##### 



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
    
    Commission FileJune 30, 2006
    
    No. 1-9309
 
  DELAWARE
    
    54-0852979(State or other jurisdiction of
    
    (I.R.S. employer identification no.)incorporation or organization)6850 Versar Center, Springfield, Virginia
    
    22151(Address of principal executive offices)
    
    (Zip code)
 (703) 750-3000
  Common Stock, $.01 par value
 American Stock Exchange
  o þ
  o þ
  þ o
   o o þ
  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 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
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 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 on project funding; and such other
risks and uncertainties as are described under Item 1A Risk Factors of 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
      2




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Infrastructure and Management Services
  Compliance:
  Environmental Restoration:
  Pollution Prevention:
  3




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##### 



Conservation of Natural and Cultural Resources:
   Engineering and Construction:
    4




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##### 



National Security
  Personal Protection Equipment ® Standard on Protective Ensembles for Chemical/Biological
Terrorism Incidents ®
 ®
   Chemical Surety Laboratory
  5




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##### 



Versar/GEOMET Collaboration Programs
 Navy Systems Engineering Support:
 Vulnerability Assessments: TM TM TM
  DoD Contract Support:
 Markets
  6




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##### 



Competition
     7




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##### 



Backlog
      8




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##### 



Employees
  9




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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.
  10




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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 regulatory enforcement of environmental 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.
    11




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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.
  
    
    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;
 12




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##### 




    
    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 rebids of our existing large government contracts; and
    
    general economic and political conditions.
  We are highly dependent on key personnel.
  Item 1B. Unresolved Staff Comments.
  Item 2. Properties
    Item 3. Legal Proceedings
  13




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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
  14




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##### 



EXECUTIVE OFFICERS
  NAME
    
    AGE
    
    POSITION WITH THE COMPANYTheodore M. Prociv
    
    
    58
    
    
    President and Chief Executive OfficerLawrence W. Sinnott
    
    
    44
    
    
    Executive Vice President, Chief Operating Officer,
Chief Financial Officer and TreasurerJerome B. Strauss
    
    
    57
    
    
    Senior Vice President, Infrastructure
and Management Services Business SegmentPaul W. Kendall
    
    
    53
    
    
    Senior Vice President, National Security
Business SegmentJames C. Dobbs
    
    
    61
    
    
    Senior Vice President, General Counsel and
SecretaryGina Foringer
    
    
    37
    
    
    Senior Vice President, Professional Services
Segment
 Theodore M. Prociv,
 Lawrence W. Sinnott
 Jerome B. Strauss,
 Paul W. Kendall,
 James C. Dobbs
 Gina Foringer
 15




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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 2006
    
    High
    
    Low4th Quarter
    
    $
    5.10
    
    
    $
    3.713rd Quarter
    
    
    4.15
    
    
    
    3.252nd Quarter
    
    
    4.23
    
    
    
    3.201st Quarter
    
    
    5.50
    
    
    
    3.15
 Fiscal Year 2005
    
    High
    
    Low4th Quarter
    
    $
    3.83
    
    
    $
    2.903rd Quarter
    
    
    4.53
    
    
    
    3.512nd Quarter
    
    
    4.78
    
    
    
    3.801st Quarter
    
    
    4.96
    
    
    
    3.65
   16




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##### 



Item 6. Selected Financial Data (unaudited)
  For the Years EndedJune 30,
    
    July 1,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2004
    
    2003
    
    2002(In thousands, except per share data)Consolidated Statement of Operations
related data:Gross Revenue
    
    $
    60,888
    
    
    $
    67,678
    
    
    $
    60,067
    
    
    $
    56,646
    
    
    $
    67,988Net Service Revenue
    
    
    34,290
    
    
    
    35,638
    
    
    
    33,656
    
    
    
    34,747
    
    
    
    38,189Operating Income
    
    
    716
    
    
    
    1,427
    
    
    
    1,913
    
    
    
    612
    
    
    
    619Income (Loss) from Continuing Operations
    
    
    1,637
    
    
    
    1,361
    
    
    
    1,827
    
    
    
    (658
    )
    
    
    159Loss from Discontinued Operations
    
    
    (290
    )
    
    
    (1,159
    )
    
    
    (636
    )
    
    
    (350
    )
    
    
    (80
    )Net Income (Loss)
    
    
    1,347
    
    
    
    202
    
    
    
    1,191
    
    
    
    (1,008
    )
    
    
    79Income (Loss) per share from Continuing
Operations  Diluted
    
    $
    .20
    
    
    $
    .16
    
    
    $
    .24
    
    
    $
    (.09
    )
    
    $
    .02Loss per share from Discontinued
Operations  Diluted
    
    $
    (.04
    )
    
    $
    (.14
    )
    
    $
    (.09
    )
    
    $
    (.05
    )
    
    $
    (.01
    )Net Income (Loss) per share  Diluted
    
    $
    .16
    
    
    $
    .02
    
    
    $
    .16
    
    
    $
    (.14
    )
    
    $
    .01Weighted Average Shares Outstanding 
Diluted
    
    
    8,347
    
    
    
    8,263
    
    
    
    7,675
    
    
    
    7,231
    
    
    
    6,998Consolidated Balance Sheet related data:Working Capital
    
    $
    9,119
    
    
    $
    7,887
    
    
    $
    7,494
    
    
    $
    4,940
    
    
    $
    6,600Current Ratio
    
    
    1.99
    
    
    
    1.86
    
    
    
    1.87
    
    
    
    1.47
    
    
    
    1.70Total Assets
    
    
    22,802
    
    
    
    20,912
    
    
    
    20,085
    
    
    
    19,336
    
    
    
    21,273Current Portion of Long-Term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-Term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Debt, excluding bank line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders Equity
    
    $
    12,572
    
    
    $
    10,552
    
    
    $
    10,065
    
    
    $
    7,396
    
    
    $
    8,324
 17




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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 impact of a negative government audit potentially impacting our costs,
reputation and ability to work with the federal government;
    
    Loss of key personnel;
    
    The ability to compete in a highly competitive environment; and
    
    Federal funding delays due to war in Iraq.
 18




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##### 



ITEM 7
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued)
 Results of Operations
         19




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##### 



ITEM 7
    
    Managements Discussion and Analysis of Financial Condition and
Results
of Operations (continued)
      REVENUE
  For the Years EndedJune 30,
    
    
    July 1,
    
    
    June 30,2006
    
    
    2005
    
    
    2004(In thousands, except for percentages)GovernmentEPA
    
    $
    3,909
    
    
    
    6
    %
    
    $
    3,972
    
    
    
    6
    %
    
    $
    4,315
    
    
    
    7
    %State & Local
    
    
    7,880
    
    
    
    13
    %
    
    
    8,620
    
    
    
    13
    %
    
    
    7,785
    
    
    
    13
    %Department
of Defense
    
    
    32,012
    
    
    
    53
    %
    
    
    31,182
    
    
    
    46
    %
    
    
    22,921
    
    
    
    38
    %Other
    
    
    11,933
    
    
    
    20
    %
    
    
    14,786
    
    
    
    22
    %
    
    
    8,558
    
    
    
    14
    %Commercial
    
    
    5,154
    
    
    
    8
    %
    
    
    9,118
    
    
    
    13
    %
    
    
    16,488
    
    
    
    28
    %Gross Revenue
    
    $
    60,888
    
    
    
    100
    %
    
    $
    67,678
    
    
    
    100
    %
    
    $
    60,067
    
    
    
    100
    %
 20




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##### 



ITEM 7
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued)
  Liquidity and Capital Resources
    Contractual Obligations
  Contractual
    
    Total
    
    
    Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Obligations
    
    Cost
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years(In thousands)Operating lease obligations
    
    $
    14,323
    
    
    $
    2,221
    
    
    $
    3,833
    
    
    $
    3,016
    
    
    $
    5,253Capital lease obligations
    
    
    961
    
    
    
    48
    
    
    
    104
    
    
    
    115
    
    
    
    694Notes payable
    
    
    223
    
    
    
    223
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    15,507
    
    
    $
    2,492
    
    
    $
    3,937
    
    
    $
    3,131
    
    
    $
    5,947
 Critical Accounting Policies and Related Estimates That Have a Material Effect on Versars
Consolidated Financial Statements
  21




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##### 



ITEM 7
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued)
 Revenue recognition:
  Allowance for doubtful accounts:
 Deferred tax valuation allowance:
 Goodwill and other intangible assets:
 22




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##### 



ITEM 7
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued)
     Stock-based compensation:
   New accounting pronouncements:
 23




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##### 



ITEM 7
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued)
 Impact of Inflation
  Business Segments
  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
  24




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##### 



PART III
 Item 9B. Other Information
  Item 10. Directors and Executive Officers of the Registrant
    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
  25




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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 30, 2006 and July 1, 2005c)
    
    Consolidated Statements of Operations for the Years Ended June 30, 2006, July 1,
2005 and June 30, 2004d)
    
    Consolidated Statements of Changes in Stockholders Equity for the Years Ended June
30, 2006, July 1, 2005 and June 30, 2004e)
    
    Consolidated Statements of Cash Flows for the Years Ended June 30, 2006, July 1,
2005 and June 30, 2004f)
    
    Notes to Consolidated Financial Statements
  a)
    
    Schedule II  Valuation and Qualifying Accounts for the Years Ended June 30, 2006,
July 1, 2005 and June 30, 2004
    26




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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
    )10.13
    
    Employee Incentive Plan, as amended *
    
    
    (E
    )10.52
    
    Incentive Stock Option Plan of Versar, Inc. dated December 1, 1992 *
    
    
    (I
    )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
    )10.109
    
    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
    )
 27




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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
    
    33-5410.118
    
    Modification Agreement of the Revolving Commercial Note, dated November 30,
2005, between Registrant and United Bank
    
    55-5610.119
    
    Amendment to Change of Control Severance Agreement dated March 1, 2004 between
the Registrant and Lawrence W. Sinnott*, March 17, 2006
    
    57-7110.120
    
    Amendment to Change of Control Severance Agreement dated March 1, 2004 between
the Registrant and James C. Dobbs*, March 17, 2006
    
    72-8610.121
    
    Change of Control Severance Agreement dated March 17, 2006 between the
Registrant and Jeffrey A. Wagonhurst*
    
    87-10010.122
    
    Change of Control Severance Agreement dated March 17, 2006 between the
Registrant and Michael J. Abram*
    
    101-11422
    
    Subsidiaries of the Registrant
    
    
    (Q
    )23
    
    Consent of Independent Certified Public Accountants, Grant Thornton LLP to register
shares under the Companys Option Plans under Form S-8 dated September 7, 2004
    
    
    (X
    )31.1
    
    Certifications by Theodore M. Prociv, President and Chief Executive Officer
pursuant to Securities Exchange Rule 13a-14
    
    
    11531.2
    
    Certifications by Lawrence W. Sinnott, Exec. Vice President, Chief Operating Officer
and Chief Financial Officer pursuant to Securities Exchange Rule 13a-14
    
    
    11632.1
    
    Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, for the period ending June 30, 2006 by Theodore
M. Prociv, President and Chief Executive Officer
    
    
    11732.2
    
    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 30, 2006 by Lawrence W.
Sinnott, Exec. Vice President, Chief Operating Officer and Chief Financial Officer
    
    
    118
 
 *
    
    Indicates management contract or compensatory plan or arrangement 
 28




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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.(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.(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.(O)
    
    Incorporated by reference to the similarly numbered exhibit to the Registrants Form S-4
registration number 333-33167.(Q)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K
Annual Report for Fiscal Year Ended June 30, 1998 (AFY1998 Form 10-K) filed with
the Commission on September 28, 1998.(R)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K
Annual Report for Fiscal Year Ended June 30, 1999 (FY1999 Form 10-K) filed with the
Commission on September 17, 1999.(S)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K/A
Annual Report for Fiscal Year Ended June 30, 1999 (FY1999 Form 10K/A) filed with the
Commission on September 1, 2000.(T)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K
Annual Report for Fiscal Year Ended June 30, 2000 (FY2000 Form 10-K) filed with the
Commission on September 26, 2000.(U)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K
Annual Report for Fiscal Year Ended June 30, 2001 (FY2001 Form 10-K) filed with the
Commission on September 28, 2001.(V)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K
Annual Report for Fiscal Year Ended June 30, 2002 (FY2002 Form 10K) filed with the
Commission on September 16, 2002.(W)
    
    Incorporated by reference to similarly numbered exhibit to the Registrants Form 10-K
Annual Report for Fiscal Year Ended June 30, 2003 (FY2003 Form 10K) filed with the
Commission on September 26, 2003.
 29




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##### 



(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.
 30




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##### 



VERSAR, INC.(Registrant)
 /S/ Paul J. HoeperDate: September 6, 2006Paul J. Hoeper
Chairman and Director
  SIGNATURES
    
    TITLE
    
    DATE/S/ Paul J. Hoeper
    
    Chairman and Director
    
    September 6, 2006Paul J. Hoeper/S/ Theodore M. Prociv
    
    Chief Executive Officer, President, and
    
    September 6, 2006Theodore M. Prociv
    
    Director/S/ Lawrence W. Sinnott
    
    Executive Vice President, Chief
    
    September 6, 2006Lawrence W. Sinnott
    
    Operating Officer, Chief Financial
Officer, Treasurer, and Principal
Accounting Officer/S/ Michael Markels, Jr.
    
    Chairman Emeritus and Director
    
    September 6, 2006Michael Markels, Jr./S/ Robert L. Durfee
    
    Director
    
    September 6, 2006Robert L. Durfee/S/ James L. Gallagher
    
    Director
    
    September 6, 2006James L. Gallagher/S/ Fernando V. Galaviz
    
    Director
    
    September 6, 2006Fernando V. Galaviz
 31




---



##### 



SIGNATURES
    
    TITLE
    
    DATE/S/ James V. Hansen
    
    Director
    
    September 6, 2006James V. Hansen/S/ Amoretta M. Hoeber
    
    Director
    
    September 6, 2006Amoretta M. Hoeber/S/ Amir A. Metry
    
    Director
    
    September 6, 2006Amir A. Metry
 32




---



##### 



Report of Independent Registered Public Accounting Firm
 
      
 F-1




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 June 30,
    
    
    July 1,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    140
    
    
    $
    132Accounts receivable, net
    
    
    16,227
    
    
    
    14,577Prepaid expenses and other current assets
    
    
    1,430
    
    
    
    2,017Deferred income taxes
    
    
    566
    
    
    
    308Total current assets
    
    
    18,363
    
    
    
    17,034Property and equipment, net
    
    
    1,744
    
    
    
    1,855Deferred income taxes
    
    
    1,144
    
    
    
    457Goodwill
    
    
    776
    
    
    
    776Other assets
    
    
    775
    
    
    
    790Total assets
    
    $
    22,802
    
    
    $
    20,912LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesBank line of credit
    
    $
    
    
    
    $
    777Accounts payable
    
    
    4,691
    
    
    
    3,958Billing in excess of revenue
    
    
    209
    
    
    
    92Accrued salaries and vacation
    
    
    1,474
    
    
    
    1,490Other liabilities
    
    
    2,585
    
    
    
    2,550Liabilities of discontinued operations
    
    
    285
    
    
    
    280Total current liabilities
    
    
    9,244
    
    
    
    9,147Other long-term liabilities
    
    
    986
    
    
    
    1,041Liabilities of discontinued operations
    
    
    
    
    
    
    172Total liabilities
    
    
    10,230
    
    
    
    10,360Commitments and contingencies
    
    
    
    
    
    
    Stockholders equityCommon stock, $.01 par value; 30,000,000 shares
authorized; 8,144,692 shares and 7,924,116
shares issued; 8,129,187 shares and 7,908,611
shares outstanding
    
    
    81
    
    
    
    79Capital in excess of par value
    
    
    22,790
    
    
    
    22,119Accumulated deficit
    
    
    (10,227
    )
    
    
    (11,574
    )Treasury stock
    
    
    (72
    )
    
    
    (72
    )Total stockholders equity
    
    
    12,572
    
    
    
    10,552Total liabilities and stockholders equity
    
    $
    22,802
    
    
    $
    20,912
  F-2




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
 Years EndedJune 30,
    
    
    July 1,
    
    
    June 30,2006
    
    
    2005
    
    
    2004GROSS REVENUE
    
    $
    60,888
    
    
    $
    67,678
    
    
    $
    60,067Purchased services and materials, at cost
    
    
    26,598
    
    
    
    32,040
    
    
    
    26,411NET SERVICE REVENUE
    
    
    34,290
    
    
    
    35,638
    
    
    
    33,656Direct costs of services and overhead
    
    
    27,901
    
    
    
    27,871
    
    
    
    26,279Selling, general and administrative expenses
    
    
    5,673
    
    
    
    6,123
    
    
    
    5,464Restructuring charge
    
    
    
    
    
    
    217
    
    
    
    OPERATING INCOME
    
    
    716
    
    
    
    1,427
    
    
    
    1,913OTHER EXPENSEInterest expense, net
    
    
    24
    
    
    
    66
    
    
    
    153Income tax (benefit) expense
    
    
    (945
    )
    
    
    
    
    
    
    (67
    )INCOME FROM CONTINUING OPERATIONS
    
    
    1,637
    
    
    
    1,361
    
    
    
    1,827DISCONTINUED OPERATIONSLoss from discontinued operations
    
    
    (290
    )
    
    
    (556
    )
    
    
    (636
    )Loss on disposal of discontinued operations
    
    
    
    
    
    
    (603
    )
    
    
    LOSS FROM DISCONTINUED OPERATIONS
    
    
    (290
    )
    
    
    (1,159
    )
    
    
    (636
    )NET INCOME
    
    $
    1,347
    
    
    $
    202
    
    
    $
    1,191INCOME PER SHARE FROM
CONTINUING OPERATIONS  BASIC
    
    $
    0.20
    
    
    $
    0.17
    
    
    $
    0.25INCOME PER SHARE FROM
CONTINUING OPERATIONS  DILUTED
    
    $
    0.20
    
    
    $
    0.16
    
    
    $
    0.24LOSS FROM DISCONTINUED OPERATION 
BASIC AND DILUTED
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.09
    )LOSS ON DISPOSAL OF DISCONTINUED
OPERATION  BASIC AND DILUTED
    
    $
    
    
    
    $
    (0.07
    )
    
    $
    NET INCOME PER SHARE  BASIC
    
    $
    0.17
    
    
    $
    0.03
    
    
    $
    0.16NET INCOME PER SHARE  DILUTED
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.16WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING  BASIC
    
    
    8,057
    
    
    
    7,890
    
    
    
    7,360WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING  DILUTED
    
    
    8,347
    
    
    
    8,263
    
    
    
    7,675
  F-3




---



##### 



VERSAR, INC.
Consolidated Statements of Changes in Stockholders Equity
 TotalCapital in
    
    
    Accumu-
    
    
    
    
    
    
    
    
    
    
    StockCommon
    
    
    Stock
    
    
    Excess of
    
    
    lated
    
    
    Treasury
    
    
    Treasury
    
    
    holdersShares
    
    
    Amount
    
    
    Par Value
    
    
    Deficit
    
    
    Shares
    
    
    Stock
    
    
    EquityBalance, June 30, 2003
    
    
    7,258
    
    
    $
    73
    
    
    $
    20,349
    
    
    $
    (12,967
    )
    
    
    (13
    )
    
    $
    (59
    )
    
    $
    7,396Exercise of stock options
    
    
    579
    
    
    
    5
    
    
    
    1,486
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,491Purchase of Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (13
    )
    
    
    (13
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,191
    
    
    
    
    
    
    
    
    
    
    
    1,191Balance, 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
    )
    
    $
    12,572
  F-4




---



##### 



VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 Years EndedJune 30,
    
    
    July 1,
    
    
    June 30,2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesIncome from continuing operations
    
    $
    1,637
    
    
    $
    1,361
    
    
    $
    1,827Loss from discontinued operations
    
    
    (290
    )
    
    
    (1,159
    )
    
    
    (636
    )Net income
    
    
    1,347
    
    
    
    202
    
    
    
    1,191Adjustments to reconcile net income to
net cash provided by (used in) continuing operationsDepreciation and amortization
    
    
    755
    
    
    
    740
    
    
    
    670Loss on sale of property and equipment
    
    
    52
    
    
    
    183
    
    
    
    1Provision for doubtful accounts receivable
    
    
    (34
    )
    
    
    100
    
    
    
    191Non-qualified stock option
    
    
    
    
    
    
    33
    
    
    
    Decrease in deferred tax valuation allowance
    
    
    (945
    )
    
    
    (96
    )
    
    
    (67
    )Tax benefit on exercise of non-qualified stock
options
    
    
    
    
    
    
    56
    
    
    
    Stock based compensation
    
    
    67
    
    
    
    
    
    
    
    Changes in assets and liabilitiesIncrease in accounts receivable
    
    
    (1,616
    )
    
    
    (533
    )
    
    
    (471
    )Decrease (increase) in prepaid expenses
and other assets
    
    
    561
    
    
    
    (1,174
    )
    
    
    333Increase (decrease) in accounts payable
    
    
    733
    
    
    
    (562
    )
    
    
    1,360Decrease in accrued salaries and vacation
    
    
    (16
    )
    
    
    (477
    )
    
    
    (42
    )Increase (decrease) in other liabilities
    
    
    98
    
    
    
    359
    
    
    
    (1,003
    )Net cash provided by (used in) continuing
operations
    
    
    1,002
    
    
    
    (1,169
    )
    
    
    2,163Changes in net assets/liabilities of discontinued
operations
    
    
    (167
    )
    
    
    243
    
    
    
    (110
    )Net cash provided by (used in) operating
activities
    
    
    835
    
    
    
    (926
    )
    
    
    2,053Cash flows used in investing activitiesPurchase of property and equipment
    
    
    (613
    )
    
    
    (670
    )
    
    
    (615
    )Increase in life insurance cash surrender va1ue
    
    
    (43
    )
    
    
    (61
    )
    
    
    (55
    )Net cash used in investing activities
    
    
    (656
    )
    
    
    (731
    )
    
    
    (670
    )Cash flows from financing activitiesNet (payments) borrowings on bank line of credit
    
    
    (777
    )
    
    
    777
    
    
    
    (2,125
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (13
    )Proceeds from issuance of common stock
    
    
    606
    
    
    
    195
    
    
    
    1,491Net cash (used in) provided by financing
activities
    
    
    (171
    )
    
    
    972
    
    
    
    (647
    )Net increase (decrease) in cash and cash equivalents
    
    
    8
    
    
    
    (685
    )
    
    
    736Cash and cash equivalents at the beginning of the year
    
    
    132
    
    
    
    817
    
    
    
    81Cash and cash equivalents at the end of
the year
    
    $
    140
    
    
    $
    132
    
    
    $
    817Supplementary disclosure of cash flow information:Cash paid during the period forInterest
    
    $
    96
    
    
    $
    69
    
    
    $
    134Income Taxes
    
    $
    44
    
    
    $
    39
    
    
    $
    41
  F-5




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A SIGNIFICANT ACCOUNTING POLICIES
 Principles of consolidation
 Accounting estimates
 Contract accounting
 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:
 Discontinued operations:
  F-7




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Stock-based
compensation:
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    Contractual
    
    
    ValueOptions
    
    (000)
    
    
    Price
    
    
    Term
    
    
    ($000)Outstanding at July 1, 2005
    
    
    1,690
    
    
    $
    3.10Granted
    
    
    5
    
    
    $
    3.20Exercised
    
    
    (221
    )
    
    $
    2.75Forfeited or
cancelled
    
    
    (244
    )
    
    $
    3.45Outstanding
at June 30, 2006
    
    
    1,230
    
    
    $
    3.15
    
    
    6.0 Years
    
    
    $
    2,160Exercisable
at June 30, 2006
    
    
    1,084
    
    
    $
    3.13
    
    
    6.2 Years
    
    
    $
    1,910
  F-8




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    Years EndedJuly 1,
    
    
    June 30,2005
    
    
    2004(In thousands)Net income
    
    $
    202
    
    
    $
    1,191Add: Share-based compensation expense
included in reported net income
    
    
    33
    
    
    
    Deduct: Total share-based compensation expense
determined under fair value based method
    
    
    (232
    )
    
    
    (87
    )Pro forma net income
    
    $
    3
    
    
    $
    1,104Income per share:Basic    as reported
    
    $
    0.03
    
    
    $
    0.16Diluted    as reported
    
    $
    0.02
    
    
    $
    0.16Basic    pro forma
    
    $
    
    
    
    $
    0.15Diluted    pro forma
    
    $
    
    
    
    $
    0.14Weighted average shares:Weighted average common shares outstanding  basic
    
    
    7,890
    
    
    
    7,360Weighted average common shares outstanding  diluted
    
    
    8,263
    
    
    
    7,675
 Net income (loss) per share:
 F-9




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Years EndedJune 30,
    
    
    July 1,
    
    
    June 30,2006
    
    
    2005
    
    
    2004(In thousands)Weighted average number of shares
outstanding basic
    
    
    8,057
    
    
    
    7,890
    
    
    
    7,360Effect of assumed exercise of options
    
    
    290
    
    
    
    373
    
    
    
    315Weighted average number of shares
outstanding   diluted
    
    
    8,347
    
    
    
    8,263
    
    
    
    7,675
 Deferred compensation:
 Cash and cash equivalents:
 Fair
value of financial instruments:
 Classification:
 New
accounting pronouncements:
  F-10




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  NOTE B BUSINESS SEGMENTS
    F-11




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Years EndedJune 30,
    
    
    July 1,
    
    
    June 30,2006
    
    
    2005
    
    
    2004(In thousands)NET SERVICE REVENUEInfrastructure and Management Services
    
    $
    28,328
    
    
    $
    29,745
    
    
    $
    28,454National Security
    
    
    5,962
    
    
    
    5,893
    
    
    
    5,202$
    34,290
    
    
    $
    35,638
    
    
    $
    33,656OPERATING INCOME(A)Infrastructure and Management Services
    
    $
    4,946
    
    
    $
    6,655
    
    
    $
    5,999National Security
    
    
    1,443
    
    
    
    1,112
    
    
    
    1,378$
    6,389
    
    
    $
    7,767
    
    
    $
    7,377Selling, general and administrative expenses
    
    
    (5,673
    )
    
    
    (6,123
    )
    
    
    (5,464
    )Restructuring charge
    
    
    
    
    
    
    (217
    )
    
    
    OPERATING INCOME
    
    $
    716
    
    
    $
    1,427
    
    
    $
    1,913
 
 (A)
    
    Operating income is defined as net service revenue less direct costs of services and overhead. Years EndedJune 30,
    
    
    July 1,2006
    
    
    2005(In thousands)IDENTIFIABLE ASSETSInfrastructure and Management Services
    
    $
    16,456
    
    
    $
    15,270National Security
    
    
    1,777
    
    
    
    1,770Corporate and Other
    
    
    4,569
    
    
    
    3,872Total Assets
    
    $
    22,802
    
    
    $
    20,912
 F-12




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE C ACCOUNTS RECEIVABLE
 Years EndedJune 30,
    
    
    July 1,2006
    
    
    2005(In thousands)Billed receivablesU.S. Government
    
    $
    6,160
    
    
    $
    6,410Commercial
    
    
    3,824
    
    
    
    2,783Unbilled receivablesU.S. Government
    
    
    6,471
    
    
    
    5,600Commercial
    
    
    121
    
    
    
    24616,576
    
    
    
    15,039Allowance for doubtful accounts
    
    
    (349
    )
    
    
    (462
    )$
    16,227
    
    
    $
    14,577
  NOTE D PROPERTY AND EQUIPMENT
 Estimated
    
    Years EndedUseful Life
    
    June 30,
    
    
    July 1,in Years
    
    2006
    
    
    2005(In thousands)Furniture and fixtures
    
    10
    
    $
    616
    
    
    $
    755Equipment
    
    3 to 10
    
    
    6,172
    
    
    
    6,030Capital leases
    
    Life of lease
    
    
    712
    
    
    
    712Leasehold improvements
    
    Life of lease
    
    
    1,368
    
    
    
    1,3298,868
    
    
    
    8,826Accumulated
depreciation and amortization
    
    
    
    
    (7,124
    )
    
    
    (6,971
    )$
    1,744
    
    
    $
    1,855
   F-13




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE E DEBT
   NOTE F STOCK OPTIONS
    F-14




---



##### 



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, 2003
    
    
    1,247
    
    
    $
    2.62
    
    
    $
    3,273Granted
    
    
    395
    
    
    
    3.16
    
    
    
    1,247Exercised
    
    
    (210
    )
    
    
    2.20
    
    
    
    (463
    )Cancelled
    
    
    (34
    )
    
    
    2.47
    
    
    
    (84
    )Reclassified to non-qualified
    
    
    (277
    )
    
    
    2.92
    
    
    
    (809
    )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
    
    
    $
    3,210
 F-15




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Number ofNumber of
    
    
    
    
    
    
    
    
    
    
    
    
    
    SharesShares
    
    
    
    
    
    Weighted-
    
    
    Weighted-
    
    
    UnderlyingUnderlying
    
    
    Range of
    
    
    Average
    
    
    Average
    
    
    ExercisableOptions
    
    
    Option Price
    
    
    Option Price
    
    
    Remaining Life
    
    
    Options(In thousands, except as noted)102
    
    
    $  1.75 to $1.81
    
    
    $  1.80
    
    
    5.6  years
    
    
    79461
    
    
    $  2.05 to $2.80
    
    
    2.50
    
    
    5.7  years
    
    
    386230
    
    
    $  3.00 to $3.82
    
    
    3.64
    
    
    7.7  years
    
    
    229233
    
    
    $  4.00 to $4.95
    
    
    4.44
    
    
    5.7  years
    
    
    2331,026
    
    
    
    
    

$  3.13
    
    
    6.2  years
    
    
    927
  Weighted-Optioned
    
    
    Average OptionShares
    
    
    Price Per Share
    
    
    Total(In thousands, except per share price)Outstanding at June 30, 2003
    
    
    498
    
    
    $
    2.92
    
    
    $
    1,455Granted
    
    
    44
    
    
    
    3.00
    
    
    
    132Exercised
    
    
    (370
    )
    
    
    2.79
    
    
    
    (1,029
    )Reclassified from ISO
    
    
    277
    
    
    
    2.93
    
    
    
    809Outstanding 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
    
    
    $
    659
  F-16




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Number ofNumber of
    
    
    
    
    
    
    
    
    
    
    
    
    
    SharesShares
    
    
    
    
    
    Weighted-
    
    
    Weighted-
    
    
    UnderlyingUnderlying
    
    Range of
    
    
    Average
    
    
    Average
    
    
    ExercisableOptions
    
    Option Price
    
    
    Option Price
    
    
    Remaining Life
    
    
    Options(In thousands, except as noted)77
    
    $
    1.75 to  $1.88
    
    
    $
    1.81
    
    
    5.4               years
    
    
    6828
    
    $
    2.06 to  $2.80
    
    
    
    2.67
    
    
    7.0             years
    
    
    2035
    
    $
    3.00 to  $3.65
    
    
    
    3.33
    
    
    6.5           years
    
    
    3533
    
    $
    4.14 to  $4.65
    
    
    
    4.38
    
    
    8.3  years
    
    
    3315
    
    $
    5.75
    
    
    
    5.75
    
    
    5.6               years
    
    
    15
    
    $
    6.50
    
    
    
    6.50
    
    
    5.6               years
    
    
    203
    
    
    
    
    
    $
    3.24
    
    
    6.5  years
    
    
    156
   NOTE G INCOME TAXES
  Years EndedJune 30,
    
    
    July 1,
    
    
    June 30,2006
    
    
    2005
    
    
    2004(In thousands)CurrentFederal
    
    $
    
    
    
    $
    (7
    )
    
    $
    State
    
    
    
    
    
    
    47
    
    
    
    DeferredFederal
    
    
    (276
    )
    
    
    197
    
    
    
    221State
    
    
    (93
    )
    
    
    15
    
    
    
    42Valuation Allowance
    
    
    (576
    )
    
    
    (252
    )
    
    
    (330
    )$
    (945
    )
    
    $
    
    
    
    $
    (67
    )
 F-17




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  June 30,
    
    
    July 1,2006
    
    
    2005Deferred Tax Assets:Employee benefits
    
    $
    542
    
    
    $
    550Bad debt reserves
    
    
    132
    
    
    
    175All other reserves
    
    
    162
    
    
    
    391Alternative minimum tax credits
    
    
    124
    
    
    
    125Net operating losses
    
    
    2,196
    
    
    
    1,401Net operating losses of purchased
business
    
    
    698
    
    
    
    915State tax net operating losses
    
    
    436
    
    
    
    436Depreciation
    
    
    437
    
    
    
    354Other
    
    
    48
    
    
    
    31Total Deferred Tax Assets
    
    
    4,775
    
    
    
    4,378Valuation Allowance
    
    
    (2,954
    )
    
    
    (3,530
    )Deferred Tax Liabilities:Goodwill
    
    
    (111
    )
    
    
    (83
    )Net Deferred Tax Assets
    
    $
    1,710
    
    
    $
    765
    F-18




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Years EndedJune 30,
    
    
    July 1,
    
    
    June 30,2006
    
    
    2005
    
    
    2004(In thousands)Expected provision at federal
statutory rate
    
    $
    133
    
    
    $
    69
    
    
    $
    382Change in valuation allowance
    
    
    (1,140
    )
    
    
    (252
    )
    
    
    (330
    )State income tax expense
    
    
    20
    
    
    
    60
    
    
    
    51Permanent items
    
    
    42
    
    
    
    41
    
    
    
    30Tax effect of non-qualified stock
option exercised
    
    
    
    
    
    
    
    
    
    
    NOL adjustments and other
    
    
    
    
    
    
    82
    
    
    
    (200
    )$
    (945
    )
    
    $
    
    
    
    $
    (67
    )
  NOTE H EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
    F-19




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  NOTE I COMMITMENTS AND CONTINGENCIES
   TotalYears Ending June 30,
    
    Amount(In thousands)2007
    
    $
    2,2692008
    
    
    1,9902009
    
    
    1,9472010
    
    
    1,8282011
    
    
    1,3032012 and thereafter
    
    
    5,947$
    15,284
   Legal
Proceedings
  Versar, Inc. v. Roy O. Ball, Trustee, URS Corporation, Environmental Resources Management and
Environ Corp.,
 F-20




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Roy O. Ball and Norman W. Bernstein,
Trustees v, Versar, Inc.,
   NOTE J CUSTOMER INFORMATION
  Years EndedJune 30,
    
    
    July 1,
    
    
    June 30,2006
    
    
    2005
    
    
    2004(In thousands)U.S. Department of Defense
    
    $
    32,012
    
    
    $
    31,182
    
    
    $
    22,921U.S. Environmental Protection Agency
    
    
    3,909
    
    
    
    3,972
    
    
    
    4,315Other U.S. Government agencies
    
    
    11,933
    
    
    
    14,786
    
    
    
    8,558Total U.S. Government
    
    $
    47,854
    
    
    $
    49,940
    
    
    $
    35,794
 F-21




---



##### 



VERSAR, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE K QUARTERLY FINANCIAL INFORMATION
  Fiscal Year 2006
    
    
    Fiscal Year 2005Quarter ending
    
    Jun 30
    
    
    Mar 31
    
    
    Dec 30
    
    
    Sep 30
    
    

Jul 1
    
    
    Apr 1
    
    
    Dec 31
    
    
    Oct 1Gross Revenue
    
    $
    17,841
    
    
    $
    12,974
    
    
    $
    16,571
    
    
    $
    13,502
    
    
    $
    14,842
    
    
    $
    14,922
    
    
    $
    18,956
    
    
    $
    18,958Net Service Revenue
    
    
    8,385
    
    
    
    8,335
    
    
    
    9,108
    
    
    
    8,462
    
    
    
    8,980
    
    
    
    8,822
    
    
    
    8,792
    
    
    
    9,044Operating (loss)
income
    
    
    (103
    )
    
    
    (14
    )
    
    
    697
    
    
    
    136
    
    
    
    62
    
    
    
    307
    
    
    
    542
    
    
    
    516(Loss) Income from continuing
operations
    
    
    (114
    )
    
    
    912
    
    
    
    723
    
    
    
    116
    
    
    
    43
    
    
    
    283
    
    
    
    532
    
    
    
    503Loss from discontinued
operations
    
    
    (85
    )
    
    
    
    
    
    
    (205
    )
    
    
    
    
    
    
    (767
    )
    
    
    (185
    )
    
    
    (111
    )
    
    
    (96
    )Net (loss) income
    
    $
    (199
    )
    
    $
    912
    
    
    $
    518
    
    
    $
    116
    
    
    $
    (724
    )
    
    $
    98
    
    
    $
    421
    
    
    $
    407Loss per
share from continuing
operations    diluted
    
    $
    (0.01
    )
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.06Loss per share from discontinued
operations    diluted
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )Net (loss) income per
share    diluted
    
    $
    (0.02
    )
    
    $
    0.11
    
    
    $
    0.06
    
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.05Weighted average number of
shares outstanding  diluted
    
    
    8,115
    
    
    
    8,336
    
    
    
    8,456
    
    
    
    8,412
    
    
    
    7,924
    
    
    
    8,302
    
    
    
    8,345
    
    
    
    8,312
  F-22




---



##### 



Schedule II
 VERSAR, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
 ADDITIONSBALANCE AT
    
    CHARGED TO
    
    
    
    
    
    BALANCE ATBEGINNING OF
    
    COSTS AND
    
    
    
    
    
    END OFYEAR
    
    EXPENSES
    
    CHARGE OFF
    
    YEARALLOWANCE FOR DOUBTFUL ACCOUNTS2004
    
    
    900,392
    
    
    
    190,916
    
    
    
    (97,931
    )
    
    
    993,3772005
    
    
    993,377
    
    
    
    99,578
    
    
    
    (631,464
    )
    
    
    461,4912006
    
    
    461,491
    
    
    
    
    
    
    
    (112,990
    )
    
    
    348,501DEFERRED TAX VALUATION ALLOWANCE2004
    
    
    4,112,000
    
    
    
    
    
    
    
    (330,000
    )
    
    
    3,782,0002005
    
    
    3,782,000
    
    
    
    
    
    
    
    (252,000
    )
    
    
    3,530,0002006
    
    
    3,530,000
    
    
    
    
    
    
    
    (576,000
    )
    
    
    2,954,000
 F-23