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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549





FORM 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934


|                                        |  |                           
|--------------------------------------- |  | --------------------------
|For the fiscal year ended
June 30, 2003 |  | Commission File
No. 1-9309





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


|                                                                                   |  |                                                
|---------------------------------------------------------------------------------- |  | -----------------------------------------------
|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
(Registrants telephone number, including area code)


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

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

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

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

Yes [X]  No
[   ]


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

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).

Yes
[   ]  No [X]


The aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 31, 2002 was
approximately $9,090,382.

The number of shares of Common Stock outstanding as of
September 2, 2003 was 7,260,266.

The Exhibit Index required by 17 CFR Part 240.0-3(c) is located
on Pages 19 through 23 hereof.



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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement to be filed with the
Securities and Exchange Commission with respect to the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.





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PART I

Item 1. Business

Forward-Looking Statements

This report contains certain forward-looking statements 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, and changes to
or failure of the Federal government to fund certain programs in which the
Company participates. Forward-looking statements involve numerous risks and
uncertainties that could cause actual results to differ materially, including,
but not limited to, the possibilities that the demand for the Companys
services may decline as a result of possible changes in general and industry
specific economic conditions and the effects of competitive services and
pricing; the possibility the Company will not be able to perform work within
budget or contractual limitations; one or more current or future claims made
against the Company may result in substantial liabilities; the possibility that
acquired entities may not perform as well as expected; the possibility the
Company will not be able to attract and retain key professional employees; and
such other risks and uncertainties as are described in reports and other
documents filed by the Company from time to time with the Securities and
Exchange Commission.

Business Overview

Versar, Inc., a Delaware Corporation organized in 1969, (the Company or
Versar), is a professional services firm that provides the government and the
private sector with value-added, high quality and innovative solutions for
their infrastructure, facilities management , environmental quality and
security needs. Versar operates three primary business segments: (1)
Environmental Services including pollution prevention, compliance management
and environmental restoration, (2) Architectural and Engineering Services in
support of industrial, commercial, and government infrastructure projects, and
(3) Defense Systems including homeland security programs and Department of
Defense (DoD) projects.

Versar operates a wholly owned subsidiary, GEOMET Technologies LLC,
(GEOMET). GEOMET provides a comprehensive range of services and guidance
including: chemical/biological (CB) agent testing and evaluation; development
and evaluation of CB detection technologies; development and manufacturing of
CB personal protective systems; counter-terrorism planning; air quality
analysis; and innovative information technology support.

Fiscal year 2003 was a difficult year for the United States (U.S.)
economy and Federal budgeting process, which translated into delayed new
business, reduction in budgets at the state and local level, and delay of
capital projects by industry. In spite of those conditions, Versar was able to
continue our support to the Federal sector, and to capitalize on the increased
awareness of homeland security and critical infrastructure protection
initiatives.

Management, however, remains unsatisfied with the performance in fiscal
year 2003 and is executing a plan to continue reducing costs, refocus our
marketing and sales efforts on core business targets, capitalize on our recent
experience in the homeland security arena, and develop more multi-year
level-of-effort projects that creates a stable business base for the Company.

Environmental Services

Environmental health and safety services include the full range of
scientific, engineering and program management services addressing prevention,
detection, control, management, and cleanup of toxic substances and hazardous
waste releases to the environment. The environmental business segment
continues to be a major component of Versars business base. Environmental
support to the DoD, the U.S. Environmental Protection Agency and state and

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local governments comprise the majority of this work. Programs generally
focus on four major pillars or service areas, including compliance with
environmental regulations, restoration of contaminated sites, prevention of
pollution at the source, and conservation of natural resources. Versar
capabilities extend to each of these areas:

Compliance:Versar provides support for regulatory compliance programs
involving air, water and other media. The trend in DoD compliance services is
to use the capabilities of professional services firms to support on-site
activity at DoD facilities, and Versar has capitalized on that trend through
the establishment of a dedicated division to provide on-site environmental
management and compliance services at a competitive prices. Our outsourcing
services are an increasingly attractive alternative as DoD shifts emphasis to
its core mission of defense of the nation. Versars Federal outsourcing
technical support business revenue has grown, by providing technical and
professional staff primarily to the U. S. Army and Air Force. Versar now has
over 50 professional and administrative on-site support staff at various DoD
installations and industrial facilities across the country. The current
Administrations public commitment to utilizing the resources of the private
sector to meet its personnel needs is another factor that will drive this
segment of the business going forward. These positions are typically assigned
on a long-term basis and represent a different business model than the
traditional project based support that has been the core of Versars
compliance work.

Another significant development in the compliance arena in fiscal year
2003 was the award of the US Air Force Center for Environmental Excellence
(AFCEE) 4P Plus contract, which is a task order contract that can accept
tasking from virtually any DoD facility worldwide. This contract combines the
requirements for compliance support, engineering and site investigation
services across a wide range of potential disciplines. The Company has begun a
program to exploit this contract vehicle through focused marketing programs to
obtain task orders under the contract.

Compliance and scientific support for the Environmental
Protection Agency (EPA) continued to show stable revenue in
fiscal year 2003, with the award of new tasks under existing
contracts to support the Office of Pesticide Programs in the
areas of risk assessment, monitoring or modeling
environmental concentrations, development of guidance for
exposure/risk assessment, peer review and meeting support.
Versar holds five prime contracts with the EPA, and recent
work has involved cutting edge technical areas, such as risk
assessment for exposure to toxic mold for children, an
external peer panel review for the exposure and human health
evaluation of airborne pollution from the World Trade Center
disaster, and risk assessment of toxic substances in the food
supply.

Environmental Restoration:Restoration program revenue
declined in fiscal year 2003, as DoD restoration budgets were
delayed due to late funding cycles and the uncertainty of
funding due to the war in Iraq. In order to contain
remediation costs, DoD customers are shifting emphasis from
traditional, cost plus fee remediation programs to
performance based contracts, that combine a fixed price,
results-based solution with cost cap insurance products to
ensure that both financial and technical risk is minimized.
In spite of the market uncertainty, the Company was able to
book its first guaranteed fixed price remediation program,
valued at $4 million, at an active Air Force installation at
Charleston AFB. This task will pave the way for future awards
of this size and scope. The Air Force continues to be our
largest remediation customer, and through our existing AFCEE
contracts we continue to bid and win task efforts at bases
worldwide.

Work at training ranges is also expected to expand,
through subcontracting opportunities with large operations
and maintenance firms. We have increased our staff of field
personnel at Nellis AFB, for example, and expect to provide
more personnel at Nellis and other ranges in fiscal year
2004.

Remediation of mold has also been a growth area for
Versar. In fact, the Company was awarded over
$1 million in mold remediation work for high-end homes
in Colorado and California for a major builder. Versars
combined capabilities in indoor air quality, construction and
remediation, and risk assessment led to a one stop shopping
solution for the customer. We expect this trend to continue
as more and more commercial and private facilities are
subject to indoor air quality and mold problems.

Pollution Prevention:Versar has been involved with
innovative pollution prevention (P2) programs since the
1980s. The move to reduce sources of pollution and to
incorporate environmentally sound practices into the
operations

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has resulted in a reduced demand for hazardous
waste removal and hazardous waste management. The market has
shifted from the assessment of opportunities for P2 to
engineering solutions that use sustainable, low impact
technology to replace traditional processes.

Our premiere P2 program continues to revolve around the
technology associated with oxygen line cleaning systems
aboard aircraft. The Aircraft Oxygen Line Cleaning System
(OLCS) development project is near completion, and has
successfully been demonstrated on a number of aircraft
platforms in the DoD inventory, including the B-1 bomber, the
F-15 and F-16 fighter aircraft, and the C-130 transport. The
$2 million developmental program will enter a new phase in
fiscal year 2004 as research and development efforts are
transitioned to deployment, and agency requirements are
developed to use the system. In a parallel development, a
smaller-scale Oxygen Cart Cleaning System has also been
developed and is in testing. Versar was awarded a contract
from Robins Air Force Base, located in Perry, Georgia, to
design, engineer, build, test, and validate a technology to
clean oxygen cart components and oxygen cylinders used
throughout the U.S. Air Force. Work will continue in fiscal
year 2004 to demonstrate the system for other agencies,
including NASA, and within DoD.

Conservation of Natural Resources:Versar continues to
grow our specialized expertise in ecological assessment and
restoration. For more than 25 years we have supported the
states of Maryland, Virginia and Delaware, EPA, and U.S.
Army Corps of Engineers (USACE) in the assessment of the
ecological health of the Chesapeake Bay, and the development
of management practices to restore this endangered ecosystem.
Versar supports the Chesapeake Bay Monitoring Program that
provides scientific support to state regulatory agencies in
the development of guidelines for protecting the bay. We
also have major contracts with the Philadelphia and
Wilmington Districts of the U.S. Army Corps of Engineers for
the conduct of ecological assessments in support of the
disposal of dredge material in the redevelopment of ports and
harbors and the restoration of our nations beaches.

Our natural resources support services recently have
expanded into stormwater management and watershed support for
a number of counties, including Fairfax County, VA and
Frederick County, MD. These projects will use water quality
models to develop and evaluate various watershed management
strategies to achieve the Countys water quality management
objectives.

Architectural and Engineering Services

Versar continued to successfully develop its
Architectural and Engineering Services segment. Versar has
grown this business from $8 million in revenue in fiscal year
2000 to $13 million in revenue in fiscal year 2003. This
growth is driven by the demand for infrastructure development
and a shift toward more design-build projects. Versar is
making the transition from being solely an engineering
services company to a specialty contractor to address the
market needs for turnkey design-build projects.

Versars engineering, architecture and construction
division is focused on providing solutions to industrial,
government and commercial clients. We have in-house
registered professionals in environmental, civil, structural,
electrical, mechanical engineering, architecture and
construction, which allows us to develop both design and
build projects of moderate size, in the $2 to $10 million
range.

Versar was awarded a major project to design and build a
freestanding, modular parking structure at our headquarters
in Springfield, Virginia, as part of the renovation of the
parking areas of the facility that were affected by the I-95
mixing bowl project.

The segment signed contracts with the Virginia
Polytechnic Institute, in Blacksburg, VA, for support to the
campus; with The City of Lynchburg, VA, for stabilizing and
rehabilitating the historic Monument Terrace; and with a
number of private sector firms involved in HVAC and other
retrofits to existing facilities.

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We are also cross training our engineering staff to
support both demilitarization and critical asset protection
projects, through assignments to relevant programs, training,
and through in-house programs. Our engineering staff has been
trained to conduct vulnerability assessments, in new
standards for building protection and in chemical and
biological detection and protection systems for buildings.

Defense Systems

The Defense System segment consists primarily of the
assets of GEOMET Technologies, LLC. The Defense segment
operates in several defense markets:

Personal Protection Equipment:Versars subsidiary,
GEOMET, is a leader in developing, testing and manufacturing
personal protection equipment (PPE). Completion of the
contract for the Armys Self-Contained Toxic Environment
Protection Outfit (STEPO) System is expected in fiscal year
2004. The STEPO contract resulted in the development of an
infrastructure in the Company which now is positioned to
respond to the increased demand for PPE from the emergency
response sector, through grants from the Federal government,
and continued support for the military. For example, the
Company is currently positioning its products and conducting
certification testing to meet the requirements for National
Fire Protection Association (NFPA) standards, compliance with
which is a requirement for selling to first responders.
Additional efforts are underway to develop new products such
as the Next Generation Modular CB Ensemble for the Marine
Corps. The PPE marketplace will continue to be highly
competitive, with decisions often based on price. Our
strategy is to continue to work with customers to become a
one stop supplier for protection needs, and to assist the
customer in determining what systems are needed and how many
to purchase. This strategy has been successfully
demonstrated, for example, in New Castle County, DE, where
GEOMET provided over $800,000 in equipment for emergency
response personnel in fiscal year 2003. We will be working
in fiscal year 2004 to become a stocking distributor for many
essential products that first responders require.

The Company has also been successful with submittals to
the Technical Support Working Group (TSWG). TSWG is the U.S.
national forum that identifies, prioritizes, and coordinates
interagency and international research and development (R&D)
requirements for combating terrorism. TSWG has awarded the
Company an R&D task, for example, to develop a heat stress
calculation system for personal protection system use which
we believe is very promising. The system, based on a personal
data assistant device, allows the user to rapidly assess and
calculate the heat stress on an individual outfitted with
PPE, and how long they can operate safely.

Chemical Surety Laboratory:The laboratory provides
cost-effective materials testing services to the U.S. Government and to
private industries, particularly manufacturers of chemical
protective equipment and clothing. Other laboratory services
include evaluation of new agent detection instrumentation,
agent decontamination and destruction techniques, site
remediation/environmental cleanup support, analysis of
environmental samples (air, soil, water, and sludge) for the
presence of chemical and biological agents and degradation
products, and testing of personal protective systems for
component survivability. Laboratory operations in fiscal
year 2003 were highlighted by an increase in work load from
private sector manufacturers responding to market demands for
chemical protection systems. The Company also conducted a
major R&D effort to evaluate a proprietary plasma-based
chemical agent destruction technology for an international
customer.

Biological Defense Laboratory:The Companys biological
defense laboratory was expanded in fiscal year 2003 to
respond to the anticipated increase in demand for biological
agent testing and identification services. Current projects
include support for the Defense Advanced Research Projects
Agency (DARPA) Biocomputational program, which involves early
detection of biological agents. The Biological Defense
Laboratory currently operates at Biosafety Level 2 (BSL-2),
and our program to complete the BSL-3 suite is ongoing, which
will allow the Company to enter new markets that require the
ability to handle live pathogens in real time.

Demilitarization:Versar is currently supporting the
Defense Threat Reduction Agency (DTRA) in the management of
the Russian Solid Rocket Destruction program. The project has
involved the value engineering of a major design for a
missile destruction facility in Russia, under direct contract
to DTRA. A unique aspect of the program

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was the
implementation of a secure, internet-based document
management and project management system, which currently
allows search and retrieval of over 6000 documents, drawings
and reports with the ability to record and search in the
Russian Cyrillic language.

The Company is also involved with the demilitarization
of Non-Stockpile Chemical Weapons for the Army, including
support for a remediation effort in Alaska.

Facility Hardening:The Company also began to integrate
the skills of the traditional engineering staff with
technology applications and requirements for homeland
security, biological warfare agent detection, chemical agent
detection, radiological protection, and explosive detection
systems on a classified project which involves design,
systems integration and construction of a world-class
facility for screening and protection of sensitive materials
shipments from around the world. This effort has already led
to other opportunities in the building protection arena. Most
of these projects are classified at the customers request.
DoD design and construction projects also have transitioned
to force facility protection initiatives, using contracts
that traditionally have been exclusively environmental in
scope. For example, Versar was awarded a new task to design
an entrance for March Air Reserve Base in Riverside, CA in
accordance with newly promulgated DoD force protection
standards, and we expect further work in this area to emerge.
This design should be useable for other facilities as force
protection becomes more and more important to DoD.

Vulnerability Assessments:Versar continued to build a
track record involving the assessment of critical
infrastructure for vulnerability to terrorist attack. Versar
is a licensee of the Sandia Laboratories Risk Assessment
Methodology for vulnerability assessment. Contracts were
awarded by over 20 cities for water utility vulnerability
assessments across the nation. The Illinois Department of
Transportation (IDOT) selected Versar for a $725,000 contract for
consulting services on deterrence, surveillance, protection,
and response to potential terrorist threats. The scope
included reviews and recommendations on transportation issues
related to infrastructure, information technology, emergency
incident prevention, preparedness, response, and recovery
from potential terrorist threats. Versar performed a
vulnerability assessment of the States highway,
infrastructure (bridges and facilities), communications
systems and computer assets under the project. The project
also included reviewing all the operational plans and the
emergency response plans for the State of Illinois. The
State tasked Versar to develop a unique vulnerability
assessment methodology to use in the evaluation of its
critical facilities and assets. The focus of the work was on
the IDOT-controlled highway network and related modal
linkages, and on IDOT-controlled infrostructure systems.
Management feels that this contract will be replicated in
other states, and has initiated an aggressive campaign to
sell these focused vulnerability assessment services
nationally.

Range Support Services/NexMIS:The Commander in Chief,
U.S. Atlantic Fleet awarded the Company a contract to
implement the Companys proprietary Next Generation
Management Information System (NexMIS) tool for the U.S.
Navy. The initial work supported the integration of
network-centric data management systems at military test
ranges in the United States. Versars network-centric
approach provides the customer with the ability to
dynamically network any of a variety of data sources in real
time, across multiple platforms, locations, and systems.
Versar is actively pursuing follow-on funding for deployment
of the system, which was successfully demonstrated. NexMIS
also has broad applications for information management
programs where data from a variety of applications can be
shared via NexMIS. The Navy implementation of NexMIS will
integrate current range data on training, operations, R&D,
readiness, budgeting and environmental planning for the
development and utilization of future strategic operational
Navy and Air Force range requirements.

DoD Contract Support:The Company was awarded a $500
million indefinite quantity contract from the Edgewood
Chemical Biological Center in Edgewood, MD this Spring during
fiscal year 2003. The challenge for the Company is to market
this contract vehicle during fiscal year 2004 to secure task
orders involving chemical and biological warfare agents,
support systems and programs. Management believes that this
contract will become an important foundation for future work
in this arena.

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Markets

Versars services are continuing to evolve in response
to clients changing needs and our market opportunities are
being driven by the availability of technology aimed at
enhancing operating performance and profitability. The
Company has refocused its emphasis on outsourcing
professional services for government customers, developing
level of effort, long term contracts to stabilize the
Companys business base and focused on the challenging
homeland security market. Management believes that all three
business segments have opportunities the Company can
capitalize on in the next year.

The industrial environmental marketplace, in our view,
will remain highly competitive, as no major new regulatory
requirements are expected to be placed on industry in the
near future. Most of our private sector customers have
deferred capital expenses for environmental projects, given
the current economic and regulatory uncertainty. However, we
will continue to pursue those opportunities that make sense,
such as the recent award of a master service agreement from
AIMCO, one of the nations largest rental apartment
owner-manager firms.

Success in the Federal environmental markets will be
driven by a cost-effective set of solutions, such as the
Guaranteed Fixed Price Remediation Program, outsourcing at
the point of need, and relationships with key customers.

The next round of Base Realignment and Closure (BRAC)
will drive a new round of base study and cleanup work,
starting in fiscal year 2005. Government reorganization and
privatization also present opportunities which we will
continue to pursue. In addition, test and training ranges
have become more and more important to the environmental
market, as new rules require more emphasis on the cleanup of
munitions and safe disposal of unexploded ordnance. Water
quality is also a focus area, and we have successfully
entered new markets at the state and local level using our
credentials gained from working at the Federal level.

The Architecture and Engineering market remains
uncertain for traditional design and construction in our
sector. Private sector work may rebound with an expanding
economy, and we have relationships in place that we believe
will place us in a good position to bid and win the jobs in
the market we serve. Design-build projects are also becoming
more important, as customers look for one stop shopping
from the contracting community. Our systems for managing
these projects have been improved and specific attention is
being paid to estimating and profit margins for this work.
Versar will continue to pursue mid-sized design build
projects that focus on hardening of critical assets, and
projects that show a return on investment in energy and HVAC
systems upgrade. Support for mail handling and remote
delivery sites grew in fiscal year 2003 and we expect that
trend to continue.

Fiscal year 2003 saw a shift in the homeland defense
priorities away from the initial response to incidents, which
characterized Versars work on the Anthrax Crisis in fiscal
year 2002, to a more complex mixture of prevention, response,
and support programs across the entire spectrum of the
government. Deloitte & Touche and Aviation Week Magazine,
for example, cite estimated government spending of between
$93 and $138 billion a year on related services, technologies
and management consulting. (The Homeland Security Market: The
Worlds Most Challenging Emerging Business Environment,
DeLoitte & Touche, 2003). The challenge for the smaller firms
is to retain a niche or technology position that makes us
attractive to the large prime contractors who are positioning
for major support efforts for the new Department of Homeland
Security, and we continue to forge those key relationships
with larger firms. Management feels that our biological,
chemical, force protection, vulnerability assessment and hard
engineering capability will pay off as this market continues
to emerge.

The Companys largest client was with the DoD for
approximately 43% of Versars revenue. The EPA constitutes
approximately 6 percent of our revenue. Other Federal
clients make up 13 percent of our revenue to include NASA,
General Services Administration, the Departments of Energy
and the Interior, Federal Housing Authority, and Intelligence
agencies. State and local governments comprise 15 percent of
Versars revenue.

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Competition

Versar continues to face substantial competition in each
market in which it operates and expects to continue to face
substantial competition as it diversifies its business.
Competitors are often larger and have greater financial
resources than Versar, which means that we have to be very selective in our marketing and sales
program efforts, yet Versar is probably the largest of the
smaller companies which enables us to compete for specific
contracts that the larger competitors do not qualify for
because the contract opportunities require that companies
cannot have more than 500 employees to qualify as a small
business. In addition, there has been major consolidation in
the environmental services market, with two brackets of firms
emerging  the large, diversified firms with a wide range of
capabilities, and the smaller, niche firms with limited
capability in specific horizontal or vertical markets. A
number of companies have restructured to become private.
Versar has historically competed primarily on its scientific,
technological, and engineering expertise; however, that is
not enough in todays market.

Our market areas of environmental, architecture and
engineering and defense reflect a mix of business that we
believe will be stable and allow for growth, while retaining
our core capability. Toward that end, we have de-emphasized
the information technology pillar as a separate organization,
folding the capability into the Defense segment of our
business.

The synthesis of our three core capabilities, however,
is an important selling feature as customers look for one
source for critical asset protection. We believe that we are
among the few firms that combine environmental health and
safety/risk assessment, hard engineering design and
construction, and chemical and biological defense capability
in one package, and we are actively pursuing customers that
require these services.

Our pricing structure has been adjusted to ensure that
we remain competitive, particularly for outsourcing, where
procurement decisions are very sensitive to pricing.
Similarly, we are concentrating our marketing efforts on
getting the most return on investment, through expanding
support for existing customers, developing tasks under
existing contracts, and collaborating with firms that need
our niche expertise. We are targeting and identifying
specific programs that match our capability this year.

Versar will also continue to target small business set
aside opportunities in the Federal marketplace, under the
North American Industry Classification System (NAICS) codes
that provide opportunities for firms with fewer than 500
personnel. We continue to work with customers to make them
aware of the benefits of setting aside work under these NAICS
codes, and expect that trend to continue. Typically, for
large, environmental contracts, at least one of the awards is
targeted for a small business, and Versar brings a wealth of
expertise to that sector.

Backlog

As of June 30, 2003, total backlog for Versar, including
unfunded government tasks and orders, was approximately $312
million, as compared to approximately $287 million as of June
30, 2002, an increase of 9%. Funded backlog for Versar was
approximately $32 million, a decrease of 9 percent compared
to approximately $35 million as of June 30, 2002. Backlog
decreased with the winding down of the STEPO contract.
Approximately $175 million of the contract unfunded backlog
is not expected to be funded in fiscal year 2004. Funded
backlog is the incremental funding authorization of contracts
and task orders based on firm contractual obligations.
Unfunded backlog includes contracts and contract vehicles,
including option periods, in which specific work tasks and
funding have not been authorized. Funded backlog amounts
have historically resulted in revenues; however, no assurance
can be given that all amounts included in funded backlog will
ultimately be realized as revenue.

Employees

At June 30, 2003, Versar had approximately 329 full-time
employees, of which eighty-five percent are engineers,
scientists, and other professionals. Eighty percent of the Companys professional employees have a bachelors
degree, twenty-five percent have a masters degree, and five
percent have a doctorate degree.

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Item 2. Properties

The Companys executive office is located in
Springfield, Virginia, a suburb of Washington, D.C. Versar
currently leases 66,742 square feet in two buildings from
Springfield Realty Investors, LLC. The rent is subject to a
two-percent escalation per year through May 31, 2009.

As of September 2, 2003, the Company had under lease an
aggregate of approximately 191,000 square feet of office and
laboratory space in the following locations: Springfield,
Lynchburg, Norfolk and Williamsburg, VA; Tempe, AZ; Fair
Oaks, CA; Northglenn, CO; Lombard, IL; Columbia, Gaithersburg
and Germantown, MD; Oklahoma City, OK; San Antonio, TX; and
Horsham, PA. The lease terms primarily range from two to six
years.

Item 3. Legal Proceedings

In August 1997, Versar entered into a contract with the
Trustees for the Enviro-Chem Superfund Site (the Superfund
Site), which provided that, based upon an existing
performance specification, Versar would refine the design,
and construct and operate a soil vapor extraction system.
During the performance of the contract, disputes arose
between Versar and the Trustees regarding the scope of work.
Eventually, Versar was terminated by the Trustees for
convenience. The Trustees then failed to pay certain
invoices and retainages due Versar.

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

On July 12, 2001, the Federal District Court in
Pennsylvania granted defendants motion to transfer the
Pennsylvania lawsuit and consolidate the two legal actions in
Indiana. The Company filed an answer and counterclaim to the
Indiana lawsuit. The plaintiffs and third-party defendants
filed Motions to Dismiss the Companys counterclaim. The
court granted the motions in part and denied them in part.
Versar amended its answer and counterclaim. In the meantime,
plaintiffs filed a Motion for Partial Summary Judgment which
the Judge granted in part and denied in part. The Judge held
that certain agreements entered into by the parties prevented
Versar from recovering certain amounts under its counterclaim
but that Versar could pursue its claim for fraud in other
areas. Written and oral discovery has commenced and is
expected to be completed by the end of 2003. Trial is
scheduled for September 2004. Based upon discussions with
outside counsel, management does not believe that the
ultimate resolution under the Trustees lawsuit will have a
materially adverse effect on the Companys consolidated financial condition and results of operations.

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

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

No matters were submitted to a vote of the Companys
security holders during the last quarter of fiscal year 2003.

9



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##### 



EXECUTIVE OFFICERS

The current executive officers of Versar, and their ages
as of September 1, 2003, their current offices or positions
and their business experience for at least the past five
years are set forth below.

|                    |  |     |    |                           |  |                                                                  
|------------------- |  | --- | -- | ------------------------- |  | -----------------------------------------------------------------
|NAME                |  | AGE |    | POSITION WITH THE COMPANY
|                    |  |     |    |                          
|Benjamin M. Rawls   |  |     | 62 |                           |  | Chairman                                                         
|                    |  |     |    |                           |  |                                                                  
|Theodore M. Prociv  |  |     | 55 |                           |  | President and Chief Executive Officer                            
|                    |  |     |    |                           |  |                                                                  
|Jerome B. Strauss   |  |     | 54 |                           |  | Senior Vice President, Environmental
Business Segment            
|                    |  |     |    |                           |  |                                                                  
|George J. Anastos   |  |     | 55 |                           |  | Senior Vice President, Architect and
Engineering Business Segment
|                    |  |     |    |                           |  |                                                                  
|Lawrence W. Sinnott |  |     | 41 |                           |  | Senior Vice President,
Chief Financial Officer and Treasurer     
|                    |  |     |    |                           |  |                                                                  
|James C. Dobbs      |  |     | 58 |                           |  | Senior Vice President, General Counsel and
Secretary             

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

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

Jerome B. Strauss,P.E., joined Versar in 1977, was elected Vice
President in 1999, and Senior Vice President in 2003. He served as Division
Director for Waste Management from 1989-2002, and Unit Manager for Atlantic
Operations from 2001-2002. Mr. Strauss has led work in virtually all areas of
environmental services during his 25 years with Versar.

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

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

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

10



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##### 



PART II

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

Common Stock

The Companys common stock is traded on the American Stock Exchange
(AMEX), under the symbol VSR. At June 30, 2003, the Company had 903
stockholders of record, excluding stockholders whose shares were held in
nominee name. The quarterly high and low sales prices as reported on the AMEX
during fiscal years 2003 and 2002 are presented below.

|            |      |             |             |     |      |      |  |  |      |      |  |  | 
|----------- | ---- | ----------- | ----------- | --- | ---- | ---- |  |  | ---- | ---- |  |  | 
|Fiscal Year |      | High        |             | Low
|            |      |             |             |    
|            | 2003 |             | 4th Quarter |     | $    | 3.30 |  |  | $    | 2.51 | 
|            |      | 3rd Quarter |             |     | 3.98 |      |  |  | 1.89 |     
|            |      | 2nd Quarter |             |     | 2.25 |      |  |  | 1.75 |     
|            |      | 1st Quarter |             |     | 3.15 |      |  |  | 1.90 |     

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

No cash dividends have been paid by Versar since it began public trading
of its stock in 1986. The Board of Directors intends to retain any future
earnings for use in the Companys business and does not anticipate paying cash
dividends in the foreseeable future. Under the terms of the Companys
revolving line of credit, approval would be required from the Companys primary
bank for the payment of any dividends.

The Company has established equity compensation plans to attract, motivate
and reward good performance of high caliber employees, directors and service
providers to serve Versar, Inc. and its affiliates. Currently, there are
four stock option plans which were previously approved by the security holders:
the 2002 Stock Incentive Plan, the 1996 Stock Option Plan, the 1992 Stock
Option Plan and the 1987 Nonqualified Stock Option Plan.

Equity Compensation Plan
June 30, 2003
(shares in thousands)

|                             |  |                         |       |                     |  |                           |      |                     |  |                      |     | 
|---------------------------- |  | ----------------------- | ----- | ------------------- |  | ------------------------- | ---- | ------------------- |  | -------------------- | --- | 
|                             |  |                         |       |                     |  |                           |      |                     |  | Number of securities
|                             |  | Number of securities    |       |                     |  |                           |      | remaining available
|                             |  | to be issued upon       |       | Weighted-average    |  | for future issuance      
|Equity compensation plans    |  | exercise of outstanding |       | exercise price of   |  | under equity compensation
|approved by security holders |  | options                 |       | outstanding options |  | plans                    
|                             |  |                         |       |                     |  |                          
|2002                         |  |                         | 21    |                     |  | $                         | 2.55 |                     |  |                      | 679 | 
|1996                         |  |                         | 682   |                     |  |                           | 3.04 |                     |  |                      | 146 | 
|1992                         |  |                         | 843   |                     |  |                           | 2.37 |                     |  |                      |    | 
|1987                         |  |                         | 199   |                     |  |                           | 3.04 |                     |  |                      |    | 
|                             |  |                         |       |                     |  |                           |      |                     |  |                      |     | 
|Total                        |  |                         | 1,745 |                     |  | $                         | 2.71 |                     |  |                      | 825 | 
|                             |  |                         |       |                     |  |                           |      |                     |  |                      |     | 

11



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##### 



Item 6. Selected Financial Data (unaudited)

The selected consolidated financial data set forth below should be read in
conjunction with Versars consolidated financial statements and notes thereto
beginning on page F-3 of this report. The financial data is as follows:

|                                                               |  |                                       |        |   |      |   |        |   |      |   |        |   |  |   |        |  |  |   |        |  | 
|-------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | - | ---- | - | ------ | - |  | - | ------ |  |  | - | ------ |  | 
|                                                               |  | For the Years Ended June 30,         
|                                                               |  |                                       |       
|                                                               |  |                                       | 2003   |   | 2002 |   | 2001   |   | 2000 |   | 1999  
|                                                               |  |                                       |        |   |      |   |        |   |      |   |       
|                                                               |  | (In thousands, except per share data)
|Consolidated Statement of Operations
related data:             |  |                                       |        |   |      |   |        |   |      |   |        |   |  |   |        |  |  |   |        | 
|Gross Revenue                                                  |  | $                                     | 57,097 |   |      | $ | 67,988 |   |      | $ | 65,816 |   |  | $ | 56,149 |  |  | $ | 58,886 | 
|Net Service Revenue                                            |  |                                       | 35,180 |   |      |   | 38,189 |   |      |   | 39,481 |   |  |   | 37,787 |  |  |   | 38,721 | 
|Operating Income (Loss)                                        |  |                                       | 262    |   |      |   | 619    |   |      |   | (352   | ) |  |   | 728    |  |  |   | 2,072  | 
|(Loss) Income from Continuing Operations                       |  |                                       | (1,008 | ) |      |   | 159    |   |      |   | (1,030 | ) |  |   | 340    |  |  |   | 1,837  | 
|(Loss) Income from Discontinued
Operations                     |  |                                       |       |   |      |   | (80    | ) |      |   | 243    |   |  |   |       |  |  |   |       | 
|Net (Loss) Income                                              |  |                                       | (1,008 | ) |      |   | 79     |   |      |   | (787   | ) |  |   | 340    |  |  |   | 1,837  | 
|(Loss) Income per share from Continuing
Operations - Diluted   |  | $                                     | (.14   | ) |      | $ | .02    |   |      | $ | (.16   | ) |  | $ | .05    |  |  | $ | .29    | 
|(Loss) Income per share from Discontinued
Operations - Diluted |  | $                                     |       |   |      | $ | (.01   | ) |      | $ | .04    |   |  | $ |       |  |  | $ |       | 
|Net (Loss) Income per share - Diluted                          |  | $                                     | (.14   | ) |      | $ | .01    |   |      | $ | (.12   | ) |  | $ | .05    |  |  | $ | .29    | 
|Weighted Average Shares Outstanding -
Diluted                  |  |                                       | 7,231  |   |      |   | 6,998  |   |      |   | 6,470  |   |  |   | 6,487  |  |  |   | 6,283  | 
|Consolidated Balance Sheet related data:                       |  |                                       |        |   |      |   |        |   |      |   |        |   |  |   |        |  |  |   |        | 
|Working Capital                                                |  | $                                     | 7,065  |   |      | $ | 6,600  |   |      | $ | 7,073  |   |  | $ | 7,801  |  |  | $ | 8,403  | 
|Current Ratio                                                  |  |                                       | 1.85   |   |      |   | 1.70   |   |      |   | 1.86   |   |  |   | 1.94   |  |  |   | 1.90   | 
|Total Assets                                                   |  |                                       | 19,336 |   |      |   | 21,273 |   |      |   | 20,117 |   |  |   | 21,387 |  |  |   | 22,687 | 
|Current Portion of Long-Term Debt                              |  |                                       |       |   |      |   |       |   |      |   |       |   |  |   |       |  |  |   | 687    | 
|Long-Term Debt                                                 |  |                                       |       |   |      |   |       |   |      |   |       |   |  |   |       |  |  |   |       | 
|                                                               |  |                                       |        |   |      |   |        |   |      |   |        |   |  |   |        |  |  |   |        | 
|Total Debt, excluding bank line of credit                      |  |                                       |       |   |      |   |       |   |      |   | 170    |   |  |   | 480    |  |  |   | 1,135  | 
|Stockholders Equity                                           |  | $                                     | 7,396  |   |      | $ | 8,324  |   |      | $ | 6,013  |   |  | $ | 6,402  |  |  | $ | 5,623  | 

12



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

This report contains certain forward-looking statements 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, and changes
to or failure of the Federal government to fund certain programs in which the
Company participates. Forward-looking statements involve numerous risks and
uncertainties that could cause actual results to differ materially, including,
but not limited to, the possibilities that the demand for the Companys
services may decline as a result of possible changes in general and industry
specific economic conditions and the effects of competitive services and
pricing; the possibility the Company will not be able to perform work within
budget or contractual limitations; one or more current or future claims made
against the Company may result in substantial liabilities; the possibility that
acquired entities may not perform as well as expected; the possibility the
Company will not be able to attract and retain key professional employees; and
such other risks and uncertainties as are described in reports and other
documents filed by the Company from time to time with the Securities and
Exchange Commission.

Critical Accounting Policies

Revenue recognition:Contracts in process are stated at the lower of
actual cost incurred plus accrued profits or net estimated realizable value of
incurred costs, reduced by progress billings. The Company records income from
major fixed-price contracts, extending over more than one accounting period,
using the percentage-of-completion method. During performance of such
contracts, estimated final contract prices and costs are periodically reviewed
and revisions are made as required. The effects of these revisions are
included in the periods in which the revisions are made. On cost-plus-fee
contracts, revenue is recognized to the extent of costs incurred plus a
proportionate amount of fee earned, and on time-and-material contracts, revenue
is recognized to the extent of billable rates times hours delivered plus
material and other reimbursable costs incurred. Losses on contracts are
recognized when they become known.

Receivable reserves:Disputes arise in the normal course of the Companys
business on projects where the Company is contesting with customers for
collection of funds because of events such as delays, changes in contract
specifications and questions of cost allowability or collectibility. Such
disputes, whether claims or unapproved change orders in the process of
negotiation, are recorded at the lesser of their estimated net realizable value
or actual costs incurred and only when realization is probable and can be
reliably estimated. Claims against the Company are recognized where loss is
considered probable and reasonably determinable in amount. Management reviews
outstanding receivables on a regular basis and assesses the need for reserves
taking into consideration past collection history and other events that bear on
the collectibility of such receivables.

Deferred tax valuation allowance:The Company has approximately $4.7
million in deferred tax assets of which a $4.1 million valuation allowance has
been established against such assets. Management provides for a valuation
allowance until such time that it can conclude more likely than not that the
Company will derive a benefit from such assets. The valuation allowance will
be adjusted as necessary in future period based upon the Companys operating
results.

Results of Operations

Versars gross revenue for fiscal year 2003 totaled $57,097,000, an
$10,891,000 (16%) decrease compared to gross revenue of $67,988,000 for fiscal
year 2002. Gross revenue for fiscal year 2002 increased by $2,172,000 (3%)
over that reported in fiscal year 2001. Approximately 67% of the decrease in
gross revenue for fiscal year 2003 was due to the anticipated winding down of
the STEPO suit production contract in the Companys Defense segment. The
balance of the decrease was due to reduced construction work in the Companys
Architecture and Engineering segment and lower subcontracted activities in the
Companys Environmental segment.

13



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##### 



Purchased services and materials for fiscal year 2003 totaled $21,917,000,
a decrease of $7,882,000 (26%) compared to fiscal year 2002. Purchased
services and materials for fiscal year 2002 increased by $3,464,000 (13%) over
fiscal year 2001. Seventy-five percent of the decrease in purchased services
in fiscal year 2003 was due to the anticipated winding down of the STEPO
contract and reduced subcontracted activities in the Companys Architecture and
Engineering, and Environmental segments, as mentioned above.

Net service revenue is derived by deducting the costs of purchased
services from gross revenue. Versar considers it appropriate to analyze
operating margins and other ratios in relation to net service revenue, because
such revenues reflect the actual work performed by the Companys labor force.
Net service revenues decreased by $3,009,000 (8%) in fiscal year 2003 due to
the decreases in gross revenue and purchased services as mentioned above.

Direct costs of service and overhead include the cost to Versar of direct
and overhead staff, including recoverable and unallowable costs that are
directly attributable to contracts. The percentage of these costs to net
service revenue decreased to 80.6% in fiscal year 2003 compared to 81.8% in
fiscal year 2002 and 81.2% in fiscal year 2001. The decrease in the percentage
in fiscal year 2003 is due to cost reduction efforts by the Company to balance
its cost structure with the current reduced business volume and the lack of
project reserves which were required in fiscal year 2002.

Selling, general and administrative expenses approximated 16.4% of net
service revenue in fiscal year 2003, compared to 16.5% in fiscal year 2002 and
16.3% in fiscal year 2001. The decrease is also due to the Companys cost
reduction efforts to balance its cost structure with the business volume.
Actual selling, general and administrative costs decreased by $547,000 (9%) in
fiscal year 2003.

In the first quarter of fiscal year 2003, management and the Board of
Directors approved a restructuring plan to reduce the Companys overall cost
structure and reduce costs in non-performing divisions, which resulted in a
non-recurring charge of $800,000. Approximately $450,000 of this charge
comprises severance payments relating to the elimination of two senior
management positions. Such severance payments are expected to be paid out
during the next two years starting in the third quarter of fiscal year 2003.
The remainder of the charge consists of costs expected to be incurred in
connection with managements plan to reduce occupancy expense. In fiscal year
2001, the Company recorded a non-recurring charge against income of $1,320,000
as a result of a settlement of a lawsuit with TAMS Consultants, Inc.

Operating income for fiscal year 2003 was $262,000, compared to $619,000
in fiscal year 2002. Operating income in fiscal year 2003 was lower primarily
due to the non-recurring charge and the reduced gross revenue and purchased
services. In fiscal year 2002, operating income was $971,000 higher than that
recorded in fiscal year 2001 due to a non-recurring charge of $1,320,000
recorded in fiscal year 2001.

Interest expense during fiscal year 2003 was $166,000, a decrease of
$37,000 from fiscal year 2002. The decrease is primarily attributable to lower
interest rates on the Companys line of credit in fiscal year 2003. In fiscal
year 2002, interest expenses decreased by $235,000 from fiscal year 2001. The
reduction in fiscal year 2002 was due to lower utilization on the Companys
line of credit and proceeds the Company received from the exercise of stock
options and new equity during the year.

Versars tax expense for fiscal year 2003 was $1,104,000 compared to
$257,000 for the prior fiscal year. In fiscal year 2003, the Company increased
the tax valuation allowance by $1,097,000. The increase was due to lower than
anticipated operating results in the fiscal year. The Company has
approximately $4.7 million in deferred tax assets of which a $4.1 million
valuation allowance has been established against such assets. Management
provides for a valuation allowance until such time that it can conclude more
likely than not that the Company will derive a benefit from such assets. The
valuation allowance will be adjusted as necessary in future periods based upon
the Companys operating results.

14



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

In summary, Versars net loss for fiscal year 2003 was $1,008,000 compared
to net income of $79,000 in fiscal year 2002 and net loss of $787,000 in fiscal
year 2001.

REVENUE

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

|              |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |    |  
|------------- | --------------------- | - | -------------------------------------- | ------ | ---- |  | ---- | -- | - | - | ------ | ------ |  |  | --- | -- | - | - | ------ | ------ |  |  | --- | -- | -
|              |                       |   | For the Years Ended June 30,          
|              |                       |   |                                       
|              |                       |   | 2003                                   |        | 2002 |  | 2001
|              |                       |   |                                        |        |      |  |     
|              |                       |   | (In thousands, except for percentages)
|Government    |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   
|              | EPA                   |   | $                                      | 3,312  |      |  |      | 6  | % |   | $      | 3,495  |  |  |     | 5  | % |   | $      | 2,734  |  |  |     | 4  | %
|              | State & Local         |   |                                        | 8,865  |      |  |      | 15 | % |   |        | 9,075  |  |  |     | 13 | % |   |        | 7,859  |  |  |     | 12 | %
|              | Department
of Defense |   |                                        | 24,343 |      |  |      | 43 | % |   |        | 38,576 |  |  |     | 57 | % |   |        | 38,157 |  |  |     | 58 | %
|              | Other                 |   |                                        | 7,644  |      |  |      | 13 | % |   |        | 3,906  |  |  |     | 6  | % |   |        | 5,202  |  |  |     | 8  | %
|Commercial    |                       |   | 12,933                                 |        |      |  | 23   | %  |   |   | 12,936 |        |  |  | 19  | %  |   |   | 11,864 |        |  |  | 18  | % 
|              |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   
|Gross Revenue |                       | $ | 57,097                                 |        |      |  | 100  | %  |   | $ | 67,988 |        |  |  | 100 | %  |   | $ | 65,816 |        |  |  | 100 | % 
|              |                       |   |                                        |        |      |  |      |    |   |   |        |        |  |  |     |    |   |   |        |        |  |  |     |   

Liquidity and Capital Resources

The Companys continuing operations generated $39,000 in cash in fiscal
year 2003. The Company purchased $415,000 of property and equipment, which was
primarily funded by borrowings under the Companys long term line of credit.

During fiscal year 2003, the Company used its line of credit to supplement
its day to day operating cash requirements. At June 30, 2003, the Company had
$7,065,000 of working capital, compared to $6,600,000 in fiscal year 2002.
Working capital increased primarily due to improved collections of receivables,
which proceeds were used to reduce outstanding accounts payables.

Versars line of credit with the Bank of America (Bank) provides for
advances up to $4,500,000 based on qualifying receivables. Interest on the
borrowings is based on 30 day London Interbank Offered Rate (LIBOR) plus three
hundred basis points (4.04% at June 30, 2003). A commitment fee of 1/4% on the
unused portion of the line of credit is also charged. The line is guaranteed
by the Company and each subsidiary individually and is collectively secured by
accounts receivable, equipment and intangibles, plus all insurance policies on
property constituting collateral. Unused borrowing availability at June 30,
2003 was approximately $2,375,000. In June 2003, the Companys line of credit
was reduced to $4,500,000 and the due date was accelerated to September 30,
2003. There are no financial covenants as of June 30, 2003.

On September 16, 2003, the Company received a firm commitment from United
Bank to provide the Company up to a $5,000,000 line of credit for working
capital purposes which will be secured by qualifying receivables. Interest on
the line of credit is based upon prime plus one and one half percent. Advances
on the line of credit are due on November 30, 2005. The Company expects to
close on the line of credit on or before September 30, 2003. The loan

15



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##### 



will
have certain covenants related to the maintenance of financial ratios. The
Company expects that it will be able to comply with those ratios. Management
believes that cash generated by operations and borrowings available from the
new line of credit will be adequate to meet its working capital needs for
fiscal year 2004.

Liquidity Requirements

At June 30, 2003, the Company had unfunded contractual payment obligations
of approximately $3,722,000 due within the next twelve months. The table below
specifies the total contractual payment obligations as of June 30, 2003.

|                                   |  |       |        |           |  |       |       |       |  |         |       |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | ----- | ------ | --------- |  | ----- | ----- | ----- |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|Contractual                        |  | Total |        | Less than |  | 1-3   |       | 4-5   |  | After 5
|Obligations                        |  | Cost  |        | 1 year    |  | years |       | years |  | years  
|                                   |  |       |        |           |  |       |       |       |  |        
|(In thousands)                     |  |       |        |           |  |       |       |       |  |         |       |  |  |   |       |  |  |   |       | 
|Operating leases                   |  | $     | 14,157 |           |  | $     | 3,392 |       |  | $       | 5,195 |  |  | $ | 3,598 |  |  | $ | 1,972 | 
|Capital lease                      |  |       | 1,093  |           |  |       | 42    |       |  |         | 90    |  |  |   | 99    |  |  |   | 862   | 
|Notes payable                      |  |       | 288    |           |  |       | 288   |       |  |         |      |  |  |   |      |  |  |   |      | 
|                                   |  |       |        |           |  |       |       |       |  |         |       |  |  |   |       |  |  |   |       | 
|Total contractual cash
obligations |  | $     | 15,538 |           |  | $     | 3,722 |       |  | $       | 5,285 |  |  | $ | 3,697 |  |  | $ | 2,834 | 
|                                   |  |       |        |           |  |       |       |       |  |         |       |  |  |   |       |  |  |   |       | 

Impact of Inflation

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

Business Segments

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements and supplementary data begin on page
F-3 of this report.

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

None.

16



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##### 



Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act)) was
carried out as of the last day of the period covered by this report. This
evaluation was made under the supervision and with the participation of the
Companys management, including its Chief Executive Officer and Chief Financial
Officer. Based upon this evaluation, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that the Companys disclosure controls
and procedures (a) are effective to ensure that information required to be
disclosed by the Company in reports filed or submitted under the Exchange Act
is timely recorded, processed, summarized and reported and (b) include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in reports filed or submitted under the
Exchange Act is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have not been any changes in the Companys internal control over
financial reporting that occurred during the Companys fourth fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information required by this item with respect to directors of the Company
will be contained in the Companys Proxy Statement for its 2003 Annual Meeting
of Stockholders, which is expected to be filed with the Commission not later
than 120 days after the Companys 2003 fiscal year end and is incorporated
herein by reference.

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

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

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

Information required by this item is incorporated herein by reference to
the Companys Proxy Statement for its 2003 Annual Meeting of Stockholders which
is expected to be filed with the Commission not later than 120 days after the
end of the Companys 2003 fiscal year.

17



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##### 



Item 14. Principal Accountant Fees and Services

Information required by this item is incorporated herein by reference to
the Companys Proxy Statement for its 2003 Annual Meeting of Stockholders which
is expected to be filed with the Commission not later than 120 days after the
end of the Companys 2003 fiscal year.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(A)(1) Financial Statements:



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

|                                   |                                                                                                                                                                                             |                                                                                                             
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------
|                                   | a)                                                                                                                                                                                          | Report of Independent Certified Public Accountants                                                          
|                                  
|                                   | b)                                                                                                                                                                                          | Consolidated Balance Sheets as of June 30, 2003 and 2002                                                    
|                                  
|                                   | c)                                                                                                                                                                                          | Consolidated Statements of Operations for the Years Ended June 30,
2003, 2002, and 2001                     
|                                  
|                                   | d)                                                                                                                                                                                          | Consolidated Statements of Changes in Stockholders Equity for
the Years Ended June 30, 2003, 2002, and 2001
|                                  
|                                   | e)                                                                                                                                                                                          | Consolidated Statements of Cash Flows for the Years Ended June
30, 2003, 2002, and 2001                     
|                                  
|                                   | f)                                                                                                                                                                                          | Notes to Consolidated Financial Statements                                                                  
|                                  
|(2) Financial Statement Schedules:
|                                  
|                                   | a)                                                                                                                                                                                          | Schedule II - Valuation and Qualifying Accounts for the Years
Ended June 30, 2003, 2002, and 2001           
|                                  
|                                   | All other schedules, except those listed above, are omitted because
they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
|                                  
|(3) Exhibits:                     
|                                  
|                                   | The exhibits to this Form 10-K are set forth in a separate Exhibit
Index which is included on pages 19 through 23 of this report.                                                          

(B) Reports on Form 8-K

Pursuant to the Securities Exchange Release No. 33-8216, Form 8-K, which
reported the Companys third quarter Results of Operations and Financial
Condition, was furnished to, but not filed with the Securities and Exchange
Commission on May 15, 2003.

18



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##### 



Exhibit Index

|         |  |                                                                                                                                                                              |  |             
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|         |  |                                                                                                                                                                              |  | Page Number/
|Item No. |  | Description                                                                                                                                                                  |  | Reference   
|         |  |                                                                                                                                                                              |  |             
|3.1      |  | Restated Articles of Incorporation of Versar, Inc. filed as an exhibit to the
Registrants Registration Statement on Form S-1 effective November 20, 1986
(File No. 33-9391) |  | (A)         
|         |  |                                                                                                                                                                              |  |             
|3.2      |  | Bylaws of Versar, Inc.                                                                                                                                                       |  | (A)         
|         |  |                                                                                                                                                                              |  |             
|3.3      |  | Amendment to the Bylaws of Versar, Inc.                                                                                                                                      |  | 26          
|         |  |                                                                                                                                                                              |  |             
|4        |  | Specimen of Certificate of Common Stock of Versar, Inc.                                                                                                                      |  | (A)         
|         |  |                                                                                                                                                                              |  |             
|10.10    |  | Incentive Stock Option Plan *                                                                                                                                                |  | (B)         
|         |  |                                                                                                                                                                              |  |             
|10.11    |  | Executive Tax and Investment Counseling Program                                                                                                                              |  | (A)         
|         |  |                                                                                                                                                                              |  |             
|10.12    |  | Nonqualified Stock Option Plan *                                                                                                                                             |  | (B)         
|         |  |                                                                                                                                                                              |  |             
|10.13    |  | Employee Incentive Plan, as amended *                                                                                                                                        |  | (E)         
|         |  |                                                                                                                                                                              |  |             
|10.17    |  | Deferred Compensation Agreements dated as follows:                                                                                                                           |  |             
|         |  |                                                                                                                                                                              |  |             
|         |  | July 1, 1988 between the Registrant and Gayaneh Contos                                                                                                                       |  | (F)         
|         |  |                                                                                                                                                                              |  |             
|10.26    |  | Executive Medical Plan dated August 21, 1991, effective July 1, 1991                                                                                                         |  | (G)         
|         |  |                                                                                                                                                                              |  |             
|10.40    |  | Option Exchange Offer dated April 16, 1991 between the Registrant and
participants of the Incentive Stock Option Plan and the Nonqualified
Stock Option Plan                 |  | (G)         
|         |  |                                                                                                                                                                              |  |             
|10.41    |  | Securities and Exchange Commission response dated September 23, 1991
to certain question regarding the Registrants Option Exchange Offer                                    |  | (G)         
|         |  |                                                                                                                                                                              |  |             
|10.52    |  | Incentive Stock Option Plan of Versar, Inc. dated December 1, 1992 *                                                                                                         |  | (I)         
|         |  |                                                                                                                                                                              |  |             
|10.65    |  | Information Statement for the Distribution to Shareholders of Versar, Inc., the
Outstanding Shares of its Wholly-owned Subsidiary, Sarnia Corporation,
dated June 30, 1994   |  | (J)         
|         |  |                                                                                                                                                                              |  |             
|10.66    |  | Agreement dated January 13, 1994 between the Registrant and the Department of
the Air Force                                                                                  |  | (K)         
|         |  |                                                                                                                                                                              |  |             
|10.83    |  | Agreement and Plan of Merger dated July 29, 1997 between the Registrant
and Science Management Corporation                                                                   |  | (O)         
|         |  |                                                                                                                                                                              |  |             
|10.84    |  | Acquisition Promissory Note, dated April 30, 1997, between the Registrant and
NationsBank, N.A.                                                                              |  | (P)         

19



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##### 



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

20



---



##### 



|         |  |                                                                                       |  |              | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ------------ | 
|         |  |                                                                                       |  | Page Number/ | 
|Item No. |  | Description                                                                           |  | Reference    | 
|         |  |                                                                                       |  |              | 
|10.103   |  | Securities Purchase Agreement, dated June 14, 2002 between Registrant and             |  |              | 
|         |  | Radyr Investments Limited                                                             |  | (V)          | 
|         |  |                                                                                       |  |              | 
|10.104   |  | Employment Agreement dated December 1, 2002 between Versar, Inc. and                  |  |              | 
|         |  | Theodore M. Prociv                                                                    |  | 27-39        | 
|         |  |                                                                                       |  |              | 
|10.105   |  | 4P Architect-Engineering Contract dated March 14, 2003                                |  | 40-107       | 
|         |  |                                                                                       |  |              | 
|10.106   |  | Revolving Promissory Note, dated June 20, 2003 between Registrant and                 |  |              | 
|         |  | Bank of America, N.A.                                                                 |  | 108-119      | 
|         |  |                                                                                       |  |              | 
|10.107   |  | Line of Credit Commitment Letter, dated September 16, 2003 between Registrant and     |  |              | 
|         |  | United Bank                                                                           |  | 120-127      | 
|         |  |                                                                                       |  |              | 
|22       |  | 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 June 13, 2003                                                                   |  | 128          | 
|         |  |                                                                                       |  |              | 
|31.1     |  | Certifications by Theodore M. Prociv, CEO and President and Lawrence
W.               |  |              | 
|         |  | Sinnott, Sr. Vice President and CFO pursuant to Securities Exchange Rule 13a-14       |  | 129-130      | 
|         |  |                                                                                       |  |              | 
|32.1     |  | 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, 2003 by Theodore    |  |              | 
|         |  | M. Prociv, CEO and President and Lawrence W. Sinnott, Sr. Vice President              |  |              | 
|         |  | and CFO                                                                               |  | 131-132      | 



|* Indicates management contract or compensatory plan or arrangement
|-------------------------------------------------------------------
|                                                                   
|(A)                                                                
|                                                                   
|(B)                                                                
|                                                                   
|(C)                                                                
|                                                                   
|(D)                                                                
|                                                                   
|(E)                                                                

21



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##### 





|(F) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-Q for the quarter ended September 30, 1989 (1st
Quarter FY 1990 Form 10-Q).                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(G) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for the Fiscal Year Ended June 30,
1991 (FY 1991 Form 10-K) filed with the Commission on October 15, 1991.  
|   
|(H) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1992
(FY 1992 Form 10-K) filed with the Commission on September 28, 1992.    
|   
|(I) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1993
(FY 1993 Form 10-K) filed with the Commission on September 22, 1993.    
|   
|(J) |  | Incorporated by reference Sarnia Corporation Information Statement for
distribution to shareholders of Versar, Inc. of the outstanding shares of
its wholly-owned subsidiary, Sarnia Corporation, dated June 30, 1994.
|   
|(K) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1994
(FY 1994 Form 10-K) filed with the Commission on September 27, 1994.    
|   
|(L) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K/A Annual Report for Fiscal Year Ended June 30, 1994
(FY 1994 Form 10-K/A) filed with the Commission on May 31, 1995.      
|   
|(M) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1995
(FY 1995 Form 10-K) filed with the Commission on September 28, 1995.    
|   
|(N) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1996
(FY 1996 Form 10-K) filed with the Commission on September 24, 1996.    
|   
|(O) |  | Incorporated by reference to the similarly numbered exhibit to the
Registrants Form S-4 registration number 333-33167.                                                                                               
|   
|(P) |  | Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1997
(FY 1997 Form 10-K) filed with the Commission on September 29, 1997.        
|   
|(Q) |  | Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1998
(FY1998 Form 10-K) filed with the Commission on September 28, 1998.         
|   
|(R) |  | Incorporated by reference to similarly numbered exhibit to the
Registrants Form 10-K Annual Report for Fiscal Year Ended June 30, 1999
(FY1999 Form 10-K) filed with the Commission on September 17, 1999.         

22



---



##### 





|(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.   

23



---



##### 



SIGNATURES

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

| |              | 
| | ------------ | 
| | VERSAR, INC. | 
| |              | 
| | (Registrant) | 

|                         |  |                                        
|------------------------ |  | ---------------------------------------
|                         |  | /S/ Benjamin M. Rawls                  
|Date: September 16, 2003 |  |                                        
|                         |  | Benjamin M. Rawls
Chairman and Director

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

|                                               |  |                                                                                             |  |                   
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ------------------
|SIGNATURES                                     |  | TITLE                                                                                       |  | DATE              
|                                               |  |                                                                                             |  |                   
|/S/ Benjamin M. Rawls                          |  |                                                                                             |  |                   
|                                               |  | Chairman and Director                                                                       |  | September 16, 2003
|Benjamin M. Rawls                              |  |                                                                                             |  |                   
|                                               |  |                                                                                             |  |                   
|/S/ Theodore M. Prociv

Theodore M. Prociv     |  | Chief Executive Officer,
President, and Director                                            |  | September 16, 2003
|                                               |  |                                                                                             |  |                   
|/S/ Lawrence W. Sinnott

Lawrence W. Sinnott   |  | Senior Vice President, Chief
Financial Officer, Treasurer,
and Principal Accounting Officer |  | September 16, 2003
|                                               |  |                                                                                             |  |                   
|/S/ Michael Markels, Jr.

Michael Markels, Jr. |  | Chairman Emeritus and Director                                                              |  | September 16, 2003
|                                               |  |                                                                                             |  |                   
|/S/ Robert L. Durfee

Robert L. Durfee         |  | Director                                                                                    |  | September 16, 2003
|                                               |  |                                                                                             |  |                   
|/S/ James L. Gallagher

James L. Gallagher     |  | Director                                                                                    |  | September 16, 2003
|                                               |  |                                                                                             |  |                   
|/S/ Fernando V. Galaviz

Fernando V. Galaviz   |  | Director                                                                                    |  | September 16, 2003

24



---



##### 



|                                           |  |          |  |                   
|------------------------------------------ |  | -------- |  | ------------------
|SIGNATURES                                 |  | TITLE    |  | DATE              
|                                           |  |          |  |                   
|/S/ Amoretta M. Hoeber

Amoretta M. Hoeber |  | Director |  | September 16, 2003
|                                           |  |          |  |                   
|/S/ Paul J. Hoeper

Paul J. Hoeper         |  | Director |  | September 16, 2003
|                                           |  |          |  |                   
|/S/ Amir A. Metry

Amir A. Metry           |  | Director |  | September 16, 2003

25



---



##### 



Report of Independent Certified Public Accountants

Board of Directors
Versar, Inc.

We have audited the accompanying consolidated balance sheets of Versar, Inc. (a
Delaware corporation), and subsidiaries as of June 30, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders equity,
and cash flows for the two years then ended. These financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Versar, Inc., and
subsidiaries as of June 30, 2003 and 2002, and the results of their operations
and their cash flows for the two years then ended, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in the notes to the consolidated financial statements, in 2003,
the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.

We have also audited Schedule II for each of the two years in the period ended
June 30, 2003. In our opinion, this schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information therein.

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

Grant Thornton, LLP | 

Vienna, Virginia
September 9, 2003 (except for Note F as to which the date is
September 16, 2003)

F-1



---



##### 



Report of Independent Public Accountants

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

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

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

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

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

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

Vienna, Virginia
September 7, 2001

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

F-2



---



##### 



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

|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |       |         |        |        | 
|------------------------------------ | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | -------- | ------ | ----- | ------- | ------ | ------ | 
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         | June 30,
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |         
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         | 2003     |        | 2002 
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|ASSETS                               |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|                                     | Current assets                              |                                                                                                                                                                                                                                          |  |                                            |         |          |        |       |        
|                                     |                                             | Cash and cash equivalents                                                                                                                                                                                                                |  | $                                          | 81      |          |        | $     | 113     |       
|                                     |                                             | Accounts receivable, net                                                                                                                                                                                                                 |  |                                            | 13,864  |          |        |       | 14,520  |       
|                                     |                                             | Prepaid expenses and other current assets                                                                                                                                                                                                |  |                                            | 1,231   |          |        |       | 1,038   |       
|                                     |                                             | Deferred income taxes                                                                                                                                                                                                                    |  |                                            | 184     |          |        |       | 419     |       
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |  | Total current assets                       |         |          | 15,360 |       |         |        | 16,090 | 
|                                     | Property and equipment, net                 |                                                                                                                                                                                                                                          |  | 2,164                                      |         |          |        | 2,474 |        
|                                     | Deferred income taxes                       |                                                                                                                                                                                                                                          |  | 418                                        |         |          |        | 1,280 |        
|                                     | Goodwill                                    |                                                                                                                                                                                                                                          |  | 776                                        |         |          |        | 776   |        
|                                     | Other assets                                |                                                                                                                                                                                                                                          |  | 618                                        |         |          |        | 653   |        
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |  | Total assets                               |         | $        | 19,336 |       |         | $      | 21,273 | 
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|LIABILITIES AND STOCKHOLDERS EQUITY |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|                                     | Current liabilities                         |                                                                                                                                                                                                                                          |  |                                            |         |          |        |       |        
|                                     |                                             | Accounts payable                                                                                                                                                                                                                         |  | $                                          | 3,160   |          |        | $     | 4,426   |       
|                                     |                                             | Accrued Income Taxes                                                                                                                                                                                                                     |  |                                            |        |          |        |       | 57      |       
|                                     |                                             | Billing in excess of revenue                                                                                                                                                                                                             |  |                                            | 379     |          |        |       | 1,000   |       
|                                     |                                             | Accrued salaries and vacation                                                                                                                                                                                                            |  |                                            | 2,009   |          |        |       | 2,195   |       
|                                     |                                             | Other liabilities                                                                                                                                                                                                                        |  |                                            | 2,747   |          |        |       | 1,812   |       
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |  | Total current liabilities                  |         |          | 8,295  |       |         |        | 9,490  | 
|                                     | Bank line of credit                         |                                                                                                                                                                                                                                          |  | 2,125                                      |         |          |        | 1,859 |        
|                                     | Other long-term liabilities                 |                                                                                                                                                                                                                                          |  | 1,201                                      |         |          |        | 1,239 |        
|                                     | Liabilities of discontinued operations, net |                                                                                                                                                                                                                                          |  | 319                                        |         |          |        | 361   |        
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |       |         |       
|                                     |                                             |                                                                                                                                                                                                                                          |  | Total liabilities                          |         |          | 11,940 |       |         |        | 12,949 | 
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|                                     | Commitments and contingencies (Note K)      |                                                                                                                                                                                                                                          |  |                                            |         |          |        |       |        
|                                     | Stockholders equity                        |                                                                                                                                                                                                                                          |  |                                            |         |          |        |       |        
|                                     |                                             | Common stock, $.01 par value; 30,000,000 shares
authorized; 7,258,346 shares and 7,226,546
shares issued June 30, 2003 and 2002,
respectively; 7,245,706 shares and 7,213,896
shares outstanding at June 30, 2003 and 2002,
respectively |  |                                            | 73      |          |        |       | 72      |       
|                                     |                                             | Capital in excess of par value                                                                                                                                                                                                           |  |                                            | 20,349  |          |        |       | 20,270  |       
|                                     |                                             | Accumulated deficit                                                                                                                                                                                                                      |  |                                            | (12,967 | )        |        |       | (11,959 | )     
|                                     |                                             | Treasury stock                                                                                                                                                                                                                           |  |                                            | (59     | )        |        |       | (59     | )     
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |  | Total stockholders equity                 |         |          | 7,396  |       |         |        | 8,324  | 
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |      
|                                     |                                             |                                                                                                                                                                                                                                          |  | Total liabilities and stockholders equity | $       | 19,336   |        |       | $       | 21,273 |       
|                                     |                                             |                                                                                                                                                                                                                                          |  |                                            |         |          |        |       |         |       

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

F-3



---



##### 



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

|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |        | 
|------------------------------------------------------------------------ | -------------------------------------------- | - | -------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                         |                                              |   | Years Ended June 30,
|                                                                         |                                              |   |                     
|                                                                         |                                              |   | 2003                 |        | 2002 |   | 2001  
|                                                                         |                                              |   |                      |        |      |   |       
|GROSS REVENUE                                                            |                                              | $ | 57,097               |        |      | $ | 67,988 |        |  | $ | 65,816 |       
|                                                                         | Purchased services and materials, at cost    |   |                      | 21,917 |      |   |        | 29,799 |  |   |        | 26,335 | 
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|NET SERVICE REVENUE                                                      |                                              |   | 35,180               |        |      |   | 38,189 |        |  |   | 39,481 |       
|                                                                         | Direct costs of services and overhead        |   |                      | 28,349 |      |   |        | 31,254 |  |   |        | 32,071 | 
|                                                                         | Selling, general and administrative expenses |   |                      | 5,769  |      |   |        | 6,316  |  |   |        | 6,442  | 
|                                                                         | Non-recurring charge                         |   |                      | 800    |      |   |        |       |  |   |        | 1,320  | 
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|OPERATING INCOME (LOSS)                                                  |                                              |   | 262                  |        |      |   | 619    |        |  |   | (352   | )     
|OTHER
EXPENSE                                                           
|                                                                         | Interest expense                             |   |                      | 166    |      |   |        | 203    |  |   |        | 438    | 
|                                                                         | Income tax expense                           |   |                      | 1,104  |      |   |        | 257    |  |   |        | 240    | 
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|(LOSS) INCOME FROM CONTINUING
OPERATIONS                                 |                                              |   | (1,008               | )      |      |   | 159    |        |  |   | (1,030 | )     
|(LOSS) INCOME FROM DISCONTINUED
OPERATIONS (net of tax)                  |                                              |   |                     |        |      |   | (80    | )      |  |   | 243    |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|NET (LOSS) INCOME                                                        |                                              | $ | (1,008               | )      |      | $ | 79     |        |  | $ | (787   | )     
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|(LOSS) INCOME PER SHARE FROM
CONTINUING OPERATIONS - BASIC
AND DILUTED   |                                              | $ | (.14                 | )      |      | $ | .02    |        |  | $ | (.16   | )     
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|(LOSS) INCOME PER SHARE FROM DISCONTINUED
OPERATIONS - BASIC AND DILUTED |                                              | $ |                     |        |      | $ | (.01   | )      |  | $ | .04    |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|NET (LOSS) INCOME PER SHARE - BASIC
AND DILUTED                          |                                              | $ | (.14                 | )      |      | $ | .01    |        |  | $ | (.12   | )     
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC                    |                                              |   | 7,231                |        |      |   | 6,709  |        |  |   | 6,470  |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       
|WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED                  |                                              |   | 7,231                |        |      |   | 6,998  |        |  |   | 6,470  |       
|                                                                         |                                              |   |                      |        |      |   |        |        |  |   |        |       

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

F-4



---



##### 



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

|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |        |  
|---------------------------------------------------- |  | ----------------------------------------- | ----- | ------ |  | --------- | -- | ---------- |  | -------- | ------ | -------- |  | - | ------- | ------ |  | - | ---- | - |  | ----- | ------ | -
|                                                     |  | Years Ended June 30, 2003, 2002, and 2001
|                                                     |  |                                          
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  | Total
|                                                     |  | Number                                    |       |        |  |           |    | Capital in |  | Accumu-  |        |          |  |   |         | Stock-
|                                                     |  | of                                        |       | Common |  | Excess of |    | lated      |  | Treasury |        | holders
|                                                     |  | Shares                                    |       | Stock  |  | Par Value |    | Deficit    |  | Stock    |        | Equity  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |         
|Balance, June 30, 2000                               |  |                                           | 6,411 |        |  | $         | 64 |            |  | $        | 18,223 |          |  | $ | (11,851 | )      |  | $ | (34  | ) |  | $     | 6,402  |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |        |  
|Common stock issued to ESSOP                         |  |                                           | 64    |        |  |           | 1  |            |  |          | 136    |          |  |   |        |        |  |   |     |   |  |       | 137    |  
|Treasury stock issued to ESSOP                       |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | 916  |   |  |       | 916    |  
|Purchase of Treasury stock                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | (955 | ) |  |       | (955   | )
|Decrease in reserve on guarantee of
real estate debt |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 300     |        |  |   |     |   |  |       | 300    |  
|Net loss                                             |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | (787    | )      |  |   |     |   |  |       | (787   | )
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |        |  
|Balance, June 30, 2001                               |  |                                           | 6,475 |        |  |           | 65 |            |  |          | 18,359 |          |  |   | (12,338 | )      |  |   | (73  | ) |  |       | 6,013  |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |        |  
|Exercise of stock options                            |  |                                           | 392   |        |  |           | 4  |            |  |          | 1,019  |          |  |   |        |        |  |   |     |   |  |       | 1,023  |  
|Treasury stock issued to ESSOP                       |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | 250  |   |  |       | 250    |  
|Purchase of Treasury stock                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | (236 | ) |  |       | (236   | )
|Decrease in reserve on guarantee of
real estate debt |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 300     |        |  |   |     |   |  |       | 300    |  
|Common stock issued to private
placement             |  |                                           | 359   |        |  |           | 3  |            |  |          | 849    |          |  |   |        |        |  |   |     |   |  |       | 852    |  
|Tax benefit from exercise of stock
options           |  |                                           |      |        |  |           |   |            |  |          | 43     |          |  |   |        |        |  |   |     |   |  |       | 43     |  
|Net income                                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 79      |        |  |   |     |   |  |       | 79     |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |        |  
|Balance, June 30, 2002                               |  |                                           | 7,226 |        |  |           | 72 |            |  |          | 20,270 |          |  |   | (11,959 | )      |  |   | (59  | ) |  |       | 8,324  |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |        |  
|Exercise of stock options                            |  |                                           | 32    |        |  |           | 1  |            |  |          | 77     |          |  |   |        |        |  |   |     |   |  |       | 78     |  
|Tax benefit from exercise of
stock options           |  |                                           |      |        |  |           |   |            |  |          | 2      |          |  |   |        |        |  |   |     |   |  |       | 2      |  
|Net loss                                             |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | (1,008  | )      |  |   |     |   |  |       | (1,008 | )
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |        |  
|Balance, June 30, 2003                               |  |                                           | 7,258 |        |  | $         | 73 |            |  | $        | 20,349 |          |  | $ | (12,967 | )      |  | $ | (59  | ) |  | $     | 7,396  |  
|                                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |      |   |  |       |        |  

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

F-5



---



##### 



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

|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |   |      |       |       |  
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------ | --------------------------------------------------- | ------ | -------------------- | --- | ---- | ------ | ------ | ----- | - | ---- | ----- | ----- | -
|                                                       |  |                                                                                          |                                                              |                                                     |        | Years Ended June 30,
|                                                       |  |                                                                                          |                                                              |                                                     |        |                     
|                                                       |  |                                                                                          |                                                              |                                                     |        | 2003                 |     | 2002 |        | 2001  
|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |       
|Cash flows from operating activities                   |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|                                                       |  | Net (loss) income                                                                        |                                                              | $                                                   | (1,008 | )                    |     | $    | 79     |        |       | $ | (787 | )    
|                                                       |  | Adjustments to reconcile net (loss) income to
net cash provided by continuing operations |                                                              |                                                     |        |                      |     |      |        |        |       |   |      |      
|                                                       |  |                                                                                          | Depreciation and amortization                                |                                                     |        | 699                  |     |      |        | 766    |       |   |      | 751   |      
|                                                       |  |                                                                                          | Loss on sale of property and
equipment                       |                                                     |        | 26                   |     |      |        | 72     |       |   |      |      |      
|                                                       |  |                                                                                          | Provision for doubtful accounts receivable                   |                                                     |        | 300                  |     |      |        | 732    |       |   |      | 179   |      
|                                                       |  |                                                                                          | Stock issued to ESSOP                                        |                                                     |        |                     |     |      |        | 250    |       |   |      | 1,053 |      
|                                                       |  |                                                                                          | Increase in tax valuation allowance                          |                                                     |        | 1,097                |     |      |        | 1      |       |   |      | 317   |      
|                                                       |  | Changes in assets and liabilities                                                        |                                                              |                                                     |        |                      |     |      |        |        |       |   |     
|                                                       |  |                                                                                          | Decrease (increase) in accounts receivable                   |                                                     |        | 356                  |     |      |        | (1,734 | )     |   |      | 223   |      
|                                                       |  |                                                                                          | (Increase) decrease in prepaid expenses
and other assets     |                                                     |        | (156                 | )   |      |        | (171   | )     |   |      | 535   |      
|                                                       |  |                                                                                          | (Decrease) increase in accounts payable                      |                                                     |        | (1,266               | )   |      |        | 768    |       |   |      | 29    |      
|                                                       |  |                                                                                          | Decrease in accrued salaries and
vacation                    |                                                     |        | (186                 | )   |      |        | (151   | )     |   |      | (182  | )    
|                                                       |  |                                                                                          | Increase (decrease) in other liabilities                     |                                                     |        | 219                  |     |      |        | 599    |       |   |      | (85   | )    
|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|                                                       |  |                                                                                          |                                                              | Net cash provided by continuing
operations          |        |                      | 81  |      |        |        | 1,211 |   |      |       | 2,033 |  
|                                                       |  |                                                                                          | Changes in net assets/liabilities of discontinued
operations |                                                     |        | (42                  | )   |      |        | (167   | )     |   |      | (393  | )    
|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|                                                       |  |                                                                                          |                                                              | Net cash provided by operating activities           |        |                      | 39  |      |        |        | 1,044 |   |      |       | 1,640 |  
|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|Cash flows used in investing activities                |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|                                                       |  | Purchases of property and equipment                                                      |                                                              |                                                     | (415   | )                    |     |      | (724   | )      |       |   | (732 | )    
|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|Cash flows from financing activities                   |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|                                                       |  | Net borrowing (payment) on bank line of credit                                           |                                                              |                                                     | 266    |                      |     |      | (1,904 | )      |       |   | 50   |      
|                                                       |  | Purchase of treasury stock                                                               |                                                              |                                                     |       |                      |     |      | (236   | )      |       |   | (955 | )    
|                                                       |  | Proceeds from issuance of common stock                                                   |                                                              |                                                     | 78     |                      |     |      | 1,023  |        |       |   |     |      
|                                                       |  | Net proceeds from private placement                                                      |                                                              |                                                     |       |                      |     |      | 852    |        |       |   |     |      
|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|                                                       |  |                                                                                          |                                                              | Net cash provided by (used in) financing
activities |        |                      | 344 |      |        |        | (265  | ) |      |       | (905  | )
|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|Net (decrease) increase in cash and cash equivalents   |  |                                                                                          | (32                                                          | )                                                   |        |                      | 55  |      |        |        | 3     |  
|Cash and cash equivalents at the beginning of
the year |  |                                                                                          | 113                                                          |                                                     |        |                      | 58  |      |        |        | 55    |  
|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  
|Cash and cash equivalents at the end of
the year       |  | $                                                                                        | 81                                                           |                                                     |        | $                    | 113 |      |        | $      | 58    |  
|                                                       |  |                                                                                          |                                                              |                                                     |        |                      |     |      |        |        |       |  

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

F-6



---



##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A SIGNIFICANT ACCOUNTING POLICIES

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

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

Contract accounting: Contracts in process are stated at the lower of
actual cost incurred plus accrued profits or net estimated realizable value of
incurred costs, reduced by progress billings. The Company records income from
major fixed-price contracts, extending over more than one accounting period,
using the percentage-of-completion method. During performance of such
contracts, estimated final contract prices and costs are periodically reviewed
and revisions are made as required. The effects of these revisions are
included in the periods in which the revisions are made. On cost-plus-fee
contracts, revenue is recognized to the extent of costs incurred plus a
proportionate amount of fee earned, and on time-and-material contracts, revenue
is recognized to the extent of billable rates times hours delivered plus
material and other reimbursable costs incurred. Losses on contracts are
recognized when they become known. Disputes arise in the normal course of the
Companys business on projects where the Company is contesting with customers
for collection of funds because of events such as delays, changes in contract
specifications and questions of cost allowability or collectibility. Such
disputes, whether claims or unapproved change orders in the process of
negotiation, are recorded at the lesser of their estimated net realizable value
or actual costs incurred and only when realization is probable and can be
reliably estimated. Claims against the Company are recognized where loss is
considered probable and reasonably determinable in amount. Management reviews
outstanding receivables on a regular basis and assesses the need for reserves
taking into consideration past collection history and other events that bear on
the collectibility of such receivables.

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

Goodwill and other intangible assets:On January 30, 1998, Versar
completed the acquisition of The Greenwood Partnership, P.C. subsequently
renamed (Versar Global Solutions, Inc. or VGSI). The transaction was accounted
for as a purchase. Goodwill recorded as part of the transaction was
approximately $1.1 million. Versar amortized the goodwill related to the
acquisition over 15 years, which was determined to be reasonable based on the
mature business of VGSI. In fiscal year 2003, the Company adopted the
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets which eliminated the amortization of goodwill and intangible
assets expense by approximately $73,000 per year. Currently, the Company has a
carrying value of approximately $776,000 for the acquisition of VGSI which is
now part of the Architecture and Engineering reporting unit. In fiscal year
2003, the Company obtained an independent appraisal in accordance with SFAS No.
142 to determine the fair value of the A&E reporting unit. Based upon this
analysis, it was determined that the fair value of the Architecture and
Engineering reporting unit of approximately $3,338,000 exceeded its carrying
value of approximately $2,467,000.

F-7



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In June 2001, the FASB issued SFAS No. 142, Goodwill and Intangible
Assets, which eliminated the systematic amortization of goodwill. The Company
adopted SFAS No. 142 effective July 1, 2002. Had SFAS No. 142 been effective
July 1, 2001, net income and earnings per share would have been reported as
follows:

|                                                             |                                                              |   |                              |       |      |   |      |      | 
|------------------------------------------------------------ | ------------------------------------------------------------ | - | ---------------------------- | ----- | ---- | - | ---- | ---- | 
|                                                             |                                                              |   | For The Years Ended June 30,
|                                                             |                                                              |   |                             
|                                                             |                                                              |   | 2003                         |       | 2002
|                                                             |                                                              |   |                              |       |     
|                                                             |                                                              |   | (In thousands)              
|Reported net (loss) income applicable
to common shareholders |                                                              | $ | (1,008                       | )     |      | $ | 79   |     
|Add back: goodwill amortization                              |                                                              |   |                             |       |      |   | 73   |     
|Adjusted net (loss) income applicable
to common shareholders |                                                              | $ | (1,008                       | )     |      | $ | 152  |     
|Basic and diluted earnings per share:                        |                                                              |   |                              |       |      |   |      |     
|                                                             | Reported
net (loss) income applicable to common
shareholders |   | $                            | (0.14 | )    |   | $    | 0.01 | 
|Goodwill amortization                                        |                                                              |   |                             |       |      |   | 0.01 |     
|Adjusted net (loss) income applicable to
common shareholders |                                                              | $ | (0.14                        | )     |      | $ | 0.02 |     

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

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

Income taxes:The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of certain assets and liabilities. A
valuation allowance is established, as necessary, to reduce deferred income tax
assets to the amount expected to be realized in future periods.

Discontinued operations:In fiscal year 1998, the Company discontinued a
significant portion of the operations of Science Management Corporation (SMC).
As such, the Company disposed of portions of SMC and wound down the remaining
assets and liabilities. The remaining liability at June 30, 2003 of $319,000
is primarily reserved to wind down the remaining benefit plans of SMC.

Stock-based compensation:The Company accounts for employee stock option
grants using the intrinsic method in accordance with Accounting Principles
Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees and
accordingly associated compensation expense, if any, is measured as the excess
of the underlying stock price over the exercise price on the date of grant.
The Company complies with the disclosure option of Statement of Financial
Accounting Standards (SFAS) No. 123 Accounting
for Stock-Based Compensation, as amended by SFAS No. 148 Accounting for
Stock-Based CompensationTransition and Disclosure which requires pro-forma
disclosure of compensation expense associated with stock options under the fair
value method.

F-8



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Had compensation cost been recognized based on the fair values of options
at the grant dates consistent with the provisions of SFAS No. 123, the
Companys net income (loss) and basic and diluted net income (loss) per common
share would have been changed to the following pro forma amounts:

|                                                                                        |                                 |   |                      |       |      |   |       |       |  
|--------------------------------------------------------------------------------------- | ------------------------------- | - | -------------------- | ----- | ---- | - | ----- | ----- | -
|                                                                                        |                                 |   | Years Ended June 30,
|                                                                                        |                                 |   |                     
|                                                                                        |                                 |   | 2003                 |       | 2002
|                                                                                        |                                 |   |                      |       |     
|                                                                                        |                                 |   | (In thousands)      
|Net (loss) income applicable to common shareholders                                     |                                 | $ | (1,008               | )     |      | $ | 79    |      
|Deduct: Total stock-based compensation expense
determined under fair value based method |                                 |   | (265                 | )     |      |   | (187  | )    
|                                                                                        |                                 |   |                      |       |      |   |       |      
|Pro forma net loss                                                                      |                                 | $ | (1,273               | )     |      | $ | (108  | )    
|                                                                                        |                                 |   |                      |       |      |   |       |      
|Earnings per share:                                                                     |                                 |   |                      |       |      |   |       |      
|                                                                                        | Basic and diluted - as reported |   | $                    | (0.14 | )    |   | $     | 0.01  |  
|                                                                                        | Basic and diluted - pro forma   |   | $                    | (0.18 | )    |   | $     | (0.02 | )
|Weighted average shares:                                                                |                                 |   |                      |       |      |   |       |      
|Weighted average common shares outstanding - basic                                      |                                 |   | 7,231                |       |      |   | 6,709 |      
|Weighted average common shares outstanding - diluted                                    |                                 |   | 7,231                |       |      |   | 6,998 |      

Net (loss) income per share:Basic net (loss) income per common share is
computed by dividing net (loss) income by the weighted average number of common
shares outstanding during the period. Diluted net (loss) income per common
share also includes common equivalent shares outstanding during the period if
it is dilutive. The Companys common equivalent shares consist of stock
options. For fiscal years 2003 and 2001, the assumed exercise of the Companys
outstanding stock options and warrants of 172,000 and 29,000 shares using the
Treasury Stock Method are not included in the calculation as the effect would
be anti-dilutive.

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

|                                                              |  |                      |       |      |  |      |       |  |  |  |       | 
|------------------------------------------------------------- |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                              |  | Years Ended June 30,
|                                                              |  |                     
|                                                              |  | 2003                 |       | 2002 |  | 2001
|                                                              |  |                      |       |      |  |     
|                                                              |  | (In thousands)      
|Weighted average number of shares outstanding
- basic         |  |                      | 7,231 |      |  |      | 6,709 |  |  |  | 6,470 | 
|Effect of assumed exercise of options
(treasury stock method) |  |                      |      |      |  |      | 289   |  |  |  |      | 
|                                                              |  |                      |       |      |  |      |       |  |  |  |       | 
|Weighted average number of shares outstanding
- diluted       |  |                      | 7,231 |      |  |      | 6,998 |  |  |  | 6,470 | 
|                                                              |  |                      |       |      |  |      |       |  |  |  |       | 

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

F-9



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In July 2002, the FASB issued FAS 146, Accounting for Exit or Disposal
Activities. FAS 146 addresses the recognition, measurement and reporting of
costs associated with exit and disposal activities, including restructuring
activities that are currently accounted for pursuant to the guidance set forth
in Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The scope of FAS 146
includes costs related to terminating a contract that is not a capital lease,
costs to consolidate facilities or relocate employees, and certain termination
benefits
provided to employees who are involuntarily terminated. FAS146 is effective
for exit or disposal activities initiated after December 31, 2002. In the
first quarter of fiscal year 2003, the Company accrued $450,000 for the
retirement of two senior executives and $350,000 to consolidate leased facility
costs in accordance with FAS 146.

In May 2003, the FASB issued FAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. FAS 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those
financial statements to recognize changes in fair value or redemption amount,
as applicable, in earnings. FAS 150 requires an issuer to classify the
following financial instruments as liabilities: a) mandatorily redeemable
preferred and common stocks; b) forward purchase contracts that obligate the
issuer to repurchase shares of its stock by transferring assets; c)
freestanding put options that may obligate the issuer to repurchase shares of
its stock by transferring assets; and d) freestanding financial instruments
that require or permit the issuer to settle an obligation by issuing a variable
number of its shares if, at inception, the monetary value of the obligation is
based solely or predominantly on a fixed monetary amount known at inception,
variations in something other than the issuers shares, such as the price of
gold multiplied by a fixed notional amount, or variations inversely related to
changes in the value of the issuers shares, such as a written put option that
can be net share settled. The effect of adopting FAS 150 will be recognized as
a cumulative effect of an accounting change as of the beginning of the period
of adoption. Restatement of prior periods is not permitted. FAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and, with one exception, is effective at the beginning of the first interim
period beginning after June 15, 2003 (July 1, 2003 for calendar year
companies). The Company does not believe there will be a material effect on
its financial condition from the adoption of this standard.

Deferred compensation: The Company permitted employees to defer a portion
of their compensation, during fiscal years 1988 through 1991, to provide for
future annual payments, including interest. Interest is accrued on a monthly
basis at the amount stated in each employees agreement. The Company has
liabilities for deferred compensation of $960,000 and $998,000 at June 30,
2003 and 2002, respectively, included in other long-term
liabilities on the accompanying consolidated balance sheets. Versar purchased
key-man life insurance policies to fund the amounts due under the deferred
compensation agreements. The cash surrender value of the policies, net of
loans, is $315,000 and $326,000 at June 30, 2003 and 2002, respectively.

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

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

NOTE B BUSINESS SEGMENTS

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

F-10



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

|                           |                                              |   |                      |        |      |   |        |        |   |   |        |        |  
|-------------------------- | -------------------------------------------- | - | -------------------- | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                           |                                              |   | Years Ended June 30,
|                           |                                              |   |                     
|                           |                                              |   | 2003                 |        | 2002 |   | 2001  
|                           |                                              |   |                      |        |      |   |       
|                           |                                              |   | (In thousands)      
|NET SERVICE REVENUE        |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                           | Environmental Services                       |   | $                    | 21,480 |      |   | $      | 21,765 |   |   | $      | 24,083 |  
|                           | Architecture/Engineering                     |   |                      | 7,504  |      |   |        | 8,889  |   |   |        | 8,921  |  
|                           | Defense Systems                              |   |                      | 6,196  |      |   |        | 7,535  |   |   |        | 6,477  |  
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                           |                                              | $ | 35,180               |        |      | $ | 38,189 |        |   | $ | 39,481 |       
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       
|OPERATING INCOME/(LOSS)(A) |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                           | Environmental Services                       |   | $                    | 4,098  |      |   | $      | 3,783  |   |   | $      | 4,420  |  
|                           | Architecture/Engineering                     |   |                      | 1,095  |      |   |        | 241    |   |   |        | 797    |  
|                           | Defense Systems                              |   |                      | 1,638  |      |   |        | 2,911  |   |   |        | 2,193  |  
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       
|                           |                                              | $ | 6,831                |        |      | $ | 6,935  |        |   | $ | 7,410  |       
|                           | Selling, general and administrative expenses |   |                      | (5,769 | )    |   |        | (6,316 | ) |   |        | (6,442 | )
|                           | Non-recurring charge                         |   |                      | (800   | )    |   |        |       |   |   |        | (1,320 | )
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       
|OPERATING INCOME (LOSS)    |                                              | $ | 262                  |        |      | $ | 619    |        |   | $ | (352   | )     
|                           |                                              |   |                      |        |      |   |        |        |   |   |        |       

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

|                    |                          |   |                      |       |      |   |        |       | 
|------------------- | ------------------------ | - | -------------------- | ----- | ---- | - | ------ | ----- | 
|                    |                          |   | Years Ended June 30,
|                    |                          |   |                     
|                    |                          |   | 2003                 |       | 2002
|                    |                          |   |                      |       |     
|                    |                          |   | (In thousands)      
|IDENTIFIABLE ASSETS |                          |   |                      |       |      |   |        |      
|                    | Environmental Services   |   | $                    | 8,388 |      |   | $      | 7,780 | 
|                    | Architecture/Engineering |   |                      | 5,735 |      |   |        | 5,346 | 
|                    | Defense Systems          |   |                      | 3,019 |      |   |        | 3,565 | 
|                    | Corporate and Other      |   |                      | 2,194 |      |   |        | 4,582 | 
|                    |                          |   |                      |       |      |   |        |      
|                    |                          | $ | 19,336               |       |      | $ | 21,273 |      
|                    |                          |   |                      |       |      |   |        |      

F-11



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE C ACCOUNTS RECEIVABLE

|                                |                 |   |                |       |      |   |        |       | 
|------------------------------- | --------------- | - | -------------- | ----- | ---- | - | ------ | ----- | 
|                                |                 |   | June 30,      
|                                |                 |   |               
|                                |                 |   | 2003           |       | 2002
|                                |                 |   |                |       |     
|                                |                 |   | (In thousands)
|Billed receivables              |                 |   |                |       |      |   |        |      
|                                | U.S. Government |   | $              | 4,207 |      |   | $      | 4,508 | 
|                                | Commercial      |   |                | 3,353 |      |   |        | 5,037 | 
|Unbilled receivables            |                 |   |                |       |      |   |        |      
|                                | U.S. Government |   |                | 4,713 |      |   |        | 3,478 | 
|                                | Commercial      |   |                | 2,491 |      |   |        | 2,365 | 
|                                |                 |   |                |       |      |   |        |      
|                                |                 |   | 14,764         |       |      |   | 15,388 |      
|Allowance for doubtful accounts |                 |   | (900           | )     |      |   | (868   | )    
|                                |                 |   |                |       |      |   |        |      
|                                |                 | $ | 13,864         |       |      | $ | 14,520 |      
|                                |                 |   |                |       |      |   |        |      

Unbilled receivables represent amounts earned which have not yet been
billed and other amounts which can be invoiced upon completion of fixed-price
contracts, attainment of certain contract objectives, or completion of Federal
and state governments incurred cost audits. Management anticipates that the
June 30, 2003 unbilled receivables will be substantially billed and collected
in fiscal year 2004.

NOTE D PROPERTY AND EQUIPMENT

|                                          |  |               |    |          |       |                |        |      |       |   |        |  
|----------------------------------------- |  | ------------- | -- | -------- | ----- | -------------- | ------ | ---- | ----- | - | ------ | -
|                                          |  | Estimated     |    |          |       |                |        |      |       |  
|                                          |  | Useful Life   |    |          |       |                |        |      |       |  
|                                          |  | in Years      |    | June 30,
|                                          |  |               |    |         
|                                          |  |               |    |          |       | 2003           |        | 2002
|                                          |  |               |    |          |       |                |        |     
|                                          |  |               |    |          |       | (In thousands)
|Furniture and fixtures                    |  |               | 10 |          |       | $              | 760    |      |       | $ | 773    |  
|Equipment                                 |  | 3 to 10       |    |          | 5,206 |                |        |      | 5,114 |  
|Leasehold improvements                    |  | Life of lease |    |          | 1,968 |                |        |      | 1,793 |  
|                                          |  |               |    |          |       |                |        |      |       |   |        |  
|                                          |  |               |    |          |       |                | 7,934  |      |       |   | 7,680  |  
|Accumulated depreciation
and amortization |  |               |    |          |       |                | (5,770 | )    |       |   | (5,206 | )
|                                          |  |               |    |          |       |                |        |      |       |   |        |  
|                                          |  |               |    |          |       | $              | 2,164  |      |       | $ | 2,474  |  
|                                          |  |               |    |          |       |                |        |      |       |   |        |  

Depreciation and amortization of property and equipment included as
expenses in the accompanying Consolidated Statements of Operations was
$699,000, $692,000, and $678,000 for the years ended June 30, 2003, 2002, and
2001, respectively.

Maintenance and repair expenses approximated $289,000, $307,000, and
$303,000 for the years ended June 30, 2003, 2002, and 2001, respectively.

NOTE E RELATED PARTY TRANSACTIONS

In February 2002, the Company advanced approximately $59,000 to an
executive officer of the Company. The advance did not bear interest and was to
be re-paid 18 months from the date of the advance. Such advance has been
included in pre-paid expenses and other current assets in the accompanying
consolidated financial statements. The advance was re-paid in June 2003.

F-12



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE F DEBT

|                                     |  |                |       |      |  |   |       | 
|------------------------------------ |  | -------------- | ----- | ---- |  | - | ----- | 
|                                     |  | June 30,      
|                                     |  |               
|                                     |  | 2003           |       | 2002
|                                     |  |                |       |     
|                                     |  | (In thousands)
|Bank line of credit, Bank of America |  | $              | 2,125 |      |  | $ | 1,859 | 
|                                     |  |                |       |      |  |   |       | 
|Total long-term debt                 |  | $              | 2,125 |      |  | $ | 1,859 | 
|                                     |  |                |       |      |  |   |       | 

Versars line of credit with the Bank of America (Bank) provides for
advances up to $4,500,000 based on qualifying receivables. Interest on the
borrowings is based on 30 day London Interbank Offered Rate (LIBOR) plus three
hundred basis points (4.04% at June 30, 2003). A commitment fee of 1/4% on the
unused portion of the line of credit is also charged. The line is guaranteed
by the Company and each subsidiary individually and is collectively secured by
accounts receivable, equipment and intangibles, plus all insurance policies on
property constituting collateral. Unused borrowing availability at June 30,
2003 was approximately $2,375,000. In June 2003, the Companys line of credit
was reduced to $4,500,000 and the due date accelerated to September 30, 2003.
There are no financial covenants as of June 30, 2003.

On September 16, 2003, the Company received a firm commitment from United
Bank to provide the Company up to a $5,000,000 line of credit for working
capital purposes which will be secured by qualifying receivables. Interest on
the line of credit is based upon prime plus one and one half percent. Advances
on the line of credit are due on November 30, 2005. The Company expects to
close on the line of credit on or before September 30, 2003. The loan will
have certain covenants related to the maintenance of financial ratios. The
Company expects that it will be able to comply with those ratios. Management
believes that cash generated by operations and borrowings available from the
new line of credit will be adequate to meet its working capital needs for
fiscal year 2004.

NOTE G NEW EQUITY

In June 2002, the Company sold 359,183 shares of its common stock at $2.78
per share to an institutional investor in a private placement. The Company
also issued warrants to the institutional investor to purchase 359,183 shares
of Common Stock, one-half with an exercise price of $3.48, which expired on
October 14, 2002. The other half has an exercise price of $4.00, and expires
on June 14, 2007. The Company also issued warrants to an investment banking
firm to purchase 26,939 shares of common stock with an exercise price of $3.48,
which expire on June 14, 2007.

The securities sold in the private placement were not registered under the
Securities Act of 1933 which could not be offered or sold in the United States
absent registration or an applicable exemption from the
registration requirements. In July 2002, the Company filed a registration
statement on Form S-3 with the Securities and Exchange Commission to register
the resale of the shares of common stock sold in the private placement as well
as the shares of common stock issuable upon exercise of the related warrants.

NOTE H STOCK OPTIONS

In November 2002, the stockholders approved the Versar, Inc. 2002 Stock
Incentive Plan (the 2002 Plan). The 2002 Plan provides for the grant of
options, restricted stock and other types of stock-based awards to any
employee, Service Provider or director to whom a grant is approved from time to
time by the Companys Compensation Committee. A Service Provider is defined
for purposes of the 2002 Plan as an individual who is neither an employee nor a
director of the Company or any of its Affiliates but who provides the Company
or one of its Affiliates substantial and important services. The aggregate
number of shares of the Companys Common Stock that may be issued upon exercise
of options

F-13



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

or granted as restricted stock or other stock-based awards under the 2002 Plan
is 700,000. Grants of restricted stock, performance equity awards, options and
stock appreciation rights in any one fiscal year to any one participant may not
exceed 250,000 shares. The maximum amount of compensation that may be received
by any one employee with respect to performance unit grants in any one fiscal
year may not exceed $250,000.

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

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

Under the 1992 Plan, options through November 2002, were granted to key
employees at the fair market value on the date of grant and become exercisable
during the five-year period from the date of the grant at 20% per year.
Certain unexercised options are cancelled on the tenth anniversary of the grant
under the 1992 Plans. The 1992 plan has expired and no additional options may
be granted. The Company will continue to maintain the plan until all
previously granted options have been exercised or expired.

Options under the Stock Option 2002, 1996, and 1992 Plans are as follows:

|                             |                               |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   |  | 
|---------------------------- | ----------------------------- |  | -------------------------------------- | ---- | ------------ | - | ----- | ----- |  | -- | -- | - | ----- | ----- |  | - | ----- | ------ | - |  | 
|                             |                               |  | Optioned                               |      | Option Price |   |       |       | 
|                             |                               |  | Shares                                 |      | Per Share    |   | Total
|                             |                               |  |                                        |      |              |   |      
|                             |                               |  | (In thousands, except per share price)
|Outstanding at June 30, 2000 |                               |  | 1,591                                  |      |              | $ | 1.750 |       |  | to |    | $ | 5.375 |       |  | $ | 4,679 |       
|                             | Granted                       |  |                                        | 35   |              |   |       | 1.938 |  |    | to |   |       | 2.060 |  |   |       | 69     |  
|                             | Cancelled                     |  |                                        | (345 | )            |   |       | 1.750 |  |    | to |   |       | 5.375 |  |   |       | (1,059 | )
|                             |                               |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   | 
|Outstanding at June 30, 2001 |                               |  | 1,281                                  |      |              | $ | 1.750 |       |  | to |    | $ | 5.375 |       |  | $ | 3,689 |       
|                             | Granted                       |  |                                        | 40   |              |   |       | 2.050 |  |    | to |   |       | 3.750 |  |   |       | 120    |  
|                             | Exercised                     |  |                                        | (282 | )            |   |       | 1.750 |  |    | to |   |       | 3.940 |  |   |       | (729   | )
|                             | Cancelled                     |  |                                        | (69  | )            |   |       | 1.750 |  |    | to |   |       | 4.500 |  |   |       | (225   | )
|                             |                               |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   | 
|Outstanding at June 30, 2002 |                               |  | 970                                    |      |              | $ | 1.750 |       |  | to |    | $ | 5.375 |       |  | $ | 2,855 |       
|                             | Granted                       |  |                                        | 492  |              |   |       | 1.810 |  |    | to |   |       | 2.870 |  |   |       | 1,028  |  
|                             | Exercised                     |  |                                        | (8   | )            |   |       | 2.375 |  |    | to |   |       | 2.400 |  |   |       | (18    | )
|                             | Cancelled                     |  |                                        | (50  | )            |   |       | 1.750 |  |    | to |   |       | 4.500 |  |   |       | (124   | )
|                             | Reclassified to non-qualified |  |                                        | (157 | )            |   |       | 1.750 |  |    | to |   |       | 5.375 |  |   |       | (468   | )
|                             |                               |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   | 
|Outstanding at June 30, 2003 |                               |  | 1,247                                  |      |              |   | 1.750 |       |  | to |    |   | 4.500 |       |  | $ | 3,273 |       
|                             |                               |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |        |   | 

F-14



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

At June 30, 2003, 2002, and 2001, options aggregating 804,000, 807,000 and
943,000 shares were exercisable under the 2002, 1996 and 1992 Plans.

Participants in the 1987 Plan include employees, independent contractors,
and, in certain circumstances, directors of the Company. This Plan has
expired and no additional options may be granted under its terms. The Company
will continue to maintain the 1987 Plan until all options previously granted
under it have been exercised or have expired without exercise. Non-qualified
options were also granted under the 2002, 1996, and 1992 plans.

Total non-qualified stock options are as follows:

|                             |                       |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |      |   |  | 
|---------------------------- | --------------------- |  | -------------------------------------- | ---- | ------------ | - | ----- | ----- |  | -- | -- | - | ----- | ----- |  | - | ----- | ---- | - |  | 
|                             |                       |  | Optioned                               |      | Option Price |   |       |       | 
|                             |                       |  | Shares                                 |      | Per Share    |   | Total
|                             |                       |  |                                        |      |              |   |      
|                             |                       |  | (In thousands, except per share price)
|Outstanding at June 30, 1999 |                       |  | 304                                    |      |              | $ | 2.375 |       |  | to |    | $ | 4.750 |       |  | $ | 877   |     
|                             | Cancelled             |  |                                        | (5   | )            |   |       | 2.437 |  |    | to |   |       | 3.563 |  |   |       | (15  | )
|                             |                       |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |      |   | 
|Outstanding at June 30, 2000 |                       |  | 299                                    |      |              | $ | 2.375 |       |  | to |    | $ | 4.750 |       |  | $ | 862   |     
|                             |                       |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |      |   | 
|Outstanding at June 30, 2001 |                       |  | 299                                    |      |              | $ | 2.375 |       |  | to |    | $ | 4.750 |       |  | $ | 862   |     
|                             | Granted               |  |                                        | 71   |              |   |       | 1.750 |  |    | to |   |       | 6.500 |  |   |       | 318  |  
|                             | Exercised             |  |                                        | (110 | )            |   |       | 2.375 |  |    | to |   |       | 4.750 |  |   |       | (295 | )
|                             | Cancelled             |  |                                        | (8   | )            |   |       | 2.500 |  |    | to |   |       | 3.563 |  |   |       | (23  | )
|                             |                       |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |      |   | 
|Outstanding at June 30, 2002 |                       |  | 252                                    |      |              | $ | 1.750 |       |  | to |    | $ | 6.500 |       |  | $ | 862   |     
|                             | Granted               |  |                                        | 129  |              |   |       | 1.810 |  |    | to |   |       | 1.880 |  |   |       | 235  |  
|                             | Exercised             |  |                                        | (24  | )            |   |       | 1.750 |  |    | to |   |       | 2.875 |  |   |       | (60  | )
|                             | Cancelled             |  |                                        | (16  | )            |   |       | 2.375 |  |    | to |   |       | 3.940 |  |   |       | (50  | )
|                             | Reclassified from ISO |  |                                        | 157  |              |   |       | 1.750 |  |    | to |   |       | 5.375 |  |   |       | 468  |  
|                             |                       |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |      |   | 
|Outstanding at June 30, 2003 |                       |  | 498                                    |      |              |   | 1.750 |       |  | to |    |   | 6.500 |       |  | $ | 1,455 |     
|                             |                       |  |                                        |      |              |   |       |       |  |    |    |   |       |       |  |   |       |      |   | 

Non-Qualified stock options of 342,000, 222,000, and 299,000 shares were
exercisable at June 30, 2003, 2002, and 2001, respectively.

The Company accounts for employee stock option grants using the intrinsic
method in accordance with Accounting Principles Board (APB) Opinion No. 25
Accounting for Stock Issued to Employees and accordingly associated
compensation expense, if any, is measured as the excess of the underlying
stock price over the exercise price on the date of grant. The Company complies
with the disclosure option of Statement of Financial Accounting Standards
(SFAS) No. 123 Accounting for Stock-Based Compensation, as amended by SFAS
No. 148 Accounting for Stock-Based Compensation - Transition and Disclosure
which requires pro-forma disclosure of compensation expense associated with
stock options under the fair value method.

F-15



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|                                       |             |  |                                       |        |      |  |      |      |   |  |   |        |  
|-------------------------------------- | ----------- |  | ------------------------------------- | ------ | ---- |  | ---- | ---- | - |  | - | ------ | -
|                                       |             |  | 2003                                  |        | 2002 |  | 2001
|                                       |             |  |                                       |        |      |  |     
|                                       |             |  | (In thousands, except per share data)
|Net (Loss) Income:                     |             |  |                                       |        |      |  |      |      |   |  |   |       
|                                       | As Reported |  | $                                     | (1,008 | )    |  | $    | 79   |   |  | $ | (787   | )
|                                       | Pro Forma   |  |                                       | (1,273 | )    |  |      | (108 | ) |  |   | (921   | )
|Net (Loss) Income Per Share
- Basic:   |             |  |                                       |        |      |  |      |      |   |  |   |       
|                                       | As Reported |  | $                                     | (.14   | )    |  | $    | .01  |   |  | $ | (.12   | )
|                                       | Pro Forma   |  |                                       | (.18   | )    |  |      | (.02 | ) |  |   | (.14   | )
|Net (Loss) Income Per Share
- Diluted: |             |  |                                       |        |      |  |      |      |   |  |   |       
|                                       | As Reported |  | $                                     | (.14   | )    |  | $    | .01  |   |  | $ | (.12   | )
|                                       | Pro Forma   |  |                                       | (.18   | )    |  |      | (.02 | ) |  |   | (  .14 | )

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

The weighted average fair value of options granted was $2.69, $2.59 and
$0.93 during 2003, 2002 and 2001, respectively. The fair value is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 2003, 2002 and 2001:
expected volatility of 60.5%, 88.7% and 47% for 2003, 2002 and 2001,
respectively; risk-free interest rate of 4.70%, 4.57% and 4.97% for 2003, 2002
and 2001, respectively; and expected lives of five years after the grant date.

NOTE I INCOME TAXES

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

|         |         |                     |       |                      |       |      |     |      |   |   |     |     |   | 
|-------- | ------- | ------------------- | ----- | -------------------- | ----- | ---- | --- | ---- | - | - | --- | --- | - | 
|         |         |                     |       | Years Ended June 30,
|         |         |                     |       |                     
|         |         |                     |       | 2003                 |       | 2002 |     | 2001
|         |         |                     |       |                      |       |      |     |     
|         |         |                     |       | (In thousands)      
|Current  |         |                     |       |                      |       |      |     |      |   |   |     |    
|         | Federal |                     | $     |                     |       |      | $   |     |   |   | $   |    |  
|         | State   |                     |       | 7                    |       |      |     | 206  |   |   |     | 73  |  
|Deferred |         |                     |       |                      |       |      |     |      |   |   |     |    
|         | Federal |                     |       |                     |       |      |     | 1    |   |   |     | 283 |  
|         | State   |                     |       |                     |       |      |     |     |   |   |     | 34  |  
|         |         | Valuation Allowance |       |                      | 1,097 |      |     |      |  |   |     |     |  | 
|         |         |                     |       |                      |       |      |     |      |   |   |     |     |   | 
|         |         | $                   | 1,104 |                      |       | $    | 207 |      |   | $ | 390 |    
|         |         |                     |       |                      |       |      |     |      |   |   |     |     |   | 

F-16



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

|                       |                                            |                           |        |          |       |          |        |       |       | 
|---------------------- | ------------------------------------------ | ------------------------- | ------ | -------- | ----- | -------- | ------ | ----- | ----- | 
|                       |                                            |                           |        | June 30, |       | June 30,
|                       |                                            |                           |        | 2003     |       | 2002    
|                       |                                            |                           |        |          |       |         
|Deferred Tax Assets:   |                                            |                           |        |          |       |          |        |      
|                       | Employee benefits                          |                           | $      | 654      |       |          | $      | 684   |      
|                       | Accrued warranty costs                     |                           |        | 116      |       |          |        | 184   |      
|                       | Bad debt reserves                          |                           |        | 359      |       |          |        | 347   |      
|                       | All other reserves                         |                           |        | 380      |       |          |        | 100   |      
|                       | Discontinued operations reserves           |                           |        | 127      |       |          |        | 143   |      
|                       | Alternative minimum tax credits            |                           |        | 117      |       |          |        | 117   |      
|                       | Net operating losses                       |                           |        | 1,668    |       |          |        | 1,646 |      
|                       | Net operating losses of purchased
business |                           |        | 663      |       |          |        | 1,000 |      
|                       | State tax net operating losses             |                           |        | 436      |       |          |        | 436   |      
|                       | Depreciation                               |                           |        | 180      |       |          |        | 184   |      
|                       | Other                                      |                           |        | 14       |       |          |        | 14    |      
|                       |                                            |                           |        |          |       |          |        |      
|                       |                                            | Total Deferred Tax Assets |        |          | 4,714 |          |        |       | 4,855 | 
|Valuation Allowance    |                                            |                           | (4,112 | )        |       |          | (3,156 | )    
|                       |                                            |                           |        |          |       |          |        |      
|Net Deferred Tax Asset |                                            | $                         | 602    |          |       | $        | 1,699  |      
|                       |                                            |                           |        |          |       |          |        |      

Realization of deferred tax assets is dependent upon generation of
sufficient income by Versar and in some cases sufficient income in specific
jurisdictions and by specific office locations. At June 30, 2003, the Company
had $117,000 of alternative minimum tax credit carryforwards which can be
carried forward indefinitely. The alternative minimum tax credit carryforward
may be used to offset regular tax liability in future years to the extent it
exceeds the alternative minimum tax liability. These carryforwards are
reflected as deferred tax assets. The Company has established a valuation
allowance to state the deferred tax assets at amounts expected to be realized
in future periods.

SMC has net operating loss carryforwards of approximately $8.5 million for
federal income tax purposes, which will expire in the years 2003 through 2012.
Due to the substantial changes in SMCs ownership, there are annual limitations
on the amount of the carryforwards that can be utilized. The utilization of
the net operating losses is limited to approximately $300,000 per year for the
eight remaining years. If the net operating losses are utilized, they will
favorably impact the results of operations as the related deferred tax asset is
fully reserved.

F-17



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

|                                                   |  |                      |       |      |  |      |     |   |  |   |      |  
|-------------------------------------------------- |  | -------------------- | ----- | ---- |  | ---- | --- | - |  | - | ---- | -
|                                                   |  | Years Ended June 30,
|                                                   |  |                     
|                                                   |  | 2003                 |       | 2002 |  | 2001
|                                                   |  |                      |       |      |  |     
|                                                   |  | (In thousands)      
|Expected provision at federal
statutory rate       |  | $                    | 51    |      |  | $    | 97  |   |  | $ | (135 | )
|Change in valuation allowance                      |  |                      | 1,007 |      |  |      | 100 |   |  |   | 421  |  
|State income tax expense                           |  |                      | 5     |      |  |      | 11  |   |  |   | 68   |  
|Permanent items                                    |  |                      | 44    |      |  |      | (38 | ) |  |   | 56   |  
|Tax effect of non-qualified stock
option exercised |  |                      | 2     |      |  |      | 43  |   |  |   |     |  
|Other                                              |  |                      | (5    | )    |  |      | (6  | ) |  |   | (20  | )
|                                                   |  |                      |       |      |  |      |     |   |  |   |      |  
|                                                   |  | $                    | 1,104 |      |  |      | 207 |   |  | $ | 390  |  
|                                                   |  |                      |       |      |  |      |     |   |  |   |      |  

Income taxes paid for the years ended June 30, 2003, 2002, and 2001 were
$78,000, $121,000, and $105,000, respectively.

NOTE J EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN

The Company has historically maintained an Employee Savings and Stock
Ownership Plan (ESSOP) for the benefit of its employees and those of its
subsidiaries. The plan included an Employee Stock Ownership Plan (ESOP) and an
Employee Savings Plan (401(k) Plan). The plan permits voluntary participation
in the 401(k) Plan upon employment. All employees with at least 500 hours of
service are eligible to participate in the ESOP.

Contributions to the ESOP are made at the discretion of the Company in the
form of the Companys stock or cash, which is invested by the plans Trustees
in the Companys stock. No contributions were made to the plan since fiscal
year 1993. The Company received approval from the Internal Revenue Service to
terminate the ESOP effective December 31, 2002. The plan assets will be
distributed to the plan participants and the plan will be closed.

The Employee Savings Plan was adopted in accordance with Section 401(k) of
the Internal Revenue Code. Under the plan, participants may elect to defer up
to 15% of their salary through contributions to the plan, which are invested in
selected mutual funds or used to buy insurance. The Company matches qualified
contributions with a contribution of 100% of each employees contribution up to
4% of the employees salary. This contribution may be in the Companys stock or
cash. In fiscal year 2003, the Company made cash matching contributions of
approximately $630,000. In fiscal year 2002, the Company matched $293,000 in
stock and $369,000 in cash for a total of $662,000. In fiscal year 2001, the
Company made stock matching contributions approximated at $1,067,000.
Effective July 1, 2003, the Company decreased the qualified matching
contributions from 4% to 2%.

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

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

F-18



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

GEOMET, a wholly-owned subsidiary of Versar, has a profit-sharing
retirement plan for the benefit of its employees. Contributions are made at
the discretion of GEOMETs Board of Directors. There were no contributions
made in fiscal years 2003 and 2002. Contributions of approximately $35,000
were made in fiscal year 2001. Vesting occurs over time, such that an employee
is 100% vested after seven years of participation.

NOTE K COMMITMENTS AND CONTINGENCIES

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

The Company leases approximately 191,000 square feet of office space, as
well as data processing and other equipment under agreements expiring through
2020. Minimum future obligations under operating leases are as follows:

|                      |  |                |        | 
|--------------------- |  | -------------- | ------ | 
|                      |  | Total         
|Years Ending June 30, |  | Amount        
|                      |  |               
|                      |  | (In thousands)
|2004                  |  | $              | 3,434  | 
|2005                  |  |                | 3,111  | 
|2006                  |  |                | 2,174  | 
|2007                  |  |                | 1,901  | 
|2008                  |  |                | 1,796  | 
|2009 and thereafter   |  |                | 2,834  | 
|                      |  |                |        | 
|                      |  | $              | 15,250 | 
|                      |  |                |        | 

Certain of the lease payments are subject to adjustment for increases in
utility costs and real estate taxes. Total office rental expense approximated
$2,943,000, $2,867,000 and $2,637,000, for 2003, 2002 and 2001, respectively.

Legal Proceedings

In August 1997, Versar entered into a contract with the Trustees for the
Enviro-Chem Superfund Site (the Superfund Site), which provided that, based
upon an existing performance specification, Versar would refine the design, and
construct and operate a soil vapor extraction system. During the performance
of the contract, disputes arose between Versar and the Trustees regarding the
scope of work. Eventually,
Versar was terminated by the Trustees for convenience. The Trustees then
failed to pay certain invoices and retainages due Versar.

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

F-19



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

breach of contract and breach of warranty with respect to the remediation
contract and asked for a declaratory judgment on a number of the previously
stated claims.

On July 12, 2001, the Federal District Court in Pennsylvania granted
defendants motion to transfer the Pennsylvania lawsuit and consolidate the two
legal actions in Indiana. The Company filed an answer and counterclaim to the
Indiana lawsuit. The plaintiffs and third-party defendants filed Motions to
Dismiss the Companys counterclaim. The court granted the motions in part and
denied them in part. Versar amended its answer and counterclaim. In the
meantime, plaintiffs filed a Motion for Partial Summary Judgment which the
Judge granted in part and denied in part. The Judge held that certain
agreements entered into by the parties prevented Versar from recovering certain
amounts under its counter claim but that Versar could pursue its claim for
fraud in other areas. Written and oral discovery has commenced and is expected
to be completed by the end of 2003. Trial is scheduled for September 2004.
Based upon discussions with outside counsel, management does not believe that
the ultimate resolution under the Trustees lawsuit will have a materially
adverse effect on the Companys consolidated financial condition and results of
operations.

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

NOTE L CUSTOMER INFORMATION

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

|                                     |                       |   |                      |        |      |   |        |        |  |   |        |        | 
|------------------------------------ | --------------------- | - | -------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                     |                       |   | Years Ended June 30,
|                                     |                       |   |                     
|                                     |                       |   | 2003                 |        | 2002 |   | 2001  
|                                     |                       |   |                      |        |      |   |       
|                                     |                       |   | (In thousands)      
|U.S. Department of Defense           |                       | $ | 24,343               |        |      | $ | 38,576 |        |  | $ | 38,157 |       
|U.S. Environmental Protection Agency |                       |   | 3,312                |        |      |   | 3,495  |        |  |   | 2,734  |       
|Other U.S. Government agencies       |                       |   | 7,644                |        |      |   | 3,906  |        |  |   | 5,202  |       
|                                     |                       |   |                      |        |      |   |        |        |  |   |        |       
|                                     | Total U.S. Government |   | $                    | 35,299 |      |   | $      | 45,977 |  |   | $      | 46,093 | 
|                                     |                       |   |                      |        |      |   |        |        |  |   |        |       

The Companys major contracts with the Department of Defense generated
revenues of approximately $11,206,000, $20,353,000 and $23,150,000 in fiscal
years 2003, 2002 and 2001, respectively.

F-20



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##### 



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE M QUARTERLY FINANCIAL INFORMATION(UNAUDITED)

Quarterly financial information for fiscal years 2003 and 2002 is as
follows (in thousands, except per share amounts):

|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |   |  |   |        |  |  |   |        |  |  |   |        |  
|------------------------------------------------------- |  | ---------------- | ------ | ---------------- |  | ------ | ------ | ------- |  | ------ | ------ | ------ |  | ------ | ------ | ------- |  | - | ------ | - |  | - | ------ |  |  | - | ------ |  |  | - | ------ | -
|                                                        |  | Fiscal Year 2003 |        | Fiscal Year 2002
|                                                        |  |                  |        |                 
|Quarter ending                                          |  | Jun 30           |        | Mar 31           |  | Dec 31 |        | Sept 30 |  | Jun 30 |        | Mar 31 |  | Dec 31 |        | Sept 30
|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |        
|Gross Revenue                                           |  | $                | 14,419 |                  |  | $      | 13,366 |         |  | $      | 15,428 |        |  | $      | 13,884 |         |  | $ | 17,486 |   |  | $ | 17,225 |  |  | $ | 18,275 |  |  | $ | 15,002 |  
|Net Service Revenue                                     |  |                  | 9,042  |                  |  |        | 8,843  |         |  |        | 9,271  |        |  |        | 8,024  |         |  |   | 9,703  |   |  |   | 9,339  |  |  |   | 10,244 |  |  |   | 8,903  |  
|Operating (loss) income                                 |  |                  | 564    |                  |  |        | 114    |         |  |        | 553    |        |  |        | (969   | )       |  |   | (531   | ) |  |   | 182    |  |  |   | 1,134  |  |  |   | (166   | )
|Net (loss) income                                       |  | $                | 519    |                  |  | $      | (455   | )       |  | $      | 329    |        |  | $      | (1,401 | )       |  | $ | (425   | ) |  | $ | 91     |  |  | $ | 661    |  |  | $ | (248   | )
|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |   |  |   |        |  |  |   |        |  |  |   |        |  
|Net (loss) income per
share - diluted                   |  | $                | 0.07   |                  |  | $      | (0.06  | )       |  | $      | 0.05   |        |  | $      | (0.19  | )       |  | $ | (0.06  | ) |  | $ | 0.01   |  |  | $ | 0.09   |  |  | $ | (0.04  | )
|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |   |  |   |        |  |  |   |        |  |  |   |        |  
|Weighted average number of
shares outstanding -
diluted |  |                  | 7,497  |                  |  |        | 7,227  |         |  |        | 7,247  |        |  |        | 7,227  |         |  |   | 6,901  |   |  |   | 7,195  |  |  |   | 7,006  |  |  |   | 6,476  |  
|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |   |  |   |        |  |  |   |        |  |  |   |        |  

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

F-21



---



##### 



Schedule II

VERSAR, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts

|                                 |  |              |           |            |  |            |           |      |  |            |          |   |  |  |           | 
|-------------------------------- |  | ------------ | --------- | ---------- |  | ---------- | --------- | ---- |  | ---------- | -------- | - |  |  | --------- | 
|                                 |  |              |           |            |  | ADDITIONS  |           |      |  |            |          |   |  | 
|                                 |  | BALANCE AT   |           | CHARGED TO |  |            |           |      |  | BALANCE AT
|                                 |  | BEGINNING OF |           | COSTS AND  |  |            |           |      |  | END OF    
|                                 |  | YEAR         |           | EXPENSES   |  | CHARGE OFF |           | YEAR
|                                 |  |              |           |            |  |            |           |     
|ALLOWANCE FOR DOUBTFUL
ACCOUNTS  |  |              |           |            |  |            |           |      |  |            |          |   |  |  |           | 
|2001                             |  |              | 548,404   |            |  |            | 179,017   |      |  |            | (405,733 | ) |  |  | 321,688   | 
|2002                             |  |              | 321,688   |            |  |            | 732,173   |      |  |            | (185,610 | ) |  |  | 868,251   | 
|2003                             |  |              | 868,251   |            |  |            | 300,137   |      |  |            | (267,996 | ) |  |  | 900,392   | 
|DEFERRED TAX VALUATION
ALLOWANCE |  |              |           |            |  |            |           |      |  |            |          |   |  |  |           | 
|2001                             |  |              | 2,499,000 |            |  |            | 557,000   |      |  |            |         |   |  |  | 3,056,000 | 
|2002                             |  |              | 3,056,000 |            |  |            | 100,000   |      |  |            |         |   |  |  | 3,156,000 | 
|2003                             |  |              | 3,156,000 |            |  |            | 1,097,000 |      |  |            | (141,000 | ) |  |  | 4,112,000 | 

F-22