaluation, systems
integration and science and technology focusing on modeling and simulation.
This organization was created to implement the Companys strategy to move from
smaller to larger projects and better penetrate the defense and homeland
security market. It will also allow a focused group of project managers,
estimators and construction specialists to perform more larger construction
projects and at higher margins. Markets Versars services are continuing to evolve 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. The Company has refocused its emphasis on outsourcing
professional services for government customers, developing long term level of
effort contracts to stabilize the Companys business base and is focusing on
the challenging homeland security market. Terrorism and defense issues are the biggest short-term threat facing the
economy, well ahead of government spending and the deficit. The next president
will devote at least half of his time to the Middle East and terrorism.
Management believes that all three business segments have expertise to address
the needs raised by these national security issues. The Company believes that
Versar is well positioned in the defense and national security sectors in the
coming years. The industrial environmental marketplace, in our view, will remain highly
competitive, as no major new regulatory requirements are expected to be placed
on industry in the near future. Some of our private sector customers 8




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are beginning to return to funding capital expenses for environmental projects.
Given the current economic and regulatory situation, we will continue to
pursue those opportunities that can be performed profitably. Success in the federal environmental markets continues to be driven by a
cost-effective set of solutions, such as the Guaranteed Fixed Price Remediation
Program, outsourcing at the point of need, and relationships with key
customers. We believe the next round of Base Realignment and Closure (BRAC) will
drive a new round of base study and clean-up work, starting in fiscal year
2006. Government reorganization and privatization also present opportunities
that we will continue to pursue. In addition, testing and training ranges have
become more and more important to the environmental market, as new rules
require more emphasis on the cleanup of munitions and safe disposal of
unexploded ordnance. Water quality is also a focus area, and we have
successfully entered new markets at the state and local level using our
credentials gained from working at the federal level. The Architecture, Engineering, and Construction market remains uncertain
for traditional design and construction in our sector. Private sector work
began to rebound with an expanding economy, and we have relationships in place
that we believe will place us in a good position to bid and win the jobs in the
markets we serve. Design/build projects are also becoming more important, as
customers look for one stop shopping from the contracting community.
Our systems for managing these projects have been improved and specific
attention is being paid to estimating and profit margins for this work. Versar
will continue to pursue mid-sized design/build projects that focus on hardening
of critical facilities, and projects that show a return on investment in energy
and HVAC systems upgrade. Support for mail handling and remote delivery sites
grew in fiscal year 2004 and we expect that trend to continue. Fiscal year 2004 saw a shift in the homeland security priorities away from
the initial response to incidents, which characterized Versars work on the
2002 Anthrax crisis, to a more complex mixture of prevention, response, and
support programs across the entire spectrum of the government. The challenge
for a smaller firm is to retain a niche or technology position that makes us
attractive to the large prime contractors who are positioning for major support
efforts for the new Department of Homeland Security, and we continue to forge
those key relationships with larger firms. Management believes that our
biological, chemical, force protection, vulnerability assessment and hard
engineering capability will pay off as this market continues to emerge. During fiscal year 2004, the Companys largest client was the DoD
constituting approximately 38% of Versars revenue. The EPA constitutes
approximately 7% of our revenue. Other federal clients which make up in the
aggregate 14% of our revenue, include NASA, General Services Administration,
the Departments of Energy and the Interior, Federal Housing Authority, and
Intelligence agencies. State and local governments comprise 13% of Versars
revenue. Commercial revenue increased to 28% primarily as a result of
increased mold remediation work. Revenues from the DoD decreased by 5% in
fiscal year 2004, primarily as a result of uncertainty of funding as a result
of the war in Iraq and Afghanistan. Competition Versar continues to face substantial competition in each market in which
it operates and expects to continue to face substantial competition as it
diversifies its business. Competitors are often larger and have greater
financial resources than Versar, which means that we have to be very selective
in our marketing and sales program efforts. However, we believe that our
larger size relative to many of the smaller, niche companies with which we
compete is an advantage. We are better able to compete with these smaller
companies for certain contracts available only to companies qualifying as a
small business under federal regulations because we have greater resources
than they do. Generally, a company with more than 500 hundred employees will
not qualify as a small business so our larger competitors are unable to
compete with us on these contracts. In addition, there has been major
consolidation in the environmental services market, with two brackets of firms
emerging  the large, diversified firms with a wide range of capabilities, and
the smaller, niche firms with limited capability in specific horizontal or
vertical markets. 9




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##### 



Our market areas of environmental, architecture and engineering and
defense reflect a mix of business that we believe will be stable and allow for
growth, while retaining our core capability. The synthesis of our three core
capabilities, however, is an important selling feature as customers look for
one source to meet their needs. We believe that we are among the few firms that
combine environmental health and safety/risk assessment, hard engineering
design and construction, and chemical and biological defense capability in one
package, and we are actively pursuing customers that require these combined
services. Our pricing structure has been adjusted to ensure that we remain
competitive, particularly for outsourcing, where procurement decisions are very
sensitive to pricing. Similarly, we are concentrating our marketing efforts on
getting the most return on investment, through expanding support for existing
customers, developing tasks under existing contracts, and collaborating with
firms that need our niche expertise. We are targeting and identifying specific
programs that match our capability. Versar will also continue to target small business set aside opportunities
in the federal marketplace, under the North American Industry Classification
System (NAICS) codes that provide opportunities for firms with fewer than 500
personnel. We continue to work with customers to make them aware of the
benefits of setting aside work under these NAICS codes, and expect that trend
to continue. Typically, for large, environmental contracts, at least one of the
awards is targeted for a small business, and Versar believes it is well equiped
with its depth of expertise to compete in that sector. Backlog Versar evaluates its backlog two ways: funded and total contract backlog.
Funded backlog represents the total amount of uncompleted work for which the
Company has received firm contractual commitments whether through a signed
contract, written task order under a large contract vehicle or master contract
or some other written authorization. Normally, at least 80% of all funded
backlog is performed in the succeeding twelve months. Funded backlog amounts
have historically resulted in revenue, however, no assurance can be given that
all amounts included in funded backlog will ultimately be realized as revenue. Total contract backlog includes funded backlog, existing written contracts
and contract vehicles, including option periods, in which funding for work or
tasks have not yet been authorized. The amount of total contract backlog is
what Versar reasonably believes, based on past experience and present
expectations, will become funded backlog over the next several years. There
cannot be any assurance, however, that all amounts included in total contract
backlog will ultimately become funded backlog and later realized as revenue. As of June 30, 2004, funded backlog for Versar was approximately $46
million, an increase of 44% compared to approximately $32 million as of June
30, 2003. Backlog significantly increased, in part, with the recent contract
awards in fiscal year 2004. As of June 30, 2004, total contract backlog for Versar, including unfunded
government task orders, was approximately $370 million, as compared to
approximately $312 million as of June 30, 2003, an increase of 19%.
Approximately $200 million of the unfunded backlog is not expected to be funded
in fiscal year 2005. Employees At June 30, 2004, Versar had approximately 374 full-time employees, of
which eighty-five percent are engineers, scientists, and other professionals.
Eighty percent of the Companys professional employees have a
bachelors degree, twenty-five percent have a masters degree, and five percent have a
doctorate degree. 10




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##### 



Item 2. Properties The Companys executive office is located in Springfield, Virginia, a
suburb of Washington, D.C. Versar currently leases 66,742 square feet in two
buildings from Springfield Realty Investors, LLC. The rent is subject to a
two-percent escalation per year through May 31, 2009. As of September 2, 2004, the Company had under lease an aggregate of
approximately 184,000 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
and Germantown, MD; Oklahoma City, OK; San Antonio, TX; and Horsham, PA. The
lease terms primarily range from two to six years. Item 3. Legal Proceedings In August 1997, Versar entered into a contract with the Trustees for the
Enviro-Chem Superfund Site (the Superfund Site), which provided that, based
upon an existing performance specification, Versar would refine the design, and
construct and operate a soil vapor extraction system. During the performance
of the contract, disputes arose between Versar and the Trustees regarding the
scope of work. Eventually, Versar was terminated by the Trustees for
convenience. The Trustees then failed to pay certain invoices and retainages
due Versar. On March 19, 2001, Versar instituted a lawsuit against the Trustees 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 the
remediation contract from the Trustees of the Superfund Site, claimed 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, where, on April 20, 2001, the two
Trustees had filed suit against Versar in the U.S. District Court for the
Southern District of Indiana, entitled, Roy O. Ball and Norman W. Bernstein,
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 judgment 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 filed an answer and counterclaim to the
Indiana lawsuit. The plaintiffs and third-party defendants filed Motions to
Dismiss the Companys counterclaim. The court granted the motions in part and
denied them in part. Versar amended its answer and counterclaim. In the
meantime, plaintiffs filed a Motion for Partial Summary Judgment which the
Judge granted in part and denied in part. The Judge held that certain
agreements entered into by the parties prevented Versar from recovering certain
amounts under its counterclaim but that Versar could pursue its claim for fraud
in other areas. Written and oral discovery has commenced and has continued for
several years. Discovery is expected to be completed by the end of calendar
2004. Trial is scheduled for May 2005. Based upon discussions with outside
counsel, management does not believe that the ultimate resolution 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 2004. 11




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##### 



EXECUTIVE OFFICERS The current executive officers of Versar, and their ages as of September
1, 2004, 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 COMPANYTheodore M. Prociv
    
    
    56
    
    
    President and Chief Executive OfficerJerome B. Strauss
    
    
    55
    
    
    Senior Vice President, Environmental Business SegmentGeorge J. Anastos
    
    
    56
    
    
    Senior Vice President, Architect and Engineering Business SegmentPaul W. Kendall
    
    
    51
    
    
    Senior Vice President, Defense Business SegmentLawrence W. Sinnott
    
    
    42
    
    
    Senior Vice President,
Chief Financial Officer and TreasurerJames C. Dobbs
    
    
    59
    
    
    Senior Vice President, General Counsel and
Secretary
 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. Jerome B. Strauss,P.E., joined Versar in 1977, was elected Vice
President in 1999, and Senior Vice President in 2003. He served as Division
Director for Waste Management from 1989-2002, and Unit Manager for Atlantic
Operations from 2001-2002. Mr. Strauss has led work in virtually all areas of
environmental services during his 27 years with Versar. 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 Senior Vice
President in charge of the Companys Architect and Engineering Business
Segment. 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. Paul W. Kendall,B.S., J.D., joined Versar in 1994 as Manager of Business
Development, was elected Vice President in 2000, served as Vice President of
Corporate Development from January to October 2003, and since November 2003 as
Senior Vice President, Defense Business Segment and President of GEOMET
Technnologies LLC. 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. 12




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##### 



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, 2004, the Company had 1,170
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 2004 and 2003 are presented below. Fiscal Year 2004
    
    High
    
    Low4th Quarter
    
    $
    5.40
    
    
    $
    3.213rd Quarter
    
    
    3.84
    
    
    
    3.202nd Quarter
    
    
    3.80
    
    
    
    2.561st Quarter
    
    
    3.29
    
    
    
    2.55
 Fiscal Year 2003
    
    High
    
    Low4th Quarter
    
    $
    3.30
    
    
    $
    2.513rd Quarter
    
    
    3.98
    
    
    
    1.892nd Quarter
    
    
    2.25
    
    
    
    1.751st Quarter
    
    
    3.15
    
    
    
    1.90
 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. The Company has established equity compensation plans to attract, motivate
and reward good performance of high caliber employees, directors and service
providers to serve Versar, Inc. and its affiliates. Currently, there are
four stock option plans which were previously approved by the security holders:
the 2002 Stock Incentive Plan, the 1996 Stock Option Plan, the 1992 Stock
Option Plan and the 1987 Nonqualified Stock Option Plan. Equity Compensation PlanJune 30, 2004
(shares in thousands) Number of securitiesNumber of securities
    
    
    
    
    
    remaining availableto be issued upon
    
    Weighted-average
    
    for future issuanceEquity compensation plans
    
    exercise of outstanding
    
    exercise price of
    
    under equity compensationapproved by security holders
    
    options
    
    outstanding options
    
    plans2002
    
    
    447
    
    
    $
    3.12
    
    
    
    2521996
    
    
    536
    
    
    
    3.31
    
    
    
    2291992
    
    
    533
    
    
    
    2.23
    
    
    
    1987
    
    
    54
    
    
    
    3.19
    
    
    
    Total
    
    
    1,570
    
    
    $
    2.89
    
    
    
    481
 13




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##### 



In June 2004, two key employees surrendered 2,865 shares of equity
securities to pay for the exercise of stock options. The purchase price of
these treasury stocks was based on the closing price of the Companys common
stock on the American Stock Exchange on the date of surrender. Purchases of Equity Securities Maximum Number (orTotal Number of
    
    Approximate DollarShares Purchased as
    
    Value) of SharesTotal Number
    
    
    
    
    
    Part of Publicly
    
    that May Yet Beof Shares
    
    Average Price
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Purchased
    
    Paid Per Share
    
    Programs
    
    Plans or ProgramsJune 1 - 30, 2004
    
    
    2,865
    
    
    $
    4.92
    
    
    
    
    
    
    
    Total
    
    
    2,865
    
    
    $
    4.92
    
    
    
    
    
    
    
    
 *Represents shares surrendered to pay the exercise price of stock options
exercised during the month. The average price paid per share is based on the
value placed on the shares for purposes of such surrender, which was equal to
the closing of a shares of the Companys common stock on the American Stock
Exchange on the date of surrender. 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-3 of this report. The financial data is as follows: For the Years Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(In thousands, except per share data)Consolidated Statement of Operations
related data:Gross Revenue
    
    $
    60,454
    
    
    $
    57,097
    
    
    $
    67,988
    
    
    $
    65,816
    
    
    $
    56,149Net Service Revenue
    
    
    33,972
    
    
    
    35,180
    
    
    
    38,189
    
    
    
    39,481
    
    
    
    37,787Operating Income (Loss)
    
    
    1,277
    
    
    
    262
    
    
    
    619
    
    
    
    (352
    )
    
    
    728Income (Loss) from Continuing Operations
    
    
    1,191
    
    
    
    (1,008
    )
    
    
    159
    
    
    
    (1,030
    )
    
    
    340(Loss) Income from Discontinued
Operations
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    243
    
    
    
    Net Income (Loss)
    
    
    1,191
    
    
    
    (1,008
    )
    
    
    79
    
    
    
    (787
    )
    
    
    340Income (Loss) per share from Continuing
Operations - Diluted
    
    $
    .16
    
    
    $
    (.14
    )
    
    $
    .02
    
    
    $
    (.16
    )
    
    $
    .05(Loss) income per share from Discontinued
Operations - Diluted
    
    $
    
    
    
    $
    
    
    
    $
    (.01
    )
    
    $
    .04
    
    
    $
    Net Income
(Loss) per share - Diluted
    
    $
    .16
    
    
    $
    (.14
    )
    
    $
    .01
    
    
    $
    (.12
    )
    
    $
    .05Weighted Average Shares Outstanding -
Diluted
    
    
    7,675
    
    
    
    7,231
    
    
    
    6,998
    
    
    
    6,470
    
    
    
    6,487Consolidated Balance Sheet related data:Working Capital
    
    $
    7,494
    
    
    $
    4,940
    
    
    $
    6,600
    
    
    $
    7,073
    
    
    $
    7,801Current Ratio
    
    
    1.87
    
    
    
    1.47
    
    
    
    1.70
    
    
    
    1.86
    
    
    
    1.94Total Assets
    
    
    20,085
    
    
    
    19,336
    
    
    
    21,273
    
    
    
    20,117
    
    
    
    21,387Current Portion of Long-Term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-Term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Debt, excluding bank line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170
    
    
    
    480Stockholders Equity
    
    $
    10,065
    
    
    $
    7,396
    
    
    $
    8,324
    
    
    $
    6,013
    
    
    $
    6,402
 14




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##### 



Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations This report contains certain forward-looking statements that 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, and the possible impact of current and future claims against the
Company based upon negligence and other theories of liability, and changes to
or failure of the Federal government to fund certain programs in which the
Company participates. 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. Critical Accounting Policies Revenue recognition: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. Receivable reserves: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. Management reviews
outstanding receivables on a regular basis and assesses the need for reserves
taking into consideration past collection history and other events that bear on
the collectibility of such receivables. Deferred tax valuation allowance:The Company has approximately $4.5
million in deferred tax assets of which a $3.8 million valuation allowance has
been established against such assets. Management provides for a valuation
allowance until such time that it can conclude more likely than not that the
Company will derive a benefit from such assets. The valuation allowance is
adjusted as necessary based upon the Companys ability to generate taxable
income, including managements ability to implement tax strategies that will
enable the Company to benefit from such deferred tax assets. Goodwill and other intangible assets: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 resulting from this transaction was approximately
$1.1 million. In fiscal year 2003, the Company adopted the Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets which eliminated the amortization of goodwill, but does require the
Company to test such goodwill for impairment annually. Currently, the carrying
value of goodwill is approximately $776,000 relating to the acquisition of
VGSI, which is now part of the Architecture and Engineering (A&E) reporting
unit. In performing its goodwill 15




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##### 



impairment analysis, management has utilized
a discounted cash flow model to determine the estimated fair value of the (A&E)
reporting unit. This model requires management, among other things, to
estimate future revenue and expenses of the A&E reporting unit based upon
current contract backlog and projected growth resulting from new business.
Management engages outside professionals and valuation experts, as necessary,
to assist in performing this analysis. For fiscal years 2004 and 2003, management concluded, based upon its
impairment analysis, that goodwill relating to the A&E reporting unit was not
impaired. Results of Operations Versars gross revenue for fiscal year 2004 totaled $60,454,000, a
$3,357,000 (6%) increase compared to gross revenue of $57,097,000 for fiscal
year 2003. Gross revenue for fiscal year 2003 decreased by $10,891,000 (16%)
over that reported in fiscal year 2002. The increase in fiscal year 2004 was
primarily due to higher revenues in the Environmental Services business segment
of $8,292,000, which was in part offset by decreases in the Architecture and
Engineering and Defense segments. The higher Environmental Services segment
revenues relate primarily to increased subcontracted mold remediation work.
The decrease in the Architecture and Engineering segment is primarily due to
delays on two major projects. The decrease in the Defense segment is due to
the completion of the Companys STEPO contract and its inability to replace
that revenue. The reduction in gross revenue for 2003 compared to 2002 was
primarily due to the anticipated wind down of the STEPO suit production
contract in the Companys Defense segment. Purchased services and materials for fiscal year 2004 totaled $26,482,000,
a 21% increase over that reported in fiscal year 2003. Purchased services and
materials for fiscal year 2003 decreased by $7,882,000 (26%) over fiscal year
2002. The increase in fiscal year 2004 was due to higher subcontractor costs
associated with the increase in mold remediation activity as mentioned above.
The decrease in purchased services in fiscal year 2003 compared to 2002 was
primarily due to cost reductions from the winding down of the STEPO contract
and reduced construction activities in the Companys Defense and Architecture
and Engineering segments. The increase in purchased services trend is
anticipated to continue into fiscal year 2005. 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 2004 due lower revenue
generated from the Companys labor work force over the prior fiscal year.
While net service revenue has decreased over the past few years, management
anticipates that such a trend will be reversed in fiscal year 2005, with the
increase in funded backlog. Direct costs of services 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 decreased to 80.2% in fiscal year 2004 compared to 80.6% in
fiscal year 2003 and 81.8% in fiscal year 2002. The decrease in the percentage
in fiscal years 2004 and 2003 is due to continued cost reduction efforts by the
Company to balance its cost structure with the business volume. Selling, general and administrative expenses approximated 16.1% of net
service revenue in fiscal year 2004, compared to 16.4% in fiscal year 2003 and
16.5% in fiscal year 2002. The decrease is due to the Companys cost reduction
efforts to balance its cost structure with the business volume. Actual
selling, general and administrative costs decreased by $305,000 (5%) in fiscal
year 2004. In fiscal year 2003, the Company recorded a non-recurring charge of
$800,000 to reduce the Companys overall cost structure and to reduce costs in
non-performing divisions. These costs included severance payments to
terminated employees and estimated costs to restructure certain facility
leases. Operating income for fiscal year 2004 was $1,277,000, compared to $262,000
in fiscal year 2003. Operating income in fiscal year 2004 increased primarily
due to the impact of the non-recurring charge in fiscal year 2003 and 16




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##### 



improved operating results in fiscal year 2004. Fiscal year 2003 operating
income was $357,000 lower than that recorded in fiscal year 2002 due to a
non-recurring charge recorded in fiscal year 2003 as mentioned above. Interest expense during fiscal year 2004 was $153,000, a decrease of
$13,000 from fiscal year 2003. The decrease is primarily attributable to
reduced borrowing on the Companys line of credit. In fiscal year 2003,
interest expenses decreased by $37,000 from fiscal year 2002. The reduction
was due to lower interest rates on the Companys line of credit. Versars tax benefit for fiscal year 2004 was $67,000 compared to tax
expense of $1,104,000 for the prior fiscal year. The tax benefit for fiscal
year 2004 relates to the utilization of net operating loss carry forward from
prior years and the decrease in tax asset valuation allowance requirement as a
result of improved operating performance. During fiscal year 2004, the Company
generated a tax benefit of approximately $169,000 relating to the exercise of
certain non-qualified stock options. Since the Company has provided a
valuation allowance against deferred tax assets, a portion of the valuation
allowance has been identified as relating to this excess tax benefit and will
be charged to additional paid-in capital in future periods. In fiscal year
2003, the Company increased the tax valuation allowance by $1,096,000 due to a
lack of profitability and concerns over the ultimate realization of the
deferred tax assets. The Company has approximately $4.5 million in deferred
tax assets of which a $3.8 million valuation allowance has been recorded
against such assets. The valuation allowance will be increased or decreased
depending on the financial performance of the Company going forward, which will
directly impact the Companys Consolidated Statement of Operations, yet does
not impact the cash flow of the Company. 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), a former subsidiary of the Company. In summary, Versars net income for fiscal year 2004 was $1,191,000
compared to net loss of $1,008,000 in fiscal year 2003 and net income of
$79,000 in fiscal year 2002. REVENUE Versar provides professional services to various industries, serving
government and commercial clients. A summary of revenue generated from the
Companys client base is as follows: For the Years Ended June 30,2004
    
    2003
    
    2002(In thousands, except for percentages)GovernmentEPA
    
    $
    4,315
    
    
    
    7
    %
    
    $
    3,312
    
    
    
    6
    %
    
    $
    3,495
    
    
    
    5
    %State & Local
    
    
    7,785
    
    
    
    13
    %
    
    
    8,865
    
    
    
    15
    %
    
    
    9,075
    
    
    
    13
    %Department
of Defense
    
    
    22,921
    
    
    
    38
    %
    
    
    24,343
    
    
    
    43
    %
    
    
    38,576
    
    
    
    57
    %Other
    
    
    8,558
    
    
    
    14
    %
    
    
    7,644
    
    
    
    13
    %
    
    
    3,906
    
    
    
    6
    %Commercial
    
    
    16,875
    
    
    
    28
    %
    
    
    12,933
    
    
    
    23
    %
    
    
    12,936
    
    
    
    19
    %Gross Revenue
    
    $
    60,454
    
    
    
    100
    %
    
    $
    57,097
    
    
    
    100
    %
    
    $
    67,988
    
    
    
    100
    %
 Liquidity and Capital Resources The Companys operations generated $1,998,000 in cash in fiscal year 2004.
The Company purchased $615,000 in property and equipment, which was funded by
operations. In addition, the Company received $1,491,000 from the issuance of
common stock resulting from the exercise of stock options. Such proceeds were
used to further pay
off the Companys line of credit in its entirety as well as retain
$817,000 in cash in the bank to be used for working capital purposes. 17




---



##### 



During fiscal year 2004, the Company used its line of credit to supplement
its day to day operating cash requirements. At June 30, 2004, the Company had

$7,494,000 of working capital, compared to $4,940,000 in fiscal year 2003.
Working capital increased primarily due to improved operating performance. Versars line of credit with United Bank (Bank) provides for advances up
to $5,000,000 based upon qualifying receivables. Interest on the borrowings is
based on prime plus one and a half percent (5.5% as of June 30, 2004). 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, 2004 was $5,000,000. Advances under the line are due
on November 2005. The loan has certain covenants related to the maintenance of
financial ratios. At June 30, 2004, the Company was in compliance with the
financial covenants. Management believes that the cash generated from
operations and borrowings available from the line of credit will be adequate to
meet its working capital needs for fiscal year 2005. Liquidity Requirements At June 30, 2004, the Company had unfunded contractual payment obligations
of approximately $3,690,000 due within the next twelve months. The table below
specifies the total contractual payment obligations as of June 30, 2004. Contractual
    
    Total
    
    Less than
    
    1-3
    
    4-5
    
    After 5Obligations
    
    Cost
    
    1 year
    
    years
    
    years
    
    years(In thousands)Operating leases
    
    $
    11,101
    
    
    $
    3,276
    
    
    $
    4,142
    
    
    $
    3,415
    
    
    $
    268Capital lease
    
    
    1,050
    
    
    
    44
    
    
    
    94
    
    
    
    104
    
    
    
    808Notes payable
    
    
    433
    
    
    
    370
    
    
    
    63
    
    
    
    00
    
    
    
    00Total contractual cash
obligations
    
    $
    12,584
    
    
    $
    3,690
    
    
    $
    4,299
    
    
    $
    3,519
    
    
    $
    1,076
 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. Business Segments Versar currently has three business segments: environmental services,
architecture and engineering, and defense, which have been reorganized
effective July 1, 2004. The details on these segments and the reorganization
are 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 None. 18




---



##### 



Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act)) was
carried out as of the last day of the period covered by this report. This
evaluation was made by the Companys Chief Executive Officer and Chief
Financial Officer. Based upon this evaluation, the Companys Chief Executive
Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures (a) are effective to ensure that information
required to be disclosed by the Company in reports filed or submitted under the
Exchange Act is timely recorded, processed, summarized and reported and (b)
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in reports filed or
submitted under the Exchange Act is accumulated and communicated to the
Companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure. Changes in Internal Controls There have not been any changes in the Companys internal control over
financial reporting that occurred during the Companys fourth fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. 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 2004 Annual Meeting
of Stockholders, which is expected to be filed with the Commission not later
than 120 days after the Companys 2004 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
401(k) 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 Information required by this item is incorporated herein by reference to
the Companys Proxy Statement for its 2004 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 2004 fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated herein by reference to
the Companys Proxy Statement for its 2004 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 2004 fiscal year. Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated herein by reference to
the Companys Proxy Statement for its 2004 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 2004 fiscal year. 19




---



##### 



Item 14. Principal Accountant Fees and Services Information required by this item is incorporated herein by reference to
the Companys Proxy Statement for its 2004 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 2004 fiscal year. PART IV Item 15. 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 Registered Public Accounting Firmb)
    
    Consolidated Balance Sheets as of June 30, 2004 and 2003c)
    
    Consolidated Statements of Operations for the Years Ended June 30,
2004, 2003, and 2002d)
    
    Consolidated Statements of Changes in Stockholders Equity for
the Years Ended
June 30, 2004, 2003, and 2002e)
    
    Consolidated Statements of Cash Flows for the Years Ended June
30, 2004, 2003, and 2002f)
    
    Notes to Consolidated Financial Statements (2) Financial Statement Schedules:  a)
    
    Schedule II - Valuation and Qualifying Accounts for the Years
Ended June 30, 2004, 2003, and 2002 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 21 through 25 of this report. (B) Reports on Form 8-K Pursuant to the Securities Exchange Release No. 33-8216, Form 8-K, which
reported the Companys third quarter Results of Operations and Financial
Condition, was furnished to, but not filed with the Securities and Exchange
Commission on May 11, 2004. 20




---



##### 



Exhibit Index Page Number/Item No.
    
    Description
    
    Reference3.1
    
    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
    )3.3
    
    Amendment to the Bylaws of Versar, Inc.
    
    
    (W
    )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
    )
 21




---



##### 



Page Number/Item No.
    
    Description
    
    Reference10.85
    
    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.
    
    (V)
 22




---



##### 



Page Number/Item No.
    
    Description
    
    Reference10.103
    
    Securities Purchase Agreement, dated June 14, 2002 between Registrant and
Radyr Investments Limited
    
    
    (V)10.104
    
    Employment Agreement dated December 1, 2002 between Versar, Inc. and
Theodore M. Prociv
    
    
    (W)10.105
    
    4P Architect-Engineering Contract dated March 14, 2003
    
    
    (W)10.106
    
    Revolving Promissory Note, dated June 20, 2003 between Registrant and
Bank of America, N.A.
    
    
    (W)10.107
    
    Line of Credit Commitment Letter, dated September 16, 2003 between Registrant and
United Bank
    
    
    (W)10.108
    
    Employment Agreement dated December 1, 2003 between Versar, Inc. and
Theodore M. Prociv*
    
    
    28-4110.109
    
    Change of Control Severance Agreement dated March 1, 2004 between
the Registrant and Lawrence W. Sinnott*
    
    
    42-5510.110
    
    Change of Control Severance Agreement dated March 1, 2004 between
the Registrant and James C. Dobbs*
    
    
    56-6910.111
    
    Modification Agreement of the Revolving Commercial Note dated May 12, 2004
between Registrant and United Bank
    
    
    70-7410.112
    
    AFCEE WERC Contract dated December 5, 2003
    
    
    75-13422
    
    Subsidiaries of the Registrant
    
    
    (Q)23
    
    Consent of Independent Certified Public Accountants, Grant Thornton LLP to register
shares under the Companys Option Plans under Form S-8 dated September 7, 2004
    
    
    13531.1
    
    Certifications by Theodore M. Prociv, CEO and President and Lawrence W.
Sinnott, Sr. Vice President and CFO pursuant to Securities Exchange
Rule 13a-14
    
    
    136-13732.1
    
    Certifications 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,
2004 by Theodore M. Prociv, CEO and President and Lawrence W. Sinnott, Sr. Vice President
and CFO
    
    
    138-139
   *
    
    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. 23




---



##### 



(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.(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. 24




---



##### 



(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.(V)
    
    Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 2002
(FY2002 Form 10K) filed with the Commission on September 16, 2002.(W)
    
    Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 2003
(FY2003 Form 10K) filed with the Commission on September 26, 2003. 25




---



##### 



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)/S/ Paul J. HoeperDate: September 7, 2004Paul J. HoeperChairman 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/ Paul J. HoeperPaul J. Hoeper
    
    Chairman and Director
    
    September 7, 2004/S/ Theodore M. ProcivChief Executive Officer, President, and
    
    September 7, 2004Theodore M. Prociv
    
    Director/S/ Lawrence W. Sinnott

Lawrence W. Sinnott
    
    Senior Vice President, Chief Financial
Officer, Treasurer, and
Principal Accounting Officer
    
    September 7, 2004/S/ Michael Markels, Jr.

Michael Markels, Jr.
    
    Chairman Emeritus and Director
    
    September 7, 2004/S/ Robert L. Durfee

Robert L. Durfee
    
    Director
    
    September 7, 2004/S/ James L. Gallagher

James L. Gallagher
    
    Director
    
    September 7, 2004/S/ Fernando V. Galaviz

Fernando V. Galaviz
    
    Director
    
    September 7, 2004
 26




---



##### 



SIGNATURES
    
    TITLE
    
    DATE/S/ James V. HansenJames V. Hansen
    
    Director
    
    September 7, 2004/S/ Amoretta M. HoeberAmoretta M. Hoeber
    
    Director
    
    September 7, 2004/S/ Amir A. MetryAmir A. Metry
    
    Director
    
    September 7, 2004
 27




---



##### 



Report of Independent Registered Public Accounting Firm Board of Directors and
Shareholders of Versar, Inc. We have audited the accompanying consolidated balance sheets of Versar, Inc. (a
Delaware corporation) (the Company), and subsidiaries as of June 30, 2004 and
2003, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended June 30,
2004. 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 the standards of the Public Company
Accounting Oversight Board (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
subsidiaries as of June 30, 2004 and 2003, and the results of their operations
and cash flows for the each of the three years in the period ended June 30,
2004, 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, 2004. 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, LLP
 Vienna, Virginia
September 7, 2004 F-1




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts) June 30,2004
    
    2003ASSETSCurrent assetsCash and cash equivalents
    
    $
    817
    
    
    $
    81Accounts receivable, net
    
    
    14,144
    
    
    
    13,864Prepaid expenses and other current assets
    
    
    1,013
    
    
    
    1,231Deferred income taxes
    
    
    168
    
    
    
    184Total current assets
    
    
    16,142
    
    
    
    15,360Property and equipment, net
    
    
    2,108
    
    
    
    2,164Deferred income taxes
    
    
    501
    
    
    
    418Goodwill
    
    
    776
    
    
    
    776Other assets
    
    
    558
    
    
    
    618Total assets
    
    $
    20,085
    
    
    $
    19,336LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesBank line of credit
    
    $
    
    
    
    $
    2,125Accounts payable
    
    
    4,520
    
    
    
    3,160Billing in excess of revenue
    
    
    433
    
    
    
    379Accrued salaries and vacation
    
    
    1,967
    
    
    
    2,009Other liabilities
    
    
    1,728
    
    
    
    2,747Total current liabilities
    
    
    8,648
    
    
    
    10,420Other long-term liabilities
    
    
    1,163
    
    
    
    1,201Liabilities of discontinued operations, net
    
    
    209
    
    
    
    319Total liabilities
    
    
    10,020
    
    
    
    11,940Commitments and contingencies (Note I)Stockholders equityCommon stock, $.01 par value; 30,000,000 shares
authorized; 7,837,033 shares and 7,258,346
shares issued June 30, 2004 and 2003,
respectively; 7,821,528 shares and 7,245,706
shares outstanding at June 30, 2004 and 2003,
respectively
    
    
    78
    
    
    
    73Capital in excess of par value
    
    
    21,835
    
    
    
    20,349Accumulated deficit
    
    
    (11,776
    )
    
    
    (12,967
    )Treasury stock
    
    
    (72
    )
    
    
    (59
    )Total stockholders equity
    
    
    10,065
    
    
    
    7,396Total liabilities and stockholders equity
    
    $
    20,085
    
    
    $
    19,336
 The accompanying notes are an integral part of these consolidated financial statements. F-2




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts) Years Ended June 30,2004
    
    2003
    
    2002GROSS REVENUE
    
    $
    60,454
    
    
    $
    57,097
    
    
    $
    67,988Purchased services and materials, at cost
    
    
    26,482
    
    
    
    21,917
    
    
    
    29,799NET SERVICE REVENUE
    
    
    33,972
    
    
    
    35,180
    
    
    
    38,189Direct costs of services and overhead
    
    
    27,231
    
    
    
    28,349
    
    
    
    31,254Selling, general and administrative expenses
    
    
    5,464
    
    
    
    5,769
    
    
    
    6,316Non-recurring charge
    
    
    
    
    
    
    800
    
    
    
    OPERATING INCOME
    
    
    1,277
    
    
    
    262
    
    
    
    619OTHER EXPENSEInterest expense
    
    
    153
    
    
    
    166
    
    
    
    203Income tax (benefit) expense
    
    
    (67
    )
    
    
    1,104
    
    
    
    257INCOME (LOSS) FROM CONTINUING
OPERATIONS
    
    
    1,191
    
    
    
    (1,008
    )
    
    
    159LOSS FROM DISCONTINUED OPERATIONS
(net of tax)
    
    
    
    
    
    
    
    
    
    
    (80
    )NET INCOME (LOSS)
    
    $
    1,191
    
    
    $
    (1,008
    )
    
    $
    79INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS - BASIC AND
DILUTED
    
    $
    .16
    
    
    $
    (.14
    )
    
    $
    .02LOSS PER SHARE FROM DISCONTINUED
OPERATIONS - BASIC AND DILUTED
    
    $
    
    
    
    $
    
    
    

    $
    (.01
    )NET INCOME
(LOSS) PER SHARE - BASIC
AND DILUTED
    
    $
    .16
    
    
    $
    (.14
    )
    
    $
    .01WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC
    
    
    7,360
    
    
    
    7,231
    
    
    
    6,709WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED
    
    
    7,675
    
    
    
    7,231
    
    
    
    6,998
 The accompanying notes are an integral part of these consolidated financial statements. F-3




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
(In thousands) Years Ended June 30, 2004, 2003, and 2002TotalNumber
    
    
    
    
    
    Capital in
    
    Accumu-
    
    
    
    
    
    Stock-of
    
    Common
    
    Excess of
    
    lated
    
    Treasury
    
    holdersShares
    
    Stock
    
    Par Value
    
    Deficit
    
    Stock
    
    EquityBalance, June 30, 2001
    
    
    6,475
    
    
    $
    65
    
    
    $
    18,359
    
    
    $
    (12,338
    )
    
    $
    (73
    )
    
    $
    6,013Exercise of stock options
    
    
    392
    
    
    
    4
    
    
    
    1,019
    
    
    
    
    
    
    
    
    
    
    
    1,023Treasury stock issued to ESSOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    250Purchase of Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (236
    )
    
    
    (236
    )Decrease in reserve on guarantee of
real estate debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    300Common stock issued to private
placement
    
    
    359
    
    
    
    3
    
    
    
    849
    
    
    
    
    
    
    
    
    
    
    
    852Tax benefit from exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    43Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    79Balance, June 30, 2002
    
    
    7,226
    
    
    
    72
    
    
    
    20,270
    
    
    
    (11,959
    )
    
    
    (59
    )
    
    
    8,324Exercise of stock options
    
    
    32
    
    
    
    1
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    78Tax benefit from exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,008
    )
    
    
    
    
    
    
    (1,008
    )Balance, June 30, 2003
    
    
    7,258
    
    
    
    73
    
    
    
    20,349
    
    
    
    (12,967
    )
    
    
    (59
    )
    
    
    7,396Exercise of stock options
    
    
    579
    
    
    
    5
    
    
    
    1,486
    
    
    
    
    
    
    
    
    
    
    
    1,491Purchase of Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,191
    
    
    
    
    
    
    
    1,191Balance, June 30, 2004
    
    
    7,837
    
    
    $
    78
    
    
    $
    21,835
    
    
    $
    (11,776
    )
    
    $
    (72
    )
    
    $
    10,065
 The accompanying notes are an integral part of these consolidated financial statements. F-4




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands) Years Ended June 30,2004
    
    2003
    
    2002Cash flows from operating activitiesNet income (loss)
    
    $
    1,191
    
    
    $
    (1,008
    )
    
    $
    79Adjustments to reconcile net income (loss) to
net cash provided by continuing operationsDepreciation and amortization
    
    
    670
    
    
    
    699
    
    
    
    766Loss on sale of property and equipment
    
    
    1
    
    
    
    26
    
    
    
    72Provision for doubtful accounts receivable
    
    
    191
    
    
    
    300
    
    
    
    732Stock issued to ESSOP
    
    
    
    
    
    
    
    
    
    
    250(Decrease) increase in tax valuation allowance
    
    
    (67
    )
    
    
    1,097
    
    
    
    1Tax benefit on exercise of non-qualified stock
options
    
    
    
    
    
    
    2
    
    
    
    43Changes in assets and liabilities(Increase) decrease in accounts receivable
    
    
    (471
    )
    
    
    356
    
    
    
    (1,734
    )Decrease (increase) in prepaid expenses
and other assets
    
    
    278
    
    
    
    (158
    )
    
    
    (214
    )Increase (decrease) in accounts payable
    
    
    1,360
    
    
    
    (1,266
    )
    
    
    768Decrease in accrued salaries and
vacation
    
    
    (42
    )
    
    
    (186
    )
    
    
    (151
    )(Decrease) increase in other liabilities
    
    
    (1,003
    )
    
    
    219
    
    
    
    599Net cash provided by continuing
operations
    
    
    2,108
    
    
    
    81
    
    
    
    1,211Changes in net assets/liabilities of discontinued
operations
    
    
    (110
    )
    
    
    (42
    )
    
    
    (167
    )Net cash provided by operating activities
    
    
    1,998
    
    
    
    39
    
    
    
    1,044Cash flows used in investing activitiesPurchases of property and equipment
    
    
    (615
    )
    
    
    (415
    )
    
    
    (724
    )Cash flows from financing activitiesNet (payment) borrowing on bank line of credit
    
    
    (2,125
    )
    
    
    266
    
    
    
    (1,904
    )Purchase of treasury stock
    
    
    (13
    )
    
    
    
    
    
    
    (236
    )Proceeds from issuance of common stock
    
    
    1,491
    
    
    
    78
    
    
    
    1,023Net proceeds from private placement
    
    
    
    
    
    
    
    
    
    
    852Net cash (used in) provided by financing
activities
    
    
    (647
    )
    
    
    344
    
    
    
    (265
    )Net increase (decrease) in cash and cash equivalents
    
    
    736
    
    
    
    (32
    )
    
    
    55Cash and cash equivalents at the beginning of
the year
    
    
    81
    
    
    
    113
    
    
    
    58Cash and cash equivalents at the end of
the year
    
    $
    817
    
    
    $
    81
    
    
    $
    113Supplementary disclosure of cash flow information:Cash paid during the period forInterest
    
    
    134
    
    
    
    156
    
    
    
    230Income Taxes
    
    
    41
    
    
    
    78
    
    
    
    121
 The accompanying notes are an integral part of these consolidated financial statements. F-5




---



##### 



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 and 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. Management reviews
outstanding receivables on a regular basis and assesses the need for reserves
taking into consideration past collection history and other events that bear on
the collectibility of such receivables. Depreciation and amortization: Depreciation and amortization are computed
on a straight-line basis over the estimated useful lives of the assets. Goodwill and other intangible assets: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 resulting from this transaction was approximately
$1.1 million. In fiscal year 2003, the Company adopted the Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets which eliminated the amortization of goodwill, but does require the
Company to test such goodwill for impairment annually. Currently, the carrying
value of goodwill is approximately $776,000 relating to the acquisition of
VGSI, which is now part of the Architecture and Engineering (A&E) reporting
unit. In performing its goodwill impairment analysis, management has utilized
a discounted cash flow model to determine the estimated fair value of the (A&E)
reporting unit. This model requires management, among other things, to
estimate future revenue and expenses of the A&E reporting unit based upon
current contract backlog and projected growth resulting from new business.
Management engages outside professionals and valuation experts, as necessary,
to assist in performing this analysis. For fiscal years 2004 and 2003, management concluded, based upon its
impairment analysis, that goodwill relating to the A&E reporting unit was not
impaired. F-6




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 performed by
the Company. 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. As of June 30,
2004, all warranty obligations for personal protective equipment had expired. 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 is established, as necessary, to reduce deferred income tax
assets to the amount 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 at June 30, 2004 of $209,000
is primarily reserved to wind down the remaining benefit plans of SMC. Stock-based compensation:The Company accounts for employee stock option
grants using the intrinsic method in accordance with Accounting Principles
Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees and
accordingly associated compensation expense, if any, is measured as the excess
of the underlying stock price over the exercise price on the date of grant.
The Company complies with the disclosure option of Statement of Financial
Accounting Standards (SFAS) No. 123 Accounting for
Stock-Based Compensation,
as amended by SFAS No. 148 Accounting for Stock-Based
Compensation--Transition
and Disclosure which requires pro-forma disclosure of compensation expense
associated with stock options under the fair value method. Had compensation cost been recognized based on the fair values of options
at the grant dates consistent with the provisions of SFAS No. 123, the
Companys net income (loss) and basic and diluted net income (loss) per common
share would have been changed to the following pro forma amounts: Years Ended June 30,2004
    
    2003(In thousands)Net income (loss) applicable to common shareholders
    
    $
    1,191
    
    
    $
    (1,008
    )Deduct: Total stock-based compensation expense
determined under fair value based method
    
    
    (329
    )
    
    
    (265
    )Pro forma net income (loss)
    
    $
    862
    
    
    $
    (1,273
    )Earnings per share:Basic and
Diluted - as reported
    
    $
    0.16
    
    
    $
    (0.14
    )Basic - pro forma
    
    $
    0.12
    
    
    $
    (0.18
    )Diluted - pro forma
    
    $
    0.11
    
    
    $
    (0.18
    )Weighted average shares:Weighted
average common shares outstanding - basic
    
    
    7,360
    
    
    
    7,231Weighted
average common shares outstanding - diluted
    
    
    7,675
    
    
    
    7,231
 F-7




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Net income (loss) per share:Basic net income (loss) per common share is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per common
share also includes common equivalent shares outstanding during the period if
it is dilutive. The
Companys common equivalent shares consist of stock options. For fiscal
year 2003, the assumed exercise of the Companys outstanding stock options and
warrants of 172,000 shares using the Treasury Stock Method are not included in
the calculation as the effect would be anti-dilutive. 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 30,2004
    
    2003
    
    2002(In thousands)Weighted average number of shares outstanding
- basic
    
    
    7,360
    
    
    
    7,231
    
    
    
    6,709Effect of assumed exercise of options
    
    
    315
    
    
    
    
    
    
    
    289Weighted average number of shares outstanding
- diluted
    
    
    7,675
    
    
    
    7,231
    
    
    
    6,998
 Recent Accounting Pronouncements: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 on its financial condition from the
adoption of this standard. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. This Interpretation clarifies
the application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires an
enterprise to consolidate a variable interest entity if that enterprise will
absorb a majority of the entitys expected losses, is entitled to receive a
majority of the entitys expected residual returns, or both. FIN 46 also
requires disclosures about unconsolidated variable interest entities in which
an enterprise holds
a significant variable interest. Application of FIN 46, as revised in December
2003, is required for financial statements of public entities that have
interest in variable interest entities, or potential variable interest entities
commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public companies for all other types of
entities is required in financial statements for periods ending after March 15,
2004. Adoption of FIN 46 will not have a significant impact on the Companys
operations as it currently does not have any variable interest entities. In May 2003, the FASB issued FAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. FAS 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those
financial statements to recognize changes in fair value or redemption amount,
as applicable, in earnings. FAS 150 requires an issuer to classify the
following financial instruments as liabilities: a) mandatorily redeemable
preferred and F-8




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) common stocks; b) forward purchase contracts that obligate the issuer to
repurchase shares of its stock by transferring assets; c) freestanding put
options that may obligate the issuer to repurchase shares of its stock by
transferring assets; and d) freestanding financial instruments that require or
permit the issuer to settle an obligation by issuing a variable number of its
shares if, at inception, the monetary value of the obligation is based solely
or predominantly on a fixed
monetary amount known at inception, variations in something other than the
issuers shares, such as the price of gold multiplied by a fixed notional
amount, or variations inversely related to changes in the value of the issuers
shares, such as a written put option that can be net share settled. The effect
of adopting FAS 150 will be recognized as a cumulative effect of an accounting
change as of the beginning of the period of adoption. Restatement of prior
periods is not permitted. FAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and, with one exception, is
effective at the beginning of the first interim period beginning after June 15,
2003 (July 1, 2003 for calendar year companies). The Company does not believe
there will be a material effect on its financial condition 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 $922,000 and $960,000 at June 30,
2004 and 2003, 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 $370,000 and $315,000 at June 30, 2004 and 2003, respectively. 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
and 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 and Engineering segment
provides engineering, design and construction management to industrial,
commercial and government 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. The buyers purchased the existing capital assets, on-going
contracts and remaining accounts receivables at book value. The buyers also
assumed the liabilities of certain leased office equipment. Versar retained
all other liabilities. The sale did 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. F-9




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Summary financial information for each of the Companys segments follows: Years Ended June 30,2004
    
    2003
    
    2002(In thousands)NET
SERVICE REVENUEEnvironmental Services
    
    $
    23,141
    
    
    $
    21,480
    
    
    $
    21,765Architecture/Engineering
    
    
    5,313
    
    
    
    7,504
    
    
    
    8,889Defense Systems
    
    
    5,518
    
    
    
    6,196
    
    
    
    7,535$
    33,972
    
    
    $
    35,180
    
    
    $
    38,189OPERATING INCOME/(LOSS)(A)Environmental Services
    
    $
    5,539
    
    
    $
    4,098
    
    
    $
    3,783Architecture/Engineering
    
    
    460
    
    
    
    1,095
    
    
    
    241Defense Systems
    
    
    742
    
    
    
    1,638
    
    
    
    2,911$
    6,741
    
    
    $
    6,831
    
    
    $
    6,935Selling, general and administrative expenses
    
    
    (5,464
    )
    
    
    (5,769
    )
    
    
    (6,316
    )Non-recurring charge
    
    
    
    
    
    
    (800
    )
    
    
    OPERATING INCOME
    
    $
    1,277
    
    
    $
    262
    
    
    $
    619
  (A) Operating income is defined as net service revenue less direct costs of
services and overhead. Years Ended June 30,2004
    
    2003(In thousands)IDENTIFIABLE ASSETSEnvironmental Services
    
    $
    9,513
    
    
    $
    8,388Architecture/Engineering
    
    
    5,105
    
    
    
    5,735Defense Systems
    
    
    2,997
    
    
    
    3,019Corporate and Other
    
    
    2,470
    
    
    
    2,194Total Assets
    
    $
    20,085
    
    
    $
    19,336
 F-10




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE C ACCOUNTS RECEIVABLE June 30,2004
    
    2003(In thousands)Billed receivablesU.S. Government
    
    $
    4,189
    
    
    $
    4,207Commercial
    
    
    4,487
    
    
    
    3,353Unbilled receivablesU.S. Government
    
    
    5,422
    
    
    
    4,713Commercial
    
    
    1,039
    
    
    
    2,49115,137
    
    
    
    14,764Allowance for doubtful accounts
    
    
    (993
    )
    
    
    (900
    )$
    14,144
    
    
    $
    13,864
 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, 2004 unbilled receivables will be substantially billed and collected
in fiscal year 2005. NOTE D PROPERTY AND EQUIPMENT Estimated Useful Life
    
    June 30,in Years
    
    2004
    
    2003(In thousands)Furniture and fixtures
    
    10
    
    $
    760
    
    
    $
    760Equipment
    
    3 to 10
    
    
    5,637
    
    
    
    5,206Capital leases
    
    Life of lease
    
    
    712
    
    
    
    568Leasehold improvements
    
    Life of lease
    
    
    1,426
    
    
    
    1,4008,535
    
    
    
    7,934Accumulated depreciation
and amortization
    
    
    
    
    (6,427
    )
    
    
    (5,770
    )$
    2,108
    
    
    $
    2,164
 Depreciation and amortization of property and equipment included as
expenses in the accompanying Consolidated Statements of Operations was
$670,000, $699,000, and $692,000 for the years ended June 30, 2004, 2003, and
2002, respectively. Maintenance and repair expenses approximated $279,000, $289,000, and
$307,000 for the years ended June 30, 2004, 2003, and 2002, respectively. F-11




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE E DEBT In September 2003, Versar entered into a new line of credit facility with
United Bank (Bank) that provides for advances up to $5,000,000 based upon
qualifying receivables. Interest on the borrowings is based on prime plus one
and a half percent (5.50% and 4.04% as of June 30, 2004 and 2003,
respectively). 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.
Outstanding borrowings as of June 30, 2003 were $2,125,000. At June 30, 2004,
there was no outstanding borrowing. The line is subject to renewal in November
2005. The loan has certain covenants related to the maintenance of financial
ratios. At June 30, 2004, the Company was in compliance with the financial
covenants. NOTE F STOCK OPTIONS In November 2002, the stockholders approved the Versar, Inc. 2002 Stock
Incentive Plan (the 2002 Plan). The 2002 Plan provides for the grant of
options, restricted stock and other types of stock-based awards to any
employee, Service Provider or director to whom a grant is approved from time to
time by the Companys Compensation Committee. A Service Provider is defined
for purposes of the 2002 Plan as an individual who is neither an employee nor a
director of the Company or any of its Affiliates but who provides the Company
or one of its Affiliates substantial and important services. The aggregate
number of shares of the Companys Common Stock that may be issued upon exercise
of options
or granted as restricted stock or other stock-based awards under the 2002 Plan
is 700,000. Grants of restricted stock, performance equity awards, options and
stock appreciation rights in any one fiscal year to any one participant may not
exceed 250,000 shares. The maximum amount of compensation that may be received
by any one employee with respect to performance unit grants in any one fiscal
year may not exceed $250,000. 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). 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 through November 2002, were 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. The 1992 plan has expired and no additional options may
be granted. The Company will continue to maintain the plan until all
previously granted options have been exercised, forfeited or expire. Participants in the 1987 Plan included 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, forfeited or expired without exercise. F-12




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Total options under the Stock Option 2002, 1996, and 1992 Plans are as
follows: Optioned
    
    Option PriceShares
    
    Per Share
    
    Total(In thousands, except per share price)Outstanding at June 30, 2001
    
    
    1,281
    
    
    $
    1.75
    
    
    to
    
    $
    5.38
    
    
    $
    3,689Granted
    
    
    40
    
    
    
    2.05
    
    
    to
    
    
    3.75
    
    
    
    120Exercised
    
    
    (282
    )
    
    
    1.75
    
    
    to
    
    
    3.94
    
    
    
    (729
    )Cancelled
    
    
    (69
    )
    
    
    1.75
    
    
    to
    
    
    4.50
    
    
    
    (225
    )Outstanding at June 30, 2002
    
    
    970
    
    
    $
    1.75
    
    
    to
    
    $
    5.38
    
    
    $
    2,855Granted
    
    
    492
    
    
    
    1.81
    
    
    to
    
    
    2.87
    
    
    
    1,028Exercised
    
    
    (8
    )
    
    
    2.38
    
    
    to
    
    
    2.40
    
    
    
    (18
    )Cancelled
    
    
    (50
    )
    
    
    1.75
    
    
    to
    
    
    4.50
    
    
    
    (124
    )Reclassified to non-qualified
    
    
    (157
    )
    
    
    1.75
    
    
    to
    
    
    5.38
    
    
    
    (468
    )Outstanding at June 30, 2003
    
    
    1,247
    
    
    
    1.75
    
    
    to
    
    
    4.50
    
    
    $
    3,273Granted
    
    
    395
    
    
    
    2.61
    
    
    to
    
    
    4.95
    
    
    
    1,247Exercised
    
    
    (210
    )
    
    
    1.75
    
    
    to
    
    
    3.50
    
    
    
    (463
    )Cancelled
    
    
    (34
    )
    
    
    1.75
    
    
    to
    
    
    4.50
    
    
    
    (84
    )Reclassified to non-qualified
    
    
    (277
    )
    
    
    1.75
    
    
    to
    
    
    4.50
    
    
    
    (809
    )Outstanding at June 30, 2004
    
    
    1,121
    
    
    $
    1.75
    
    
    to
    
    $
    4.95
    
    
    $
    3,164
 At June 30, 2004, 2003, and 2002, options aggregating 566,000, 804,000 and
807,000 shares were exercisable under the 2002, 1996 and 1992 Plans. F-13




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Total non-qualified stock options granted under the 2002, 1996, and 1992 plans
are as follows: Optioned
    
    Option PriceShares
    
    Per Share
    
    Total(In thousands, except per share price)Outstanding at June 30, 2001
    
    
    299
    
    
    $
    2.38
    
    
    to
    
    $
    4.75
    
    
    $
    862Granted
    
    
    71
    
    
    
    1.75
    
    
    to
    
    
    6.50
    
    
    
    318Exercised
    
    
    (110
    )
    
    
    2.38
    
    
    to
    
    
    4.75
    
    
    
    (295
    )Cancelled
    
    
    (8
    )
    
    
    2.50
    
    
    to
    
    
    3.57
    
    
    
    (23
    )Outstanding at June 30, 2002
    
    
    252
    
    
    $
    1.75
    
    
    to
    
    $
    6.50
    
    
    $
    862Granted
    
    
    129
    
    
    
    1.81
    
    
    to
    
    
    1.88
    
    
    
    235Exercised
    
    
    (24
    )
    
    
    1.75
    
    
    to
    
    
    2.88
    
    
    
    (60
    )Cancelled
    
    
    (16
    )
    
    
    2.38
    
    
    to
    
    
    3.94
    
    
    
    (50
    )Reclassified from ISO
    
    
    157
    
    
    
    1.75
    
    
    to
    
    
    5.38
    
    
    
    468Outstanding at June 30, 2003
    
    
    498
    
    
    
    1.75
    
    
    to
    
    
    6.50
    
    
    $
    1,455Granted
    
    
    44
    
    
    
    2.80
    
    
    to
    
    
    3.10
    
    
    
    132Exercised
    
    
    (370
    )
    
    
    1.75
    
    
    to
    
    
    4.50
    
    
    
    (1,029
    )Reclassified from ISO
    
    
    277
    
    
    
    1.75
    
    
    to
    
    
    4.50
    
    
    
    809Outstanding at June 30, 2004
    
    
    449
    
    
    $
    1.75
    
    
    to
    
    $
    6.50
    
    
    $
    1,367
 Non-Qualified stock options of 326,000, 342,000, and 222,000 shares were
exercisable at June 30, 2004, 2003, and 2002, respectively. F-14




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The weighted average fair value of options granted was $2.85, $2.69 and
$2.59 during 2004, 2003 and 2002, 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 2004, 2003 and 2002:
expected volatility of 63.8%, 60.5% and 88.7% for 2004, 2003 and 2002,
respectively; risk-free interest rate of 4.11%, 4.70% and 4.57% for 2004, 2003
and 2002, respectively; and expected lives of five years after the grant date. NOTE G INCOME TAXES The income taxes (benefit) expense applicable to income from continuing
operations consists of the following: Years Ended June 30,2004
    
    2003
    
    2002(In thousands)CurrentFederal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    7
    
    
    
    206DeferredFederal
    
    
    
    
    
    
    
    
    
    
    1State
    
    
    
    
    
    
    
    
    
    
    Valuation Allowance
    
    
    (67
    )
    
    
    1,097
    
    
    
    $
    (67
    )
    
    $
    1,104
    
    
    $
    207
 Deferred tax assets are comprised of the following (in thousands): June 30,
    
    June 30,2004
    
    2003Deferred Tax Assets:Employee benefits
    
    $
    587
    
    
    $
    654Accrued warranty costs
    
    
    76
    
    
    
    116Bad debt reserves
    
    
    394
    
    
    
    359All other reserves
    
    
    300
    
    
    
    380Discontinued operations reserves
    
    
    111
    
    
    
    127Alternative minimum tax credits
    
    
    117
    
    
    
    117Net operating losses
    
    
    1,244
    
    
    
    1,668Net operating losses of purchased
business
    
    
    915
    
    
    
    663State tax net operating losses
    
    
    436
    
    
    
    436Depreciation
    
    
    256
    
    
    
    180Other
    
    
    15
    
    
    
    14Total Deferred Tax Assets
    
    
    4,451
    
    
    
    4,714Valuation Allowance
    
    
    (3,782
    )
    
    
    (4,112
    )Net Deferred Tax Asset
    
    $
    669
    
    
    $
    602
 F-15




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. During fiscal year 2004, the
Company generated a tax benefit of approximately $169,000 relating to the
exercise of certain non-qualified stock options. Since the Company has
provided a valuation allowance against deferred tax assets, a portion of the
valuation allowance has been identified as relating to this excess tax benefit
and will be charged to additional paid-in capital in future periods. At June
30, 2004, 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 to state the deferred tax assets at amounts
expected to be realized in future periods. SMC has net operating loss carryforwards of approximately $8.3 million for
federal income tax purposes, which will expire in the years 2005 through 2012.
Due to the substantial changes in SMCs ownership, there are limitations on the
amount of the carryforwards that can be utilized. A reconciliation of the Companys income tax (benefit) expense for the
federal statutory rate is as follows: Years Ended June 30,2004
    
    2003
    
    2002(In thousands)Expected provision at federal
statutory rate
    
    $
    382
    
    
    $
    51
    
    
    $
    97Change in valuation allowance
    
    
    (497
    )
    
    
    1,007
    
    
    
    100State income tax expense
    
    
    51
    
    
    
    5
    
    
    
    11Permanent items
    
    
    30
    
    
    
    44
    
    
    
    (38
    )Tax effect of non-qualified stock
option exercised
    
    
    
    
    
    
    2
    
    
    
    43Other
    
    
    (33
    )
    
    
    (5
    )
    
    
    (6
    )$
    (67
    )
    
    $
    1,104
    
    
    $
    207
 Income taxes paid for the years ended June 30, 2004, 2003, and 2002 were
$41,000, $78,000, and $121,000, respectively. NOTE H EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN The Company has historically maintained an Employee Savings and Stock
Ownership Plan (ESSOP) for the benefit of its employees and those of its
subsidiaries. The plan included an Employee Stock Ownership Plan (ESOP) and an
Employee Savings Plan (401(k) Plan). The 401(k) plan permits voluntary
participation in the 401(k) Plan upon employment. All employees with at least
500 hours of service were 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 to the plan since fiscal
year 1993. The Company received approval from the Internal Revenue Service to
terminate the ESOP effective December 31, 2002. The plan assets have been
fully distributed to the plan participants and the plan was closed in September
2003. 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. In fiscal year 2004, the
Company matched qualified contributions of 100% of each employees deferral up
to 2% of the employees salary. This contribution may be in the Companys stock
or cash. In fiscal year 2004, the Company made cash matching contributions of
approximately F-16




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) $320,000. In fiscal year 2003, the Company made cash matching contributions of
approximately $630,000. In fiscal year 2002, the Company matched $293,000 in
stock and $369,000 in cash for a total of $662,000. Effective July 1, 2004,
the Company will match 100% for the first 3% and 50% for the next 2% of the
qualified employee salary for a total of 4% employer match. All contributions
to the 401(k) Plan vest immediately. Effective July 1, 2002, the 401(k) Plan was restated to comply with the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The
Company also changed the plan year from June 30 to a calendar year end.
Restated plan documents and changes for the 401(k) plan have received favorable
determination from the IRS. 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 2004, 2003 and 2002. Vesting occurs over time, such that
an employee is 100% vested after seven years of participation. NOTE I 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 2002 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 184,000 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: TotalYears Ending June 30,
    
    Amount(In thousands)2005
    
    $
    3,3202006
    
    
    2,2802007
    
    
    1,9562008
    
    
    1,7982009
    
    
    1,7212010 and thereafter
    
    
    1,076$
    12,151
 Certain of the lease payments are subject to adjustment for increases in
utility costs and real estate taxes. Total office rental expense approximated
$3,008,000, $2,943,000 and $2,867,000, for 2004, 2003 and 2002, respectively. In May 2004, the Company entered into a letter of credit with the Greek
government for approximately $140,000 to guarantee the performance under a
contract to deliver chemical protective suits for the Greek Olympics. The
Company anticipates that the letter of credit will be terminated in early
fiscal year 2005 with the completion of the Companys obligations under the
contract. Legal Proceedings In August 1997, Versar entered into a contract with the Trustees for the
Enviro-Chem Superfund Site (the
Superfund Site), which provided that, based upon an existing performance
specification, Versar would refine the F-17




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) design, and construct and operate a soil vapor extraction system. During the
performance of the contract, disputes arose between Versar and the Trustees
regarding the scope of work. Eventually, Versar was terminated by the Trustees
for convenience. The Trustees then failed to pay certain invoices and
retainages due Versar. On March 19, 2001, Versar instituted a lawsuit against the Trustees 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 the remediation
contract from the Trustees of the Superfund Site, claimed 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, where, on April 20, 2001, the two Trustees had filed suit
against Versar in the U.S. District Court for the Southern District of Indiana,
entitled, Roy O. Ball and Norman W. Bernstein, 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 judgment 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 filed an answer and counterclaim to the
Indiana lawsuit. The plaintiffs and third-party defendants filed Motions to
Dismiss the Companys counterclaim. The court granted the motions in part and
denied them in part. Versar amended its answer and counterclaim. In the
meantime, plaintiffs filed a Motion for Partial Summary Judgment which the
Judge granted in part and denied in part. The Judge held that certain
agreements entered into by the parties prevented Versar from recovering certain
amounts under its counter claim but that Versar could pursue its claim for
fraud in other areas. Written and oral discovery has commenced and has
continued for several years. Discovery is expected to be completed by the end
of calendar 2004. Trial is scheduled for May 2005. Based upon discussions
with outside counsel, management does not believe that the ultimate resolution
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 J 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 30,2004
    
    2003
    
    2002(In thousands)U.S. Department of Defense
    
    $
    22,921
    
    
    $
    24,343
    
    
    $
    38,576U.S. Environmental Protection Agency
    
    
    4,315
    
    
    
    3,312
    
    
    
    3,495Other U.S. Government agencies
    
    
    8,558
    
    
    
    7,644
    
    
    
    3,906Total U.S. Government
    
    $
    35,794
    
    
    $
    35,299
    
    
    $
    45,977
 The Companys major contracts with the Department of Defense generated
revenues of approximately $10,974,000, $11,206,000 and $20,353,000 in fiscal
years 2004, 2003 and 2002, respectively. F-18




---



##### 



VERSAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE K QUARTERLY FINANCIAL INFORMATION(UNAUDITED) Quarterly financial information for fiscal years 2004 and 2003 is as
follows (in thousands, except per share amounts): Fiscal Year 2004
    
    Fiscal Year 2003Quarter ending
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sept 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sept 30Gross Revenue
    
    $
    17,431
    
    
    $
    15,130
    
    
    $
    14,288
    
    
    $
    13,605
    
    
    $
    14,419
    
    
    $
    13,366
    
    
    $
    15,428
    
    
    $
    13,884Net Service Revenue
    
    
    9,043
    
    
    
    8,447
    
    
    
    8,253
    
    
    
    8,229
    
    
    
    9,042
    
    
    
    8,843
    
    
    
    9,271
    
    
    
    8,024Operating (loss) income
    
    
    417
    
    
    
    64
    
    
    
    399
    
    
    
    397
    
    
    
    564
    
    
    
    114
    
    
    
    553
    
    
    
    (969
    )Net (loss) income
    
    $
    461
    
    
    $
    21
    
    
    $
    366
    
    
    $
    343
    
    
    $
    519
    
    
    $
    (455
    )
    
    $
    329
    
    
    $
    (1,401
    )Net (loss) income per
share - diluted
    
    $
    0.06
    
    
    $
    
    
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    (0.06
    )
    
    $
    0.05
    
    
    $
    (0.19
    )Weighted average number of
shares outstanding -
diluted
    
    
    8,105
    
    
    
    7,737
    
    
    
    7,569
    
    
    
    7,518
    
    
    
    7,497
    
    
    
    7,227
    
    
    
    7,247
    
    
    
    7,227
 Quarterly earnings per share data may not equal annual total due to
fluctuations in common shares outstanding. F-19




---



##### 



Schedule II VERSAR, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts ADDITIONSBALANCE AT
    
    CHARGED TO
    
    
    
    
    
    BALANCE ATBEGINNING OF
    
    COSTS AND
    
    
    
    
    
    END OFYEAR
    
    EXPENSES
    
    CHARGE OFF
    
    YEARALLOWANCE FOR DOUBTFUL
ACCOUNTS2002
    
    
    321,688
    
    
    
    732,173
    
    
    
    (185,610
    )
    
    
    868,2512003
    
    
    868,251
    
    
    
    300,137
    
    
    
    (267,996
    )
    
    
    900,3922004
    
    
    900,392
    
    
    
    190,916
    
    
    
    (97,931
    )
    
    
    993,377DEFERRED TAX VALUATION
ALLOWANCE2002
    
    
    3,056,000
    
    
    
    100,000
    
    
    
    
    
    
    
    3,156,0002003
    
    
    3,156,000
    
    
    
    1,097,000
    
    
    
    (141,000
    )
    
    
    4,112,0002004
    
    
    4,112,000
    
    
    
    
    
    
    
    (330,000
    )
    
    
    3,782,000
 F-20