##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended 
June 29, 2007
    
    Commission File
No. 1-9309
 
 DELAWARE
(State or other jurisdiction of 
Incorporation or organization)
    
    54-0852979
(I.R.S. employer identification no.)
 6850 Versar Center, Springfield, Virginia
(Address of principal executive offices)
    
    22151
(Zip code)
 (703) 750-3000
 Common Stock, $.01 par value
 American Stock Exchange
  o þ
  o þ
  þ o
 o
  o þ
  o o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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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
without limitation, those regarding the continued award of future work or task orders from
government and private clients, cost controls and reductions, the expected resolution of delays in
billing of certain projects, and the possible impact of current and future claims against the
Company based upon negligence and other theories of liability. Forward-looking statements involve
numerous risks and uncertainties that could cause actual results to differ materially, including,
but not limited to, the possibility 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 that 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 the Company will not be able
to attract and retain key professional employees; changes to or failure of the Federal government
to fund certain programs in which the Company participates; delays in project funding; and such
other risks and uncertainties set forth in this report and in other reports and other documents
filed by the Company from time to time with the Securities and Exchange Commission.
 Business Overview
    Program Management Business Segment :
 2




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Compliance and Environmental Programs Business Segment:
   Professional Services Business Segment:
 3




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National Security Business Segment
 Personal Protection Equipment: ® Standard on Protective Ensembles for Chemical/Biological Terrorism Incidents ®
  Chemical Testing Laboratory:
  Markets
    4




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Competition
     Backlog
  5




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Employees
  6




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Item 1A. Risk Factors
 We are dependent on government contracts for the majority of our revenue, and a reduction or delay
in spending by government agencies could adversely affect our business and operating results.
  
    
    a competitive procurement process with no guaranty of being awarded contracts;
    
    dependence on congressional appropriations and administrative allotment of funds;
    
    policies and regulations that can be changed at any time by Congress or a
presidential administration;
    
    competing political priorities and changes in the political climate regarding
funding and operations of the services;
    
    changes in and delays or cancellations of government programs or requirements;
    
    government contracts that are usually awarded for relatively short periods of time
and are subject to renewal options in favor of the government; and
    
    many contracts with Federal government agencies require annual funding and may be
terminated at the agencys discretion.
   Our government contracts are subject to audit and potential reduction of costs and fees.
  As a government contractor, we are subject to a number of procurement laws and regulations; a
violation of any such law or regulation could result in sanctions, contract termination, forfeiture
of profit, harm to our reputation or loss of our status as an eligible government contractor.
  7




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Since we depend on federal, state and local governments for a significant portion of our revenue,
our inability to win or renew government contracts could harm our operations and financial
condition.
  Robust enforcement of regulations is important to our financial success.
  A large portion of our backlog is subject to cancellation and adjustments which makes backlog an
uncertain indicator of future operating results.
    8




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We could face potential liability for failure to properly design remediation.
  Our failure to properly manage projects may result in additional costs or claims.
  Our services expose us to significant risks of liability and it may be difficult to obtain or
maintain adequate insurance coverage.
   We operate in highly competitive industries.
  Our quarterly and annual revenue, expenses and operating results may fluctuate significantly, which
could have a negative effect on the price of our common stock.
 9




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
    
    the seasonality of the spending cycle of our public sector clients, notably the Federal
government and the spending patterns of our private sector clients;
    
    employee hiring and utilization rates;
    
    the number and significance of client engagements commenced and completed during the period;
    
    delays incurred in connection with an engagement because of weather or other factors;
    
    the ability of clients to terminate engagements without penalties;
    
    the creditworthiness and solvency of clients;
    
    the size and scope of engagements;
    
    the ability to perform contracts within budget or contractual limitations;
    
    the timing of expenses incurred for corporate initiatives;
    
    threatened or pending litigation matters;
    
    reductions in the prices of services offered by our competitors;
    
    winning re-bids of our existing large government contracts; and
    
    general economic and political conditions.
  We are highly dependent on key personnel.
  Item 1B. None
  Item 2. Properties
    Item 3. Legal Proceedings
  10




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Versar, Inc. v. Roy O. Ball, Trustee, URS Corporation, Environmental Resources Management and
Environ Corp., Roy O. Ball and Norman W.
Bernstein, Trustees v. Versar, Inc.,
   Item 4. Submission of Matters to a Vote of Security Holders
  EXECUTIVE OFFICERS
  NAME
    
    AGE
    
    POSITION WITH THE COMPANYTheodore M. Prociv
    
    
    59
    
    
    President and Chief Executive OfficerLawrence W. Sinnott
    
    
    45
    
    
    Executive Vice President, Chief Operating Officer,
Chief Financial Officer and TreasurerJeffrey A. Wagonhurst
    
    
    59
    
    
    Senior Vice President, Program Management Business SegmentJerome B. Strauss
    
    
    58
    
    
    Senior Vice President, Corporate DevelopmentPaul W. Kendall
    
    
    54
    
    
    Senior Vice President, National Security Business
SegmentJames C. Dobbs
    
    
    62
    
    
    Senior Vice President, General Counsel and
SecretaryGina Foringer
    
    
    38
    
    
    Senior Vice President, Professional Services Business SegmentMichael Abram
    
    
    51
    
    
    Senior Vice President, Compliance and
Environmental Programs Business Segment
 Theodore M. Prociv
 11




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##### 



Lawrence W. Sinnott
 Jeffrey A. Wagonhurst
 Jerome B. Strauss
 Paul W. Kendall
 James C. Dobbs
 Gina Foringer
 Michael Abram
 12




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PART II
 Item 5. Market for Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Common Stock
  Fiscal Year 2007
    
    High
    
    Low4th Quarter
    
    $
    9.15
    
    
    $
    4.753rd Quarter
    
    
    5.40
    
    
    
    3.982nd Quarter
    
    
    4.48
    
    
    
    3.461st Quarter
    
    
    4.45
    
    
    
    3.56
 Fiscal Year 2006
    
    High
    
    Low4th Quarter
    
    $
    5.10
    
    
    $
    3.713rd Quarter
    
    
    4.15
    
    
    
    3.252nd Quarter
    
    
    4.23
    
    
    
    3.201st Quarter
    
    
    5.50
    
    
    
    3.15
   Equity Compensation Plan Information
(In thousands, except share price)
 Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuanceSecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected in columnand rights
    
    
    and rights
    
    
    (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    838
    
    
    $
    3.25
    
    
    
    812
 13




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Item 6. Selected Financial Data (unaudited)
  For the Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,
    
    
    June 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands, except per share data)Consolidated Statement of Operations
related data:Gross Revenue
    
    $
    102,726
    
    
    $
    60,888
    
    
    $
    67,678
    
    
    $
    60,067
    
    
    $
    56,646Gross Profit
    
    
    10,822
    
    
    
    6,354
    
    
    
    7,759
    
    
    
    7,377
    
    
    
    7,181Operating Income
    
    
    4,153
    
    
    
    681
    
    
    
    1,419
    
    
    
    1,913
    
    
    
    612Income (Loss) from Continuing Operations
    
    
    5,282
    
    
    
    1,637
    
    
    
    1,361
    
    
    
    1,827
    
    
    
    (658
    )Loss from Discontinued Operations
    
    
    
    
    
    
    (290
    )
    
    
    (1,159
    )
    
    
    (636
    )
    
    
    (350
    )Net Income (Loss)
    
    
    5,282
    
    
    
    1,347
    
    
    
    202
    
    
    
    1,191
    
    
    
    (1,008
    )Income (Loss) per share from Continuing
Operations  Diluted
    
    $
    .62
    
    
    $
    .20
    
    
    $
    .16
    
    
    $
    .24
    
    
    $
    (.09
    )Loss per share from Discontinued
Operations  Diluted
    
    $
    
    
    
    $
    (.04
    )
    
    $
    (.14
    )
    
    $
    (.09
    )
    
    $
    (.05
    )Net Income (Loss) per share  Diluted
    
    $
    .62
    
    
    $
    .16
    
    
    $
    .02
    
    
    $
    .16
    
    
    $
    (.14
    )Weighted Average Shares Outstanding 
Diluted
    
    
    8,466
    
    
    
    8,347
    
    
    
    8,263
    
    
    
    7,675
    
    
    
    7,231Consolidated Balance Sheet related data:Working Capital
    
    $
    16,176
    
    
    $
    9,119
    
    
    $
    7,887
    
    
    $
    7,494
    
    
    $
    4,940Current Ratio
    
    
    2.01
    
    
    
    1.99
    
    
    
    1.86
    
    
    
    1.87
    
    
    
    1.47Total Assets
    
    
    36,817
    
    
    
    22,802
    
    
    
    20,912
    
    
    
    20,085
    
    
    
    19,336Current Portion of Long-Term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-Term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Debt, excluding bank line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders Equity
    
    $
    19,422
    
    
    $
    12,572
    
    
    $
    10,552
    
    
    $
    10,065
    
    
    $
    7,396
 14




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ITEM 7 
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Financial Trends
         
    
    General economic or political conditions;
    
    Threatened or pending litigation;
    
    The timing of expenses incurred for corporate initiatives;
    
    Employee hiring, utilization, and turnover rates;
    
    The seasonality of spending in the federal government and for commercial clients;
    
    Delays in project contracted engagements;
    
    Unanticipated contract changes impacting profitability;
    
    Reductions in prices by our competitors;
    
    The ability to obtain follow-on project work;
    
    Failure to properly manage projects resulting in additional costs;
    
    The cost of compliance for the Companys laboratories;
    
    The results of a negative government audit potentially impacting our costs, reputation and
ability to work with the federal government;
 15




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ITEM 7 Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
    
    Loss of key personnel;
    
    The ability to compete in a highly competitive environment; and
    
    Federal funding delays due to war in Iraq.
 Results of Operations
    Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2005(In thousands)GROSS REVENUEProgram Management
    
    $
    58,765
    
    
    $
    19,507
    
    
    $
    19,610Compliance and Environmental
Programs
    
    
    29,839
    
    
    
    26,958
    
    
    
    33,873Professional Services
    
    
    7,318
    
    
    
    7,010
    
    
    
    6,569National Security
    
    
    6,804
    
    
    
    7,413
    
    
    
    7,626$
    102,726
    
    
    $
    60,888
    
    
    $
    67,678
  16




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ITEM 7 Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
       Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2005(In thousands)OPERATING INCOMEProgram Management
    
    $
    7,037
    
    
    $
    815
    
    
    $
    2,243Compliance and Environmental
Programs
    
    
    2,313
    
    
    
    2,985
    
    
    
    3,051Professional Services
    
    
    1,257
    
    
    
    1,379
    
    
    
    1,353National Security
    
    
    215
    
    
    
    1,175
    
    
    
    1,112$
    10,822
    
    
    $
    6,354
    
    
    $
    7,759
 17




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ITEM 7 Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
       18




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ITEM 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)
 REVENUE CLIENT BASE
  For the Years EndedJune 29, 2007
    
    
    June 30, 2006
    
    
    July 1, 2005(In thousands, except for percentagesGovernmentEPA
    
    $
    2,753
    
    
    
    3
    %
    
    $
    3,909
    
    
    
    6
    %
    
    $
    3,972
    
    
    
    6
    %State & Local
    
    
    13,936
    
    
    
    14
    %
    
    
    7,880
    
    
    
    13
    %
    
    
    8,620
    
    
    
    13
    %Department of Defense
    
    
    65,997
    
    
    
    64
    %
    
    
    32,012
    
    
    
    53
    %
    
    
    31,182
    
    
    
    46
    %Other
    
    
    16,512
    
    
    
    16
    %
    
    
    11,933
    
    
    
    20
    %
    
    
    14,786
    
    
    
    22
    %Commercial
    
    
    3,528
    
    
    
    3
    %
    
    
    5,154
    
    
    
    8
    %
    
    
    9,118
    
    
    
    13
    %Gross Revenue
    
    $
    102,726
    
    
    
    100
    %
    
    $
    60,888
    
    
    
    100
    %
    
    $
    67,678
    
    
    
    100
    %
 Liquidity and Capital Resources
   1 2
  19




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ITEM 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)
 Contractual Obligations
  Contractual
    
    
    
    
    
    Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Obligations
    
    Total Cost
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    Years(In thousands)Operating
lease obligations
    
    $
    12,908
    
    
    $
    2,337
    
    
    $
    4,062
    
    
    $
    2,433
    
    
    $
    4,076Capital lease obligations
    
    
    952
    
    
    
    62
    
    
    
    137
    
    
    
    120
    
    
    
    633Notes payable
    
    
    335
    
    
    
    335
    
    
    
    
    
    
    
    
    
    
    
    Estimated interest
obligations
    
    
    282
    
    
    
    36
    
    
    
    59
    
    
    
    54
    
    
    
    133Total contractual cash
Obligations
    
    $
    14,477
    
    
    $
    2,770
    
    
    $
    4,258
    
    
    $
    2,607
    
    
    $
    4,842
 Critical Accounting Policies and Related Estimates That Have a Material Effect on Versars Consolidated Financial Statements
  Revenue recognition:
  20




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ITEM 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)
 Allowance for doubtful accounts
 Deferred tax valuation allowance
 Asset retirement obligation 1 2
 Goodwill and other intangible assets
  21




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ITEM 7 
Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Share-based compensation
    New accounting pronouncements
 Impact of Inflation
  Business Segments
  22




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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
  Item 8. Financial Statements and Supplementary Data
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  Item 9B. Other Information
  PART III
 Item 10. Directors and Executive Officers of the Registrant
    23




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Item 11. Executive Compensation
  Item 12. Security Ownership of Certain Beneficial Owners and Management
  Item 13. Certain Relationships and Related Transactions
  Item 14. Principal Accountant Fees and Services
  24




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PART IV
 Item 15. Exhibits, Financial Statement Schedules
   a)
    
    Report of Independent Registered Public Accounting Firmb)
    
    Consolidated Balance Sheets as of June 29, 2007 and June 30, 2006.c)
    
    Consolidated Statements of Income for the Years Ended June 29, 2007, June 30, 2006 and
July 1, 2005d)
    
    Consolidated Statements of Changes in Stockholders Equity for the Years Ended June 29,
2007, June 30, 2006 and July 1, 2005e)
    
    Consolidated Statements of Cash Flows for the Years Ended June 29, 2007, June 30, 2006 and
July 1, 2005f)
    
    Notes to Consolidated Financial Statements
  a)
    
    Schedule II  Valuation and Qualifying Accounts for the Years Ended June 29, 2007, June
30, 2006 and July 1, 2005
    25




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Exhibit Index
 Page Number/Item No.
    
    Description
    
    Reference3.1
    
    Restated Articles of Incorporation of Versar, Inc. filed as an exhibit to the
Registrants Registration Statement on Form S-1 effective November 20, 1986
(File No. 33-9391)
    
    
    (A
    )3.2
    
    Bylaws of Versar, Inc.
    
    
    (A
    )3.3
    
    Amendment to the Bylaws of Versar, Inc.
    
    
    (W
    )4
    
    Specimen of Certificate of Common Stock of Versar, Inc.
    
    
    (A
    )10.10
    
    Incentive Stock Option Plan *
    
    
    (B
    )10.11
    
    Executive Tax and Investment Counseling Program
    
    
    (A
    )10.12
    
    Nonqualified Stock Option Plan *
    
    
    (B
    )10.100
    
    AFCEE ENRAC Contract
    
    
    (U
    )10.103
    
    Securities Purchase Agreement, dated June 14, 2002 between Registrant and
Radyr Investments Limited
    
    
    (V
    )10.105
    
    4P Architect-Engineering Contract dated March 14, 2003
    
    
    (W
    )10.107
    
    Line of Credit Commitment Letter, dated September 16, 2003 between
the Registrant and United Bank
    
    
    (W
    )10.109
    
    Change of Control Severance Agreement dated March 1, 2004 between
the Registrant and Lawrence W. Sinnott*
    
    
    (X
    )10.110
    
    Change of Control Severance Agreement dated March 1, 2004 between
the Registrant and James C. Dobbs*
    
    
    (X
    )10.111
    
    Modification Agreement of the Revolving Commercial Note dated May 12, 2004
between Registrant and United Bank
    
    
    (X
    )10.112
    
    AFCEE WERC Contract dated December 5, 2003
    
    
    (X
    )10.113
    
    2002 Stock Incentive Plan
    
    
    (Y
    )10.114
    
    Employment Agreement dated February 8, 2005 between Versar, Inc. and
Theodore M. Prociv*
    
    
    (Z
    )10.115
    
    Form of Stock Option Agreement
    
    
    (Z
    )10.116
    
    Air National Guard Contract dated July 6, 2005
    
    
    (Z
    )
 26




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Page Number/Item No.
    
    Description
    
    Reference10.117
    
    2005 Stock Incentive Plan and definitions as approved by the Board of
Directors on September 7, 2005 and by the stockholders on November 16, 2005
    
    (AA)10.118
    
    Modification Agreement of the Revolving Commercial Note, dated November 30,
2005, between Registrant and United Bank
    
    (AA)10.119
    
    Amendment to Change of Control Severance Agreement dated March 1, 2004 between
the Registrant and Lawrence W. Sinnott*, March 17, 2006
    
    (AA)10.120
    
    Amendment to Change of Control Severance Agreement dated March 1, 2004 between
the Registrant and James C. Dobbs*, March 17, 2006
    
    (AA)10.121
    
    Change of Control Severance Agreement dated March 17, 2006 between the
Registrant and Jeffrey A. Wagonhurst*
    
    (AA)10.122
    
    Change of Control Severance Agreement dated March 17, 2006 between the
Registrant and Michael J. Abram*
    
    (AA)10.123
    
    Modification Agreement of the Revolving Commercial Note, dated September 24,
2007, between Registrant and United Bank
    
    
    31-3310.124
    
    Amendment to Employment Agreement dated February 8, 2005 between Versar, Inc.
and Theodore M. Prociv, September 25, 2007
    
    
    3422
    
    Subsidiaries of the Registrant
    
    
    (Q
    )23.1
    
    Consent of Independent Registered Public Accounting Firm, Grant Thornton LLP
to register Shares under the Companys Option Plans under Form S-8 dated
September 7, 2004
    
    
    (X
    )23.2
    
    Consent of Independent Registered Public Accounting Firm, Grant Thornton LLP
to the incorporation by reference of the previously filed Forms S-8
    
    
    3531.1
    
    Certifications by Theodore M. Prociv, President and Chief Executive Officer
Pursuant to Securities Exchange Rule 13a-14
    
    
    3631.2
    
    Certifications by Lawrence W. Sinnott, Exec. Vice President, Chief Operating Officer
and Chief Financial Officer pursuant to Securities Exchange Rule 13a-14
    
    
    3732.1
    
    Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
Of the Sarbanes-Oxley Act of 2002, for the period ending June 29, 2007 by Theodore
M. Prociv, President and Chief Executive Officer
    
    
    3832.2
    
    Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
Of the Sarbanes-Oxley Act of 2002, for the period ending June 29, 2007 by Lawrence W.
Sinnott, Exec. Vice President, Chief Operating Officer and Chief Financial Officer
    
    
    39
 
 *
    
    Indicates management contract or compensatory plan or arrangement 27




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(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.(O)
    
    Incorporated by reference to the similarly numbered exhibit to the Registrants Form S-4
registration number 333-33167.(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.(V)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K
Annual Report for Fiscal Year Ended June 30, 2002 (FY2002 Form 10K) filed with the Commission on September 16, 2002.(W)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K
Annual Report for Fiscal Year Ended June 30, 2003 (FY2003 Form 10K) filed with the Commission on September 26, 2003.(X)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K
Annual Report for Fiscal Year Ended June 30, 2004 (FY2004 Form 10K) filed with the Commission on September 27, 2004.(Y)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Definitive
Proxy Statement filed with the Commission on October 11, 2002.(Z)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K/A
Annual Report for Fiscal Year Ended July 1, 2005 (FY2005 Form 10K/A) filed with the Commission on October
4, 2005.(AA)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K Annual
Report for Fiscal Year Ended June 30, 2006 (FY1006 Form 10K) filed with the Commission on September 19, 2006. 28




---



##### 



VERSAR, INC.(Registrant)Date:  September 26, 2007
    /S/ Paul J. HoeperPaul J. Hoeper
Chairman and Director  SIGNATURES
    
    TITLE
    
    DATE/S/ Paul J. Hoeper

Paul J. Hoeper
    
    Chairman and Director
    
    September 26, 2007/S/ Theodore M. Prociv

Theodore M. Prociv
    
    Chief Executive Officer, President, and
Director
    
    September 26, 2007/S/ Lawrence W. Sinnott

Lawrence W. Sinnott
    
    Executive Vice President, Chief
Operating Officer, Chief Financial
Officer, Treasurer, and Principal
Accounting Officer
    
    September 26, 2007/S/ Michael Markels, Jr.

Michael Markels, Jr.
    
    Chairman Emeritus and Director
    
    September 26, 2007/S/ Robert L. Durfee

Robert L. Durfee
    
    Director
    
    September 26, 2007
 29




---



##### 



SIGNATURES
    
    TITLE
    
    DATE/S/ James L. Gallagher

James L. Gallagher
    
    Director
    
    September 26, 2007/S/ Fernando V. Galaviz

Fernando V. Galaviz
    
    Director
    
    September 26, 2007/S/ James V. Hansen

James V. Hansen
    
    Director
    
    September 26, 2007/S/ Amoretta M. Hoeber

Amoretta M. Hoeber
    
    Director
    
    September 26, 2007/S/ Amir A. Metry

Amir A. Metry
    
    Director
    
    September 26, 2007
 30




---



##### 



Report of Independent Registered Public Accounting Firm
 
      
 F-1




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 June 29,
    
    
    June 30,2007
    
    
    2006ASSETSCurrent assetsCash and cash equivalents
    
    $
    6,296
    
    
    $
    140Accounts receivable, net
    
    
    22,507
    
    
    
    16,227Prepaid expenses and other current assets
    
    
    1,250
    
    
    
    1,430Deferred income taxes
    
    
    2,107
    
    
    
    566Total current assets
    
    
    32,160
    
    
    
    18,363Property and equipment, net
    
    
    2,306
    
    
    
    1,744Deferred income taxes
    
    
    802
    
    
    
    1,144Goodwill
    
    
    776
    
    
    
    776Other assets
    
    
    773
    
    
    
    775Total assets
    
    $
    36,817
    
    
    $
    22,802LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    10,454
    
    
    $
    5,950Billings in excess of revenue
    
    
    594
    
    
    
    209Accrued salaries and vacation
    
    
    1,604
    
    
    
    1,474Accrued bonus
    
    
    1,793
    
    
    
    Other liabilities
    
    
    1,539
    
    
    
    1,326Liabilities of discontinued operations
    
    
    
    
    
    
    285Total current liabilities
    
    
    15,984
    
    
    
    9,244Other long-term liabilities
    
    
    1,411
    
    
    
    986Total liabilities
    
    
    17,395
    
    
    
    10,230Commitments and contingencies
    
    
    
    
    
    
    Stockholders equityCommon stock, $.01 par value; 30,000,000 shares
authorized; 8,705,733 shares and 8,144,692 shares
issued; 8,651,742 shares and 8,129,187 shares outstanding
    
    
    87
    
    
    
    81Capital in excess of par value
    
    
    24,679
    
    
    
    22,790Accumulated deficit
    
    
    (4,945
    )
    
    
    (10,227
    )Treasury stock
    
    
    (399
    )
    
    
    (72
    )Total stockholders equity
    
    
    19,422
    
    
    
    12,572Total liabilities and stockholders equity
    
    $
    36,817
    
    
    $
    22,802
  F-2




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Income
 Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2005GROSS REVENUE
    
    $
    102,726
    
    
    $
    60,888
    
    
    $
    67,678Purchased services and materials, at cost
    
    
    62,750
    
    
    
    26,598
    
    
    
    32,040Direct costs of services and overhead
    
    
    29,154
    
    
    
    27,936
    
    
    
    27,879GROSS PROFIT
    
    
    10,822
    
    
    
    6,354
    
    
    
    7,759Selling, general and administrative expenses
    
    
    6,669
    
    
    
    5,673
    
    
    
    6,123Restructuring charge
    
    
    
    
    
    
    
    
    
    
    217OPERATING INCOME
    
    
    4,153
    
    
    
    681
    
    
    
    1,419OTHER EXPENSEInterest (income)/expense, net
    
    
    (24
    )
    
    
    (11
    )
    
    
    58Income tax benefit, net
    
    
    (1,105
    )
    
    
    (945
    )
    
    
    INCOME FROM CONTINUING OPERATIONS
    
    
    5,282
    
    
    
    1,637
    
    
    
    1,361DISCONTINUED OPERATIONSLoss from discontinued operations
    
    
    
    
    
    
    (290
    )
    
    
    (556
    )Loss on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (603
    )LOSS FROM DISCONTINUED OPERATIONS
    
    
    
    
    
    
    (290
    )
    
    
    (1,159
    )NET INCOME
    
    $
    5,282
    
    
    $
    1,347
    
    
    $
    202INCOME PER SHARE FROM CONTINUING
OPERATIONS  BASIC
    
    $
    0.64
    
    
    $
    0.20
    
    
    $
    0.17INCOME PER SHARE FROM CONTINUING
OPERATIONS  DILUTED
    
    $
    0.62
    
    
    $
    0.20
    
    
    $
    0.16LOSS FROM DISCONTINUED OPERATIONS 
BASIC AND DILUTED
    
    $
    
    
    
    $
    (0.04
    )
    
    $
    (0.07
    )LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS  BASIC AND DILUTED
    
    $
    
    
    
    $
    
    
    
    $
    (0.07
    )NET INCOME PER SHARE  BASIC
    
    $
    0.64
    
    
    $
    0.17
    
    
    $
    0.03NET INCOME PER SHARE  DILUTED
    
    $
    0.62
    
    
    $
    0.16
    
    
    $
    0.02WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING  BASIC
    
    
    8,201
    
    
    
    8,057
    
    
    
    7,890WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING  DILUTED
    
    
    8,466
    
    
    
    8,347
    
    
    
    8,263
  F-3




---



##### 



VERSAR, INC.
Consolidated Statements of Changes in Stockholders Equity
  TotalCapital in
    
    
    Accumu-
    
    
    
    
    
    
    
    
    
    
    Stock-Common
    
    
    Stock
    
    
    Excess of
    
    
    lated
    
    
    Treasury
    
    
    Treasury
    
    
    holdersShares
    
    
    Amount
    
    
    Par Value
    
    
    Deficit
    
    
    Shares
    
    
    Stock
    
    
    EquityBalance, June 30, 2004
    
    
    7,837
    
    
    $
    78
    
    
    $
    21,835
    
    
    $
    (11,776
    )
    
    
    (16
    )
    
    $
    (72
    )
    
    $
    10,065Exercise of stock options
    
    
    87
    
    
    
    1
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Share-based compensation
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Tax benefit from exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    202Balance, July 1, 2005
    
    
    7,924
    
    
    
    79
    
    
    
    22,119
    
    
    
    (11,574
    )
    
    
    (16
    )
    
    
    (72
    )
    
    
    10,552Exercise of stock options
    
    
    221
    
    
    
    2
    
    
    
    604
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606Share-based compensation
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,347
    
    
    
    
    
    
    
    
    
    
    
    1,347Balance, June 30, 2006
    
    
    8,145
    
    
    
    81
    
    
    
    22,790
    
    
    
    (10,227
    )
    
    
    (16
    )
    
    
    (72
    )
    
    
    12,572Exercise of stock options
    
    
    231
    
    
    
    2
    
    
    
    713
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    715Issuance of restricted stock
    
    
    21
    
    
    
    1
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85Exercise of stock warrants
    
    
    180
    
    
    
    2
    
    
    
    717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    719Stock exchange
    
    
    129
    
    
    
    1
    
    
    
    327
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (327
    )
    
    
    (327
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,282
    
    
    
    
    
    
    
    
    
    
    
    5,282Balance, June 29, 2007
    
    
    8,706
    
    
    $
    87
    
    
    $
    24,679
    
    
    $
    (4,945
    )
    
    
    (54
    )
    
    $
    (399
    )
    
    $
    19,422
  F-4




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2005Cash flows from operating activitiesIncome from continuing operations
    
    $
    5,282
    
    
    $
    1,637
    
    
    $
    1,361Loss from discontinued operations
    
    
    
    
    
    
    (290
    )
    
    
    (1,159
    )Net income
    
    
    5,282
    
    
    
    1,347
    
    
    
    202Adjustments to reconcile net income to net cash
provided by (used in) continuing operationsDepreciation and amortization
    
    
    687
    
    
    
    755
    
    
    
    740Loss on sale of property and equipment
    
    
    19
    
    
    
    52
    
    
    
    183Provision for doubtful accounts receivable
    
    
    336
    
    
    
    (34
    )
    
    
    100Non-qualified stock option
    
    
    
    
    
    
    
    
    
    
    33Decrease in deferred tax valuation allowance
    
    
    (1,200
    )
    
    
    (945
    )
    
    
    (96
    )Tax benefit on exercise of non-qualified stock
options
    
    
    
    
    
    
    
    
    
    
    56Share-based compensation
    
    
    132
    
    
    
    67
    
    
    
    Changes in assets and liabilitiesIncrease in accounts receivable
    
    
    (6,616
    )
    
    
    (1,616
    )
    
    
    (533
    )Decrease (increase) in prepaid expenses
and other assets
    
    
    187
    
    
    
    561
    
    
    
    (1,174
    )Increase (decrease) in accounts payable
    
    
    4,504
    
    
    
    733
    
    
    
    (562
    )Increase (decrease) in accrued salaries and
vacation
    
    
    130
    
    
    
    (16
    )
    
    
    (477
    )Increase in other liabilities
    
    
    2,320
    
    
    
    98
    
    
    
    359Net cash provided by (used in) continuing
operations
    
    
    5,781
    
    
    
    1,002
    
    
    
    (1,169
    )Changes in net assets/liabilities of discontinued
operations
    
    
    (285
    )
    
    
    (167
    )
    
    
    243Net cash provided by (used in) operating
activities
    
    
    5,496
    
    
    
    835
    
    
    
    (926
    )Cash flows used in investing activitiesPurchase of property and equipment
    
    
    (693
    )
    
    
    (613
    )
    
    
    (670
    )Increase in life insurance cash surrender value
    
    
    (82
    )
    
    
    (43
    )
    
    
    (61
    )Net cash used in investing activities
    
    
    (775
    )
    
    
    (656
    )
    
    
    (731
    )Cash flows from financing activitiesNet (payments) borrowings on bank line of credit
    
    
    
    
    
    
    (777
    )
    
    
    777Purchase of treasury stock
    
    
    (327
    )
    
    
    
    
    
    
    Proceeds from exercise of options and warrants
    
    
    1,762
    
    
    
    606
    
    
    
    195Net cash provided by (used in) financing
activities
    
    
    1,435
    
    
    
    (171
    )
    
    
    972Net increase (decrease) in cash and cash equivalents
    
    
    6,156
    
    
    
    8
    
    
    
    (685
    )Cash and cash equivalents at the beginning of the year
    
    
    140
    
    
    
    132
    
    
    
    817Cash and cash equivalents at the end of the year
    
    $
    6,296
    
    
    $
    140
    
    
    $
    132Supplementary disclosure of cash flow information:Cash paid during the period forInterest
    
    $
    70
    
    
    $
    96
    
    
    $
    69Income Taxes
    
    $
    55
    
    
    $
    44
    
    
    $
    39
  F-5




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A SIGNIFICANT ACCOUNTING POLICIES
 Principles of consolidation:
 Accounting estimates:
 Contract accounting:
 Pre-contract costs:
 Depreciation and amortization:
 Goodwill and other intangible assets:
 F-6




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Direct costs of services and overhead:
 Income taxes:
 Asset retirement obligation: 1 2
 Discontinued operations:
 F-7




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Share-based compensation:
    Restricted Stock Grants:
 Net income per share:
 F-8




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2005(In thousands)Weighted average number of shares outstanding  basic
    
    
    8,201
    
    
    
    8,057
    
    
    
    7,890Effect of assumed exercise of options
    
    
    265
    
    
    
    290
    
    
    
    373Weighted average number of shares outstanding  diluted
    
    
    8,466
    
    
    
    8,347
    
    
    
    8,263
  Deferred compensation:
 Cash and cash equivalents:
 Fair value of financial instruments:
 Classification:
 New accounting pronouncements:
  F-9




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE B BUSINESS SEGMENTS
     F-10




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2005(In thousands)GROSS REVENUEProgram Management
    
    $
    58,765
    
    
    $
    19,507
    
    
    $
    19,610Compliance and Environmental
Programs
    
    
    29,839
    
    
    
    26,958
    
    
    
    33,873Professional Services
    
    
    7,318
    
    
    
    7,010
    
    
    
    6,569National Security
    
    
    6,804
    
    
    
    7,413
    
    
    
    7,626$
    102,726
    
    
    $
    60,888
    
    
    $
    67,678GROSS PROFIT (A)Program Management
    
    $
    7,037
    
    
    $
    815
    
    
    $
    2,243Compliance and Environmental
Programs
    
    
    2,313
    
    
    
    2,985
    
    
    
    3,051Professional Services
    
    
    1,257
    
    
    
    1,379
    
    
    
    1,353National Security
    
    
    215
    
    
    
    1,175
    
    
    
    1,112$
    10,822
    
    
    $
    6,354
    
    
    $
    7,759Selling, general and administrative
Expenses
    
    
    (6,669
    )
    
    
    (5,673
    )
    
    
    (6,123
    )Restructuring charge
    
    
    
    
    
    
    
    
    
    
    (217
    )OPERATING INCOME
    
    $
    4,153
    
    
    $
    681
    
    
    $
    1,419
 
 (A)
    
    Gross Profit is defined as gross revenue less purchased services and
materials and direct costs of services and overhead. Years EndedJune 29,
    
    
    June 30,2007
    
    
    2006(In thousands)IDENTIFIABLE ASSETSProgram Management
    
    $
    11,497
    
    
    $
    7,964Compliance and Environmental Programs
    
    
    10,042
    
    
    
    6,916Professional Services
    
    
    1,651
    
    
    
    1,638National Security
    
    
    1,985
    
    
    
    1,795Corporate and Other
    
    
    11,642
    
    
    
    4,489Total Assets
    
    $
    36,817
    
    
    $
    22,802
 F-11




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTES C ACCOUNTS RECEIVABLE
 Years EndedJune 29,
    
    
    June 30,2007
    
    
    2006(In thousands)Billed receivablesU.S. Government
    
    $
    6,492
    
    
    $
    6,160Commercial
    
    
    3,468
    
    
    
    3,824Unbilled receivablesU.S. Government
    
    
    12,827
    
    
    
    6,471Commercial
    
    
    94
    
    
    
    12122,881
    
    
    
    16,576Allowance for doubtful accounts
    
    
    (374
    )
    
    
    (349
    )$
    22,507
    
    
    $
    16,227
  NOTE D PROPERTY AND EQUIPMENT
 Estimated
    
    
    Years EndedUseful Life
    
    
    June 29,
    
    
    June 30,in Years
    
    
    2007
    
    
    2006(In thousands)Furniture and fixtures
    
    
    10
    
    
    $
    773
    
    
    $
    616Equipment
    
    
    3 to 10
    
    
    
    6,502
    
    
    
    6,172Capital leases
    
    Life of lease
    
    
    568
    
    
    
    712Leasehold improvements
    
    Life of lease
    
    
    2,022
    
    
    
    1,3689,865
    
    
    
    8,868Accumulated depreciation and amortization
    
    
    
    
    
    
    (7,559
    )
    
    
    (7,124
    )$
    2,306
    
    
    $
    1,744
   F-12




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE E DEBT
  1 2
  NOTE F STOCK OPTIONS
   F-13




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
      Weighted-Optioned
    
    
    Average OptionShares
    
    
    Price Per Share
    
    
    Total(In thousands, except per share price)Outstanding at June 30, 2004
    
    
    1,121
    
    
    $
    2.82
    
    
    $
    3,164Granted
    
    
    293
    
    
    
    4.10
    
    
    
    1,200Exercised
    
    
    (42
    )
    
    
    2.17
    
    
    
    (91
    )Cancelled
    
    
    (71
    )
    
    
    3.38
    
    
    
    (240
    )Reclassified to non-qualified
    
    
    (19
    )
    
    
    2.71
    
    
    
    (52
    )Outstanding at July 1, 2005
    
    
    1,282
    
    
    $
    3.10
    
    
    $
    3,981Granted
    
    
    5
    
    
    
    3.20
    
    
    
    16Exercised
    
    
    (81
    )
    
    
    2.51
    
    
    
    (203
    )Cancelled
    
    
    (180
    )
    
    
    3.24
    
    
    
    (584
    )Outstanding at June 30, 2006
    
    
    1,026
    
    
    $
    3.13
    
    
    $
    3,210Exercised
    
    
    (332
    )
    
    
    2.87
    
    
    
    (952
    )Cancelled
    
    
    (27
    )
    
    
    3.72
    
    
    
    (99
    )Reclassified to non-qualified
    
    
    (12
    )
    
    
    3.50
    
    
    
    (42
    )Outstanding at June 29, 2007
    
    
    656
    
    
    $
    3.23
    
    
    $
    2,117
 F-14




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of SharesShares
    
    
    
    
    
    Weighted-
    
    
    Weighted-
    
    
    UnderlyingUnderlying
    
    Range of
    
    
    Average
    
    
    Average
    
    
    ExercisableOptions
    
    Option Price
    
    
    Option Price
    
    
    Remaining Life
    
    
    Options(In thousands, except as noted)39
    
    $1.75 to $1.81
    
    $
    1.80
    
    
    4.0-years
    
    
    39300
    
    $2.05 to $2.80
    
    
    2.56
    
    
    4.8-years
    
    
    264172
    
    $3.00 to $3.82
    
    
    3.71
    
    
    7.0-years
    
    
    172145
    
    $4.00 to $4.95
    
    
    4.41
    
    
    4.7-years
    
    
    145656
    
    
    
    
    
    $
    3.23
    
    
    5.4-years
    
    
    620
  Weighted-Optioned
    
    
    Average OptionShares
    
    
    Price Per Share
    
    
    Total(In thousands, except per share price)Outstanding at June 30, 2004
    
    
    449
    
    
    $
    3.05
    
    
    $
    1,367Granted
    
    
    25
    
    
    
    4.66
    
    
    
    116Exercised
    
    
    (46
    )
    
    
    2.32
    
    
    
    (105
    )Cancelled
    
    
    (40
    )
    
    
    2.70
    
    
    
    (108
    )Reclassified from ISO
    
    
    19
    
    
    
    2.71
    
    
    
    52Outstanding at July 1, 2005
    
    
    407
    
    
    $
    3.25
    
    
    $
    1,322Exercised
    
    
    (140
    )
    
    
    2.89
    
    
    
    (403
    )Cancelled
    
    
    (64
    )
    
    
    4.03
    
    
    
    (260
    )Outstanding at June 30, 2006
    
    
    203
    
    
    $
    3.24
    
    
    $
    659Exercised
    
    
    (29
    )
    
    
    3.16
    
    
    
    (92
    )Cancelled
    
    
    (14
    )
    
    
    2.77
    
    
    
    (37
    )Reinstated
    
    
    10
    
    
    
    3.49
    
    
    
    33Reclassified from ISO
    
    
    12
    
    
    
    3.50
    
    
    
    42Outstanding at June 29, 2007
    
    
    182
    
    
    $
    3.32
    
    
    $
    605
  F-15




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of SharesShares
    
    
    
    
    
    Weighted-
    
    
    Weighted-
    
    
    UnderlyingUnderlying
    
    Range of
    
    
    Average
    
    
    Average
    
    
    ExercisableOptions
    
    Option Price
    
    
    Option Price
    
    
    Remaining Life
    
    
    Options(In thousands, except as noted)79
    
    
    $1.75 to $1.88
    
    $
    1.81
    
    
    4.3-years
    
    
    795
    
    
    $2.06 to $2.80
    
    
    2.80
    
    
    6.3-years
    
    
    532
    
    
    $3.00 to $3.65
    
    
    3.31
    
    
    5.6-years
    
    
    3236
    
    
    $4.14 to $4.65
    
    
    4.39
    
    
    6.7-years
    
    
    3615
    
    
    $5.75
    
    
    
    5.75
    
    
    
    
    
    
    
    1515
    
    
    $6.50
    
    
    
    6.50
    
    
    
    
    
    
    
    182
    
    
    
    
    
    $
    3.32
    
    
    3.8-years
    
    
    167
   NOTE G INCOME TAXES
  Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2005(In thousands)CurrentFederal
    
    $
    85
    
    
    $
    
    
    
    $
    (7
    )State
    
    
    10
    
    
    
    
    
    
    
    47DeferredFederal
    
    
    1,404
    
    
    
    (276
    )
    
    
    197State
    
    
    350
    
    
    
    (93
    )
    
    
    15Valuation Allowance
    
    
    (2,954
    )
    
    
    (576
    )
    
    
    (252
    )$
    (1,105
    )
    
    $
    (945
    )
    
    $
    
 F-16




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  June 29,
    
    
    June 30,2007
    
    
    2006Deferred Tax Assets:Employee benefits
    
    $
    301
    
    
    $
    542Bad debt reserves
    
    
    142
    
    
    
    132All other reserves
    
    
    97
    
    
    
    162Alternative minimum tax credits
    
    
    200
    
    
    
    124Net operating losses
    
    
    1,317
    
    
    
    2,196Net operating losses of
purchased business
    
    
    
    
    
    
    698State tax net operating losses
    
    
    267
    
    
    
    436Depreciation
    
    
    372
    
    
    
    437Other
    
    
    353
    
    
    
    48Total Deferred Tax Assets
    
    
    3049
    
    
    
    4,775Valuation Allowance
    
    
    
    
    
    
    (2,954
    )Deferred Tax Liabilities:Goodwill
    
    
    (140
    )
    
    
    (111
    )Net Deferred Tax Assets
    
    $
    2,909
    
    
    $
    1,710
     F-17




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2005(In thousands)Expected provision at federal
statutory rate
    
    $
    1,447
    
    
    $
    133
    
    
    $
    69Change in valuation allowance
    
    
    (2,954
    )
    
    
    (1,140
    )
    
    
    (252
    )State income tax expense
    
    
    183
    
    
    
    20
    
    
    
    60Permanent items
    
    
    40
    
    
    
    42
    
    
    
    41Tax effect of non-qualified stock
option exercised
    
    
    
    
    
    
    
    
    
    
    NOL adjustments and other
    
    
    179
    
    
    
    
    
    
    
    82$
    (1,105
    )
    
    $
    (945
    )
    
    $
    
  NOTE H EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
    F-18




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  NOTE I COMMITMENTS AND CONTINGENCIES
   TotalYears Ending June 30,
    
    Amount(In thousands)2008
    
    $
    2,3982009
    
    
    2,2692010
    
    
    1,9312011
    
    
    1,3102012
    
    
    1,2432013 and thereafter
    
    
    4,709$
    13,860
   Legal Proceedings
  Versar, Inc. v. Roy O. Ball,
 F-19




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Trustee, URS Corporation, Environmental Resources Management and Environ Corp., Roy O. Ball and Norman W. Bernstein, Trustees v.
Versar, Inc.,
   NOTE J CUSTOMER INFORMATION
  Years EndedJune 29,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2005(In Thousands)U.S. Department of Defense
    
    $
    65,997
    
    
    $
    32,012
    
    
    $
    31,182U.S. Environmental Protection Agency
    
    
    2,753
    
    
    
    3,909
    
    
    
    3,972Other U.S. Government Agencies
    
    
    16,512
    
    
    
    11,933
    
    
    
    14,786Total U.S. Government
    
    $
    85,262
    
    
    $
    47,854
    
    
    $
    49,940
 F-20




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE K QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
  Fiscal Year 2007
    
    
    Fiscal Year 2006Quarter Ending
    
    June 29
    
    
    Mar 30
    
    
    Dec 29
    
    
    Sep 29
    
    
    Jun 30
    
    
    Mar 31
    
    
    Dec 30
    
    
    Sep 30Gross Revenue
    
    $
    30,190
    
    
    $
    28,313
    
    
    $
    21,938
    
    
    $
    22,285
    
    
    $
    17,841
    
    
    $
    12,974
    
    
    $
    16,571
    
    
    $
    13,502Gross Profit
    
    
    3,346
    
    
    
    2,860
    
    
    
    2,468
    
    
    
    2,148
    
    
    
    1,288
    
    
    
    1,409
    
    
    
    2,072
    
    
    
    1,585Operating income (loss)
    
    
    1,599
    
    
    
    1,126
    
    
    
    777
    
    
    
    651
    
    
    
    (116
    )
    
    
    (28
    )
    
    
    691
    
    
    
    134Income (loss) from
continuing operations
    
    
    830
    
    
    
    3,097
    
    
    
    749
    
    
    
    606
    
    
    
    (114
    )
    
    
    912
    
    
    
    723
    
    
    
    116Loss from discontinued
Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    (205
    )
    
    
    Net income (loss)
    
    $
    830
    
    
    $
    3,097
    
    
    $
    749
    
    
    $
    606
    
    
    $
    (199
    )
    
    $
    912
    
    
    $
    518
    
    
    $
    116Income (loss) per share
from continuing
operations  diluted
    
    $
    0.10
    
    
    $
    0.36
    
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.01Loss per share from
discontinued
operations  diluted
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    Net income (loss) per
share  diluted
    
    $
    0.10
    
    
    $
    0.36
    
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    (0.02
    )
    
    $
    0.11
    
    
    $
    0.06
    
    
    $
    0.01Weighted average
number of shares
outstanding  diluted
    
    
    8,736
    
    
    
    8,564
    
    
    
    8,392
    
    
    
    8,429
    
    
    
    8,115
    
    
    
    8,336
    
    
    
    8,456
    
    
    
    8,412
  F-21




---



##### 



Schedule II
 VERSAR, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
 ADDITIONSBALANCE
    
    CHARGEDAT
    
    TO COSTS
    
    
    
    
    
    BALANCEBEGINNING
    
    AND
    
    CHARGE
    
    AT END OFOF YEAR
    
    EXPENSES
    
    OFF
    
    YEARALLOWANCE FOR
DOUBTFUL ACCOUNTS2005
    
    
    993,377
    
    
    
    99,578
    
    
    
    (631,464
    )
    
    
    461,4912006
    
    
    461,491
    
    
    
    (33,696
    )
    
    
    (79,294
    )
    
    
    348,5012007
    
    
    348,501
    
    
    
    335,518
    
    
    
    (310,043
    )
    
    
    373,976DEFERRED TAX
VALUATION ALLOWANCE2005
    
    
    3,782,000
    
    
    
    
    
    
    
    (252,000
    )
    
    
    3,530,0002006
    
    
    3,530,000
    
    
    
    
    
    
    
    (576,000
    )
    
    
    2,954,0002007
    
    
    2,954,000
    
    
    
    
    
    
    
    (2,954,000
    )
    
    
    
 F-22