SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

|                          |  |                
|------------------------- |  | ---------------
|For the fiscal year ended |  | Commission File
|                         
|                         
|                         
|                         
|June 30, 2001             |  | No. 1-9309     



---

VERSAR INC.
(Exact name of registrant as specified in its charter)

|                                          |  |                                     
|----------------------------------------- |  | ------------------------------------
|DELAWARE                                  |  | 54-0852979                          
|                                         
|                                         
|                                         
|                                         
|(State or other jurisdiction of           |  | (I.R.S. employer identification no.)
|                                         
|                                         
|                                         
|                                         
|incorporation or organization)           
|                                         
|                                         
|                                         
|                                         
|6850 Versar Center, Springfield, Virginia |  | 22151                               
|                                         
|                                         
|                                         
|                                         
|(Address of principal executive offices)  |  | (Zip code)                          

(703) 750-3000
(Registrants telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YesX     No

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of September 4, 2001 was approximately $8,010,200.

The number of shares of Common Stock outstanding as of September 4, 2001
was 6,477,452.

The Exhibit Index required by 17 CFR Part 240.0-3(c) is located on Pages
19 through 22 hereof.



---



DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement to be filed with the
Securities and Exchange Commission with respect to the 2001 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.





---



PART I

Item 1. Business

Forward-Looking Statements

This report contains certain forward-looking statements which are based on
current expectations. Actual results may differ materially. The
forward-looking statements include those regarding the continued award of
future work or task orders from government and private clients, cost controls
and reductions, the expected resolution of delays in billing of certain
projects, the possible impact of current and future claims against the Company
based upon negligence and other theories of liability, and the possibility of
the Company making acquisitions during the next 12 to 18 months.
Forward-looking statements involve numerous risks and uncertainties that could
cause actual results to differ materially, including, but not limited to, the
possibilities that the demand for the Companys services may decline as a
result of possible changes in general and industry specific economic conditions
and the effects of competitive services and pricing; the possibility the
Company will not be able to perform work within budget or contractual
limitations; one or more current or future claims made against the Company may
result in substantial liabilities; the possibility that acquired entities may
not perform as well as expected; the possibility the Company will not be able
to attract and retain key professional employees; and such other risks and
uncertainties as are described in reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission.

Versar is a leading professional services firm that utilizes innovation
and technology to help customers meet their infrastructure needs and enhance
their competitiveness in todays global economy. Our focus is infrastructure
revitalization and development where we provide environmental, architectural,
engineering and technology application services to government and industry.
Versar has three major business areas that include: (1) Environmental Services
including pollution prevention, compliance management and the environmental
restoration of industrial and commercial facilities sites and military bases,
(2) Architectural and Engineering Servicesin support of industrial,
commercial, and government infrastructure projects, including energy and
recreational facilities, and (3) Defense Systemsincluding personal protection
equipment and technology development efforts in support of chemical
demilitarization and counter-terrorism.

Environmental Services

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

Achieving Compliance through Pollution Prevention.Todays business
challenges require viewing environmental management as an integral part of
customers day-to-day operations, so that informed decisions can be made based
on the economics of alternate solutions and their impact on productivity and
profitability. Versar helps its customers manage compliance as part of
operations and encourages recognition that pollution prevention and waste
minimization are necessary parts of the long-term solution to local and
national environmental challenges. This approach recognizes that there is
competition for limited resources and a need for new and better technology to
eliminate
waste, reduce emissions, and to implement more cost effective corrective
actions. Versars combined strengths in regulatory policy, risk assessment,
information management, pollution control, and treatment technology emphasize
pollution prevention and waste reduction. Versar provides nationally
recognized expert services in the areas of air and water quality, waste
management, natural resources management, ecological assessments, asbestos and
lead paint abatement, industrial hygiene and a wide range of corrective and
remedial action technologies. Versar also provides

2



---



consulting and engineering
services to industry and government agencies in assessing alternative
compliance strategies and their impacts on our customers operations and
profits. We help develop plans for their implementation, obtain necessary
permits, evaluate performance, and take any corrective action required. In
fiscal year (FY) 2001, Versar won two contracts valued at $2.7M to support the
Defense Energy Supply Center (DESC) by providing environmental and energy
engineering support to DESC bulk fuel transfer stations and military facilities
world-wide focused on compliance and pollution prevention. In FY 2001, Versar
also won a re-bid of its support contract for Wright Patterson AFB and
Aeronautical Systems Center. This 5 year contract valued at $8.3M requires the
Company to provide comprehensive environmental services to Air Force
installations nationwide.

Clean Technology.Versar is a leader in the development of clean
technology to solve complex environmental problems. For example, Versar
applied an alternative technology and paint formulation for coating mass
transit vehicles eliminating the need to install a $6M vapor collection system.
Over the last two years, Versar has assisted the U.S. military in the complete
redesign of a system to clean oxygen converters and oxygen lines used by
military aircraft. The system has eliminated the use of toxic materials,
increased the efficiency of the cleaning process by a factor of 10 and
increased the life of equipment. In (FY) 2001, Versar patented the
technology, which has world-wide applications. Versar also completed a
successful demonstration for the Royal Australian Air Force and is now
evaluating options for the commercialization and licensing of the technology.

Ecological Restoration.Water quality is one of the emerging global
environmental issues of the 21st century. Excessive nutrients and non-point
source pollution is severely impacting the natural filtering capability of our
aquatic ecosystem, which affects our water quality. Versar has developed
specialized expertise in ecological assessment and restoration. For more than
25 years we have supported the State of Maryland, Virginia, Delaware, the U.S.
Environmental Protection Agency (EPA), and U.S. Army Corps of Engineers (USACE)
in the assessment of the ecological health of the Chesapeake Bay and the
development of management practices to restore this endangered ecosystem and to
protect it from further harm due to increased development in this region.
Versar manages the Chesapeake Bay Monitoring Program that provides scientific
support to state regulatory agencies in the development of guidelines for
development for protecting the bay. We also have major contracts with the
Philadelphia and Baltimore Districts of the USACE for the conduct of ecological
assessments in support of the disposal of dredge material in the redevelopment
of ports and harbors and the restoration of our nations beaches. In FY 2000,
Versar won the follow-on contract of our Philadelphia District USACE contract
valued at $10M and also won a new contract for the Wilmington District of the
USACE for similar work valued at $6M. Versar is now trying to bring our
Chesapeake Bay experience to the Comprehensive Everglades Restoration Program.

Remediation of Industrial Facilities/Military Bases.Versar provides the
full range of services in remediation/corrective action from site
investigation, remedial design, to construction, operation and maintenance
(O&M) of remedial systems. A major accomplishment of the Company in FY 2001
was the award of a new Environmental Remediation and Construction Contract
(ENRAC) for the Air Force Center for Environmental Excellence, which is a
follow-on to our existing Worldwide Full Service Remedial Action Contract.
This new contract has an estimated value of $54M over 5 years and recognizes
Versars accomplishments as a remedial construction contractor. In FY 2000,
under an existing remediation contract, Versar booked approximately $13.8M in
new orders for remedial construction projects. We have work-in-progress at
Castle, Beale, Pease, Lowry, and Plattsburgh Air Force Bases as well as Pueblo Army
Depot.

Versar brings to its customers innovative solutions to cleanup that are
cost effective and permanent. For example, Versar has successfully
demonstrated the effectiveness of a passive reactive barrier consisting of iron
fillings placed in a trench to remove halogenated organic compounds from
groundwater at Lowry Air Force Base. This eliminated the need to pump and
treat the groundwater. Versar is expected to construct the full scale remedy
at Lowry AFB under our ENRAC contract; however, the project is dependent on a
final decision by the Air Force and available funding.

3



---



Military Range Cleanup.Versar is applying innovative approaches to
reduce the cost of cleanup of military ranges, a high priority for the U.S.
Department of Defense (DoD) as it continues to realign its bases as part of its
transformation into a new force structure. Versar is separating reusable
materials from bomb range residues, used targets, and other scrap materials at
Nellis Air Force Base. Versar is brokering reusable material to aluminum
processors and scrap metal smelters and reimbursing the government for the
savings.

Outsourcing.Versar is increasingly providing on-site and off-site
support to help customers manage their environmental programs. Over the last 7
years, the Company has provided a full range of pollution prevention,
compliance management, cleanup, and O&M services for the Washington, D.C.
Metropolitan Area Transit Authority (WMATA). This model project demonstrates
how environmental management can be integrated with the customers operations
on an outsourced basis. Versar also has over 35 on-site support staff at
various DoD installations and industrial facilities across the country managing
a wide spectrum of customers environmental management functions ranging from
underground storage tanks (USTs), asbestos abatement programs, air
compliance/permitting, real property transfers, and on-site hazardous material
pharmacies.

Architectural and Engineering Services

Versar has successfully leveraged its environmental technology expertise
in designing industrial, commercial, and government facilities for sustainable
operations preserving our natural resources. In FY 2001, in response to our
customers increasing needs for design-build services, Versar established a
separate business unit, Versar Global Solutions, Inc. (VGSI), based on the
Greenwood Partnership acquired in 1998, to provide integrated
design-construction services to its customers with a focus on sustainable
development.

Industrial and Public Infrastructure Servicesis a core business of
Versar. We have integrated all of our industrial and public infrastructure
project support services into VGSI. This service area includes providing a
full range of architectural, engineering, and construction management services
in the site development, and design of industrial/commercial facilities and
public infrastructure projects. Key industrial sectors that the Company serves
include the pharmaceuticals, semi-conductor/internet services, biotechnology,
food processing, paper products, film, plastics and fiber industries. Services
include architectural design, site development, design, construction or
design-build of plant facility, and supporting utility, material handling, and
waste management systems. Versar recently completed the design of a new
facility for Avenir the internet service company in Northern Virginia. The
design maximizes the use of
natural light, and provides maximum flexibility for the upgrade of internet
technology infrastructure.

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

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



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

4



---



Versar offers to take over the operation and maintenance of utility
infrastructure systems of its customers on a contract services basis.

Public Infrastructure Servicesinclude highway design and construction
oversight, municipal stormwater, water and wastewater design, and recreational
facilities including waterparks and skateboard parks.

Versar was just awarded its third consecutive contract to support the Army
on public works projects at Ft. Monmouth, New Jersey and other Army
installations in the mid-Atlantic region. We just completed the installation
of a major data main at Beale AFB and are under contract to support Norfolk
Southern in the placement of fiber optics along its right-of-ways on the
eastern seaboard.

Versars Utah Office has extensive depth of experience in municipal
engineering services. Over the past 20 years we have completed a large number
of projects for the Utah Department of Transportation (UDOT), municipalities
and counties in the state. Projects have included highway and interchange
designs, water distribution systems, wastewater systems, surface water drainage
systems and other general civil engineering design projects. Much of the work
over the past few years relates to the 2002 Winter Olympics and I-15 projects,
and management believes civil engineering business will continue to grow as a
result of population growth in the region.

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

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

Versar currently has developed alliances with four major utilities who are
marketing Energy Services Performance Contracts (ESPC) for the government and
industry. These alliances include Duke Energy (DukeSolutions Inc.), Virginia
Power and Light (Evantage Co.), Carolina P&L (Strategic Resources Services) and
ENRON Energy Services. Potential fees for the utility companies on these
contracts are based on energy savings that can be achieved. Versars utility
partners make the required investment to upgrade each facility while Versar is
reimbursed on the basis of a negotiated fixed fee.

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

Defense Systems

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

5



---



Versars subsidiary, GEOMET Technologies, Inc. (GEOMET) is a leader in
developing, testing and manufacturing personal protection equipment (PPE).
Current projects include development of two PPE ensembles for use in the depots
where chemical weapons are stockpiled, and in activities where exposure to
chemical agents is likely, such as laboratory work and emergency response. The
ensembles include a protective suit, clean air source, radio communications,
and a Personal Ice Cooling System (PICS). In July 1998, GEOMET was awarded a
$38M contract for the production and fielding of the Armys Self-Contained
Toxic Environment Protection Outfit (STEPO) System for 73 installations through
the year 2002. GEOMET started production in late fiscal year 1999 and was
funded the remaining balance for full scale production in fiscal year 2000.

These protective suits will be used to recover, render safe, store and
dispose of unexploded chemical and biological weapons.

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

GEOMET is also involved in the disposal of residual chemical weapons
material at sites throughout the United States. GEOMETs program, which was
rebid in fiscal year 2001, includes outfitting and operating a mobile
laboratory, which will support the disposal operations, design of air
monitoring and warning systems, specification of the PPE to be used, and other
assignments dealing with environmental compliance, development of operational
procedures, and program management. We expect to receive notice about the
follow-on to this contract in fiscal year 2002. GEOMET has also recently
mobilized support of a chemical demilitarization project in Japan, and we
expect other overseas opportunities to result from this initiative.

Major Initiatives

Versar is committed to transforming its services to meet new economic
development technology driven demands including Brownfields redevelopment
energy resources, transportation infrastructure/management, community
redevelopment, defense systems, counter-terrorism, and information technology
applications. Major initiatives include:

Brownfields Redevelopment.Versar has established a new business unit to
support industry in the disposition of non-performing assets and government in
the reuse of military bases as part of the Base Realignment and Closure
program. Our focus is on deal making, where Versar brings together
developers, financers, and insurers to develop an acquisition and exit strategy
and plan. Versars role may vary from project engineer responsible for
cleanup to the design and construction of reuse facilities. Our goal is to
develop an equity stake in selected deals that provides a source of non-labor
generated revenue and profits. We have hired a senior executive to manage this
initiative and are negotiating our first project  the Carriage House of the
Jefferson Hotel in Richmond, Virginia.

Versar is applying innovative technology and approaches that include
creative financing, and stop-loss insurance in the cleanup and redevelopment of
industrial and commercial properties that are environmentally impaired or part
of the EPA and the states Brownfields programs. Versar focuses primarily on
the enhancement of assets in the cleanup of sites and the redevelopment of
industrial facilities and commercial properties for reuse. Versar has
established alliances with real estate and investment firms, developers,
insurers, and property managers to help clients bring new life to otherwise
abandoned, contaminated sites in prime real estate locations.

6



---



Green Energy Development.Versar is taking advantage of the nations
energy needs and the deregulation of the industry. As part of its new project
development program to generate non-labor revenues and profits, Versar is
evaluating a number of different energy development projects such as the use of
landfill gas to produce electricity.

Construction and Design-Build.Versar has successfully made the
transition from an engineering services company to a general contractor to
address market needs for turnkey design-build environmental restoration
projects. In FY 2001, Versar performed over $15M in remedial construction
services. Versar is now expanding its capability as a general contractor to
capture a larger part of the design-build business for
industrial and public infrastructure projects. Versar completed the
construction of a water main for Beale Air Force Base in fiscal year 2001.

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

Versar is currently supporting the State of Maryland in the management of
the Chesapeake Bay Monitoring Program. Versar hosts the website and links to
program technical databases for this program. We have also developed and
manage a website for the State of Maryland that collects and displays
information on ozone pollution in the atmosphere. We are also currently
developing a website for an industry trade group that will provide a wide range
of environmental information to building managers to help them better manage
their energy resources and enhance the comfort of commercial facilities.

Markets

Versars services are evolving in response to clients changing needs, and
market opportunities are being driven by the availability of technology aimed
at enhancing operating performance and profitability. Versar has diversified
its business over the past few years with a much greater emphasis on (1)
environmental services which help our customers bottom line, such as P2
initiatives with short paybacks, redevelopment of industry properties and
conversion of military bases for alternative productive uses and hands-on
remediation and construction services; (2) the emerging energy conservation
services markets with alliances and core capabilities to enter this new market;
and (3) industrial and public infrastructure services to respond to our
clients increasing need to expand or upgrade plant and equipment to improve
their operating performance.

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

The Department of Defense (DoD) is Versars largest government client,
making up 58 percent of its business base. Versar is a major support
contractor to DoD, offering the same range of services as in the private
sector. DoD is going through many of the same issues faced by private industry
including restructuring and cost reduction in response to increasing budget
limitations. DoD also has an aggressive environmental program to cleanup,
realign, and close bases worldwide as it continues to restructure to a smaller
force. DoDs major focus over the next few years will be to reduce its
infrastructure. Congress is considering additional base consolidation, which
will drive more base realignment and closure activity, including cleanup. The
EPA makes up 4 percent of Versars business, which is growing in new areas such
as water quality, risk assessment, and natural resources management. Versar
thus maintains extensive knowledge of regulatory trends and their impacts.
Other Federal clients make up 8 percent of our business and include NASA, the
Departments of Energy and the Interior, Federal Housing Authority, and
Intelligence Agencies. State and local governments make up 12 percent of
Versars business.

7



---



Competition

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

Backlog

As of June 30, 2001, total backlog for Versar, including unfunded
government tasks and orders, was approximately $300 million, as compared to
approximately $246 million as of June 30, 2000, an increase of 22 percent.
Funded backlog for Versar was approximately $42 million, a decrease of 31
percent compared to approximately $61 million as of June 30, 2000.
Approximately $225 million of the contract backlog is not expected to be funded
in fiscal year 2002. Funded backlog is the incremental funding authorization
of contracts and task orders based on firm contractual obligations. Unfunded
backlog includes contracts and contract vehicles, including option periods, in
which specific work tasks and funding have not been authorized. Funded backlog
amounts have historically resulted in revenues; however, no assurance can be
given that all amounts included in funded backlog will ultimately be realized
as revenue.

Employees

At June 30, 2001, Versar has approximately 350 full-time employees, of
which seventy-seven percent are engineers, scientists, and other professionals.
Seventy-one percent of the Companys professional employees have a bachelors
degree, twenty-four percent have a masters degree, and five percent have a
doctorate degree.

Item 2. Properties

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

As of September 1, 2001, the Company had under lease an aggregate of
approximately 201,000 square feet of office and laboratory space in the
following locations: Springfield, Lynchburg, Norfolk, and Williamsburg, VA;
Tempe, AZ; Fair Oaks and Pleasant Hill, CA; Northglenn, CO; Miami, FL; Lombard,
IL; Hopkins, MN; Columbia, Gaithersburg and Germantown, MD; Cary, NC; Oklahoma
City, OK; Bristol, PA; San Antonio, TX; and American Fork, UT. These leases
are generally for terms of five years or less.

Versar believes that its facilities are suitable and adequate for its
current and foreseeable operational and administrative needs.

8



---



Item 3. Legal Proceedings

On January 26, 2001, TAMS Consultants, Inc. (TAMS), a subcontractor to
Versar on one of its largest government contracts (which is now substantially
completed), filed an action in the U.S. District Court for the Eastern District
of Virginia, entitled TAMS Consultants, Inc. v. Versar, Inc. Case No. CA
01-114A. TAMS claimed breach of contract and fraudulent inducement alleging
Versar failed to provide an agreed upon percentage of work to TAMS. TAMS also
claimed monetary damages in excess of $5 million.

Versar filed a Motion to Dismiss which was denied. At the same time;
however, the Court granted TAMS the right to file an Amended Complaint which
TAMS did, dropping the fraudulent inducement claims.

On June 21, 2001, Versar entered into a Settlement Agreement to resolve
the ongoing lawsuit between Versar and TAMS Consultants, Inc. As a result of
this settlement and the legal fees and costs associated with the litigation,
Versar took a charge of approximately $1,320,000 in the fourth quarter of
fiscal year 2001.

The TAMS litigation was not covered by insurance. The alternatives,
however, of significant additional legal costs, the uncertainty of full success
at trial or other settlement scenarios were deemed unacceptable.

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

On July 12, 2001, the Federal District Court in Pennsylvania granted
defendants motion to transfer the Pennsylvania lawsuit and consolidate the two
legal actions in Indiana. The Company expects responsive pleadings to be filed
and that discovery will be ongoing for the remainder of calendar year 2001.
Based upon discussions with outside counsel, management does not believe that
any adverse determination under the Trustees lawsuit will have a materially
adverse effect on the Companys consolidated financial condition and results of
operations.

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

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

No matters were submitted to a vote of the Companys security holders
during the last quarter of fiscal year 2001.

9



---



EXECUTIVE OFFICERS

The current executive officers of Versar, and their ages as of September 1,
2001, their current offices or positions and their business experience for at
least the past five years are set forth below.

|                    |  |     |    |                           |  |                                                    
|------------------- |  | --- | -- | ------------------------- |  | ---------------------------------------------------
|NAME                |  | AGE |    | POSITION WITH THE COMPANY
|                    |  |     |    |                          
|Benjamin M. Rawls   |  |     | 60 |                           |  | Chairman                                           
|                   
|                   
|                   
|                   
|Theodore M. Prociv  |  |     | 53 |                           |  | President and Chief Executive Officer              
|                   
|                   
|                   
|                   
|Robert L. Durfee    |  |     | 65 |                           |  | Executive Vice President,                          
|                   
|                   
|                   
|                   
|                    |  |     |    |                           |  | President, GEOMET Technologies, Inc.               
|                   
|                   
|                   
|                   
|Gayaneh Contos      |  |     | 65 |                           |  | Executive Vice President, Environmental Pillar     
|                   
|                   
|                   
|                   
|Lawrence A. White   |  |     | 58 |                           |  | Executive Vice President,                          
|                   
|                   
|                   
|                   
|                    |  |     |    |                           |  | Corporate Development                              
|                   
|                   
|                   
|                   
|George J. Anastos   |  |     | 53 |                           |  | Executive Vice President, Architect and Engineering
|                   
|                   
|                   
|                   
|                    |  |     |    |                           |  | Pillar                                             
|                   
|                   
|                   
|                   
|Lawrence W. Sinnott |  |     | 39 |                           |  | Senior Vice President,                             
|                   
|                   
|                   
|                   
|                    |  |     |    |                           |  | Chief Financial Officer and Treasurer              
|                   
|                   
|                   
|                   
|James C. Dobbs      |  |     | 56 |                           |  | Senior Vice President, General Counsel and         
|                   
|                   
|                   
|                   
|                    |  |     |    |                           |  | Secretary                                          

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

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

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

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

10



---



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

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

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

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

11



---



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, 2001, the Company has 827
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 2001 and 2000 are presented below.

|            |  |      |             |     |  |   |       |  |  |   |       | 
|----------- |  | ---- | ----------- | --- |  | - | ----- |  |  | - | ----- | 
|Fiscal Year |  | High |             | Low
|            |  |      |             |    
|2001        |  |      | 4th Quarter |     |  | $ | 2.390 |  |  | $ | 1.750 | 
|           
|           
|           
|           
|            |  |      | 3rd Quarter |     |  |   | 2.438 |  |  |   | 1.750 | 
|           
|           
|           
|           
|            |  |      | 2nd Quarter |     |  |   | 2.125 |  |  |   | 1.500 | 
|           
|           
|           
|           
|            |  |      | 1st Quarter |     |  |   | 2.188 |  |  |   | 1.500 | 

|            |  |      |             |     |  |   |       |  |  |   |       | 
|----------- |  | ---- | ----------- | --- |  | - | ----- |  |  | - | ----- | 
|Fiscal Year |  | High |             | Low
|            |  |      |             |    
|2000        |  |      | 4th Quarter |     |  | $ | 2.500 |  |  | $ | 1.750 | 
|           
|           
|           
|           
|            |  |      | 3rd Quarter |     |  |   | 2.938 |  |  |   | 2.000 | 
|           
|           
|           
|           
|            |  |      | 2nd Quarter |     |  |   | 2.875 |  |  |   | 1.813 | 
|           
|           
|           
|           
|            |  |      | 1st Quarter |     |  |   | 3.063 |  |  |   | 2.250 | 

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.

12



---



Item 6. Selected Financial Data (unaudited)

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

|                                                                   |         |   |                              |       |      |   |                                       |       |      |   |        |       |  |   |         |       |  |   |        |       | 
|------------------------------------------------------------------ | ------- | - | ---------------------------- | ----- | ---- | - | ------------------------------------- | ----- | ---- | - | ------ | ----- |  | - | ------- | ----- |  | - | ------ | ----- | 
|                                                                   |         |   | For the Years Ended June 30,
|                                                                   |         |   |                             
|                                                                   |         |   | 2001                         |       | 2000 |   | 1999                                  |       | 1998 |   | 1997  
|                                                                   |         |   |                              |       |      |   |                                       |       |      |   |       
|                                                                   |         |   |                              |       |      |   | (In thousands, except per share data)
|Consolidated Statement of Operations
related data:                
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Gross Revenue                                                      |         | $ | 65,816                       |       |      | $ | 56,149                                |       |      | $ | 58,886 |       |  | $ | 50,420  |       |  | $ | 44,935 |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net Service Revenue                                                |         |   | 39,481                       |       |      |   | 37,787                                |       |      |   | 38,721 |       |  |   | 34,895  |       |  |   | 31,696 |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Operating (Loss) Income                                            |         |   | (352                         | )     |      |   | 728                                   |       |      |   | 2,072  |       |  |   | 378     |       |  |   | 1,266  |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|(Loss) Income from Continuing Operations                           |         |   | (1,030                       | )     |      |   | 340                                   |       |      |   | 1,837  |       |  |   | 276     |       |  |   | 1,109  |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Income (Loss) from Discontinued
Operations                         |         |   | 243                          |       |      |   |                                      |       |      |   |       |       |  |   | (10,929 | )     |  |   | 147    |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net (Loss) Income                                                  |         |   | (787                         | )     |      |   | 340                                   |       |      |   | 1,837  |       |  |   | (10,653 | )     |  |   | 1,256  |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|(Loss) Income per share from Continuing
    Operations  Diluted   |         | $ | (.16                         | )     |      | $ | .05                                   |       |      | $ | .29    |       |  | $ | .05     |       |  | $ | .21    |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|(Loss) Income per share from Discontinued
    Operations  Diluted |         | $ | .04                          |       |      | $ |                                      |       |      | $ |       |       |  | $ | (1.92   | )     |  | $ | .03    |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net (Loss) Income per share  Diluted                              |         | $ | (.12                         | )     |      | $ | .05                                   |       |      | $ | .29    |       |  | $ | (1.87   | )     |  | $ | .24    |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Weighted Average Shares
Outstanding                              
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Diluted |   |                              | 6,470 |      |   |                                       | 6,487 |      |   |        | 6,283 |  |   |         | 5,695 |  |   |        | 5,286 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Consolidated Balance Sheet related data:                          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Working Capital                                                    |         | $ | 7,073                        |       |      | $ | 7,801                                 |       |      | $ | 8,403  |       |  | $ | 3,120   |       |  | $ | 9,140  |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current Ratio                                                      |         |   | 1.86                         |       |      |   | 1.94                                  |       |      |   | 1.90   |       |  |   | 1.23    |       |  |   | 2.21   |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Total Assets                                                       |         |   | 20,117                       |       |      |   | 21,387                                |       |      |   | 22,687 |       |  |   | 21,795  |       |  |   | 21,870 |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current Portion of Long-Term Debt                                  |         |   | 170                          |       |      |   | 480                                   |       |      |   | 1,135  |       |  |   | 1,114   |       |  |   | 819    |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Long-Term Debt                                                     |         |   |                             |       |      |   |                                      |       |      |   |       |       |  |   | 688     |       |  |   | 1,437  |      
|                                                                   |         |   |                              |       |      |   |                                       |       |      |   |        |       |  |   |         |       |  |   |        |      
|Total Debt, excluding bank line of credit                          |         |   | 170                          |       |      |   | 480                                   |       |      |   | 1,135  |       |  |   | 1,802   |       |  |   | 2,256  |      
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Stockholders Equity                                               |         | $ | 6,013                        |       |      | $ | 6,402                                 |       |      | $ | 5,623  |       |  | $ | 2,891   |       |  | $ | 9,523  |      

13



---



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

This report contains certain forward-looking statements which are based on
current expectations. Actual results may differ materially. The
forward-looking statements include those regarding the continued award of
future work or task orders from government and private clients, cost controls
and reductions, the expected resolution of delays in billing of certain
projects, the possible impact of current and future claims against the Company
based upon negligence and other theories of liability, and
the possibility of the Company making acquisitions during the next 12 to 18
months. Forward-looking statements involve numerous risks and uncertainties
that could cause actual results to differ materially, including, but not
limited to, the possibilities that the demand for the Companys services may
decline as a result of possible changes in general and industry specific
economic conditions and the effects of competitive services and pricing; the
possibility the Company will not be able to perform work within budget or
contractual limitations; one or more current or future claims made against the
Company may result in substantial liabilities; the possibility that acquired
entities may not perform as well as expected; the possibility the Company will
not be able to attract and retain key professional employees; and such other
risks and uncertainties as are described in reports and other documents filed
by the Company from time to time with the Securities and Exchange Commission.

Versars gross revenue for fiscal year 2001 totaled $ 65,816,000, or
$9,667,000 (17.2%) higher than gross revenue of $56,149,000 for fiscal year
2000. Gross revenue for fiscal year 2000 decreased by $2,737,000 (4.6%) over
that reported in fiscal year 1999. Approximately fifty percent of the increase
in fiscal year 2001 is attributable to increased construction work in the
Companys Environmental Services segment. The balance of the increase was due
to increased suit production in the Companys Defense segment, increased
Environmental Protection Agency work in the Environmental Services segment, and
increased work at Ft. Monmouth in the Companys Architecture and Engineering
segment. The decrease in gross revenue in fiscal year 2000 was attributable to
reduced work with the Air Force and reduced commercial work in the
Environmental Services segment. As reflected on page 15, government revenue
represented 82% of the total revenue in fiscal year 2001, compared to 72% in
fiscal year 2000 and 63% in fiscal year 1999.

Purchased services and materials for fiscal year 2001 totaled $26,335,000,
or $7,973,000 (43.4%) higher than fiscal year 2000 purchased services.
Purchased services for fiscal year 2000 decreased by $1,803,000 (8.9%) over
fiscal year 1999. The increase in purchased services in fiscal year 2001 is
attributable to the increased project work resulting in increased gross
revenues as mentioned above. The decrease in fiscal year 2000 was due to the
reduced work in the Environmental Services segment as mentioned above.

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. Net service
revenues increased 4% in fiscal year 2001 due to the increase in gross revenues
as mentioned above.

Direct costs of service and overhead include the cost to Versar of direct
and overhead staff, including recoverable overhead and unallowable costs that
are directly attributable to contracts. The percentage of these costs to net
service revenue decreased to 81.2% in fiscal year 2001 compared to 81.4% in
fiscal year 2000 and 80.3% in fiscal year 1999. The slight decrease in fiscal
year 2001 is primarily due to the increase in net service revenue. The
increase in fiscal year 2000 was due to project overruns as well as lower labor
billability.

Selling, general and administrative expenses approximated 16.3% of the net
service revenue in fiscal year 2001, compared to 16.7% in fiscal year 2000 and
14.3% in fiscal year 1999. The decrease in fiscal year 2001 is attributable to
the 4% increase in net service revenue during the year. The increase in fiscal
year 2000 was attributable to higher costs to support the Defense segment suit
production contract as well as increased business development and proposal
costs.

14



---



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

Operating loss for fiscal year 2001 was $352,000, compared to operating
income of $728,000 in fiscal year 2000. The decrease is primarily due to the
non-recurring charge of $1,320,000 mentioned above. Operating income for
fiscal year 2001 would have been $968,000 without the non-recurring charge,
which would have been an increase of $240,000 over that reported in fiscal year
2000. In fiscal year 2000, operating income decreased by $1,344,000 compared
to fiscal year 1999 primarily due to project overruns, lower labor billability
and higher selling, general and administrative expenses.

Interest expense during fiscal year 2001 was $438,000, a decrease of
$88,000 from fiscal year 2000. The decrease is attributable to lower interest
rates on the Companys line of credit during the year. In fiscal year 2000,
interest costs increased by $5,000 compared to fiscal year 1999. The increase
was due to higher interest rates associated with the Companys line of credit
in fiscal year 2000 as a result of the increased prime rate during the year.

Versars tax expense for fiscal year 2001 was $390,000 compared to a tax
benefit of $138,000 in fiscal year 2000. In fiscal year 2001, the Company
increased its tax valuation allowance by approximately $557,000 as a result of
the reduced financial performance for the past two fiscal years. The Company
carries a substantial valuation allowance of approximately $3,056,000, on
deferred tax assets. The Company had released $200,000 and $900,000 of the
valuation allowance in fiscal years 2000 and 1999, respectively when the
Companys earnings were at higher levels. (Refer to Note G of the Notes to
Financial Statements for further information).

In fiscal year 2001, Versar reversed $243,000 (net of tax of $150,000) of
reserves that had been set up in fiscal year 1998 associated with the
discontinuance of Science Management Corporation (SMC).

In summary, Versars net loss was $787,000 in fiscal year 2001, compared
to net income of $340,000 in fiscal year 2000 and net income of $1,837,000 in
fiscal year 1999.

REVENUE

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

|               |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |    |  
|-------------- | --------------------- | - | -------------------------------------- | ------ | ---- |  | ---- | -- | - | - | ------ | ------ |  |  | --- | -- | - | - | ------ | ------ |  |  | --- | -- | -
|               |                       |   | For the Years Ended June 30,          
|               |                       |   |                                       
|               |                       |   | 2001                                   |        | 2000 |  | 1999
|               |                       |   |                                        |        |      |  |     
|               |                       |   | (In thousands, except for percentages)
|Government
EPA |                       | $ | 2,734                                  |        |      |  | 4    | %  |   | $ | 3,245  |        |  |  | 6   | %  |   | $ | 3,496  |        |  |  | 6   | % 
|              
|              
|              
|              
|               | State & Local         |   |                                        | 7,859  |      |  |      | 12 | % |   |        | 7,073  |  |  |     | 12 | % |   |        | 7,247  |  |  |     | 12 | %
|              
|              
|              
|              
|               | Department
of Defense |   |                                        | 38,157 |      |  |      | 58 | % |   |        | 28,021 |  |  |     | 50 | % |   |        | 24,973 |  |  |     | 42 | %
|              
|              
|              
|              
|               | Other                 |   |                                        | 5,202  |      |  |      | 8  | % |   |        | 2,158  |  |  |     | 4  | % |   |        | 1,316  |  |  |     | 3  | %
|              
|              
|              
|              
|Commercial     |                       |   | 11,864                                 |        |      |  | 18   | %  |   |   | 15,652 |        |  |  | 28  | %  |   |   | 21,854 |        |  |  | 37  | % 
|               |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   
|Gross Revenue  |                       | $ | 65,816                                 |        |      |  | 100  | %  |   | $ | 56,149 |        |  |  | 100 | %  |   | $ | 58,886 |        |  |  | 100 | % 
|               |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   

15



---



Liquidity and Capital Resources

The Companys continuing operations generated $2,343,000 in cash in fiscal
year 2001 of which $732,000 was used to invest in property, plant and equipment
with the balance used to pay down debt and wind down SMC operations.

During fiscal year 2001, the Company utilized long-term bank financing to
supplement its ability to meet day to day operating cash requirements. In
December 2000, the Company extended its existing line
of credit for an additional 11 months. In June 2001, the Company had to obtain
a waiver of its financial covenants with the Bank as a result of the TAMS
lawsuit settlement. At June 30, 2001, the Company had $7,073,000 of working
capital, compared to $7,801,000 in fiscal year 2000. Working capital decreased
primarily as the result of the settlement of the lawsuit as mentioned above.

Versars line of credit with the Bank of America (Bank) provides for
advances up to $6,500,000 based on qualifying receivables less the $300,000
guarantee of Sarnias term loan by Versar. Interest on the borrowings is based
on the lower of the 30 day London Interbank Offered Rate (LIBOR) plus two
hundred and seventy-five basis points (6.25% at June 30, 2001). A commitment
fee of 1/4% on the unused portion of the line of credit is also charged. The
line is guaranteed by the Company and each subsidiary individually and is
collectively secured by accounts receivable, equipment and intangibles, plus
all insurance policies on property constituting collateral. Unused borrowing
availability at June 30, 2001 was approximately $738,000. In December 2000,
the Company extended its line of credit until November 2002. The loan has
certain covenants related to maintenance of financial ratios. Advances under
the line are due upon demand or on November 30, 2002. In August 2001, in
conjunction with the settlement of the TAMS lawsuit, the Company obtained a
waiver from the Bank of its financial covenants and reset them for fiscal year
2002. The bank also provided additional loan availability of $1,500,000
through December 2001 on the Companys unbilled receivables. Management
believes that cash generated by operations and borrowings available from the
Bank line of credit will be adequate to meet the working capital needs for
fiscal year 2002.

Versar guarantees Sarnias term loan. The balance was $300,000 at June
30, 2001. As the term loan is repaid, Versars reserve will be reduced and
added to Versars equity.

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. The details on these segments is in
Note B of the Notes to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

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

16



---



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

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information required by this item with respect to directors of the Company
is to be contained in the Companys Proxy Statement for its 2001 Annual Meeting
of Stockholders, which is expected to be filed with the Commission not later
than 120 days after the Companys 2001 fiscal year end and is incorporated
herein by reference.

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

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

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

Information required by these items is incorporated herein by reference to
the Companys Proxy Statement for its 2001 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 2001 fiscal year.

17



---



PART IV

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

(A)(1) Financial Statements:

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



| | a) |  | Report of Independent Public Accountants                                                                    
| | -- |  | ------------------------------------------------------------------------------------------------------------
|
| | b) |  | Consolidated Balance Sheets as of June 30, 2001 and 2000                                                    
|
| | c) |  | Consolidated Statements of Operations for the Years Ended June 30,
2001, 2000, and 1999                     
|
| | d) |  | Consolidated Statements of Changes in Stockholders Equity for the
Years Ended June 30, 2001, 2000, and 1999
|
| | e) |  | Consolidated Statements of Cash Flows for the Years Ended June 30,
2001, 2000, and 1999                     
|
| | f) |  | Notes to Consolidated Financial Statements                                                                  

(2) Financial Statement Schedules:



| | a) |  | Schedule II  Valuation and Qualifying Accounts for the Years Ended
June 30, 2001, 2000, and 1999                                                                                          
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | 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 19 through 22 of this report.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------

(B) Reports on Form 8-K

Form 8-K, which provided details on the Settlement Agreement to resolve
the lawsuit between Versar and TAMS Consultants, Inc. filed on June 27, 2001.

18



---



Exhibit Index

|         |  |                                                                                  |  |             
|-------- |  | -------------------------------------------------------------------------------- |  | ------------
|         |  |                                                                                  |  | Page Number/
|Item No. |  | Description                                                                      |  | Reference   
|         |  |                                                                                  |  |             
|3.1      |  | Restated Articles of Incorporation of Versar, Inc. filed as an exhibit to the   
|        
|        
|        
|        
|         |  | Registrants Registration Statement on Form S-1 effective November 20, 1986     
|        
|        
|        
|        
|         |  | (File No. 33-9391)                                                               |  | (A)         
|        
|        
|        
|        
|3.2      |  | Bylaws of Versar, Inc.                                                           |  | (A)         
|        
|        
|        
|        
|4        |  | Specimen of Certificate of Common Stock of Versar, Inc.                          |  | (A)         
|        
|        
|        
|        
|10.10    |  | Incentive Stock Option Plan *.                                                   |  | (B)         
|        
|        
|        
|        
|10.11    |  | Executive Tax and Investment Counseling Program.                                 |  | (A)         
|        
|        
|        
|        
|10.12    |  | Nonqualified Stock Option Plan *.                                                |  | (B)         
|        
|        
|        
|        
|10.13    |  | Employee Incentive Plan, as amended *.                                           |  | (E)         
|        
|        
|        
|        
|10.17    |  | Deferred Compensation Agreements dated as follows:                              
|        
|        
|        
|        
|         |  | July 1, 1988 between the Registrant and Gayaneh Contos                           |  | (F)         
|        
|        
|        
|        
|10.26    |  | Executive Medical Plan dated August 21, 1991, effective July 1, 1991             |  | (G)         
|        
|        
|        
|        
|10.40    |  | Option Exchange Offer dated April 16, 1991 between the Registrant and           
|        
|        
|        
|        
|         |  | participants of the Incentive Stock Option Plan and the Nonqualified            
|        
|        
|        
|        
|         |  | Stock Option Plan                                                                |  | (G)         
|        
|        
|        
|        
|10.41    |  | Securities and Exchange Commission response dated September 23, 1991            
|        
|        
|        
|        
|         |  | to certain question regarding the Registrants Option Exchange Offer             |  | (G)         
|        
|        
|        
|        
|10.52    |  | Incentive Stock Option Plan of Versar, Inc. dated December 1, 1992 *             |  | (I)         
|        
|        
|        
|        
|10.65    |  | Information Statement for the Distribution to Shareholders of Versar, Inc., the 
|        
|        
|        
|        
|         |  | Outstanding Shares of its Wholly-owned Subsidiary, Sarnia Corporation,          
|        
|        
|        
|        
|         |  | dated June 30, 1994                                                              |  | (J)         
|        
|        
|        
|        
|10.66    |  | Agreement dated January 13, 1994 between the Registrant and the Department of   
|        
|        
|        
|        
|         |  | the Air Force                                                                    |  | (K)         
|        
|        
|        
|        
|10.75    |  | Agreement dated January 31, 1995 between GEOMET Technologies, Inc., a subsidiary
|        
|        
|        
|        
|         |  | of the Registrant and the U.S. Army Soldier Systems Command                      |  | (M)         
|        
|        
|        
|        
|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)         

19



---



|         |  |                                                                                    |  |             
|-------- |  | ---------------------------------------------------------------------------------- |  | ------------
|         |  |                                                                                    |  | Page Number/
|Item No. |  | Description                                                                        |  | Reference   
|         |  |                                                                                    |  |             
|10.85    |  | Revolving Promissory Note, dated March 27, 1997, between the Registrant and       
|        
|        
|        
|        
|         |  | NationsBank, N.A.                                                                  |  | (P)         
|        
|        
|        
|        
|10.86    |  | Financing and Security Agreement, dated March 27, 1997, between the Registrant and
|        
|        
|        
|        
|         |  | NationsBank, N.A.                                                                  |  | (P)         
|        
|        
|        
|        
|10.87    |  | Amendment to Financing and Security Agreement, dated April 30, 1997, between the  
|        
|        
|        
|        
|         |  | Registrant and NationsBank, N.A.                                                   |  | (P)         
|        
|        
|        
|        
|10.88    |  | The Greenwood Partnership Asset Acquisition Agreement                              |  | (Q)         
|        
|        
|        
|        
|10.89    |  | Modification to NationsBank loan to increase to $5M                                |  | (Q)         
|        
|        
|        
|        
|10.90    |  | AFCEE RAC Contract                                                                 |  | (Q)         
|        
|        
|        
|        
|10.93    |  | Change of Control Severance Agreement dated January 30, 1999 between the          
|        
|        
|        
|        
|         |  | Registrant and Lawrence W. Sinnott*                                                |  | (R)         
|        
|        
|        
|        
|10.94    |  | Change of Control Severance Agreement dated January 30, 1999 between the          
|        
|        
|        
|        
|         |  | Registrant and James C. Dobbs*                                                     |  | (R)         
|        
|        
|        
|        
|10.95    |  | Financing and Security Agreement, dated May 24, 1999, between the Registrant and  
|        
|        
|        
|        
|         |  | NationsBank, N.A.                                                                  |  | (R)         
|        
|        
|        
|        
|10.96    |  | Revolving Promissory Note, dated May 24, 1999, between the Registrant and         
|        
|        
|        
|        
|         |  | NationsBank, N.A.                                                                  |  | (R)         
|        
|        
|        
|        
|10.97    |  | Revolving Promissory Note, dated December 20, 1999, between the Registrant and    
|        
|        
|        
|        
|         |  | Bank of America, N.A.                                                              |  | (T)         
|        
|        
|        
|        
|10.98    |  | Employment Agreement dated November 1, 1999 between Registrant and                
|        
|        
|        
|        
|         |  | Benjamin M. Rawls*.                                                                |  | (T)         
|        
|        
|        
|        
|10.99    |  | Employment Agreement dated November 1, 1999 between Registrant and                
|        
|        
|        
|        
|         |  | Theodore M. Prociv*.                                                               |  | (T)         
|        
|        
|        
|        
|10.100   |  | AFCEE ENRAC Contract                                                               |  | 25-53       
|        
|        
|        
|        
|10.101   |  | Revolving Promissory Note, dated August 31, 2001 between Registrant and           
|        
|        
|        
|        
|         |  | Bank of America, N.A.                                                              |  | 54-66       
|        
|        
|        
|        
|22       |  | Subsidiaries of the Registrant                                                     |  | (Q)         



---

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

20



---



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

21



---



|    |  |                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(N) |  | Incorporated by reference to the similarly numbered exhibit to the Registrants Form 10-K Annual Report
|   
|   
|   
|   
|    |  | for Fiscal Year Ended June 30, 1996 (FY 1996 Form 10-K) filed with the Commission on                 
|   
|   
|   
|   
|    |  | September 24, 1996.                                                                                    
|   
|   
|   
|   
|(O) |  | Incorporated by reference to the similarly numbered exhibit to the Registrants Form S-4 registration  
|   
|   
|   
|   
|    |  | number 333-33167.                                                                                      
|   
|   
|   
|   
|(P) |  | Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K Annual Report    
|   
|   
|   
|   
|    |  | for Fiscal Year Ended June 30, 1997 (FY 1997 Form 10-K) filed with the Commission on                 
|   
|   
|   
|   
|    |  | September 29, 1997.                                                                                    
|   
|   
|   
|   
|(Q) |  | Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K Annual Report    
|   
|   
|   
|   
|    |  | for Fiscal Year Ended June 30, 1998 (FY1998 Form 10-K) filed with the Commission on                  
|   
|   
|   
|   
|    |  | September 28, 1998.                                                                                    
|   
|   
|   
|   
|(R) |  | Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K Annual Report    
|   
|   
|   
|   
|    |  | for Fiscal Year Ended June 30, 1999 (FY1999 Form 10-K) filed with the Commission on                  
|   
|   
|   
|   
|    |  | September 17, 1999.                                                                                    
|   
|   
|   
|   
|(S) |  | Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K/A Annual Report  
|   
|   
|   
|   
|    |  | for Fiscal Year Ended June 30, 1999 (FY1999 Form 10K/A) filed with the Commission on                 
|   
|   
|   
|   
|    |  | September 1, 2000.                                                                                     
|   
|   
|   
|   
|(T) |  | Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K Annual Report    
|   
|   
|   
|   
|    |  | for Fiscal Year Ended June 30, 2000 (FY2000 Form 10-K) filed with the Commission on                  
|   
|   
|   
|   
|    |  | September 26, 2000.                                                                                    

22



---



SIGNATURES

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

|                           |  |  |  |  |  |                                        
|-------------------------- |  |  |  |  |  | ---------------------------------------
|                           |  |  |  |  |  | VERSAR, INC.

(Registrant)             
|                          
|                          
|                          
|Date:   September 28, 2001 |  |  |  |  |  | /S/ Benjamin M. Rawls                  
|                           |  |  |  |  |  |                                        
|                           |  |  |  |  |  | Benjamin M. Rawls
Chairman and Director

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

|                                              |  |                                                                                             |  |                   
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ------------------
|SIGNATURES                                    |  | TITLE                                                                                       |  | DATE              
|                                              |  |                                                                                             |  |                   
|                                             
|                                             
|/S/ Benjamin M. Rawls
Benjamin M. Rawls       |  | Chairman and Director                                                                       |  | September 28, 2001
|                                             
|                                             
|/S/ Theodore M. Prociv
Theodore M. Prociv     |  | Chief Executive Officer, President, and
Director                                            |  | September 28, 2001
|                                             
|                                             
|/S/ Robert L. Durfee
Robert L. Durfee         |  | Executive Vice President and
Director                                                       |  | September 28, 2001
|                                             
|                                             
|/S/ Lawrence W. Sinnott
Lawrence W. Sinnott   |  | Senior Vice President, Chief Financial
Officer, Treasurer, and
Principal Accounting Officer |  | September 28, 2001
|                                             
|                                             
|/S/ Michael Markels, Jr.
Michael Markels, Jr. |  | Chairman Emeritus and Director                                                              |  | September 28, 2001
|                                             
|                                             
|/S/ Thomas J. Shields
Thomas J. Shields       |  | Director                                                                                    |  | September 28, 2001
|                                             
|                                             
|/S/ Pat H. Moore
Pat H. Moore                 |  | Director                                                                                    |  | September 28, 2001

23



---



|                                            |  |          |  |                   
|------------------------------------------- |  | -------- |  | ------------------
|SIGNATURES                                  |  | TITLE    |  | DATE              
|                                            |  |          |  |                   
|                                           
|                                           
|/S/ James L. Gallagher
James L. Gallagher   |  | Director |  | September 28, 2001
|                                           
|                                           
|/S/ Fernando V. Galaviz
Fernando V. Galaviz |  | Director |  | September 28, 2001
|                                           
|                                           
|/S/ Amoretta M. Hoeber
Amoretta M. Hoeber   |  | Director |  | September 28, 2001

24



---



Report of Independent Public Accountants



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

We have audited the accompanying consolidated balance sheets of Versar, Inc. (a
Delaware corporation) and its subsidiaries as of June 30, 2001 and 2000, and
the related consolidated statements of operations, changes in stockholders
equity, and cash flows for the three years ended June 30, 2001. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Versar, Inc. and
its subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for the three years ended June 30, 2001, in
conformity with accounting principles generally accepted in the United States.

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





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



Vienna, Virginia
September 7, 2001

F-1



---



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

|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |       |         |        |        | 
|------------------------------------ | ------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | -------- | ------ | ----- | ------- | ------ | ------ | 
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         | June 30,
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |         
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         | 2001     |        | 2000 
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|                                     | Current assets                             
|                                    
|                                    
|                                    
|                                    
|                                     |                                             |                                                 | Cash and cash equivalents                                                                                                                                                                |                                            | $       | 58       |        |       | $       | 55     |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                             |                                                 | Accounts receivable, net                                                                                                                                                                 |                                            |         | 13,518   |        |       |         | 13,920 |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                             |                                                 | Prepaid expenses and other current assets                                                                                                                                                |                                            |         | 1,269    |        |       |         | 1,561  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                             |                                                 | Deferred income taxes                                                                                                                                                                    |                                            |         | 449      |        |       |         | 536    |       
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      
|                                     |                                             |                                                 |                                                                                                                                                                                          | Total current assets                       |         |          | 15,294 |       |         |        | 16,072 | 
|                                    
|                                     | Property and equipment, net                 |                                                 |                                                                                                                                                                                          | 2,515                                      |         |          |        | 2,461 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred income taxes                       |                                                 |                                                                                                                                                                                          | 1,251                                      |         |          |        | 1,481 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill                                    |                                                 |                                                                                                                                                                                          | 849                                        |         |          |        | 922   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Other assets                                |                                                 |                                                                                                                                                                                          | 208                                        |         |          |        | 451   |        
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      
|                                     |                                             |                                                 |                                                                                                                                                                                          | Total assets                               |         | $        | 20,117 |       |         | $      | 21,387 | 
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|                                     | Current liabilities                        
|                                    
|                                    
|                                    
|                                    
|                                     |                                             |                                                 | Accounts payable                                                                                                                                                                         |                                            | $       | 3,658    |        |       | $       | 3,629  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                             |                                                 | Current portion of long-term debt                                                                                                                                                        |                                            |         | 170      |        |       |         | 480    |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                             |                                                 | Accrued salaries and vacation                                                                                                                                                            |                                            |         | 2,346    |        |       |         | 2,528  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                             |                                                 | Other liabilities                                                                                                                                                                        |                                            |         | 2,047    |        |       |         | 1,634  |       
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      
|                                     |                                             |                                                 |                                                                                                                                                                                          | Total current liabilities                  |         |          | 8,221  |       |         |        | 8,271  | 
|                                    
|                                     | Bank line of credit                         |                                                 |                                                                                                                                                                                          | 3,763                                      |         |          |        | 3,713 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Other long-term liabilities                 |                                                 |                                                                                                                                                                                          | 1,292                                      |         |          |        | 1,480 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Liabilities of discontinued operations, net |                                                 |                                                                                                                                                                                          | 528                                        |         |          |        | 921   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Reserve on guarantee of real estate debt    |                                                 |                                                                                                                                                                                          | 300                                        |         |          |        | 600   |        
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      
|                                     |                                             |                                                 |                                                                                                                                                                                          | Total liabilities                          |         |          | 14,104 |       |         |        | 14,985 | 
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      
|                                    
|                                     | Commitments and contingencies (Note I)     
|                                    
|                                     | Stockholders equity                       
|                                    
|                                    
|                                    
|                                    
|                                     |                                             | Common stock, $.01 par value; 30,000,000 shares
|                                    
|                                    
|                                    
|                                    
|                                     |                                             |                                                 | authorized; 6,475,052 shares and 6,410,824
shares issued June 30, 2001 and 2000,
respectively; 6,437,814 shares and 6,395,824
shares outstanding at June 30, 2001 and 2000,
respectively |                                            |         | 65       |        |       |         | 64     |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                             | Capital in excess of par value                  |                                                                                                                                                                                          |                                            | 18,359  |          |        |       | 18,223  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                             | Accumulated deficit                             |                                                                                                                                                                                          |                                            | (12,338 | )        |        |       | (11,851 | )     
|                                    
|                                    
|                                    
|                                    
|                                     |                                             | Treasury stock                                  |                                                                                                                                                                                          |                                            | (73     | )        |        |       | (34     | )     
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      
|                                     |                                             |                                                 |                                                                                                                                                                                          | Total stockholders equity                 |         |          | 6,013  |       |         |        | 6,402  | 
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      
|                                    
|                                     |                                             |                                                 |                                                                                                                                                                                          | Total liabilities and stockholders equity |         | $        | 20,117 |       |         | $      | 21,387 | 
|                                     |                                             |                                                 |                                                                                                                                                                                          |                                            |         |          |        |      

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,
|                                         |                                              |   |                     
|                                         |                                              |   | 2001                 |        | 2000 |   | 1999  
|                                         |                                              |   |                      |        |      |   |       
|                                        
|GROSS REVENUE                            |                                              | $ | 65,816               |        |      | $ | 56,149 |        |   | $ | 58,886 |       
|                                        
|                                        
|                                        
|                                        
|                                         | Purchased services and materials, at cost    |   |                      | 26,335 |      |   |        | 18,362 |   |   |        | 20,165 |  
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|NET SERVICE REVENUE                      |                                              |   | 39,481               |        |      |   | 37,787 |        |   |   | 38,721 |       
|                                        
|                                         | Direct costs of services and overhead        |   |                      | 32,071 |      |   |        | 30,742 |   |   |        | 31,107 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Selling, general and administrative expenses |   |                      | 6,442  |      |   |        | 6,317  |   |   |        | 5,542  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Non-recurring charge (Note I)                |   |                      | 1,320  |      |   |        |       |   |   |        |       |  
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|OPERATING (LOSS) INCOME                  |                                              |   | (352                 | )      |      |   | 728    |        |   |   | 2,072  |       
|                                        
|OTHER EXPENSE                           
|                                        
|                                        
|                                        
|                                        
|                                         | Interest expense                             |   |                      | 438    |      |   |        | 526    |   |   |        | 521    |  
|                                        
|                                        
|                                        
|                                        
|                                         | Income tax expense (benefit)                 |   |                      | 240    |      |   |        | (138   | ) |   |        | (286   | )
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|(LOSS) INCOME FROM CONTINUING OPERATIONS |                                              |   | (1,030               | )      |      |   | 340    |        |   |   | 1,837  |       
|                                        
|INCOME FROM DISCONTINUED                
|                                        
|                                        
|                                        
|                                        
|OPERATIONS (net of tax of $150)          |                                              |   | 243                  |        |      |   |       |        |   |   |       |       
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|NET (LOSS) INCOME                        |                                              | $ | (787                 | )      |      | $ | 340    |        |   | $ | 1,837  |       
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|(LOSS) INCOME PER SHARE FROM            
|                                        
|                                        
|                                        
|                                        
|CONTINUING OPERATIONS BASIC             |                                              | $ | (.16                 | )      |      | $ | .05    |        |   | $ | .30    |       
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|(LOSS) INCOME PER SHARE FROM            
|                                        
|                                        
|                                        
|                                        
|CONTINUING OPERATIONS DILUTED           |                                              | $ | (.16                 | )      |      | $ | .05    |        |   | $ | .29    |       
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|INCOME PER SHARE FROM DISCONTINUED      
|                                        
|                                        
|                                        
|                                        
|OPERATIONS BASIC AND DILUTED            |                                              | $ | .04                  |        |      | $ |       |        |   | $ |       |       
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|NET (LOSS) INCOME PER SHARE BASIC       |                                              | $ | (.12                 | )      |      | $ | .05    |        |   | $ | .30    |       
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|NET (LOSS) INCOME PER SHARE DILUTED     |                                              | $ | (.12                 | )      |      | $ | .05    |        |   | $ | .29    |       
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|WEIGHTED AVERAGE NUMBER OF SHARES       
|                                        
|                                        
|                                        
|                                        
|OUTSTANDING BASIC                       |                                              |   | 6,470                |        |      |   | 6,400  |        |   |   | 6,190  |       
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                                        
|WEIGHTED AVERAGE NUMBER OF              
|                                        
|                                        
|                                        
|                                        
|SHARES OUTSTANDING DILUTED              |                                              |   | 6,470                |        |      |   | 6,487  |        |   |   | 6,283  |       
|                                         |                                              |   |                      |        |      |   |        |        |   |   |        |       

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, 2001, 2000, and 1999
|                                    |                  |  |                                          
|                                   
|                                    |                  |  |                                           |   |        |   |           |   |            |   |          |   |          |   |         |     |        |   |      |   |  |   | Total
|                                    |                  |  | Number                                    |   |        |   |           |   | Capital in |   | Accumu-  |   |          |   |         |     | Stock-
|                                    |                  |  | of                                        |   | Common |   | Excess of |   | lated      |   | Treasury |   | holders'
|                                    |                  |  | Shares                                    |   | Stock  |   | Par Value |   | Deficit    |   | Stock    |   | Equity  
|                                    |                  |  |                                           |   |        |   |           |   |            |   |          |   |         
|                                   
|Balance, June 30, 1998              |                  |  | 6,072                                     |   |        | $ | 61        |   |            | $ | 17,458   |   |          | $ | (14,628 | )   |        | $ |     |   |  | $ | 2,891 |    
|                                   
|Exercise of stock options           |                  |  | 5                                         |   |        |   |          |   |            |   | 13       |   |          |   |        |     |        |   |     |   |  |   | 13    |    
|                                   
|                                   
|                                   
|                                   
|Common stock issued to ESSOP        |                  |  | 260                                       |   |        |   | 2         |   |            |   | 580      |   |          |   |        |     |        |   |     |   |  |   | 582   |    
|                                   
|                                   
|                                   
|                                   
|Decrease in reserve on guarantee of
|                                   
|                                   
|                                   
|                                   
|                                    | real estate debt |  |                                           |  |        |   |           |  |            |   |          |  |          |   |         | 300 |        |   |      |  |  |   |       | 300 | 
|                                   
|                                   
|                                   
|                                   
|Net income                          |                  |  |                                          |   |        |   |          |   |            |   |         |   |          |   | 1,837   |     |        |   |     |   |  |   | 1,837 |    
|                                    |                  |  |                                           |   |        |   |           |   |            |   |          |   |          |   |         |     |        |   |      |   |  |   |       |    
|                                   
|Balance, June 30, 1999              |                  |  | 6,337                                     |   |        |   | 63        |   |            |   | 18,051   |   |          |   | (12,491 | )   |        |   |     |   |  |   | 5,623 |    
|                                    |                  |  |                                           |   |        |   |           |   |            |   |          |   |          |   |         |     |        |   |      |   |  |   |       |    
|                                   
|Exercise of stock options           |                  |  | 5                                         |   |        |   |          |   |            |   | 9        |   |          |   |        |     |        |   |     |   |  |   | 9     |    
|                                   
|                                   
|                                   
|                                   
|Common stock issued to ESSOP        |                  |  | 69                                        |   |        |   | 1         |   |            |   | 163      |   |          |   |        |     |        |   | 100  |   |  |   | 264   |    
|                                   
|                                   
|                                   
|                                   
|Decrease in reserve on guarantee of
|                                   
|                                   
|                                   
|                                   
|                                    | real estate debt |  |                                           |  |        |   |           |  |            |   |          |  |          |   |         | 300 |        |   |      |  |  |   |       | 300 | 
|                                   
|                                   
|                                   
|                                   
|Treasury stock                      |                  |  |                                          |   |        |   |          |   |            |   |         |   |          |   |        |     |        |   | (134 | ) |  |   | (134  | )  
|                                   
|                                   
|                                   
|                                   
|Net income                          |                  |  |                                          |   |        |   |          |   |            |   |         |   |          |   | 340     |     |        |   |     |   |  |   | 340   |    
|                                    |                  |  |                                           |   |        |   |           |   |            |   |          |   |          |   |         |     |        |   |      |   |  |   |       |    
|                                   
|Balance, June 30, 2000              |                  |  | 6,411                                     |   |        |   | 64        |   |            |   | 18,223   |   |          |   | (11,851 | )   |        |   | (34  | ) |  |   | 6,402 |    
|                                    |                  |  |                                           |   |        |   |           |   |            |   |          |   |          |   |         |     |        |   |      |   |  |   |       |    
|                                   
|Common stock issued to ESSOP        |                  |  | 64                                        |   |        |   | 1         |   |            |   | 136      |   |          |   |        |     |        |   | 916  |   |  |   | 1,053 |    
|                                   
|                                   
|                                   
|                                   
|Decrease in reserve on guarantee of
|                                   
|                                   
|                                   
|                                   
|                                    | real estate debt |  |                                           |  |        |   |           |  |            |   |          |  |          |   |         | 300 |        |   |      |  |  |   |       | 300 | 
|                                   
|                                   
|                                   
|                                   
|Treasury stock                      |                  |  |                                          |   |        |   |          |   |            |   |         |   |          |   |        |     |        |   | (955 | ) |  |   | (955  | )  
|                                   
|                                   
|                                   
|                                   
|Net loss                            |                  |  |                                          |   |        |   |          |   |            |   |         |   |          |   | (787    | )   |        |   |     |   |  |   | (787  | )  
|                                    |                  |  |                                           |   |        |   |           |   |            |   |          |   |          |   |         |     |        |   |      |   |  |   |       |    
|                                   
|Balance, June 30, 2001              |                  |  | 6,475                                     |   |        | $ | 65        |   |            | $ | 18,359   |   |          | $ | (12,338 | )   |        | $ | (73  | ) |  | $ | 6,013 |    
|                                    |                  |  |                                           |   |        |   |           |   |            |   |          |   |          |   |         |     |        |   |      |   |  |   |       |    

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,
|                                                       |                                               |                                                |                                                              |      |                     
|                                                       |                                               |                                                |                                                              |      | 2001                 |        | 2000 |     | 1999  
|                                                       |                                               |                                                |                                                              |      |                      |        |      |     |       
|Cash flows from operating activities                  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net (loss) income                             |                                                | $                                                            | (787 | )                    |        | $    | 340 |        |        | $   | 1,837 |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Adjustments to reconcile net (loss) income to
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               | net cash provided by continuing operations    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Depreciation and amortization                                |      |                      | 751    |      |     |        | 748    |     |       |      | 725    |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Loss on sale of property and
equipment                       |      |                      |       |      |     |        | 1      |     |       |      | 39     |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Provision for doubtful accounts receivable                   |      |                      | 179    |      |     |        | 231    |     |       |      | 92     |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Common stock issued to ESSOP                                 |      |                      | 1,053  |      |     |        | 264    |     |       |      | 582    |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Deferred tax expense (benefit)                               |      |                      | 317    |      |     |        | (138   | )   |       |      | (286   | )
|                                                      
|                                                       | Changes in assets and liabilities            
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Decrease (increase) in accounts receivable                   |      |                      | 223    |      |     |        | 1,788  |     |       |      | (1,400 | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Decrease (increase) in prepaid expenses and other assets     |      |                      | 535    |      |     |        | (680   | )   |       |      | 165    |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Increase (decrease) in accounts payable                      |      |                      | 29     |      |     |        | (661   | )   |       |      | 987    |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | (Decrease) increase in accrued salaries and
vacation         |      |                      | (182   | )    |     |        | 348    |     |       |      | 685    |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Increase (decrease) in other liabilities                     |      |                      | 225    |      |     |        | (432   | )   |       |      | (1,046 | )
|                                                       |                                               |                                                |                                                              |      |                      |        |      |     |        |        |     |      
|                                                       |                                               |                                                | Net cash provided by continuing
operations                   |      |                      | 2,343  |      |     |        | 1,809  |     |       |      | 2,380  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               |                                                | Changes in net assets/liabilities of discontinued operations |      |                      | (393   | )    |     |        | 16     |     |       |      | (1,806 | )
|                                                       |                                               |                                                |                                                              |      |                      |        |      |     |        |        |     |      
|                                                       |                                               |                                                | Net cash provided by operating activities                    |      |                      | 1,950  |      |     |        | 1,825  |     |       |      | 574    |  
|                                                       |                                               |                                                |                                                              |      |                      |        |      |     |        |        |     |      
|                                                      
|Cash flows from investing activities                  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               | Purchases of property and equipment            |                                                              |      | (732                 | )      |      |     | (653   | )      |     |       | (378 | )     
|                                                       |                                               |                                                |                                                              |      |                      |        |      |     |        |        |     |      
|                                                      
|Cash flows from financing activities                  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               | Net borrowing (payment) on bank line of credit |                                                              |      | 50                   |        |      |     | (395   | )      |     |       | 444  |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               | Principal payments on long-term debt           |                                                              |      | (310                 | )      |      |     | (1,135 | )      |     |       | (667 | )     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               | Borrowings on long-term debt                   |                                                              |      |                     |        |      |     | 480    |        |     |       |     |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               | Purchase of treasury stock                     |                                                              |      | (955                 | )      |      |     | (134   | )      |     |       |     |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                               | Proceeds from issuance of common stock         |                                                              |      |                     |        |      |     | 9      |        |     |       | 13   |       
|                                                       |                                               |                                                |                                                              |      |                      |        |      |     |        |        |     |      
|                                                       |                                               |                                                | Net cash used in financing
activities                        |      |                      | (1,215 | )    |     |        | (1,175 | )   |       |      | (210   | )
|                                                       |                                               |                                                |                                                              |      |                      |        |      |     |        |        |     |      
|                                                      
|Net increase (decrease) in cash and cash equivalents   |                                               |                                                | 3                                                            |      |                      |        | (3   | )   |        |        | (14 | )    
|                                                      
|                                                      
|                                                      
|                                                      
|Cash and cash equivalents at the beginning of
the year |                                               |                                                | 55                                                           |      |                      |        | 58   |     |        |        | 72  |      
|                                                       |                                               |                                                |                                                              |      |                      |        |      |     |        |        |     |      
|                                                      
|Cash and cash equivalents at the end of
the year       |                                               | $                                              | 58                                                           |      |                      | $      | 55   |     |        | $      | 58  |      
|                                                       |                                               |                                                |                                                              |      |                      |        |      |     |        |        |     |      

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 majority-owned
subsidiaries (Versar or the Company). All significant intercompany balances
and transactions have been eliminated in consolidation. The Companys major
business segments are environmental, defense, and architecture/engineering
services.

Accounting estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates.

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

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

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

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

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.

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

F-6



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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,
|                                                        |  |                     
|                                                        |  | 2001                 |       | 2000 |  | 1999
|                                                        |  |                      |       |      |  |     
|                                                        |  | (In thousands)      
|                                                       
|Weighted average number of shares outstanding
- basic   |  |                      | 6,470 |      |  |      | 6,400 |  |  |  | 6,190 | 
|                                                       
|Effect of assumed exercise of options                   |  |                      |      |      |  |      | 87    |  |  |  | 93    | 
|                                                        |  |                      |       |      |  |      |       |  |  |  |       | 
|                                                       
|Weighted average number of shares outstanding
- diluted |  |                      | 6,470 |      |  |      | 6,487 |  |  |  | 6,283 | 
|                                                        |  |                      |       |      |  |      |       |  |  |  |       | 

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

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 $1,027,000 and $1,046,000 at June 30,
2001 and 2000, 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 $363,000 and $431,000 at June 30, 2001 and 2000, 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/Engineering, Defense Systems and Information Technology. The
Environmental Services segment provides a full range of services including
remediation/corrective actions, site investigations, remedial designs, and
construction, operation and maintenance (O&M) of remedial systems. The
Architecture/Engineering segment provides engineering, design and construction
management to industrial and commercial facilities. The Defense Systems
segment provides expertise in developing, testing and providing personal
protection equipment. The newly formed Information Technology segment will
focus

F-7



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

on e-business by providing on-line consulting services through the Companys
website. The Information Technology segment currently is not large enough to
be treated as a reportable segment.

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

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

|                           |                                              |   |                      |        |      |   |        |        |   |   |        |        |  
|-------------------------- | -------------------------------------------- | - | -------------------- | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                           |                                              |   | Years Ended June 30,
|                           |                                              |   |                     
|                           |                                              |   | 2001                 |        | 2000 |   | 1999  
|                           |                                              |   |                      |        |      |   |       
|                           |                                              |   | (In thousands)      
|NET SERVICE REVENUE       
|                          
|                          
|                          
|                          
|                           | Environmental Services                       |   | $                    | 24,083 |      |   | $      | 23,885 |   |   | $      | 25,380 |  
|                          
|                          
|                          
|                          
|                           | Architecture/Engineering                     |   |                      | 8,921  |      |   |        | 8,202  |   |   |        | 8,160  |  
|                          
|                          
|                          
|                          
|                           | Defense Systems                              |   |                      | 6,477  |      |   |        | 5,700  |   |   |        | 5,181  |  
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                          
|                           |                                              | $ | 39,481               |        |      | $ | 37,787 |        |   | $ | 38,721 |       
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                          
|OPERATING (LOSS)/INCOME(A)
|                          
|                          
|                          
|                          
|                           | Environmental Services                       |   | $                    | 4,420  |      |   | $      | 4,571  |   |   | $      | 6,305  |  
|                          
|                          
|                          
|                          
|                           | Architecture/Engineering                     |   |                      | 797    |      |   |        | 750    |   |   |        | (179   | )
|                          
|                          
|                          
|                          
|                           | Defense Systems                              |   |                      | 2,193  |      |   |        | 1,724  |   |   |        | 1,488  |  
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                          
|                           |                                              | $ | 7,410                |        |      | $ | 7,045  |        |   | $ | 7,614  |       
|                          
|                           | Selling, general and administrative expenses |   |                      | (6,442 | )    |   |        | (6,317 | ) |   |        | (5,542 | )
|                          
|                          
|                          
|                          
|                           | Non-recurring charge                         |   |                      | (1,320 | )    |   |        |       |   |   |        |       |  
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                          
|                           |                                              | $ | (352                 | )      |      | $ | 728    |        |   | $ | 2,072  |       
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       

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

|                    |                          |   |                      |       |      |   |        |       | 
|------------------- | ------------------------ | - | -------------------- | ----- | ---- | - | ------ | ----- | 
|                    |                          |   | Years Ended June 30,
|                    |                          |   |                     
|                    |                          |   | 2001                 |       | 2000
|                    |                          |   |                      |       |     
|                    |                          |   | (In thousands)      
|IDENTIFIABLE ASSETS
|                   
|                   
|                   
|                   
|                    | Environmental Services   |   | $                    | 8,008 |      |   | $      | 9,208 | 
|                   
|                   
|                   
|                   
|                    | Architecture/Engineering |   |                      | 5,229 |      |   |        | 4,170 | 
|                   
|                   
|                   
|                   
|                    | Defense Systems          |   |                      | 3,011 |      |   |        | 2,295 | 
|                   
|                   
|                   
|                   
|                    | Corporate and Other      |   |                      | 3,869 |      |   |        | 5,714 | 
|                    |                          |   |                      |       |      |   |        |      
|                   
|                    |                          | $ | 20,117               |       |      | $ | 21,387 |      
|                    |                          |   |                      |       |      |   |        |      

F-8



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE C ACCOUNTS RECEIVABLE

|                                |                 |   |                |       |      |   |        |       | 
|------------------------------- | --------------- | - | -------------- | ----- | ---- | - | ------ | ----- | 
|                                |                 |   | June 30,      
|                                |                 |   |               
|                                |                 |   | 2001           |       | 2000
|                                |                 |   |                |       |     
|                                |                 |   | (In thousands)
|Billed receivables             
|                               
|                               
|                               
|                               
|                                | U.S. Government |   | $              | 2,737 |      |   | $      | 4,818 | 
|                               
|                               
|                               
|                               
|                                | Commercial      |   |                | 5,185 |      |   |        | 3,588 | 
|                               
|                               
|                               
|                               
|Unbilled receivables           
|                               
|                               
|                               
|                               
|                                | U.S. Government |   |                | 4,178 |      |   |        | 4,579 | 
|                               
|                               
|                               
|                               
|                                | Commercial      |   |                | 1,740 |      |   |        | 1,483 | 
|                                |                 |   |                |       |      |   |        |      
|                                |                 |   | 13,840         |       |      |   | 14,468 |      
|                               
|                               
|                               
|                               
|Allowance for doubtful accounts |                 |   | (322           | )     |      |   | (548   | )    
|                                |                 |   |                |       |      |   |        |      
|                                |                 | $ | 13,518         |       |      | $ | 13,920 |      
|                                |                 |   |                |       |      |   |        |      

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, 2001 unbilled receivables will be substantially billed and collected
in fiscal year 2002.

NOTE D PROPERTY AND EQUIPMENT

| |                        |                                           |  |               |  |          |       |                |        |      |       |       |        |  
| | ---------------------- | ----------------------------------------- |  | ------------- |  | -------- | ----- | -------------- | ------ | ---- | ----- | ----- | ------ | -
| |                        |                                           |  | Estimated    
| |                        |                                           |  | Useful Life  
| |                        |                                           |  | in Years      |  | June 30,
| |                        |                                           |  |               |  |         
| |                        |                                           |  |               |  |          |       | 2001           |        | 2000
| |                        |                                           |  |               |  |          |       |                |        |     
| |                        |                                           |  |               |  |          |       | (In thousands)
| | Furniture and fixtures |                                           |  | 5             |  |          | $     | 1,334          |        |      | $     | 1,278 |       
|
|
|
|
| | Equipment              |                                           |  | 3 to 10       |  |          |       | 5,983          |        |      |       | 5,382 |       
|
|
|
|
| | Leasehold improvements |                                           |  | Life of lease |  |          |       | 1,926          |        |      |       | 1,896 |       
| |                        |                                           |  |               |  |          |       |                |        |      |       |      
| |                        |                                           |  |               |  |          | 9,243 |                |        |      | 8,556 |      
|
|
|
|
| |                        | Accumulated depreciation
and amortization |  |               |  |          |       |                | (6,728 | )    |       |       | (6,095 | )
| |                        |                                           |  |               |  |          |       |                |        |      |       |       |       
| |                        |                                           |  |               |  | $        | 2,515 |                |        | $    | 2,461 |      
| |                        |                                           |  |               |  |          |       |                |        |      |       |       |       

Depreciation and amortization of property and equipment included as
expenses in the accompanying Consolidated Statements of Operations was
$678,000, $674,000, and $652,000 for the years ended June 30, 2001, 2000, and
1999, respectively.

Maintenance and repair expenses approximated $303,000, $312,000, and
$322,000 for the years ended June 30, 2001, 2000, and 1999, respectively.

F-9



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE E DEBT

|                                     |            |   |                |       |      |   |       |       | 
|------------------------------------ | ---------- | - | -------------- | ----- | ---- | - | ----- | ----- | 
|                                     |            |   | June 30,      
|                                     |            |   |               
|                                     |            |   | 2001           |       | 2000
|                                     |            |   |                |       |     
|                                     |            |   | (In thousands)
|Bank line of credit, Bank of America |            | $ | 3,763          |       |      | $ | 3,713 |      
|                                    
|                                    
|                                    
|                                    
|Other                                |            |   | 170            |       |      |   | 480   |      
|                                     |            |   |                |       |      |   |       |      
|                                     | Total debt |   |                | 3,933 |      |   |       | 4,193 | 
|                                    
|                                    
|                                    
|                                    
|Current portion of long-term debt    |            |   | (170           | )     |      |   | (480  | )    
|                                     |            |   |                |       |      |   |       |      
|Long-term debt                       |            | $ | 3,763          |       |      | $ | 3,713 |      
|                                     |            |   |                |       |      |   |       |      

Versars line of credit with the Bank of America (Bank) provides for
advances up to $6,500,000 based on qualifying receivables less the $300,000
guarantee of Sarnias (a former subsidiary of Versar) term loan by Versar.
Interest on the borrowings is based on the lower of the 30 day London Interbank
Offered Rate (LIBOR) plus two hundred and seventy-five basis points (6.25% at
June 30, 2001). A commitment fee of 1/4% on the unused portion of the line of
credit is also charged. The line is guaranteed by the Company and each
subsidiary individually and is collectively secured by accounts receivable,
equipment and intangibles, plus all insurance policies on property constituting
collateral. Unused borrowing availability at June 30, 2001 was approximately
$738,000. In December 2000, the Company extended its line of credit until
November 2002. The loan has certain covenants related to maintenance of
financial ratios. Advances under the line are due upon demand or on November
30, 2002. In August 2001, in conjunction with the settlement of the TAMS
lawsuit (See Note I), the company obtained a waiver from the Bank of its
financial covenants and reset them for fiscal year 2002. The bank also
provided additional loan availability of $1,500,000 through December 2001 on
the Companys unbilled receivables. Management believes that cash generated by
operations and borrowings available from the Bank line of credit will be
adequate to meet the working capital needs for fiscal year 2002.

Versar guarantees Sarnias term loan of $300,000 at June 30, 2001. As the
term loan is repaid, Versars reserve will be reduced and added to Versars
equity.

The revolving Bank line of credit amount based on average daily balances
outstanding for the years ended June 30, 2001, 2000, and 1999, approximated
$3,973,000, $4,180,000 and $4,906,000, respectively, and the weighted average
interest rates for such periods were 8.3%, 8.5%, and 8.0%, respectively. The
maximum amount outstanding approximated $6,264,000, $6,086,500, and $6,125,600
during fiscal years 2001, 2000, and 1999, respectively. Weighted average
interest rates are computed by relating the interest expense to the average
month-end balance.

Interest payments were $418,000, $414,000, and $533,000 for the fiscal
years ended June 30, 2001, 2000, and 1999, respectively.

NOTE F STOCK OPTIONS

In November 1996, the stockholders approved the Versar 1996 Stock Option
Plan (the 1996 Plan) to provide employees and directors of the Company and
certain other persons an incentive to remain as employees of the Company and to
encourage superior performance. The Company also maintains the Versar 1992
Stock Option Plan (the 1992 Plan), the 1982 Incentive Stock Option Plan (the
1982 Plan), and a Non-Qualified Stock Option Plan adopted on April 30, 1987
(the 1987 Plan). Options have been granted from these plans to purchase the
Companys common stock.

F-10



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Under the 1992 Plan, options may be granted to key employees at the fair
market value on the date of grant and become exercisable during the five-year
period from the date of the grant at 20% per year. Certain unexercised options
are cancelled on the fifth anniversary of certain grants under the 1982 Plan
and on the tenth anniversary of the grant
under the remainder of the 1982 and 1992 Plans. Under the 1996 Stock Option
Plan, options may be granted 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 90 days after the date the option ceases to be affiliated with
the Company or its subsidiaries.

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

|                             |           |  |                                        |      |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |        |  
|---------------------------- | --------- |  | -------------------------------------- | ---- | ------------ | - | ----- | ----- |  |  | -- | -- |  | - | ----- | ----- |  | - | ----- | ------ | -
|                             |           |  | Optioned                               |      | Option Price
|                             |           |  | Shares                                 |      | Per Share    |   | Total
|                             |           |  |                                        |      |              |   |      
|                             |           |  | (In thousands, except per share price)
|                            
|Outstanding at June 30, 1998 |           |  | 1,170                                  |      |              | $ | 2.375 |       |  |  | to |    |  | $ | 5.375 |       |  | $ | 4,082 |       
|                            
|                            
|                            
|                            
|                             | Granted   |  |                                        | 394  |              |   |       | 1.750 |  |  |    | to |  |   |       | 3.063 |  |   |       | 730    |  
|                            
|                            
|                            
|                            
|                             | Exercised |  |                                        | (5   | )            |   |       | 2.375 |  |  |    | to |  |   |       | 2.688 |  |   |       | (13    | )
|                            
|                            
|                            
|                            
|                             | Cancelled |  |                                        | (154 | )            |   |       | 1.750 |  |  |    | to |  |   |       | 4.500 |  |   |       | (527   | )
|                             |           |  |                                        |      |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |       
|                            
|Outstanding at June 30, 1999 |           |  | 1,405                                  |      |              | $ | 1.750 |       |  |  | to |    |  | $ | 5.375 |       |  | $ | 4,272 |       
|                            
|                            
|                            
|                            
|                             | Granted   |  |                                        | 271  |              |   |       | 2.375 |  |  |    | to |  |   |       | 2.813 |  |   |       | 650    |  
|                            
|                            
|                            
|                            
|                             | Exercised |  |                                        | (5   | )            |   |       | 1.750 |  |  |    | to |  |   |       | 1.750 |  |   |       | (9     | )
|                            
|                            
|                            
|                            
|                             | Cancelled |  |                                        | (80  | )            |   |       | 1.750 |  |  |    | to |  |   |       | 4.500 |  |   |       | (234   | )
|                             |           |  |                                        |      |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |       
|                            
|Outstanding at June 30, 2000 |           |  | 1,591                                  |      |              | $ | 1.750 |       |  |  | to |    |  | $ | 5.375 |       |  | $ | 4,679 |       
|                            
|                            
|                            
|                            
|                             | Granted   |  |                                        | 35   |              |   |       | 1.938 |  |  |    | to |  |   |       | 2.060 |  |   |       | 69     |  
|                            
|                            
|                            
|                            
|                             | Cancelled |  |                                        | (344 | )            |   |       | 1.750 |  |  |    | to |  |   |       | 5.375 |  |   |       | (1,056 | )
|                             |           |  |                                        |      |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |       
|                            
|Outstanding at June 30, 2001 |           |  | 1,282                                  |      |              | $ | 1.750 |       |  |  | to |    |  | $ | 5.375 |       |  | $ | 3,692 |       
|                             |           |  |                                        |      |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |       

At June 30, 2001, 2000, and 1999, options aggregating 942,500, 1,066,000
and 859,000 shares were exercisable under the 1982, 1992 and 1996 Plans.

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

F-11



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Options under the 1987 Plan are as follows:

|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |     |      |  
|---------------------------- | --------- |  | -------------------------------------- | --- | ------------ | - | ----- | ----- |  |  | -- | -- |  | - | ----- | ----- |  | - | --- | ---- | -
|                             |           |  | Optioned                               |     | Option Price
|                             |           |  | Shares                                 |     | Per Share    |   | Total
|                             |           |  |                                        |     |              |   |      
|                             |           |  | (In thousands, except per share price)
|                            
|Outstanding at June 30, 1998 |           |  | 344                                    |     |              | $ | 2.375 |       |  |  | to |    |  | $ | 3.563 |       |  | $ | 985 |     
|                            
|                            
|                            
|                            
|                             | Granted   |  |                                        | 10  |              |   |       | 4.750 |  |  |    | to |  |   |       | 4.750 |  |   |     | 48   |  
|                            
|                            
|                            
|                            
|                             | Cancelled |  |                                        | (50 | )            |   |       | 3.125 |  |  |    | to |  |   |       | 3.125 |  |   |     | (156 | )
|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |     |     
|Outstanding at June 30, 1999 |           |  | 304                                    |     |              | $ | 2.375 |       |  |  | to |    |  | $ | 4.750 |       |  | $ | 877 |     
|                            
|                            
|                            
|                            
|                             | Cancelled |  |                                        | (5  | )            |   |       | 2.437 |  |  |    | to |  |   |       | 3.563 |  |   |     | (15  | )
|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |     |     
|Outstanding at June 30, 2000 |           |  | 299                                    |     |              | $ | 2.375 |       |  |  | to |    |  | $ | 4.750 |       |  | $ | 862 |     
|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |     |     
|Outstanding at June 30, 2001 |           |  | 299                                    |     |              | $ | 2.375 |       |  |  | to |    |  | $ | 4.750 |       |  | $ | 862 |     
|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |     |     

Non-Qualified stock options of 299,000, 299,000, and 261,000 shares were
exercisable at June 30, 2001, 2000, and 1999, respectively.

The Company applies Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized for stock options. Had compensation
cost for stock options been determined based on the fair value at the grant
dates for awards under these plans consistent with the method of SFAS No. 123,
Accounting for Stock-Based Compensation, the Companys net income and net
income per share would have been reduced to the pro forma amounts indicated as
follows:

|                                       |  |             |  |                       |       |      |  |      |     |  |  |   |       | 
|-------------------------------------- |  | ----------- |  | --------------------- | ----- | ---- |  | ---- | --- |  |  | - | ----- | 
|                                       |  |             |  | 2001                  |       | 2000 |  | 1999
|                                       |  |             |  |                       |       |      |  |     
|                                       |  |             |  | (In thousands, except
|                                       |  |             |  | per share data)      
|                                      
|Net (Loss) Income:                     |  | As Reported |  | $                     | (787) |      |  | $    | 340 |  |  | $ | 1,837 | 
|                                      
|                                      
|                                      
|                                      
|                                       |  | Pro Forma   |  |                       | (921) |      |  |      | 185 |  |  |   | 1,761 | 
|                                      
|Net (Loss) Income Per Share
- Basic:   |  | As Reported |  | $                     | (.12) |      |  | $    | .05 |  |  | $ | .30   | 
|                                      
|                                      
|                                      
|                                      
|                                       |  | Pro Forma   |  |                       | (.14) |      |  |      | .03 |  |  |   | .28   | 
|                                      
|Net (Loss) Income Per Share
- Diluted: |  | As Reported |  | $                     | (.12) |      |  | $    | .05 |  |  | $ | .29   | 
|                                      
|                                      
|                                      
|                                      
|                                       |  | Pro Forma   |  |                       | (.14) |      |  |      | .03 |  |  |   | .28   | 

F-12



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As permitted by SFAS No. 123, the fair value approach to valuing stock
options used for pro forma presentation has not been applied to stock options
granted prior to July 1, 1995. The compensation cost calculated under the fair
value approach is recognized over the vesting period of the stock options.

The weighted average fair value of options granted was $0.93, $1.22 and
$0.97 during 2001, 2000 and 1999, 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 2001, 2000 and 1999:
expected volatility of 47%, 49% and 53% for 2001, 2000 and 1999, respectively;
risk-free interest rate of 4.97%, 6.18% and 5.67% for 2001, 2000 and 1999,
respectively; and expected lives of five years after the grant date.

NOTE G INCOME TAXES

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

|         |         |   |                      |     |      |   |      |      |   |   |      |      |  
|-------- | ------- | - | -------------------- | --- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|         |         |   | Years Ended June 30,
|         |         |   |                     
|         |         |   | 2001                 |     | 2000 |   | 1999
|         |         |   |                      |     |      |   |     
|         |         |   | (In thousands)      
|Current 
|        
|        
|        
|        
|         | Federal |   | $                    |    |      |   | $    |     |   |   | $    |     |  
|        
|        
|        
|        
|         | State   |   |                      | 73  |      |   |      |     |   |   |      |     |  
|        
|Deferred
|        
|        
|        
|        
|         | Federal |   |                      | 283 |      |   |      | (188 | ) |   |      | (407 | )
|        
|        
|        
|        
|         | State   |   |                      | 34  |      |   |      | 50   |   |   |      | 121  |  
|         |         |   |                      |     |      |   |      |      |   |   |      |     
|         |         | $ | 390                  |     |      | $ | (138 | )    |   | $ | (286 | )   
|         |         |   |                      |     |      |   |      |      |   |   |      |     

F-13



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

|                       |                                            |                           |        |          |       |          |        |       |       | 
|---------------------- | ------------------------------------------ | ------------------------- | ------ | -------- | ----- | -------- | ------ | ----- | ----- | 
|                       |                                            |                           |        | June 30, |       | June 30,
|                       |                                            |                           |        | 2001     |       | 2000    
|                       |                                            |                           |        |          |       |         
|Deferred Tax Assets:  
|                      
|                      
|                      
|                      
|                       | Employee benefits                          |                           | $      | 685      |       |          | $      | 658   |      
|                      
|                      
|                      
|                      
|                       | Bad debt reserves                          |                           |        | 122      |       |          |        | 209   |      
|                      
|                      
|                      
|                      
|                       | All other reserves                         |                           |        | 149      |       |          |        | 36    |      
|                      
|                      
|                      
|                      
|                       | Discontinued operations reserves           |                           |        | 157      |       |          |        | 316   |      
|                      
|                      
|                      
|                      
|                       | Alternative minimum tax credits            |                           |        | 117      |       |          |        | 117   |      
|                      
|                      
|                      
|                      
|                       | Net operating losses                       |                           |        | 2,078    |       |          |        | 1,800 |      
|                      
|                      
|                      
|                      
|                       | Net operating losses of purchased
business |                           |        | 1,000    |       |          |        | 1,000 |      
|                      
|                      
|                      
|                      
|                       | State tax net operating losses             |                           |        | 280      |       |          |        | 258   |      
|                      
|                      
|                      
|                      
|                       | Depreciation                               |                           |        | 164      |       |          |        | 107   |      
|                      
|                      
|                      
|                      
|                       | Other                                      |                           |        | 4        |       |          |        | 15    |      
|                       |                                            |                           |        |          |       |          |        |      
|                       |                                            | Total Deferred Tax Assets |        |          | 4,756 |          |        |       | 4,516 | 
|                      
|Valuation Allowance    |                                            |                           | (3,056 | )        |       |          | (2,499 | )    
|                       |                                            |                           |        |          |       |          |        |      
|                      
|Net Deferred Tax Asset |                                            | $                         | 1,700  |          |       | $        | 2,017  |      
|                       |                                            |                           |        |          |       |          |        |      

Realization of deferred tax assets is dependent upon generation of
sufficient income by Versar and in some cases sufficient income in specific
jurisdictions and by specific office locations. At June 30, 2001, the Company
had $117,000 of alternative minimum tax credit carryforwards which can be
carried forward indefinitely. The alternative minimum tax credit carryforward
may be used to offset regular tax liability in future years to the extent it
exceeds the alternative minimum tax liability. These carryforwards are
reflected as deferred tax assets. The Company has established a valuation
allowance until the probability of realization of these assets becomes more
certain.

SMC has net operating loss carryforwards of approximately $9,500,000 for
federal income tax purposes, which will expire in the years 2002 through 2011.
Due to the substantial changes in SMCs ownership, there are annual limitations
on the amount of the carryforwards that can be utilized. The utilization of
the net operating losses is limited to approximately $300,000 per year for the
9 remaining years. If the net operating losses are utilized, they will
favorably impact the results of operations as the related deferred tax asset is
fully reserved.

F-14



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The tax benefit was composed of the following:

|                                             |  |                      |      |      |  |      |      |   |  |   |      |  
|-------------------------------------------- |  | -------------------- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                             |  | Years Ended June 30,
|                                             |  |                     
|                                             |  | 2001                 |      | 2000 |  | 1999
|                                             |  |                      |      |      |  |     
|                                             |  | (In thousands)      
|Expected provision at federal
statutory rate |  | $                    | (135 | )    |  | $    | 55   |   |  | $ | 527  |  
|                                            
|                                            
|                                            
|                                            
|Change in valuation allowance                |  |                      | 421  |      |  |      | (200 | ) |  |   | (900 | )
|                                            
|                                            
|                                            
|                                            
|State income tax, net of federal benefit     |  |                      | 68   |      |  |      | 33   |   |  |   | 80   |  
|                                            
|                                            
|                                            
|                                            
|Permanent items                              |  |                      | 56   |      |  |      | 5    |   |  |   | 27   |  
|                                            
|                                            
|                                            
|                                            
|Other                                        |  |                      | (20  | )    |  |      | (31  | ) |  |   | (20  | )
|                                             |  |                      |      |      |  |      |      |   |  |   |      |  
|                                             |  | $                    | 390  |      |  |      | (138 | ) |  | $ | (286 | )
|                                             |  |                      |      |      |  |      |      |   |  |   |      |  

Income taxes paid for the years ended June 30, 2001, 2000, and 1999 were
$105,000, $91,000, and $69,000, respectively.

NOTE H EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN

The Company has established an Employee Savings and Stock Ownership Plan
(ESSOP) for the benefit of its employees and those of its subsidiaries. The
plan includes an Employee Stock Ownership Plan (ESOP) and an Employee Savings
Plan (401(k)). In June 1999, the plan was modified to permit voluntary
participation in the 401(k) Plan upon employment effective July 1, 1999. All
employees with at least 1,000 hours of service are eligible to participate in
the ESOP.

Contributions to the ESOP are made at the discretion of the Company in the
form of the Companys stock or cash, which is invested by the plans Trustees
in the Companys stock. No contributions were made in fiscal years 2001, 2000,
and 1999, respectively.

The Employee Savings Plan was adopted in accordance with Section 401(k) of
the Internal Revenue Code. Under the plan, participants may elect to defer up
to 15% of their salary through contributions to the plan, which are invested in
selected mutual funds or used to buy insurance. The Company will match
qualified contributions with a contribution of 100% of each employees
contribution up to 4% of the employees salary. This contribution may be in the
Companys stock or cash. All Company matching contributions were made in stock
for the past three years and approximated $1,067,000, $164,000, and $629,000,
for fiscal years 2001, 2000, and 1999, respectively.

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

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 2001 and 2000. Vesting occurs over time, such that an
employee is 100% vested after seven years of participation.

F-15



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 1999 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 201,000 square feet of office space,
including space leased from Sarnia, as well as data processing and other
equipment under agreements expiring through 2009. Minimum future obligations
under operating leases are as follows:

|                      |  |                |        | 
|--------------------- |  | -------------- | ------ | 
|                      |  | Total         
|Years Ending June 30, |  | Amount        
|                      |  |               
|                      |  | (In thousands)
|                     
|2002                  |  | $              | 3,291  | 
|                     
|                     
|                     
|                     
|2003                  |  |                | 2,881  | 
|                     
|                     
|                     
|                     
|2004                  |  |                | 2,502  | 
|                     
|                     
|                     
|                     
|2005                  |  |                | 2,459  | 
|                     
|                     
|                     
|                     
|2006                  |  |                | 1,468  | 
|                     
|                     
|                     
|                     
|2007 and thereafter   |  |                | 7,336  | 
|                      |  |                |        | 
|                      |  | $              | 19,937 | 
|                      |  |                |        | 

Certain of the lease payments are subject to adjustment for increases in
utility costs and real estate taxes. Total office rental expense approximated
$2,637,000, $2,625,000 and $2,561,000, for 2001, 2000 and 1999, respectively.

On January 26, 2001, TAMS Consultants, Inc., a subcontractor to Versar on
one of its largest government contracts (which is now substantially completed),
filed an action in the U.S. District Court for the Eastern District of
Virginia, entitled TAMS Consultants, Inc. v. Versar, Inc. Case No. CA 01-114A.
TAMS claimed breach of contract and fraudulent inducement alleging Versar
failed to provide an agreed upon percentage of work to TAMS. TAMS also claimed
monetary damages in excess of $5 million.

Versar filed a Motion to Dismiss which was denied. At the same time,
however; the Court granted TAMS the right to file an Amended Complaint which
TAMS did, dropping the fraudulent inducement claims.

On June 21, 2001, Versar entered into a Settlement Agreement to resolve
the ongoing lawsuit between Versar and TAMS Consultants, Inc. As a result of
this settlement and the legal fees and costs associated with the litigation,
Versar took a charge of approximately $1,320,000 in the fourth quarter of
fiscal year 2001.

The TAMS litigation was not covered by insurance. The alternatives,
however, of significant additional legal costs, the uncertainty of full success
at trial or other settlement scenarios were deemed unacceptable.

Versar is a defendant in lawsuits that have arisen in the ordinary course
of its business. Management does not believe that the outcome of these
lawsuits will have a material adverse effect on the Companys consolidated
financial position and results of operations.

F-16



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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,
|                                     |                       |   |                     
|                                     |                       |   | 2001                 |        | 2000 |   | 1999  
|                                     |                       |   |                      |        |      |   |       
|                                     |                       |   | (In thousands)      
|U.S. Department of Defense           |                       | $ | 38,157               |        |      | $ | 28,021 |        |  | $ | 24,973 |       
|                                    
|                                    
|                                    
|                                    
|U.S. Environmental Protection Agency |                       |   | 2,734                |        |      |   | 3,245  |        |  |   | 3,496  |       
|                                    
|                                    
|                                    
|                                    
|Other U.S. Government agencies       |                       |   | 5,202                |        |      |   | 2,158  |        |  |   | 1,316  |       
|                                     |                       |   |                      |        |      |   |        |        |  |   |        |       
|                                    
|                                     | Total U.S. Government |   | $                    | 46,093 |      |   | $      | 33,424 |  |   | $      | 29,785 | 
|                                     |                       |   |                      |        |      |   |        |        |  |   |        |       

The Companys largest contract with the U.S. Air Force generated revenues
of approximately $13,865,000 and $4,508,000 in fiscal years 2001 and 2000,
respectively.

F-17



---



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE K QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial information for fiscal years 2001 and 2000 is as
follows (in thousands, except per share amounts):

|                           |                      |        |                  |        |                  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |       |  |   |        |       |   |   |        |       |  |   |        |       | 
|-------------------------- | -------------------- | ------ | ---------------- | ------ | ---------------- | ------ | ------ | ------- |  | ------ | ------ | ------ |  | ------ | ------ | ------- |  | - | ------ | ----- |  | - | ------ | ----- | - | - | ------ | ----- |  | - | ------ | ----- | 
|                           |                      |        | Fiscal Year 2001 |        | Fiscal Year 2000
|                           |                      |        |                  |        |                 
|                          
|Quarter ending             |                      | Jun 30 |                  | Mar 31 |                  | Dec 31 |        | Sept 30 |  | Jun 30 |        | Mar 31 |  | Dec 31 |        | Sept 30
|                           |                      |        |                  |        |                  |        |        |         |  |        |        |        |  |        |        |        
|                          
|Gross Revenue              |                      | $      | 15,107           |        |                  | $      | 16,789 |         |  | $      | 17,745 |        |  | $      | 16,175 |         |  | $ | 15,460 |       |  | $ | 12,955 |       |   | $ | 13,758 |       |  | $ | 13,976 |      
|                          
|Net Service Revenue        |                      |        | 9,592            |        |                  |        | 9,947  |         |  |        | 10,259 |        |  |        | 9,683  |         |  |   | 10,117 |       |  |   | 9,159  |       |   |   | 9,145  |       |  |   | 9,366  |      
|                          
|Operating (loss) income    |                      |        | (1,697           | )      |                  |        | 241    |         |  |        | 563    |        |  |        | 541    |         |  |   | 209    |       |  |   | (186   | )     |   |   | 225    |       |  |   | 480    |      
|                          
|Net (loss) income          |                      | $      | (1,377           | )      |                  | $      | 70     |         |  | $      | 261    |        |  | $      | 259    |         |  | $ | 71     |       |  | $ | (185   | )     |   | $ | 274    |       |  | $ | 180    |      
|                           |                      |        |                  |        |                  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |       |  |   |        |       |   |   |        |       |  |   |        |      
|                          
|Net (loss) income per     
|                          
|                          
|                          
|                          
|                           | share  diluted      |        | $                | (0.21  | )                |        | $      | 0.01    |  |        | $      | 0.04   |  |        | $      | 0.04    |  |   | $      | .01   |  |   | $      | (.03  | ) |   | $      | .04   |  |   | $      | .03   | 
|                           |                      |        |                  |        |                  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |       |  |   |        |       |   |   |        |       |  |   |        |      
|                          
|Weighted average number of
|                          
|                          
|                          
|                          
|                           | shares outstanding -
|                          
|                          
|                          
|                          
|                           | diluted              |        |                  | 6,475  |                  |        |        | 6,518   |  |        |        | 6,486  |  |        |        | 6,482   |  |   |        | 6,465 |  |   |        | 6,405 |   |   |        | 6,471 |  |   |        | 6,511 | 
|                           |                      |        |                  |        |                  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |       |  |   |        |       |   |   |        |       |  |   |        |      

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

F-18



---



Schedule II



VERSAR, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts



|                       |  |              |         |            |  |            |         |      |  |            |          |   |  |  |         | 
|---------------------- |  | ------------ | ------- | ---------- |  | ---------- | ------- | ---- |  | ---------- | -------- | - |  |  | ------- | 
|                       |  |              |         |            |  | ADDITIONS 
|                       |  | BALANCE AT   |         | CHARGED TO |  |            |         |      |  | BALANCE AT
|                       |  | BEGINNING OF |         | COSTS AND  |  |            |         |      |  | END OF    
|                       |  | YEAR         |         | EXPENSES   |  | CHARGE OFF |         | YEAR
|                       |  |              |         |            |  |            |         |     
|                      
|                      
|ALLOWANCE FOR DOUBTFUL
|                      
|                      
|                      
|                      
|ACCOUNTS              
|                      
|                      
|                      
|                      
|                      
|1999                   |  |              | 615,830 |            |  |            | 92,257  |      |  |            | (99,540  | ) |  |  | 608,547 | 
|                      
|2000                   |  |              | 608,547 |            |  |            | 230,869 |      |  |            | (291,012 | ) |  |  | 548,404 | 
|                      
|2001                   |  |              | 548,404 |            |  |            | 179,017 |      |  |            | (405,733 | ) |  |  | 321,688 | 

F-19