##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549



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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, 2000 |  | Commission File
No. 1-9309



(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

|    |  |   |  |   
|--- |  | - |  | --
|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 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. ( )

The aggregate market value of the voting stock held by
non-affiliates of the registrant as of September 1, 2000 was
approximately $7,176,808.

The number of shares of Common Stock outstanding as of September
1, 2000 was 6,402,048.

The Exhibit Index required by 17 CFR Part 240.0-3(c) is located
on Pages 18 through 21 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 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III
hereof.





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TABLE OF CONTENTS



|                                         |                                                                                                              |  |  |  |  |  |  | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I                                  
|                                         | Item 1.  Business                                                                                           
|                                         | Item 2.  Properties                                                                                         
|                                         | Item 3.  Legal Proceedings                                                                                  
|                                         | Item 4.  Submission of Matters to a Vote of Security Holders                                                
|PART II                                 
|                                         | Item 6. Selected Financial Data                                                                             
|                                         | Item 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations              
|                                         | Item 8.  Financial Statements and Supplementary Data                                                        
|                                         | Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial                Disclosure
|PART III                                
|                                         | Item 11.  Executive Compensation                                                                            
|                                         | Item 12.  Security Ownership of Certain Beneficial Owners and Management                                    
|                                         | Item 13.  Certain Relationships and Related Transactions                                                    
|PART IV                                 
|                                         | SIGNATURES                                                                                                  
|                                         | Schedule II                                                                                                 
|Revolving Promissory Note               
|Employment Agreement, Benjamin M. Rawls 
|Employment Agreement, Theodore M. Prociv
|Financial Data Schedule                 



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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, the possible impact of current and future claims against the Company
based upon negligence and other theories of liability, and the possibility of
the Company making acquisitions during the next 12 to 18 months.
Forward-looking statements involve numerous risks and uncertainties that could
cause actual results to differ materially, including, but not limited to, the
possibilities that the demand for the Companys services may decline as a
result of possible changes in general and industry specific economic conditions
and the effects of competitive services and pricing; the ability 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
ability to attract and retain key professional employees; and such other risks
and uncertainties as are described in reports and other documents filed by the
Company from time to time with the Securities and Exchange Commission.

Versar, Inc. (Versar or the Company) is a diversified international
professional services firm, helping clients in the private and public sectors
enhance their performance while reducing costs, conserving energy, and
achieving environmental excellence. Versar combines science, technology, and
people with specialized skills to identify customer needs to develop and
implement solutions that improve our customers bottom line while focusing on
the economics of alternate solutions to their environmental problems. We do
this by integrating our environmental and engineering expertise into the design
of facilities, systems, and equipment. This approach improves our customers
operating performance, conserves resources, and reduces emissions and waste
generation. This ultimately increases productivity and profitability while
protecting worker health and safety and our environment.

Versars major business areas include: (1) environmental, health and
safety services; (2) energy conservation services; and (3) industrial and
public infrastructure services. As is indicated below, certain of these
business areas have evolved as a result of significant expansion of our
personal protection equipment business and the integration of the business of
Versar Greenwood, Inc. (VGI) into the Versar corporate group and represent a
combination of VGIs services with Versars traditional service offerings.

Environmental, Health and Safety Services

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

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

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These protective suits will be used to recover, render safe, store and dispose
of unexploded chemical and biological weapons. GEOMET is also expecting to do
the systems integration, inspection and testing for the production on an
Improved Toxic Agent Protective (ITAP) suit in fiscal year 2001.

GEOMET is a commercial supplier to remedial action contractors and
emergency responders of PPE specially qualified for chemical protection.
Driven in part by the sarin nerve gas attack on the Tokyo subway in 1995,
Versar has significantly expanded this divisions offering of services to
local, state, United States, and foreign governments in support of
counter-terrorism. Since fiscal year 1998 the Company has been selling
protective suits to the National Guard as part of the nations
counter-terrorism civil defense program. Management believes the
opportunities for commercial application of its products and services will
continue to grow in this area. In FY2000 we expanded our laboratory
capabilities to include biological agents and to broaden our service capability
in Homeland Defense. We now offer our PPE products and services through the
Internet at nbcprotect.com and are working with foreign manufacturers and
vendors to expand our capabilities in this emerging market.

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

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

Versar provides the full range of services in remediation/corrective
action from site investigation, remedial design, and construction, operation
and maintenance (O&M) of remedial systems. A major accomplishment of the
Company in fiscal year 1998 was the award of a Worldwide Environmental Remedial
Action Services Contract (RAC) to support the Air Force Center of Environmental
Excellence. This contract has an estimated value of $40M over 5 years and
recognizes Versar as a remedial construction contractor. In fiscal year 2000,
Versar booked about $13.8M in new orders for remedial construction projects
under this contract. We have work-in-progress at Castle, Beale, Pease, Lowry,
and Plattsburgh air force bases. Versar brings to its customers innovative
solutions to cleanup that are cost effective and permanent. For example,
Versar has successfully demonstrated the effectiveness of a passive reactive
wall consisting of iron fillings placed in a trench to remove halogenated
organic compounds from groundwater at Lowry Air Force Base. This eliminated
the need to pump and treat the groundwater. Versar is expected to construct
the full scale remedy at Lowry AFB under our RAC contract; however, the project
is dependent on a final decision by the Air Force and available funding.

Under an existing contract with the Air Force Armstrong Labs, Versar is
separating reusable materials from bomb range residues, used targets, and other
scrap materials at Nellis Air Force Base. Versar is brokering reusable
material to aluminum processors and scrap metal smelters and reimbursing the
government for the savings.

Consulting/Engineeringincludes the full range of scientific, engineering
and program management services addressing prevention, detection, control,
management, and cleanup of toxic substances and hazardous waste releases to the
environment. Versar emphasizes innovation in process and technology
application to achieve better results more quickly and at less cost in todays
highly competitive market. The addition of VGI to the Versar team provides
Versar with specialized skills in technology and the design of industrial
infrastructure to help our clients
build environmental performance into their plant operations and improve
their bottom line. Our objective is to provide a design that helps

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our
clients become more active in preventing pollution by applying innovative and
cost-effective approaches to achieving sustainable growth while maintaining
compliance and taking corrective actions to cleanup past problems.

Todays business challenges require viewing environmental management as an
integral part of the day to day operations so that informed decisions can be
made based on the economics of alternate solutions and their impact on
productivity and profitability. Versar helps its customers manage compliance
as part of operations and encourages recognition that pollution prevention and
waste minimization are necessary parts of the long-term solution to local and
national environmental challenges. This approach recognizes that there is
competition for limited resources and a need for new and better technology to
eliminate waste, reduce emissions, and to implement more cost effective
corrective actions. Versars combined strengths in regulatory policy, risk
assessment, information management, pollution control, and treatment
technology, emphasize pollution prevention and waste reduction. Versar
provides nationally recognized expert services in the area of air and water
quality, waste management, natural resources management, ecological
assessments, asbestos and lead paint abatement, industrial hygiene and a wide
range of corrective and remedial action technologies. Versar also provides
consulting and engineering services to industry and government agencies in
assessing alternative compliance strategies and their impacts on our customers
operations and profits. We help develop plans for their implementation, obtain
necessary permits, evaluate performance, and take any corrective action
required.

Versar provides turnkey services in evaluating state-of-the-art
environmentally friendly and energy efficient technology and in designing and
installing systems that both enhance operating performance and reduce costs.
For example, Versar applied an alternative technology and paint formulation for
coating mass transit vehicles eliminating the need to install a $6M vapor
collection system. In fiscal year 2000 Versar assisted the U.S. Military in
the complete redesign of a system to clean oxygen convertors and oxygen lines
used by pilots. The system eliminated the use of toxic materials, increased
the efficiency of the cleaning process by a factor of 10 and increased the life
of equipment. Versar is in the process of patenting the technology, which has
a world-wide application. We recently completed a successful demonstration for
the Royal Australian Air Force.

Versar has developed specialized expertise in aquatic ecology and risk
assessment. For more than 20 years we have supported the State of Maryland in
the assessment of the ecological health of the Chesapeake Bay. We also have
major contracts with the Philadelphia and Baltimore Districts of the U.S. Army
Corps of Engineers (COE) in conducting ecological assessments in support of the
disposal of dredge material in the redevelopment of ports and harbors and the
restoration of our nations beaches. In fiscal year 2000, we won the follow-on
contract of our Philadelphia COE contract valued at $10M and also won a new
contract for the Wilmington COE for similar work valued at $6M.

Outsourcing. Versar is increasingly providing on-site and off-site
support to help our customers manage their environmental programs. Over the
last 5 years the Company has provided a full range of pollution prevention,
compliance management, cleanup, and O&M services for the Washington, D.C.
Metropolitan Area Transit Authority (WMATA). A key accomplishment in fiscal
year 1999 was the renewal of our 5-year contract to support WMATA. This
multi-million dollar contract is Versars model project that demonstrates how
environmental management can be integrated with the customers operations on an
outsourced basis. Versar also has over 20 on-site support staff at DOD
installations and industrial facilities across the country managing a wide
spectrum of customers environmental management functions ranging from
underground storage tanks (USTs), asbestos abatement programs, air
compliance/permitting, real property transfers, and on-site hazardous material
pharmacies.

Energy Conservation Services

With the acquisition of VGI, Versar now has energy conservation services
as one of its core businesses. This not only helps diversify the Companys
business, it also provides an entry to new customers in an emerging growth
market. VGI brings to Versar engineering, design, and construction management
expertise in the upgrade of plant

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infrastructure to reduce energy consumption. In addition, GEOMET has for many
years provided demand side management support to utilities in the
identification and implementation of efforts to reduce energy consumption.
GEOMET has provided energy auditing and energy conservation services for a
variety of clients.

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

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

Industrial and Public Infrastructure Services

Industrial Infrastructure Servicesis the core business of VGI that has
been integrated with Versars businesses. This service area includes providing
a full range of architectural and engineering services in industrial/commercial
facilities and supporting central mechanical and electrical utilities and
building systems. VGI designs manufacturing facilities deploying
state-of-the-art material handling, waste treatment, and utility infrastructure
support systems.

Key industrial sectors that the Company serves include the
pharmaceuticals, semi-conductor/internet services, biotechnology, food
processing, paper products, film, plastics and fiber industries. Services
include architectural design, site development, design, construction or
design-build of plant facility, and supporting utility, material handling, and
waste management systems.

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

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



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

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

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Public Infrastructure Servicesinclude highway design and construction
oversight, municipal stormwater, water and wastewater design, and waterparks.

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

Versars Arizona Office has about 95 percent of the market in designing
public recreational water parks in Arizona. This market also continues to grow
rapidly as a result of strong population expansion in the region. Versar is
now designing other recreational facilities. For example, in fiscal year 1999
Versar designed the first skateboard park in Arizona.

Markets

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

Versar participates in a number of growth markets. These include:



| |  |  | Counter-terrorism and nuclear/biological/chemical warfare
preparedness including PPE, training, monitoring, and analytical
services.                           
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Industrys and governments continued focus on
productivity improvement with increased need for services to
expand or upgrade plant and utility infrastructure.
|
| |  |  | Expansion and revitalization of public infrastructure.                                                                                                         
|
| |  |  | Energy conservation projects resulting from the deregulation of the energy industry.                                                                           
|
| |  |  | Industry and government outsourcing of non-core functions.                                                                                                     
|
| |  |  | Kyoto Agreement and need to reduce Greenhouse Gases.                                                                                                           
|
| |  |  | Brownsfield legislation and tax incentives that will provide opportunities in industrial and military base redevelopment projects.                             
|
| |  |  | Continued availability of new and better technology to increase productivity, prevent pollution, and preserve natural resources.                               

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

The U.S. Department of Defense (DOD) is Versars largest government
client, making up 50 percent of its business base. DOD is going through many
of the same issues faced by private industry including restructuring and cost

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reduction in response to increasing budget limitations. DOD also has an
aggressive environmental program to cleanup, realign, and close bases worldwide
as it continues to restructure to a smaller force. DODs major focus over the
next few years will be to reduce its infrastructure. Versar is a major support
contractor to DOD, offering the same range of services as in the private
sector. The U.S. Environmental Protection Agency (EPA) makes up 6 percent of
Versars business, which is growing in new areas such as water quality, risk
assessment, and natural resources management. Versar thus maintains extensive
knowledge of regulatory trends and their impacts. Other Federal clients make
up 4 percent of our business and include NASA, the Departments of Energy and
the Interior, Federal Housing Authority, and Intelligence Agencies. State and
local governments make up 12 percent of Versars business.

Competition

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

Backlog

As of June 30, 2000, total backlog for Versar, including unfunded
government tasks and orders, is approximately $246 million, as compared to
approximately $244 million as of June 30, 1999, an increase of 1 percent.
Funded backlog for Versar is approximately $61 million, an increase of 49
percent compared to approximately $41 million as of June 30, 1999.
Approximately $115 million of the contract backlog is not expected to be funded
in fiscal year 2001. 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, 2000, Versar has approximately 375 full-time employees, of
which approximately seventy-nine percent are engineers, scientists, and other
professionals. Sixty-seven percent of the Companys professional employees
have a bachelors degree, twenty-eight percent have a masters degree, and five
percent have a doctorate degree.

Item 2. Properties




The Companys executive office is located in Springfield, Virginia, a
suburb of Washington, D.C. Versar currently leases 68,414 square feet in two
buildings from Sarnia Corporation. The rent is subject to a two-percent
escalation per year. Both lease streams are subject to adjustment on June 1,
2004, at which time the lease streams will be adjusted to the current fair
value. This value will set the base rate of the lease streams in the year of
adjustment. The adjusted lease stream is subject to the contracted escalation
in future years.

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As of September 1, 2000, the Company had under lease an aggregate of
approximately 213,000 square feet of office and laboratory space in the
following locations: Springfield, Lynchburg, and Williamsburg, VA; Tempe, AZ;
Fair Oaks and Pleasant Hill, CA; Northglenn, CO; Miami, FL; Lombard, IL;
Hopkins, MN; Columbia, Gaithersburg and Germantown, MD; Cary, NC; Oklahoma
City, OK; Bristol, PA; San Antonio, TX; and American Fork, UT. These leases
are generally for terms of five years or less.

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

Item 3. Legal Proceedings




Versar and its subsidiaries are parties to various legal actions arising
in the normal course of business. The company believes that an 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 2000.

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EXECUTIVE OFFICERS

The current executive officers of Versar, and their ages as of September 1,
2000, 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   |  |     | 59 |                           |  | Chairman                                                      
|                   
|                   
|                   
|                   
|Theodore M. Prociv  |  |     | 52 |                           |  | President and Chief Executive Officer                         
|                   
|                   
|                   
|                   
|Thomas S. Rooney    |  |     | 66 |                           |  | Executive Vice President and
Chief Operating Officer          
|                   
|                   
|                   
|                   
|Robert L. Durfee    |  |     | 64 |                           |  | Executive Vice President,
President, GEOMET Technologies, Inc.
|                   
|                   
|                   
|                   
|Lawrence A. White   |  |     | 57 |                           |  | Executive Vice President,
Corporate Development               
|                   
|                   
|                   
|                   
|Lawrence W. Sinnott |  |     | 38 |                           |  | Senior Vice President,
Chief Financial Officer and Treasurer  
|                   
|                   
|                   
|                   
|James C. Dobbs      |  |     | 55 |                           |  | Senior Vice President, General Counsel and
Secretary          
|                   
|                   
|                   
|                   
|Gayaneh Contos      |  |     | 64 |                           |  | Senior Vice President                                         

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. From
1988 to April 1991, Mr. Rawls was President and Chief Executive Officer of
Rawls Associates, Inc., a management consulting firm. Mr. Rawls was President
and Chief Executive Officer of R-C Holding, Inc. (now Air & Water Technologies
Corporation) from 1987 to 1988 and was Chairman of Metcalf & Eddy, Inc., a
subsidiary of Research-Cottrell, Inc., from 1984 to 1988.

Theodore M. Prociv, Ph.D., joined Versar as President on November 1, 1999
and was elected Chief Executive Officer on July 1, 2000. From September 1998
through November 1999, Dr. Prociv served first 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.
He also served as an officer in the U.S. Army assigned to the U.S. Army Dugway
Proving Grounds as a research chemist 1975-1979, and as an adjunct professor of
Chemistry at the City University of New York, 1970-1975.

Thomas S. Rooney, P.E., B.S.C.E., joined Versar in 1991 as Executive Vice
President and Chief Operating Officer. From 1989 to 1991, Mr. Rooney was the
President of Rooney Consulting, Inc., an environmental engineering company in
Haddonfield, New Jersey. Between 1987 and 1989, he was President of Orfa
Corporation, a company that built and operated plants that recycle municipal
solid waste into useful end products.

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Robert L. Durfee, Ph.D., is a co-founder of Versar and has been President
of GEOMET Technologies, Inc., a subsidiary of the Company, since 1991. Prior
to that, Dr. Durfee managed all environmental services provided by Versar, Inc.

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

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. 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. 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.

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

10



---



##### Table of Contents



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 (the
AMEX), under the symbol VSR. At June 30, 2000, the Company has 858
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 2000 and 1999 are presented below.

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

|            |  |      |             |             |  |   |       |       |  |   |       |       | 
|----------- |  | ---- | ----------- | ----------- |  | - | ----- | ----- |  | - | ----- | ----- | 
|Fiscal Year |  | High |             | Low        
|            |  |      |             |            
|1999        |  |      | 4th Quarter |             |  | $ | 2.688 |       |  | $ | 1.750 |      
|           
|           
|           
|           
|            |  |      |             | 3rd Quarter |  |   |       | 2.813 |  |   |       | 1.625 | 
|           
|           
|           
|           
|            |  |      |             | 2nd Quarter |  |   |       | 3.000 |  |   |       | 1.500 | 
|           
|           
|           
|           
|            |  |      |             | 1st Quarter |  |   |       | 4.750 |  |   |       | 1.875 | 

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.

11



---



##### Table of Contents



Item 6. Selected Financial Data




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

|                                                                         |         |   |                              |       |      |   |                                       |       |      |   |         |       |  |   |        |       |  |   |        |       | 
|------------------------------------------------------------------------ | ------- | - | ---------------------------- | ----- | ---- | - | ------------------------------------- | ----- | ---- | - | ------- | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                         |         |   | For the Years Ended June 30,
|                                                                         |         |   |                             
|                                                                         |         |   | 2000                         |       | 1999 |   | 1998                                  |       | 1997 |   | 1996   
|                                                                         |         |   |                              |       |      |   |                                       |       |      |   |        
|                                                                         |         |   |                              |       |      |   | (In thousands, except per share data)
|Consolidated Statement of Operations
related data:                      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Gross Revenue                                                            |         | $ | 56,149                       |       |      | $ | 58,886                                |       |      | $ | 50,420  |       |  | $ | 44,935 |       |  | $ | 44,283 |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Net Service Revenue                                                      |         |   | 37,787                       |       |      |   | 38,721                                |       |      |   | 34,895  |       |  |   | 31,696 |       |  |   | 31,919 |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Operating Income                                                         |         |   | 728                          |       |      |   | 2,072                                 |       |      |   | 378     |       |  |   | 1,266  |       |  |   | 872    |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Income from Continuing Operations                                        |         |   | 340                          |       |      |   | 1,837                                 |       |      |   | 276     |       |  |   | 1,109  |       |  |   | 992    |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|(Loss) Income from Discontinued
Operations                               |         |   |                             |       |      |   |                                      |       |      |   | (10,929 | )     |  |   | 147    |       |  |   |       |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Net Income (Loss)                                                        |         |   | 340                          |       |      |   | 1,837                                 |       |      |   | (10,653 | )     |  |   | 1,256  |       |  |   | 992    |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Income per share from Continuing
Operations - Diluted                    |         | $ | .05                          |       |      | $ | .29                                   |       |      | $ | .05     |       |  | $ | .21    |       |  | $ | .19    |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|(Loss) Income per share from Discontinued
Operations - Basic and Diluted |         |   |                             |       |      |   |                                      |       |      |   | (1.92   | )     |  |   | .03    |       |  |   |       |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Net Income (Loss) per share - Diluted                                    |         | $ | .05                          |       |      | $ | .29                                   |       |      | $ | (1.87   | )     |  | $ | .24    |       |  | $ | .19    |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Weighted Average Shares Outstanding -                                   
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Diluted |   |                              | 6,487 |      |   |                                       | 6,283 |      |   |         | 5,695 |  |   |        | 5,286 |  |   |        | 5,248 | 
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Consolidated Balance Sheet related data:                                
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Working Capital                                                          |         | $ | 7,687                        |       |      | $ | 8,403                                 |       |      | $ | 3,120   |       |  | $ | 9,140  |       |  | $ | 7,629  |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Current Ratio                                                            |         |   | 1.92                         |       |      |   | 1.90                                  |       |      |   | 1.23    |       |  |   | 2.21   |       |  |   | 2.14   |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Total Assets                                                             |         |   | 21,387                       |       |      |   | 22,687                                |       |      |   | 21,795  |       |  |   | 21,870 |       |  |   | 16,979 |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Current Portion of Long-Term Debt                                        |         |   | 480                          |       |      |   | 1,135                                 |       |      |   | 1,114   |       |  |   | 819    |       |  |   | 323    |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Long-Term Debt                                                           |         |   |                             |       |      |   |                                      |       |      |   | 688     |       |  |   | 1,437  |       |  |   | 2      |      
|                                                                         |         |   |                              |       |      |   |                                       |       |      |   |         |       |  |   |        |       |  |   |        |      
|Total Debt, excluding bank line of credit                                |         |   | 480                          |       |      |   | 1,135                                 |       |      |   | 1,802   |       |  |   | 2,256  |       |  |   | 325    |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Stockholders Equity                                                     |         | $ | 6,402                        |       |      | $ | 5,623                                 |       |      | $ | 2,891   |       |  | $ | 9,523  |       |  | $ | 7,776  |      

12



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##### Table of Contents



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, the ability to
perform work within budget or contractual limitations, cost controls and
reductions, the expected resolution of delays in billing of certain projects,
the possible impact of current and future claims against the Company based upon
negligence and other theories of liability, and the possibility of the Company
making acquisitions during the next 12 to 18 months. Forward-looking
statements involve numerous risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, the possibilities
that the demand for the Companys services may decline as a result of possible
changes in general and industry specific economic conditions and the effects of
competitive services and pricing; 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 ability to attract
and retain key professional employees; and such other risks and uncertainties
as are described in reports and other documents filed by the Company from time
to time with the Securities and Exchange Commission.

Versars gross revenue for fiscal year 2000 totaled $56,149,000, or
$2,737,000 (4.6%) lower than gross revenue of $58,886,000 for fiscal year 1999.
Gross revenue for fiscal year 1999 increased by $8,466,000 (16.8%) over that
reported in fiscal year 1998. A majority of the decrease in gross revenues for
fiscal year 2000 was attributable to reduced work with the Air Force in the
Rocky Mountain region and a reduction in commercial work in the Midwest,
Atlantic and Northeast operations. Approximately fifty percent of these
reductions were offset by increased revenues in the Companys GEOMET
subsidiary, and the Pacific and ESM operations. These increases were due to
the work performed under the STEPO, AFCEE RAC, and Philadelphia Corps.
contracts, respectively. Gross revenue in fiscal year 1999 increased primarily
in the Companys Rocky Mountain operations in the support of the Air Forces
Armstrong contract and higher gross revenues in the Companys GEOMET subsidiary
in support of the STEPO suit production contract. As reflected on page 14,
government revenue represented 72.1% of the total revenue in fiscal year 2000,
compared to 62.9% in fiscal year 1999 and 55.8% in fiscal year 1998.

Purchased services and materials for fiscal year 2000 totaled $18,362,000,
or $1,803,000 (8.9%) lower than fiscal year 1999 purchased services. Purchased
services for fiscal year 1999 increased by $4,460,000 (29.9%) over fiscal year
1998. The decrease in purchased services for fiscal year 2000 is attributable
to the lower gross revenues in the Companys Rocky Mountain and Northeast
operations as mentioned above. The increase in fiscal year 1999 was due to
higher subcontracted revenues in the Companys Rocky Mountain and GEOMET
subsidiaries as mentioned above.

Net service revenue is derived by deducting the costs of purchased
services from gross revenue. Versar considers it appropriate to analyze
operating margins and other ratios in relation to net service revenue, because
such revenues reflect the actual work performed by the Company. Net service
revenues decreased in fiscal year 2000 due to the lower gross revenues as
mentioned above.

Direct costs of service and overhead include the cost to Versar of direct
and overhead staff, including recoverable overhead and unallowable costs that
are directly attributable to overhead. The percentage of these costs to net
service revenue increased to 81.4% in fiscal year 2000 compared to 80.3% in
fiscal year 1999 and 84.3% in fiscal year 1998. The increase in fiscal year
2000 is primarily due to project overruns and lower labor billability. The
decrease in fiscal year 1999 was primarily due to improved labor billability.

Selling, general and administrative expenses approximated 16.7% of the net
service revenue in fiscal year
2000, compared to 14.3% in fiscal year 1999 and 13.7% in fiscal year 1998.
The increase in fiscal year 2000 is attributable to higher levels of resources
required in support of the STEPO contract as well as increased business
development and proposal costs offset by cost reduction efforts that were
implemented in fiscal year 1999. The slight increase in fiscal year 1999 was
attributable to the start up of the STEPO contract as mentioned above.

13



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##### Table of Contents



Operating income for fiscal year 2000 was $728,000, a decrease of
$1,344,000 over fiscal year 1999. The decrease is primarily due to project
overruns, lower labor billability and higher selling, general and
administrative expenses. In fiscal year 1999, operating income increased by
$1,694,000 compared to fiscal year 1998 due primarily to increased revenues and
improved labor utilization.

Interest expense during fiscal 2000 was $526,000, an increase of $5,000
from fiscal year 1999. The increase was attributable to higher interest rates
in fiscal year 2000 on the Companys line of credit as a result of the
increased prime rate during the year. Interest expense increased in fiscal
year 1999 by $270,000 compared to fiscal year 1998 primarily due to the
disposition of Science Management Corporation and its subsidiaries (SMC) and
the winding down of its operations in fiscal year 1999.

Versars tax benefit for fiscal year 2000 was $138,000 compared to a
benefit of $286,000 in fiscal year 1999. A substantial valuation allowance of
approximately $3.4 million on deferred tax assets was set up at the end of
fiscal year 1998 due to the losses from discontinued operations of SMC. The
Company released $200,000 and $900,000 of the valuation allowance in fiscal
years 2000 and 1999, respectively due to improved earnings of the Company.
Refer to Note I of the Notes to Financial Statements.

In fiscal year 1998, the Company recorded a loss from discontinued
operations for the two segments acquired from SMC of $10,929,000, net of
$379,000 tax benefit, including the write-off of goodwill of $5,064,000
associated with its acquisition and operating losses for a total of $7,876,000
(net of tax) and accrued reserves of $3,053,000 to finalize the disposition of
SMC. Part of the operating losses include unrecorded tax liabilities of
approximately $807,000 ($500,000 net of tax) in which the Company is asserting
that these obligations are not the obligation of the consolidated operations of
Versar, yet because they have not been adjudicated, the liabilities have been
recorded on the consolidated financial statements. As part of the accrued
liabilities the Company reserved approximately $1,700,000 for operating losses
in the phase out of the two segments. (Refer to Notes C and I of the Notes to
Financial Statements for further information on the discontinuance of the
engineering, design and construction services and management services segments
of SMC and the related tax impact to the Company.)

In summary, Versars net income was $340,000 in fiscal year 2000, compared
to net income of $1,837,000 in fiscal year 1999 and a net loss of $10,653,000
in fiscal year 1998.

REVENUE

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

|                     |                       |   |                              |        |  |  |                                        |    |      |  |  |  |  |   |        |        |  |  |     |    |   |  |  |  |  |   |        |        |  |  |     |    |   |  |  |  | 
|-------------------- | --------------------- | - | ---------------------------- | ------ |  |  | -------------------------------------- | -- | ---- |  |  |  |  | - | ------ | ------ |  |  | --- | -- | - |  |  |  |  | - | ------ | ------ |  |  | --- | -- | - |  |  |  | 
|                     |                       |   | For the Years Ended June 30,
|                     |                       |   |                             
|                     |                       |   | 2000                         |        |  |  |                                        |    | 1999 |  |  |  |  |   | 1998  
|                     |                       |   |                              |        |  |  |                                        |    |      |  |  |  |  |   |       
|                     |                       |   |                              |        |  |  | (In thousands, except for percentages)
|Government
      EPA |                       | $ | 3,245                        |        |  |  | 6                                      | %  |      |  |  |  |  | $ | 3,496  |        |  |  | 6   | %  |   |  |  |  |  | $ | 3,493  |        |  |  | 7   | % 
|                    
|                    
|                    
|                    
|                     | State & Local         |   |                              | 7,073  |  |  |                                        | 12 | %    |  |  |  |  |   |        | 7,247  |  |  |     | 12 | % |  |  |  |  |   |        | 5,460  |  |  |     | 11 | % |  |  |  | 
|                    
|                    
|                    
|                    
|                     | Department
of Defense |   |                              | 28,021 |  |  |                                        | 50 | %    |  |  |  |  |   |        | 24,973 |  |  |     | 42 | % |  |  |  |  |   |        | 16,771 |  |  |     | 33 | %
|                    
|                    
|                    
|                    
|                     | Other                 |   |                              | 2,158  |  |  |                                        | 4  | %    |  |  |  |  |   |        | 1,316  |  |  |     | 3  | % |  |  |  |  |   |        | 2,385  |  |  |     | 5  | %
|                    
|                    
|                    
|                    
|Commercial           |                       |   | 15,652                       |        |  |  | 28                                     | %  |      |  |  |  |  |   | 21,854 |        |  |  | 37  | %  |   |  |  |  |  |   | 22,311 |        |  |  | 44  | % 
|                     |                       |   |                              |        |  |  |                                        |    |      |  |  |  |  |   |        |        |  |  |     |    |   |  |  |  |  |   |        |        |  |  |     |   
|Gross Revenue        |                       | $ | 56,149                       |        |  |  | 100                                    | %  |      |  |  |  |  | $ | 58,886 |        |  |  | 100 | %  |   |  |  |  |  | $ | 50,420 |        |  |  | 100 | % 
|                     |                       |   |                              |        |  |  |                                        |    |      |  |  |  |  |   |        |        |  |  |     |    |   |  |  |  |  |   |        |        |  |  |     |   

14



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##### Table of Contents



Liquidity and Capital Resources

The Companys continuing operations generated $1,709,000 in cash in fiscal
year 2000 of which $653,000 was used to invest in property, plant and
equipment with the balance used to reduce debt. The increase in cash flow over
fiscal year 1999 was used primarily to wind down SMC operations.

During fiscal year 2000, the Company utilized short-term bank financing to
supplement its ability to meet day-to-day operating cash requirements. In
December 1999, the Company extended its existing line of credit for an
additional 11 months. At June 30, 2000, the Company had $7,687,000 of working
capital, compared to $8,403,000 in 1999. Working capital decreased primarily
as a result of the reduction of long term liabilities.

Versars line of credit provides for advances up to $6,500,000 based on
qualifying receivables less the $600,000 guarantee of Sarnias term loan by
Versar and the outstanding acquisition loan balance. Interest on the
borrowings is based on the lower of the 30 day London Interbank Offered Rate
(LIBOR) plus two hundred and eighty basis points (9.18% at June 30, 2000) or
the prime rate. A commitment fee of one quarter of one percent (.25%) 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,
2000 was approximately $892,000. Advances under the line are due upon demand
or on November 30, 2001. The loan has certain covenants related to maintenance
of financial ratios. The Company was in compliance with the covenants as of
June 30, 2000. As such, since the line of credit is greater than one year, it
has been classified as long term on the balance sheet. Management believes
that cash generated by operations and borrowings available from the bank line
of credit and the extension of the line will be adequate to meet the working
capital needs for fiscal year 2001.

Versar obtained a $2,000,000 promissory note from NationsBank on April 30,
1997 for the acquisition of SMC (See Note B). Principal payment commenced on
May 31, 1997 and were paid in full on April 30, 2000.

Versar guarantees certain debt of Sarnia Corporation. Sarnias balance
due on the term loan was $600,000 at June 30, 2000 and, accordingly, Versar
reduced its reserve to $600,000 as of June 30, 2000. As the term loan is
repaid, the reserve will be reduced and added to Versars equity.

Impact of Inflation

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

Business Segment

Versar currently has three business segments: environmental services,
energy conservation services, and industrial and public facility infrastructure
services. Currently, the energy conservation and facility infrastructure
services segments do not meet the segment reporting requirements. During
fiscal year 2001, the growth in these segments may require the Company to
provide financial disclosure.

15



---



##### Table of Contents



Item 8.  Financial Statements and Supplementary Data




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

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




None.

PART III

Item 10.  Directors and Executive Officers of the
Registrant




Information required by this item with respect to directors of the Company
is to be contained in the Companys Proxy Statement for its 2000 Annual Meeting
of Stockholders, which is expected to be filed with the Commission not later
than 120 days after the Companys 2000 fiscal year end and is incorporated
herein by reference.

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

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

Item 11.  Executive Compensation




Item 12.  Security Ownership of Certain Beneficial Owners and Management




Item 13.  Certain Relationships and Related Transactions




Information required by these items is incorporated herein by reference to
the Companys Proxy Statement for its 2000 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 2000 fiscal year.

16



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##### Table of Contents



PART IV

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




(A)(1) Financial Statements:

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



| | a) |  | Report of Independent Public Accountants                                                                    
| | -- |  | ------------------------------------------------------------------------------------------------------------
|
| | b) |  | Consolidated Balance Sheets as of June 30, 2000 and 1999                                                    
|
| | c) |  | Consolidated Statements of Operations for the Years Ended June 30,
2000, 1999, and 1998                     
|
| | d) |  | Consolidated Statements of Changes in Stockholders Equity for the
Years Ended
June 30, 2000, 1999, and 1998
|
| | e) |  | Consolidated Statements of Cash Flows for the Years Ended June 30,
2000, 1999, and
1998                     
|
| | f) |  | Notes to Consolidated Financial Statements                                                                  

(2) Financial Statement Schedules:



| | a) |  | Schedule II Valuation and Qualifying Accounts for the Years Ended
June 30, 2000, 1999, and 1998
| | -- |  | ------------------------------------------------------------------------------------------------



| |  | 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 18 through 21 of this report.
| |  | ---------------------------------------------------------------------------------------------------------------------------------

(B) Reports on Form 8-K

None.

17



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##### Table of Contents



Exhibit Index

|         |  |                                                                                                                                                                              |  |             
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|         |  |                                                                                                                                                                              |  | Page Number/
|Item No. |  | Description                                                                                                                                                                  |  | Reference   
|         |  |                                                                                                                                                                              |  |             
|3.1      |  | Restated Articles of Incorporation of Versar, Inc. filed as an exhibit to the
Registrants Registration Statement on Form S-1 effective November 20, 1986
(File No. 33-9391) |  | (A)         
|        
|        
|        
|        
|3.2      |  | Bylaws of Versar, Inc.                                                                                                                                                       |  | (A)         
|        
|        
|        
|        
|4        |  | Specimen of Certificate of Common Stock of Versar, Inc.                                                                                                                      |  | (A)         
|        
|        
|        
|        
|10.10    |  | Incentive Stock Option Plan *.                                                                                                                                               |  | (B)         
|        
|        
|        
|        
|10.11    |  | Executive Tax and Investment Counseling Program.                                                                                                                             |  | (A)         
|        
|        
|        
|        
|10.12    |  | Nonqualified Stock Option Plan *.                                                                                                                                            |  | (B)         
|        
|        
|        
|        
|10.13    |  | Employee Incentive Plan, as amended *.                                                                                                                                       |  | (E)         
|        
|        
|        
|        
|10.17    |  | Deferred Compensation Agreements dated as follows:                                                                                                                          
|        
|        
|        
|        
|         |  | July 1, 1988 between the Registrant and Gayaneh Contos                                                                                                                       |  | (F)         
|        
|        
|        
|        
|10.26    |  | Executive Medical Plan dated August 21, 1991, effective July 1, 1991                                                                                                         |  | (G)         
|        
|        
|        
|        
|10.40    |  | Option Exchange Offer dated April 16, 1991 between the Registrant and
participants of the Incentive Stock Option Plan and the Nonqualified
Stock Option Plan                 |  | (G)         
|        
|        
|        
|        
|10.41    |  | Securities and Exchange Commission response dated September 23, 1991
to certain question regarding the Registrants Option Exchange Offer                                    |  | (G)         
|        
|        
|        
|        
|10.47    |  | Bankruptcy Court-approved Settlement Agreement and Mutual Release
between Versar Architects and Engineers, Inc. and the City of
Sterling, Colorado                           |  | (H)         
|        
|        
|        
|        
|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)         
|        
|        
|        
|        
|10.70    |  | Agreement dated July 18, 1995 between the Registrant and the U.S. Air Force
Human Systems Center                                                                             |  | (M)         
|        
|        
|        
|        
|10.71    |  | Agreement dated March 29, 1995 between the Registrant and the U.S. Army Norfolk
Corps of Engineers                                                                           |  | (M)         

18



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##### Table of Contents



|         |  |                                                                                                                                              |  |             
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|         |  |                                                                                                                                              |  | Page Number/
|Item No. |  | Description                                                                                                                                  |  | Reference   
|         |  |                                                                                                                                              |  |             
|10.72    |  | Agreement dated March 16, 1995 between the Registrant and the U.S. Army Baltimore                                                           
|        
|        
|        
|        
|         |  | Corps of Engineers                                                                                                                           |  | (M)         
|        
|        
|        
|        
|10.73    |  | Agreement dated April 25, 1995 between the Registrant and the U.S. Army Philadelphia
Corps of Engineers                                      |  | (M)         
|        
|        
|        
|        
|10.74    |  | Agreement dated August 10, 1995 between the Registrant and the Environmental
Protection Agency                                               |  | (M)         
|        
|        
|        
|        
|10.75    |  | Agreement dated January 31, 1995 between GEOMET Technologies, Inc., a subsidiary
of the Registrant and the U.S. Army Soldier Systems Command |  | (M)         
|        
|        
|        
|        
|10.76    |  | Agreement dated July 13, 1995 between GEOMET Technologies, Inc., a subsidiary of
the Registrant and the U.S. General Services Administration |  | (M)         
|        
|        
|        
|        
|10.83    |  | Agreement and Plan of Merger dated July 29, 1997 between the Registrant
and Science Management Corporation                                   |  | (O)         
|        
|        
|        
|        
|10.84    |  | Acquisition Promissory Note, dated April 30, 1997, between the Registrant and
NationsBank, N.A.                                              |  | (P)         
|        
|        
|        
|        
|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)         
|        
|        
|        
|        
|10.92    |  | Employment Agreement dated January 30, 1999 between the Registrant and
Thomas S. Rooney*                                                     |  | (R)         
|        
|        
|        
|        
|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)         

19



---



##### Table of Contents



|         |  |                                                                                                      |  |             
|-------- |  | ---------------------------------------------------------------------------------------------------- |  | ------------
|         |  |                                                                                                      |  | Page Number/
|Item No. |  | Description                                                                                          |  | Reference   
|         |  |                                                                                                      |  |             
|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. |  | 24-38       
|        
|        
|        
|        
|10.98    |  | Employment Agreement dated November 1, 1999 between Registrant and
Benjamin M. Rawls*.               |  | 39-58       
|        
|        
|        
|        
|10.99    |  | Employment Agreement dated November 1, 1999 between Registrant and
Theodore M. Prociv*.              |  | 59-78       
|        
|        
|        
|        
|22       |  | Subsidiaries of the Registrant                                                                       |  | (Q)         
|        
|        
|        
|        
|27       |  | Financial Data Schedules                                                                            



---

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



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

20



---



##### Table of Contents





|(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.         
|   
|(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.       

21



---



##### Table of Contents



SIGNATURES




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

|      |  |  |                    |  |  |                                                                                            
|----- |  |  | ------------------ |  |  | -------------------------------------------------------------------------------------------
|      |  |  |                    |  |  | VERSAR, INC.______________________________                                                 
|      |  |  |                    |  |  | (Registrant)                                                                               
|     
|Date: |  |  | September 15, 2000 |  |  | /S/ Benjamin M. Rawls______________________________
Benjamin M. Rawls
Chairman and Director

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

|                         |  |                                                      |  |                   
|------------------------ |  | ---------------------------------------------------- |  | ------------------
|SIGNATURES               |  | TITLE                                                |  | DATE              
|                         |  |                                                      |  |                   
|/S/ Benjamin M. Rawls    |  | Chairman and Director                                |  | September 15, 2000
|Benjamin M. Rawls       
|                        
|/S/ Theodore M. Prociv   |  | Chief Executive Officer, President, and              |  | September 15, 2000
|Theodore M. Prociv       |  | Director                                            
|                        
|/S/ Robert L. Durfee     |  | Executive Vice President and                         |  | September 15, 2000
|Robert L. Durfee         |  | Director                                            
|                        
|/S/ Lawrence W. Sinnott  |  | Vice President, Chief Financial                      |  | September 15, 2000
|Lawrence W. Sinnott      |  | Officer, Treasurer, and
Principal Accounting Officer
|                        
|/S/ Michael Markels, Jr. |  | Chairman Emeritus and Director                       |  | September 15, 2000
|Michael Markels, Jr.    
|                        
|/S/ Thomas J. Shields    |  | Director                                             |  | September 15, 2000
|Thomas J. Shields       

22



---



##### Table of Contents



|                            |  |          |  |                   
|--------------------------- |  | -------- |  | ------------------
|/S/ Constantine G. Caras    |  | Director |  | September 15, 2000
|Constantine G. Caras       
|                           
|/S/ Pat H. Moore            |  | Director |  | September 15, 2000
|Pat H. Moore               
|                           
|/S/ Charles I. Judkins, Jr. |  | Director |  | September 15, 2000
|Charles I. Judkins, Jr.    
|                           
|/S/ M. Lee Rice             |  | Director |  | September 15, 2000
|M. Lee Rice                

23



---



##### Table of Contents



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.
and its subsidiaries (a Delaware corporation) as of June 30, 2000 and 1999, and
the related consolidated statements of operations, changes in stockholders
equity, and cash flows for the three years ended June 30, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years ended June 30,
2000, 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. The schedule listed in the index of financial
statements 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 the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



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





Vienna, VA
September 8, 2000

F-1



---



##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)

|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |       |         |        |        | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ------------------------------------------- | ------------------------------------------ | ------- | -------- | ------ | ----- | ------- | ------ | ------ | 
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         | June 30,
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |         
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         | 2000     |        | 1999 
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|                                     | Current assets
             Cash and cash equivalents                                                                                                                                                                                                             |                                | $                                           | 55                                         |         |          | $      | 58    |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   |                                | Accounts receivable, net                    |                                            |         | 13,920   |        |       |         | 15,939 |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   |                                | Prepaid expenses and other current assets   |                                            |         | 1,561    |        |       |         | 1,125  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   |                                | Deferred income taxes                       |                                            |         | 536      |        |       |         | 599    |       
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             | Total current assets                       |         |          | 16,072 |       |         |        | 17,721 | 
|                                    
|                                    
|                                    
|                                    
|                                     | Property and equipment, net                                                                                                                                                                                                                                       |                                |                                             | 2,461                                      |         |          |        | 2,466 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred income taxes                                                                                                                                                                                                                                             |                                |                                             | 1,481                                      |         |          |        | 1,280 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill                                                                                                                                                                                                                                                          |                                |                                             | 922                                        |         |          |        | 996   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Other assets                                                                                                                                                                                                                                                      |                                |                                             | 451                                        |         |          |        | 224   |        
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             | Total assets                               |         | $        | 21,387 |       |         | $      | 22,687 | 
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|                                     | Current liabilities
             Accounts payable                                                                                                                                                                                                                 |                                | $                                           | 3,629                                      |         |          | $      | 4,290 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   |                                | Current portion of long-term debt           |                                            |         | 480      |        |       |         | 1,135  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   |                                | Accrued salaries and vacation               |                                            |         | 2,528    |        |       |         | 2,180  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   |                                | Liabilities of discontinued operations, net |                                            |         | 114      |        |       |         | 98     |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   |                                | Other liabilities                           |                                            |         | 1,634    |        |       |         | 1,615  |       
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             | Total current liabilities                  |         |          | 8,385  |       |         |        | 9,318  | 
|                                    
|                                    
|                                    
|                                    
|                                     | Bank line of credit                                                                                                                                                                                                                                               |                                |                                             | 3,713                                      |         |          |        | 4,108 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Other long-term liabilities                                                                                                                                                                                                                                       |                                |                                             | 1,480                                      |         |          |        | 1,931 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Liabilities of discontinued operations, net                                                                                                                                                                                                                       |                                |                                             | 807                                        |         |          |        | 807   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Reserve on guarantee of real estate debt                                                                                                                                                                                                                          |                                |                                             | 600                                        |         |          |        | 900   |        
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             | Total liabilities                          |         |          | 14,985 |       |         |        | 17,064 | 
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      
|                                     | Commitments and contingencies                                                                                                                                                                                                                                     |                                |                                             |                                           |         |          |        |      |        
|                                    
|                                    
|                                    
|                                    
|                                     | Stockholders equity
Common stock, $.01 par value; 30,000,000 shares
authorized; 6,410,824 shares and 6,336,758
shares issued at June 30, 2000
and 1999, respectively; 6,395,824 shares and 6,336,758
shares outstanding at June 30, 2000 and 1999, respectively. |                                |                                             | 64                                         |         |          |        | 63    |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   | Capital in excess of par value |                                             |                                            | 18,223  |          |        |       | 18,051  |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   | Accumulated deficit            |                                             |                                            | (11,851 | )        |        |       | (12,491 | )     
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                                   | Treasury stock                 |                                             |                                            | (34     | )        |        |       |        |       
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             | Total stockholders equity                 |         |          | 6,402  |       |         |        | 5,623  | 
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             | Total liabilities and stockholders equity |         | $        | 21,387 |       |         | $      | 22,687 | 
|                                     |                                                                                                                                                                                                                                                                   |                                |                                             |                                            |         |          |        |      

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

F-2



---



##### Table of Contents



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

|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |         |        |  
|------------------------------------ | ----------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------ | -------------------- | ------ | ---- | ------ | ----- | ------ | - | ------- | ------- | ------ | -
|                                     |                               |                                                                                                                                                              |        | Years Ended June 30,
|                                     |                               |                                                                                                                                                              |        |                     
|                                     |                               |                                                                                                                                                              |        | 2000                 |        | 1999 |        | 1998 
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |      
|GROSS REVENUE                        |                               | $                                                                                                                                                            | 56,149 |                      |        | $    | 58,886 |       |        | $ | 50,420  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Purchased services and materials, at cost                                                                                                                    |        |                      | 18,362 |      |        |       | 20,165 |   |         |         | 15,525 |  
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|NET SERVICE REVENUE                  |                               |                                                                                                                                                              | 37,787 |                      |        |      | 38,721 |       |        |   | 34,895  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Direct costs of services and overhead                                                                                                                        |        |                      | 30,742 |      |        |       | 31,107 |   |         |         | 29,418 |  
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Selling, general and administrative expenses                                                                                                                 |        |                      | 6,317  |      |        |       | 5,542  |   |         |         | 4,769  |  
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Special charge                                                                                                                                               |        |                      |       |      |        |       |       |   |         |         | 330    |  
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|OPERATING INCOME                     |                               |                                                                                                                                                              | 728    |                      |        |      | 2,072  |       |        |   | 378     |        
|                                    
|                                    
|                                    
|                                    
|OTHER EXPENSE                       
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Interest expense                                                                                                                                             |        |                      | 526    |      |        |       | 521    |   |         |         | 251    |  
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Income tax benefit                                                                                                                                           |        |                      | (138   | )    |        |       | (286   | ) |         |         | (149   | )
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|INCOME FROM CONTINUING OPERATIONS    |                               |                                                                                                                                                              | 340    |                      |        |      | 1,837  |       |        |   | 276     |        
|                                    
|                                    
|                                    
|                                    
|DISCONTINUED OPERATIONS             
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Loss from discontinued operations
(net of tax benefit of $397 at June 30,
1998)                                                                              |        |                      |       |      |        |       |       |   |         |         | (7,876 | )
|                                    
|                                    
|                                    
|                                    
|                                     |                               | Loss on disposal of discontinued operations,
including provision of $1,700 for operating
losses during phase out period (less
applicable income taxes of $0) |        |                      |       |      |        |       |       |   |         |         | (3,053 | )
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|LOSS FROM DISCONTINUED              
|                                    
|                                    
|                                    
|                                    
|                                     | OPERATIONS                    |                                                                                                                                                              |        |                     |        |      |        |      |        |   |         | (10,929 | )     
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|NET INCOME (LOSS)                    |                               | $                                                                                                                                                            | 340    |                      |        | $    | 1,837  |       |        | $ | (10,653 | )      
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|INCOME PER SHARE FROM CONTINUING    
|                                    
|                                    
|                                    
|                                    
|                                     | OPERATIONS BASIC             |                                                                                                                                                              | $      | .05                  |        |      | $      | .30   |        |   | $       | .05     |       
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|INCOME PER SHARE FROM CONTINUING    
|                                    
|                                    
|                                    
|                                    
|                                     | OPERATIONS DILUTED           |                                                                                                                                                              | $      | .05                  |        |      | $      | .29   |        |   | $       | .05     |       
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|LOSS PER SHARE FROM DISCONTINUED    
|                                    
|                                    
|                                    
|                                    
|                                     | OPERATIONS BASIC AND DILUTED |                                                                                                                                                              | $      |                     |        |      | $      |      |        |   | $       | (1.92   | )     
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|NET INCOME (LOSS) PER SHARE BASIC   |                               | $                                                                                                                                                            | .05    |                      |        | $    | .30    |       |        | $ | (1.87   | )      
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|NET INCOME (LOSS) PER SHARE DILUTED |                               | $                                                                                                                                                            | .05    |                      |        | $    | .29    |       |        | $ | (1.87   | )      
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|WEIGHTED AVERAGE NUMBER OF SHARES   
|                                    
|                                    
|                                    
|                                    
|                                     | OUTSTANDING BASIC            |                                                                                                                                                              |        | 6,400                |        |      |        | 6,190 |        |   |         | 5,695   |       
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        
|WEIGHTED AVERAGE NUMBER OF          
|                                    
|                                    
|                                    
|                                    
|SHARES OUTSTANDING DILUTED          |                               |                                                                                                                                                              | 6,487  |                      |        |      | 6,283  |       |        |   | 5,695   |        
|                                     |                               |                                                                                                                                                              |        |                      |        |      |        |       |        |   |         |        

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

F-3



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##### Table of Contents



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

|                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |     |   |  |       |         |  
|------------------------------------ |  | ----------------------------------------- | ----- | ------ |  | --------- | -- | ---------- |  | -------- | ------ | -------- |  | - | ------- | ------ |  | - | --- | - |  | ----- | ------- | -
|                                     |  | Years Ended June 30, 2000, 1999, and 1998
|                                     |  |                                          
|                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |     |   |  | Total
|                                     |  | Number                                    |       |        |  |           |    | Capital in |  | Accumu-  |        |          |  |   |         | Stock-
|                                     |  | of                                        |       | Common |  | Excess of |    | lated      |  | Treasury |        | holders'
|                                     |  | Shares                                    |       | Stock  |  | Par Value |    | Deficit    |  | Stock    |        | Equity  
|                                     |  |                                           |       |        |  |           |    |            |  |          |        |         
|Balance, June 30, 1997               |  |                                           | 5,152 |        |  | $         | 52 |            |  | $        | 13,788 |          |  | $ | (4,317  | )      |  | $ |    |   |  | $     | 9,523   |  
|                                    
|                                    
|                                    
|                                    
|Exercise of stock options            |  |                                           | 71    |        |  |           |   |            |  |          | 206    |          |  |   |        |        |  |   |    |   |  |       | 206     |  
|                                    
|                                    
|                                    
|                                    
|Common stock issued for acquisitions |  |                                           | 773   |        |  |           | 8  |            |  |          | 3,061  |          |  |   |        |        |  |   |    |   |  |       | 3,069   |  
|                                    
|                                    
|                                    
|                                    
|Common stock issued to ESSOP         |  |                                           | 76    |        |  |           | 1  |            |  |          | 403    |          |  |   |        |        |  |   |    |   |  |       | 404     |  
|                                    
|                                    
|                                    
|                                    
|Decrease in guarantee of Sarnia debt |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 300     |        |  |   |    |   |  |       | 300     |  
|                                    
|                                    
|                                    
|                                    
|Tax benefit of exercised options     |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 42      |        |  |   |    |   |  |       | 42      |  
|                                    
|                                    
|                                    
|                                    
|Net loss                             |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | (10,653 | )      |  |   |    |   |  |       | (10,653 | )
|                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |     |   |  |       |         |  
|Balance, June 30, 1998               |  |                                           | 6,072 |        |  |           | 61 |            |  |          | 17,458 |          |  |   | (14,628 | )      |  |   |    |   |  |       | 2,891   |  
|                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |     |   |  |       |         |  
|Exercise of stock options            |  |                                           | 5     |        |  |           |   |            |  |          | 13     |          |  |   |        |        |  |   |    |   |  |       | 13      |  
|                                    
|                                    
|                                    
|                                    
|Common stock issued to ESSOP         |  |                                           | 260   |        |  |           | 2  |            |  |          | 580    |          |  |   |        |        |  |   |    |   |  |       | 582     |  
|                                    
|                                    
|                                    
|                                    
|Decrease in guarantee of
Sarnia debt |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 300     |        |  |   |    |   |  |       | 300     |  
|                                    
|                                    
|                                    
|                                    
|Net income                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 1,837   |        |  |   |    |   |  |       | 1,837   |  
|                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |     |   |  |       |         |  
|Balance, June 30, 1999               |  |                                           | 6,337 |        |  |           | 63 |            |  |          | 18,051 |          |  |   | (12,491 | )      |  |   |    |   |  |       | 5,623   |  
|                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |     |   |  |       |         |  
|Exercise of stock options            |  |                                           | 5     |        |  |           |   |            |  |          | 9      |          |  |   |        |        |  |   |    |   |  |       | 9       |  
|                                    
|                                    
|                                    
|                                    
|Common stock issued to ESSOP         |  |                                           | 69    |        |  |           | 1  |            |  |          | 163    |          |  |   |        |        |  |   |    |   |  |       | 164     |  
|                                    
|                                    
|                                    
|                                    
|Decrease in guarantee of Sarnia debt |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 300     |        |  |   |    |   |  |       | 300     |  
|                                    
|                                    
|                                    
|                                    
|Treasury stock                       |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   |        |        |  |   | (34 | ) |  |       | (34     | )
|                                    
|                                    
|                                    
|                                    
|Net income                           |  |                                           |      |        |  |           |   |            |  |          |       |          |  |   | 340     |        |  |   |    |   |  |       | 340     |  
|                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |     |   |  |       |         |  
|Balance, June 30, 2000               |  |                                           | 6,411 |        |  | $         | 64 |            |  | $        | 18,223 |          |  | $ | (11,851 | )      |  | $ | (34 | ) |  | $     | 6,402   |  
|                                     |  |                                           |       |        |  |           |    |            |  |          |        |          |  |   |         |        |  |   |     |   |  |       |         |  

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

F-4



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##### Table of Contents



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

|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |        |        |        |  
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----- | -------------------- | ------ | ----- | ------ | ---- | ------ | ------- | ------ | ------ | ------ | -
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       | Years Ended June 30,
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                     
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       | 2000                 |        | 1999  |        | 1998
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |     
|Cash flows from operating
activities        Net income (loss)                               |                                                                                      | $                                                                                                                               | 340                                                          |       |                      | $      | 1,837 |        |      | $      | (10,653 | )     
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      | Adjustments to reconcile net income (loss) to
net cash provided by continuing operations      Loss from discontinued operations |                                                              |       |                     |        |       |        |     |        |         |        | 10,929 |       
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | Depreciation and amortization                                |       |                      | 748    |       |        |      | 725    |         |        |        | 731    |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | Goodwill write-off                                           |       |                      |       |       |        |      |       |         |        |        | 55     |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | (Gain) Loss on sale of property and
equipment                |       |                      | 1      |       |        |      | 39     |         |        |        | 80     |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | Provision for doubtful accounts receivable                   |       |                      | 231    |       |        |      | 92     |         |        |        | 269    |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | Common stock issued to ESSOP                                 |       |                      | 164    |       |        |      | 582    |         |        |        | 404    |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | Deferred tax benefit                                         |       |                      | (138   | )     |        |      | (286   | )       |        |        | (287   | )
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|                                                                                            |                                                                                      |                                                                                                                                 | Subtotal                                                     |       |                      | 1,346  |       |        |      | 2,989  |         |        |        | 1,528  |  
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|                                                                                            | Changes in assets and liabilities
        Decrease (increase) in accounts receivable |                                                                                                                                 |                                                              | 1,788 |                      |        |       | (1,400 | )    |        |         | (2,244 | )     
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | (Increase) decrease in prepaids and other assets             |       |                      | (680   | )     |        |      | 165    |         |        |        | (716   | )
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | (Decrease) Increase in accounts payable                      |       |                      | (661   | )     |        |      | 987    |         |        |        | 420    |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | Increase in accrued salaries and vacation                    |       |                      | 348    |       |        |      | 685    |         |        |        | 8      |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | (Decrease) increase in other liabilities                     |       |                      | (432   | )     |        |      | (1,046 | )       |        |        | 1,595  |  
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|                                                                                            |                                                                                      |                                                                                                                                 | Net cash provided by continuing
operations                   |       |                      | 1,709  |       |        |      | 2,380  |         |        |        | 591    |  
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | Changes in net assets/liabilities of discontinued
operations |       |                      | 16     |       |        |      | (1,806 | )       |        |        | (2,258 | )
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|                                                                                            |                                                                                      |                                                                                                                                 | Net cash provided by (used in) operating activities          |       |                      | 1,725  |       |        |      | 574    |         |        |        | (1,667 | )
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|Cash flows from investing activities
       Purchases of property and equipment             |                                                                                      |                                                                                                                                 | (653                                                         | )     |                      |        | (378  | )      |      |        | (482    | )     
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      | Cash used by discontinued operations                                                                                            |                                                              |       |                     |        |       |        |     |        |         |        | (77    | )     
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      | Acquisition of businesses                                                                                                       |                                                              |       |                     |        |       |        |     |        |         |        | (940   | )     
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|                                                                                            |                                                                                      |                                                                                                                                 | Net cash used in investing activities                        |       |                      | (653   | )     |        |      | (378   | )       |        |        | (1,499 | )
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|Cash flows from financing
activities
       Net (payment) borrowings on bank line of credit |                                                                                      |                                                                                                                                 | (395                                                         | )     |                      |        | 444   |        |      |        | 3,390   |       
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      | Principal payments on long-term debt                                                                                            |                                                              |       | (1,135               | )      |       |        | (667 | )      |         |        | (520   | )     
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      | Borrowings on long-term debt                                                                                                    |                                                              |       | 480                  |        |       |        |     |        |         |        |       |       
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      | Notes payable for leases                                                                                                        |                                                              |       |                     |        |       |        |     |        |         |        | 66     |       
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      | Purchase of treasury stock                                                                                                      |                                                              |       | (34                  | )      |       |        |     |        |         |        |       |       
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      | Proceeds from issuance of common stock                                                                                          |                                                              |       | 9                    |        |       |        | 13   |        |         |        | 206    |       
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|                                                                                            |                                                                                      |                                                                                                                                 | Net cash (used in) provided by financing
activities          |       |                      | (1,075 | )     |        |      | (210   | )       |        |        | 3,142  |  
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|                                                                                            |                                                                                      |                                                                                                                                 | Net decrease in cash                                         |       |                      | (3     | )     |        |      | (14    | )       |        |        | (24    | )
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                            |                                                                                      |                                                                                                                                 | Cash at the beginning of the year                            |       |                      | 58     |       |        |      | 72     |         |        |        | 96     |  
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       
|                                                                                            |                                                                                      |                                                                                                                                 | Cash at the end of the year                                  |       | $                    | 55     |       |        | $    | 58     |         |        | $      | 72     |  
|                                                                                            |                                                                                      |                                                                                                                                 |                                                              |       |                      |        |       |        |      |        |         |       

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

F-5



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##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation:The accompanying consolidated financial
statements include the accounts of Versar, Inc. and its majority-owned
subsidiaries (Versar or the Company). All significant intercompany
balances and transactions have been eliminated in consolidation. In September
1998, the Company decided to discontinue its management services and
engineering, design and construction services businesses, which are classified
as discontinued operations. Both of these businesses were acquired in the
acquisition of Science Management Corporation (SMC) in May 1997 (see Note B).
In fiscal year 2000, the Company restated the financial statements for fiscal
year 1998 in the Companys fiscal year 1999 10K/A. The restatement was made
due to unrecorded payroll and state tax liabilities in the discontinued
operations of SMC McEver, Inc. Refer to the 10K/A for fiscal year 1999 for
further details. The Companys remaining business segments are environmental,
health and safety services, energy conservation services and facility and
public infrastructure services. The energy conservation and facility and
public infrastructure segments are collectively less than 10% of the
consolidated revenues, operating profit and identifiable assets and therefore
separate segment reporting is not required. Both segments are expected to grow
and may become separate reportable segments in fiscal year 2001.

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

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

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

Intangible assets: On April 29, 1996, Versar purchased for 30,000 common
shares the assets of ValuAdd. The purchase resulted in the Company recording
goodwill of $97,500, which was being amortized over a five-year
period. In fiscal year 1998, the Company recorded a special charge of
$330,000 to write off receivables and remaining goodwill of approximately
$55,000 for the ValuAdd operations. The Companys decision to shut down the
ValuAdd operations was a result of significant business shortfalls in the
ValuAdd operations.

F-6



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##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On May 2, 1997, Versar acquired 53.5% of the outstanding common stock and
all outstanding preferred stock of Science Management Corporation (SMC) for
cash. Versar had selected a period of 15 years for amortization of the
goodwill, which was determined to be reasonable based on the mature businesses
of SMC.

On October 22, 1997, the shareholders of SMC approved the Agreement and
Plan of Merger between Versar and SMC, and SMC was merged into a wholly-owned
subsidiary of Versar effective October 23, 1997. In connection with the
merger, Versar issued 533,433 shares of Versars common stock to SMC
stockholders and SMC became a wholly-owned subsidiary of Versar. The issuance
of the 533,433 shares and transaction costs increased goodwill and equity of
Versar during the second quarter of fiscal year 1998 by approximately
$2,898,000.

In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, in the fourth quarter of fiscal year 1998, the Company determined that
the projected future cash flows over the next 14 years, based on current
information, would not be sufficient to offset the goodwill amortization
related to the SMC acquisition. The Company further determined that the
goodwill was fully impaired and, accordingly, wrote off the entire balance of
$5,064,000 of goodwill resulting from the SMC acquisition. This write-off is
included in the loss from discontinued operations on the accompanying
consolidated statements of operations.

On January 30, 1998, Versar completed the acquisition of The Greenwood
Partnership, Ltd. (Versar Greenwood or VGI). The transaction was accounted
for as a purchase. Goodwill recorded as part of the transaction was
approximately $1.1 million. Versar is amortizing the goodwill related to the
acquisition over 15 years, which was determined to be reasonable based on the
mature business of Versar Greenwood.

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 overhead.

Income taxes: The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of certain assets and liabilities.

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

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,
|                                                        |  |                     
|                                                        |  | 2000                 |       | 1999           |  | 1998
|                                                        |  |                      |       |                |  |     
|                                                        |  |                      |       | (In thousands)
|Weighted average number of shares outstanding
- basic   |  |                      | 6,400 |                |  |      | 6,190 |  |  |  | 5,695 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Effect of assumed exercise of options                   |  |                      | 87    |                |  |      | 93    |  |  |  |      | 
|                                                        |  |                      |       |                |  |      |       |  |  |  |       | 
|Weighted average number of shares outstanding
- diluted |  |                      | 6,487 |                |  |      | 6,283 |  |  |  | 5,695 | 

F-7



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##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Deferred compensation: The Company permitted employees to defer a portion
of their compensation, during fiscal years 1988 through 1991, providing for
future annual payments, including interest. Interest is accrued on a monthly
basis at the amount stated in each employees agreement. The Company has
liabilities for deferred compensation of $1,046,000 and $1,052,000 at June 30,
2000 and 1999, 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
$431,000 and $292,000 at June 30, 2000 and 1999, 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 ACQUISITIONS

On May 2, 1997, Versar acquired 53.5% of the outstanding common stock and
all outstanding preferred stock of SMC for $2,870,000 in cash. The acquisition
was financed by a three-year $2,000,000 term note at a prime rate of interest
plus 1/2% (9% at June 30, 1998) from NationsBank, N.A. The remaining portion
of $870,000 was paid with current working capital. This transaction was
accounted for under the purchase method of accounting. On October 22, 1997,
the shareholders of SMC approved the Agreement and Plan of Merger between
Versar and SMC, and SMC was merged into a wholly-owned subsidiary of Versar
effective October 23, 1997. In connection with the merger, Versar issued
533,433 shares of Versars common stock to SMC stockholders other than Versar,
and SMC became a wholly-owned subsidiary of Versar. The issuance of the
533,433 shares increased goodwill and equity of Versar during the second
quarter of fiscal year 1998 by $2,898,000. SMC represented the engineering,
design and construction services and management services segments of the
Company in fiscal year 1997. The entire balance of the goodwill was written
off in fiscal year 1998 and the SMC businesses are presented as discontinued
operations in fiscal year 1998.

On January 30, 1998, Versar completed the acquisition of The Greenwood
Partnership, Ltd. As a part of the acquisition, the Company increased its
current line of credit by $2,000,000 and retired existing debt of Versar
Greenwood of approximately $672,000, paid $300,000 in cash, recorded an
additional note payable to Versar Greenwood stockholders of $450,000 payable
over 4 years, and issued 228,572 shares of common stock. The transaction was
accounted for as a purchase of assets and goodwill recorded as part of the
transaction was approximately $1.1 million. The assets of Versar Greenwood are
now included as collateral as part of the Companys line of credit. The
Greenwood operation became part of Versars energy conservation segment.

NOTE C DISCONTINUED OPERATIONS

As a result of poor performance following its acquisition of SMC, the
Company decided to discontinue the operations of its management services and
engineering, design and construction services segments (acquired from
SMC), which provided services to the commercial and the petrochemical
industries. The engineering, design and construction services segment was
severely impacted by the recent downturn in the petrochemical industry and the
winding down of a $20 million construction project, which reduced its sales
volume by over 80%. Such a downturn could not be reasonably anticipated as
several pending projects were put on hold or cancelled because the reduced oil

F-8



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##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

prices did not make it economically feasible for the projects. The management
services segment of SMC also suffered from the loss of three large contracts,
which represented 75% of the sales volume. SMCs sales for fiscal year 1998
were $33,283,000 and $3,582,000 for the two months of fiscal year 1997.

In October 1998, the management services segment was sold to the remaining
SMC principals in exchange for the release of certain employment obligations.
In November 1998, the engineering, design and construction segments fixed
assets were sold to an unrelated third party for book value. All other
remaining assets and liabilities were retained by the Company.

In conjunction with the decision to discontinue these businesses, the
Company recorded a loss from discontinued operations of $10,929,000, net of
$397,000 tax benefit, due to the write-off of goodwill associated with its
acquisition and operating losses of $7,876,000 (net of tax) and accrued
reserves of $3,053,000 to finalize the disposition. As part of the accrued
reserves, the Company reserved approximately $1,700,000 for operating losses
during the phase out period.

NOTE D ASSET DISPOSITIONS

Sarnia Corporation (Sarnia), formerly Versar Virginia, Inc., a former
wholly-owned real estate subsidiary of Versar, was spun-off to Versar
stockholders on June 30, 1994. Sarnia was established in 1982 to own and
operate Versar Center, the headquarters buildings of Versar in Springfield,
Virginia. On June 30, 1994, Versar distributed to the holders of its common
stock substantially all of the common stock of Sarnia (the Distribution).
The Distribution provided Versar stockholders one share of Sarnia common stock
for every outstanding share of Versar common stock. The spin-off, although a
divestiture for legal and tax purposes, was not accounted for as a divestiture
for accounting purposes until January 1996, because the spin-off did not
relieve Versar of the risks of ownership due to Versars guarantee of Sarnias
$12,400,000 debt at June 30, 1994.

On January 25, 1996, Sarnia obtained new financing which reduced Versars
guarantee of Sarnias indebtedness from $12,400,000 to $1,500,000. Sarnia has
paid down the debt that Versar has guaranteed to $600,000 at June 30, 2000, and
accordingly, Versars current reserve is $600,000 against the guarantee. After
the second quarter of fiscal year 1996, Versar no longer includes the results
of operations and financial position of Sarnia in the consolidated financial
statements.

NOTE E ACCOUNTS RECEIVABLE

|                                          |            |   |                |       |      |   |        |       | 
|----------------------------------------- | ---------- | - | -------------- | ----- | ---- | - | ------ | ----- | 
|                                          |            |   | June 30,      
|                                          |            |   |               
|                                          |            |   | 2000           |       | 1999
|                                          |            |   |                |       |     
|                                          |            |   | (In thousands)
|Billed receivables
     U.S. Government   |            | $ | 4,818          |       |      | $ | 3,534  |      
|                                         
|                                         
|                                         
|                                         
|                                          | Commercial |   |                | 3,588 |      |   |        | 7,134 | 
|                                         
|                                         
|                                         
|                                         
|Unbilled receivables
     U.S. Government |            |   | 4,579          |       |      |   | 3,391  |      
|                                         
|                                         
|                                         
|                                         
|                                          | Commercial |   |                | 1,483 |      |   |        | 2,489 | 
|                                          |            |   |                |       |      |   |        |      
|                                          |            |   | 14,468         |       |      |   | 16,548 |      
|                                         
|                                         
|                                         
|                                         
|Allowance for doubtful accounts           |            |   | (548           | )     |      |   | (609   | )    
|                                          |            |   |                |       |      |   |        |      
|                                          |            | $ | 13,920         |       |      | $ | 15,939 |      
|                                          |            |   |                |       |      |   |        |      

F-9



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##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2000 unbilled receivables will be substantially billed and collected
in fiscal year 2001.

NOTE F PROPERTY AND EQUIPMENT

|                                                |  |  |               |  |          |   |                |   |      |   |        |   | 
|----------------------------------------------- |  |  | ------------- |  | -------- | - | -------------- | - | ---- | - | ------ | - | 
|                                                |  |  | Estimated    
|                                                |  |  | Useful Life  
|                                                |  |  | in Years      |  | June 30,
|                                                |  |  |               |  |         
|                                                |  |  |               |  |          |   | 2000           |   | 1999
|                                                |  |  |               |  |          |   |                |   |     
|                                                |  |  |               |  |          |   | (In thousands)
|Furniture and fixtures                          |  |  | 5             |  |          | $ | 1,278          |   |      | $ | 1,499  |  
|                                               
|                                               
|                                               
|                                               
|Equipment                                       |  |  | 3 to 10       |  |          |   | 5,382          |   |      |   | 5,538  |  
|                                               
|                                               
|                                               
|                                               
|Leasehold improvements                          |  |  | Life of lease |  |          |   | 1,896          |   |      |   | 2,105  |  
|                                                |  |  |               |  |          |   |                |   |      |   |        |  
|                                                |  |  |               |  |          |   | 8,556          |   |      |   | 9,142  |  
|                                               
|                                               
|                                               
|                                               
|Accumulated depreciation
      and amortization |  |  |               |  |          |   | (6,095         | ) |      |   | (6,676 | )
|                                                |  |  |               |  |          |   |                |   |      |   |        |  
|                                                |  |  |               |  |          | $ | 2,461          |   |      | $ | 2,466  |  
|                                                |  |  |               |  |          |   |                |   |      |   |        |  

Depreciation and amortization of property and equipment included as
expense in the accompanying Consolidated Statements of Operations was $674,000,
$652,000, and $681,000 for the years ended June 30, 2000, 1999, and 1998,
respectively.

Maintenance and repair expenses approximated $312,412, $322,000, and
$279,000 for the years ended June 30, 2000, 1999, and 1998, respectively.

NOTE G DEBT

|                                      |            |   |                |       |      |   |        |       | 
|------------------------------------- | ---------- | - | -------------- | ----- | ---- | - | ------ | ----- | 
|                                      |            |   | June 30,      
|                                      |            |   |               
|                                      |            |   | 2000           |       | 1999
|                                      |            |   |                |       |     
|                                      |            |   | (In thousands)
|Bank line of credit, NationsBank, N.A |            | $ | 3,713          |       |      |   | 4,108  |      
|                                     
|                                     
|                                     
|                                     
|Acquisition promissory note           |            |   |               |       |      |   | 688    |      
|                                     
|                                     
|                                     
|                                     
|Other                                 |            |   | 480            |       |      |   | 447    |      
|                                      |            |   |                |       |      |   |        |      
|                                      | Total debt |   |                | 4,193 |      |   |        | 5,243 | 
|                                     
|                                     
|                                     
|                                     
|Current portion of long-term debt     |            |   | (480           | )     |      |   | (1,135 | )    
|                                      |            |   |                |       |      |   |        |      
|Long-term debt                        |            | $ | 3,713          |       |      | $ | 4,108  |      
|                                      |            |   |                |       |      |   |        |      

Versars line of credit provides for advances up to $6,500,000 based on
qualifying receivables less the $600,000 guarantee of Sarnias term loan by
Versar and any outstanding acquisition loan balance. Interest on the
borrowings is based on the lower of the 30 day London Interbank Offered
Rate (LIBOR) plus two hundred and eighty basis points (9.18% at June 30, 2000).
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, 2000 was approximately $892,000. The
Company was in compliance with its financial covenants at June 30, 2000. In
December 1999, the Company extended its line of credit until November 2001.

F-10



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VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The loan has certain covenants related to maintenance of financial ratios.
Advances under the line are due upon demand
or on November 30, 2001. Management believes that cash generated by operations
and borrowings available from
the bank line of credit will be adequate to meet the working capital needs for
fiscal year 2001.

Versar obtained a $2,000,000 promissory note from NationsBank on April 30,
1997 for the acquisition of SMC (See Note B). The interest on the note is
based on prime rate plus one half of one percent (.50%) per annum. Principal
payments commenced on May 31, 1997 and were paid in full on April 30, 2000.

Versar guarantees certain debt of Sarnia Corporation. Sarnias balance
due on the term loan was $600,000 at June 30, 2000 and accordingly, Versar
reduced its reserve to $600,000 as of June 30, 2000. As the term loan is
repaid, the reserve will be reduced and added to Versars equity.

The revolving bank line of credit amount outstanding based on average
daily balances outstanding for the revolving bank line of credit for the years
ended June 30, 2000, 1999, and 1998, approximated $4,180,000, $4,906,000 and
$2,126,000, respectively, and the weighted average interest rates for such
periods were 8.50%, 8.00%, and 8.19%, respectively. The maximum amount
outstanding approximated $6,086,500, $6,125,600, and $4,449,700 during fiscal
years 2000, 1999, and 1998, respectively. Weighted average interest rates are
computed by relating the interest expense to the average month-end balance.

Interest payments were $414,000, $533,000, and $339,000 for the fiscal
years ended June 30, 2000, 1999, and 1998, respectively.

NOTE H STOCK OPTIONS

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

At June 30, 2000, options to purchase an aggregate of approximately
1,591,000 shares of common stock were outstanding under the 1996, 1992 and 1982
Plans at per share exercise prices ranging from $1.750 to $5.375, and options
to purchase an aggregate of approximately 299,000 shares were outstanding under
the Non-Qualified Stock Option Plan at per share exercise prices ranging from
$2.375 to $4.750.

Under the 1992 Plan, options may be granted to key employees at the fair
market value on the date of grant and become exercisable during the five-year
period from the date of the grant at 20% per year. Certain unexercised options
are cancelled on the fifth anniversary of certain grants under the 1982 Plan
and on the tenth anniversary of the grant under the remainder of the 1982 and
1992 Plans. Under the 1996 Stock Option Plan, options may be granted at the
fair market value on the date of grant. The vesting of each option will be
determined by the Administrator of the Plan. Each option expires on the
earlier of the last day of the tenth year after the date of grant or the date
the optionee ceases to be affiliated with the Company or its subsidiaries.

F-11



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##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

|                             |           |  |          |                                        |              |   |       |       |  |  |  |  |  |  |    |    |  |   |       |       |  |   |       |       |  
|---------------------------- | --------- |  | -------- | -------------------------------------- | ------------ | - | ----- | ----- |  |  |  |  |  |  | -- | -- |  | - | ----- | ----- |  | - | ----- | ----- | -
|                             |           |  | Optioned |                                        | Option Price
|                             |           |  | Shares   |                                        | Per Share    |   | Total
|                             |           |  |          |                                        |              |   |      
|                             |           |  |          | (In thousands, except per share price)
|Outstanding at June 30, 1997 |           |  | 924      |                                        |              | $ | 2.375 |       |  |  |  |  |  |  | to |    |  | $ | 3.940 |       |  | $ | 2,853 |      
|                            
|                            
|                            
|                            
|                             | Granted   |  |          | 326                                    |              |   |       | 3.375 |  |  |  |  |  |  |    | to |  |   |       | 5.375 |  |   |       | 1,466 |  
|                            
|                            
|                            
|                            
|                             | Exercised |  |          | (61                                    | )            |   |       | 2.375 |  |  |  |  |  |  |    | to |  |   |       | 3.940 |  |   |       | (176  | )
|                            
|                            
|                            
|                            
|                             | Cancelled |  |          | (19                                    | )            |   |       | 2.375 |  |  |  |  |  |  |    | to |  |   |       | 3.940 |  |   |       | (61   | )
|                             |           |  |          |                                        |              |   |       |       |  |  |  |  |  |  |    |    |  |   |       |       |  |   |       |      
|Outstanding at June 30, 1998 |           |  | 1,170    |                                        |              | $ | 2.375 |       |  |  |  |  |  |  | to |    |  | $ | 5.375 |       |  | $ | 4,082 |      
|                            
|                            
|                            
|                            
|                             | Granted   |  |          | 394                                    |              |   |       | 1.750 |  |  |  |  |  |  |    | to |  |   |       | 3.063 |  |   |       | 730   |  
|                            
|                            
|                            
|                            
|                             | Exercised |  |          | (5                                     | )            |   |       | 2.375 |  |  |  |  |  |  |    | to |  |   |       | 2.688 |  |   |       | (13   | )
|                            
|                            
|                            
|                            
|                             | Cancelled |  |          | (154                                   | )            |   |       | 1.750 |  |  |  |  |  |  |    | to |  |   |       | 4.500 |  |   |       | (527  | )
|                             |           |  |          |                                        |              |   |       |       |  |  |  |  |  |  |    |    |  |   |       |       |  |   |       |      
|Outstanding at June 30, 1999 |           |  | 1,405    |                                        |              | $ | 1.750 |       |  |  |  |  |  |  | to |    |  | $ | 5.375 |       |  | $ | 4,272 |      
|                            
|                            
|                            
|                            
|                             | Granted   |  |          | 271                                    |              |   |       | 2.375 |  |  |  |  |  |  |    | to |  |   |       | 2.813 |  |   |       | 650   |  
|                            
|                            
|                            
|                            
|                             | Exercised |  |          | (5                                     | )            |   |       | 1.750 |  |  |  |  |  |  |    | to |  |   |       | 1.750 |  |   |       | (9    | )
|                            
|                            
|                            
|                            
|                             | Cancelled |  |          | (80                                    | )            |   |       | 1.750 |  |  |  |  |  |  |    | to |  |   |       | 4.500 |  |   |       | (234  | )
|                             |           |  |          |                                        |              |   |       |       |  |  |  |  |  |  |    |    |  |   |       |       |  |   |       |      
|Outstanding at June 30, 2000 |           |  | 1,591    |                                        |              | $ | 1.750 |       |  |  |  |  |  |  | to |    |  | $ | 5.375 |       |  | $ | 4,679 |      
|                             |           |  |          |                                        |              |   |       |       |  |  |  |  |  |  |    |    |  |   |       |       |  |   |       |      

At June 30, 2000, 1999, and 1998, options of 1,066,144, 859,000 and
685,000 shares were exercisable under the 1982, 1992 and 1996 Plans.

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

F-12



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##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Options under the 1987 Non-Qualified Plan are as follows:

|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |      |  
|---------------------------- | --------- |  | -------------------------------------- | --- | ------------ | - | ----- | ----- |  |  | -- | -- |  | - | ----- | ----- |  | - | ----- | ---- | -
|                             |           |  | Optioned                               |     | Option Price
|                             |           |  | Shares                                 |     | Per Share    |   | Total
|                             |           |  |                                        |     |              |   |      
|                             |           |  | (In thousands, except per share price)
|Outstanding at June 30, 1997 |           |  | 369                                    |     |              | $ | 2.375 |       |  |  | to |    |  | $ | 3.563 |       |  | $ | 1,063 |     
|                            
|                            
|                            
|                            
|                             | Granted   |  |                                        |    |              |   |       |      |  |  |    |    |  |   |       |      |  |   |       |     |  
|                            
|                            
|                            
|                            
|                             | Cancelled |  |                                        | (15 | )            |   |       | 3.125 |  |  |    | to |  |   |       | 3.125 |  |   |       | (47  | )
|                            
|                            
|                            
|                            
|                             | Exercised |  |                                        | (10 | )            |   |       | 3.125 |  |  |    | to |  |   |       | 3.125 |  |   |       | (31  | )
|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |     
|Outstanding at June 30, 1998 |           |  | 344                                    |     |              | $ | 2.375 |       |  |  | to |    |  | $ | 3.563 |       |  | $ | 985   |     
|                            
|                            
|                            
|                            
|                             | Granted   |  |                                        | 10  |              |   |       | 4.750 |  |  |    | to |  |   |       | 4.750 |  |   |       | 48   |  
|                            
|                            
|                            
|                            
|                             | Cancelled |  |                                        | (50 | )            |   |       | 3.125 |  |  |    | to |  |   |       | 3.125 |  |   |       | (156 | )
|                            
|                            
|                            
|                            
|                             | Exercised |  |                                        |    |              |   |       |      |  |  |    |    |  |   |       |      |  |   |       |     |  
|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |     
|Outstanding at June 30, 1999 |           |  | 304                                    |     |              | $ | 2.375 |       |  |  | to |    |  | $ | 4.750 |       |  | $ | 877   |     
|                            
|                            
|                            
|                            
|                             | Granted   |  |                                        |    |              |   |       |      |  |  |    |    |  |   |       |      |  |   |       |     |  
|                            
|                            
|                            
|                            
|                             | Cancelled |  |                                        | (5  | )            |   |       | 2.437 |  |  |    | to |  |   |       | 3.563 |  |   |       | (15  | )
|                            
|                            
|                            
|                            
|                             | Exercised |  |                                        |    |              |   |       |      |  |  |    |    |  |   |       |      |  |   |       |     |  
|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |     
|Outstanding at June 30, 2000 |           |  | 299                                    |     |              | $ | 2.375 |       |  |  | to |    |  | $ | 4.750 |       |  | $ | 862   |     
|                             |           |  |                                        |     |              |   |       |       |  |  |    |    |  |   |       |       |  |   |       |     

Non-Qualified stock options of 298,835, 261,000, and 250,000 shares were
exercisable at June 30, 2000, 1999, and 1998, respectively.

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

|                                     |             |  |  |      |     |      |  |                       |       |  |  |   |         |  
|------------------------------------ | ----------- |  |  | ---- | --- | ---- |  | --------------------- | ----- |  |  | - | ------- | -
|                                     |             |  |  | 2000 |     | 1999 |  | 1998                 
|                                     |             |  |  |      |     |      |  |                      
|                                     |             |  |  |      |     |      |  | (In thousands, except
|                                     |             |  |  |      |     |      |  | per share data)      
|Net Income (Loss):                   | As Reported |  |  | $    | 340 |      |  | $                     | 1,837 |  |  | $ | (10,653 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Pro Forma   |  |  |      | 185 |      |  |                       | 1,761 |  |  |   | (10,824 | )
|                                    
|Net Income (Loss) Per Share - Basic: | As Reported |  |  | $    | .05 |      |  | $                     | .30   |  |  | $ | (1.87   | )
|                                    
|                                    
|                                    
|                                    
|                                     | Pro Forma   |  |  |      | .03 |      |  |                       | .28   |  |  |   | (1.90   | )

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##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The weighted average fair value of options granted was $1.22, $0.97 and
$2.05 during 2000, 1999 and 1998, 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 2000 and 1999:
expected volatility of 49%, 53% and 47% for 2000, 1999 and 1998, respectively;
risk-free interest rate of 6.18%, 5.67% and 5.00% for 2000, 1999 and 1998,
respectively; and expected lives of five years after the grant date.

NOTE I INCOME TAXES

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

|                             |  |                      |      |      |  |                |      |   |  |   |      |  
|---------------------------- |  | -------------------- | ---- | ---- |  | -------------- | ---- | - |  | - | ---- | -
|                             |  | Years Ended June 30,
|                             |  |                     
|                             |  | 2000                 |      | 1999 |  | 1998          
|                             |  |                      |      |      |  |               
|                             |  |                      |      |      |  | (In thousands)
|Currently payable
   Federal |  | $                    |     |      |  | $              |     |   |  | $ | 95   |  
|                            
|                            
|                            
|                            
|State                        |  |                      |     |      |  |                |     |   |  |   | 43   |  
|                            
|                            
|                            
|                            
|Deferred
   Federal          |  |                      | (188 | )    |  |                | (407 | ) |  |   | (287 | )
|                            
|                            
|                            
|                            
|State                        |  |                      | 50   |      |  |                | 121  |   |  |   |     |  
|                             |  |                      |      |      |  |                |      |   |  |   |      |  
|                             |  | $                    | (138 | )    |  | $              | (286 | ) |  | $ | (149 | )
|                             |  |                      |      |      |  |                |      |   |  |   |      |  

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##### Table of Contents



VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

|                          |                                            |                                |        |          |       |          |        |       |       |  
|------------------------- | ------------------------------------------ | ------------------------------ | ------ | -------- | ----- | -------- | ------ | ----- | ----- | -
|                          |                                            |                                |        | June 30, |       | June 30,
|                          |                                            |                                |        | 2000     |       | 1999    
|                          |                                            |                                |        |          |       |         
|Deferred Tax Assets:     
|                         
|                         
|                         
|                         
|                          | Employee benefits                          |                                | $      | 658      |       |          | $      | 776   |      
|                         
|                         
|                         
|                         
|                          | Bad debt reserves                          |                                |        | 209      |       |          |        | 230   |      
|                         
|                         
|                         
|                         
|                          | All other reserves                         |                                |        | 36       |       |          |        | 74    |      
|                         
|                         
|                         
|                         
|                          | Discontinued operations reserves           |                                |        | 316      |       |          |        | 338   |      
|                         
|                         
|                         
|                         
|                          | Alternative minimum tax credits            |                                |        | 117      |       |          |        | 132   |      
|                         
|                         
|                         
|                         
|                          | Net operating losses                       |                                |        | 1,800    |       |          |        | 1,415 |      
|                         
|                         
|                         
|                         
|                          | Net operating losses of purchased
business |                                |        | 1,000    |       |          |        | 1,000 |      
|                         
|                         
|                         
|                         
|                          | State tax net operating losses             |                                |        | 258      |       |          |        | 262   |      
|                         
|                         
|                         
|                         
|                          | Depreciation                               |                                |        | 107      |       |          |        | 42    |      
|                         
|                         
|                         
|                         
|                          | Other                                      |                                |        | 15       |       |          |        | 68    |      
|                          |                                            |                                |        |          |       |          |        |      
|                          |                                            | Total Deferred Tax Assets      |        |          | 4,516 |          |        |       | 4,337 |  
|                         
|                         
|                         
|                         
|Deferred Tax Liabilities:
|                         
|                         
|                         
|                         
|                          | Other                                      |                                |        |         |       |          |        | (3    | )    
|                          |                                            |                                |        |          |       |          |        |      
|                          |                                            | Total Deferred Tax Liabilities |        |          |      |          |        |       | (3    | )
|                         
|                         
|                         
|                         
|Net Deferred Tax Assets   |                                            |                                | 4,516  |          |       |          | 4,334  |      
|                         
|                         
|                         
|                         
|Valuation Allowance       |                                            |                                | (2,499 | )        |       |          | (2,455 | )    
|                          |                                            |                                |        |          |       |          |        |      
|Net Deferred Tax Asset    |                                            | $                              | 2,017  |          |       | $        | 1,879  |      
|                          |                                            |                                |        |          |       |          |        |      

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, 2000, the Company
had $117,000 of alternative minimum tax credit carryforwards which can be
carried forward indefinitely. The alternative minimum tax credit carryforward
may be used to offset regular tax liability in future years to the extent it
exceeds the alternative minimum tax liability. These carryforwards are
reflected as deferred tax assets. The Company has established a valuation
allowance until the probability of realization of these assets becomes more
certain.

SMC has net operating loss carryforwards of approximately $9,500,000 for
federal income tax purposes, which will expire in the years 2001 through 2011.
Due to the substantial changes in SMCs ownership, there are annual limitations
on the amount of the carryforwards that can be utilized. The utilization of
the net operating losses is limited to approximately $300,000 per year for the
11 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.

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VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The tax benefit was composed of the following:

|                                             |  |                      |      |                |  |      |      |   |  |   |      |  
|-------------------------------------------- |  | -------------------- | ---- | -------------- |  | ---- | ---- | - |  | - | ---- | -
|                                             |  | Years Ended June 30,
|                                             |  |                     
|                                             |  | 2000                 |      | 1999           |  | 1998
|                                             |  |                      |      |                |  |     
|                                             |  |                      |      | (In thousands)
|Expected provision at federal
statutory rate |  | $                    | 55   |                |  | $    | 527  |   |  | $ | 43   |  
|                                            
|                                            
|                                            
|                                            
|Change in valuation allowance                |  |                      | (200 | )              |  |      | (900 | ) |  |   | (300 | )
|                                            
|                                            
|                                            
|                                            
|State income tax, net of federal benefit     |  |                      | 33   |                |  |      | 80   |   |  |   | 28   |  
|                                            
|                                            
|                                            
|                                            
|Permanent items                              |  |                      | 5    |                |  |      | 27   |   |  |   | 66   |  
|                                            
|                                            
|                                            
|                                            
|Other                                        |  |                      | (31  | )              |  |      | (20  | ) |  |   | 14   |  
|                                             |  |                      |      |                |  |      |      |   |  |   |      |  
|                                             |  | $                    | (138 | )              |  |      | (286 | ) |  | $ | (149 | )
|                                             |  |                      |      |                |  |      |      |   |  |   |      |  

Income taxes paid for the years ended June 30, 2000, 1999, and 1998 were
$91,000, $ 69,000, and $414,000, respectively.

NOTE J EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN

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

Contributions to the ESOP are made at the discretion of the Company in the
form of the Companys stock or cash, which is invested by the plans Trustees
in the Companys stock. No contributions were made in fiscal years 2000, 1999,
and 1998, respectively.

The Employee Savings Plan was adopted in accordance with Section 401(k) of
the Internal Revenue Code. Under the plan, participants may elect to defer up
to 15% of their salary through contributions to the plan, which are invested in
selected mutual funds or used to buy insurance. The Company will match
qualified contributions with a contribution of 100% of each employees
contribution up to 4% of the employees salary. This contribution may be in the
Companys stock or cash. All Company matching contributions were made in stock
and approximated $164,000, $629,000, and $514,000, for fiscal years 2000, 1999,
and 1998, respectively.

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

GEOMET Technologies, Inc. (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 2000 and 1999. In fiscal year 1998,
contributions approximated $25,000. Vesting occurs over time, such that an
employee is 100% vested after seven years of participation.

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VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 1997 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 213,000 square feet of office space,
including space leased from Sarnia, as well as data processing and other
equipment under agreements expiring through 2009. Minimum future obligations
under operating leases are as follows:

|                      |  |                |        | 
|--------------------- |  | -------------- | ------ | 
|                      |  | Total         
|Years Ending June 30, |  | Amount        
|                      |  |               
|                      |  | (In thousands)
|2001                  |  |                | 2,945  | 
|                     
|                     
|                     
|                     
|2002                  |  |                | 2,597  | 
|                     
|                     
|                     
|                     
|2003                  |  |                | 2,288  | 
|                     
|                     
|                     
|                     
|2004                  |  |                | 1,947  | 
|                     
|                     
|                     
|                     
|2005                  |  |                | 1,914  | 
|                     
|                     
|                     
|                     
|2006 and thereafter   |  |                | 8,781  | 
|                      |  |                |        | 
|                      |  | $              | 20,472 | 
|                      |  |                |        | 

Certain of the lease payments are subject to adjustment for increases in
utility costs and real estate taxes. Total office rental expense approximated
$2,625,000, $2,561,000 and $2,663,000, for 2000, 1999 and 1998, respectively.

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

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VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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,
|                                     |                       |   |                     
|                                     |                       |   | 2000                 |        | 1999 |   | 1998          
|                                     |                       |   |                      |        |      |   |               
|                                     |                       |   |                      |        |      |   | (In thousands)
|U.S. Department of Defense           |                       | $ | 28,021               |        |      | $ | 24,973         |        |  | $ | 16,771 |       
|                                    
|                                    
|                                    
|                                    
|U.S. Environmental Protection Agency |                       |   | 3,245                |        |      |   | 3,496          |        |  |   | 3,493  |       
|                                    
|                                    
|                                    
|                                    
|Other U.S. Government Agencies       |                       |   | 2,158                |        |      |   | 1,316          |        |  |   | 2,385  |       
|                                     |                       |   |                      |        |      |   |                |        |  |   |        |       
|                                     | Total U.S. Government |   | $                    | 33,424 |      |   | $              | 29,785 |  |   | $      | 22,649 | 
|                                     |                       |   |                      |        |      |   |                |        |  |   |        |       

The Companys largest contract with the U.S. Air Force generated revenues
of approximately $5,502,533, $7,756,000 and $10,513,000 in fiscal years 2000,
1999 and 1998, respectively.

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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 2000 and 1999 is as
follows (in thousands, except per share amounts):

|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------------- |  | ---------------- | ------ | ---------------- |  | ------ | ------ | ------- |  | ------ | ------ | ------ |  | ------ | ------ | ------- |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                        |  | Fiscal Year 2000 |        | Fiscal Year 1999
|                                                        |  |                  |        |                 
|Quarter ending                                          |  | Jun 30           |        | Mar 31           |  | Dec 31 |        | Sept 30 |  | Jun 30 |        | Mar 31 |  | Dec 31 |        | Sept 30
|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |        
|Gross Revenue                                           |  | $                | 15,460 |                  |  | $      | 12,955 |         |  | $      | 13,758 |        |  | $      | 13,976 |         |  | $ | 15,015 |  |  | $ | 13,593 |  |  | $ | 15,479 |  |  | $ | 14,799 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Net Service Revenue                                     |  |                  | 10,117 |                  |  |        | 9,159  |         |  |        | 9,145  |        |  |        | 9,366  |         |  |   | 9,660  |  |  |   | 9,605  |  |  |   | 9,414  |  |  |   | 10,042 | 
|                                                       
|                                                       
|                                                       
|                                                       
|Operating income (loss)                                 |  |                  | 209    |                  |  |        | (186   | )       |  |        | 225    |        |  |        | 480    |         |  |   | 356    |  |  |   | 574    |  |  |   | 486    |  |  |   | 656    | 
|                                                       
|                                                       
|                                                       
|                                                       
|Net income (loss)                                       |  | $                | 71     |                  |  | $      | (185   | )       |  | $      | 274    |        |  | $      | 180    |         |  | $ | 639    |  |  | $ | 257    |  |  | $ | 601    |  |  | $ | 340    | 
|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|Net income (loss) per
share - diluted                   |  | $                | .01    |                  |  | $      | (.03   | )       |  | $      | .04    |        |  | $      | .03    |         |  | $ | .10    |  |  | $ | .04    |  |  | $ | .10    |  |  | $ | .06    | 
|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|Weighted average number of
shares outstanding -
diluted |  |                  | 6,465  |                  |  |        | 6,405  |         |  |        | 6,471  |        |  |        | 6,511  |         |  |   | 6,361  |  |  |   | 6,296  |  |  |   | 6,117  |  |  |   | 6,178  | 
|                                                        |  |                  |        |                  |  |        |        |         |  |        |        |        |  |        |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 

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

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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               |              |  |            |           |  |            |  |            |        |  |         | 
|1998                   |              |  | 589,539    |           |  | 268,485    |  | (242,194)  |        |  | 615,830 | 
|1999                   |              |  | 615,830    |           |  | 92,257     |  | (99,540)   |        |  | 608,547 | 
|2000                   |              |  | 608,547    |           |  | 230,869    |  | (291,012)  |        |  | 548,404 | 

F-20