SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
 
                                 ---------------

                                    FORM 10-K

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

For the fiscal year ended                                        Commission File
      June 30, 1997                                                 No. 1-9309

                                 ---------------

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

                 DELAWARE                                         54-0852979
     -------------------------------                         -------------------
     (State or other jurisdiction of                          (I.R.S. employer 
      incorporation or organization)                         identification no.)

6850 Versar Center, Springfield, Virginia                           22151
-----------------------------------------                    -------------------
 (Address of principal executive offices)                         (Zip code)

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

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

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

                             American Stock Exchange
             ------------------------------------------------------
                   (Name of each exchange on which registered)

          Securities registered pursuant to Section 12(g) of Act: NONE

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.  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 2, 1997 was approximately $10,209,341.

     The number of shares of Common  Stock  outstanding  as of September 2, 1997
was 5,171,459.

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

                        DOCUMENTS INCORPORATED BY REFERENCE

     Portions  of  the  registrant's  Proxy  Statement  to  be  filed  with  the
Securities  and Exchange  Commission  with respect to the 1997 Annual Meeting of
Stockholders  scheduled  to be held on  November  12, 1997 are  incorporated  by
reference into Part III hereof.

<PAGE>

                                     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 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,  the  integration of the recent or ongoing  acquisitions,
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;
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.

     The statements in this report,  including  statements under the headings of
Business,  Legal Proceedings,  and Management's  Discussion and Analysis and the
attached  financial  statements,  reflect  the  business  lines and two  month's
financial results of Science  Management  Corporation  ("SMC").  On May 2, 1997,
Versar,  Inc.  ("Versar"  or the  "Company")  purchased a majority of the common
shares  and  all of the  outstanding  preferred  shares  of  SMC as  more  fully
described  below.  As a  result,  the SMC  revenue  for the last two  months  of
Versar's fiscal year is included in Versar's financial  statements as a majority
owned subsidiary.  In addition,  because SMC has negative retained earnings, the
entire net income of SMC for May and June of 1997 is also  included  in Versar's
results.  This inclusion will continue until the negative  retained earnings are
eliminated and then,  until the closing of the merger  described  below,  Versar
will  account  for  SMC's  earnings  on an equity  basis of its 53.5%  ownership
interest in SMC's common stock. On July 27, 1997, SMC and Versar entered into an
Agreement  and Plan of Merger  which is  subject  to SMC  stockholder  approval.
Versar  believes that the merger and, thus, the acquisition of the remaining SMC
outstanding  common stock,  will occur during the second  quarter of fiscal year
1998.

     Versar is a diversified  international  professional services firm, helping
clients in the  private  and public  sectors  enhance  their  performance  while
reducing costs and achieving environmental excellence.  Versar combines science,
technology, and people with specialized skills to design and implement programs.
In addition, we design systems,  facilities,  and equipment to improve operating
performance,  conserve resources,  reduce emissions and waste generation,  which
ultimately increase  productivity and profitability,  protects worker health and
safety and our environment.

     On May 2, 1997,  pursuant  to a Stock  Purchase  Agreement  dated April 30,
1997,  Versar  purchased  from  Imperial  Capital  Worldwide  Partners,  L.P., a
Delaware limited partnership  ("Imperial")  1,070,000 shares common stock of SMC
(representing  53.5% of the issued and outstanding common stock of SMC), 100% of
the  issued  and  outstanding  preferred  stock of SMC and  certain  options  to
purchase 350,000  additional  shares of SMC common stock for a purchase price of
$2,790,000 paid in cash. As additional  consideration  for such stock purchases,
the Company paid certain legal fees  incurred by Imperial and its  affiliates in
connection  with the stock  purchase  and  other  matters  related  to SMC in an
aggregate  amount  of  $80,000.  The  purchase  price  paid by the  Company  was
determined by the Company's bid exceeding another competitive bid.

     Versar's four major business  areas are: (1)  environmental  services;  (2)
management services; (3) facilities and information management services; and (4)
engineering,  design, and construction services to the process industries. As is
indicated  below,  certain of these business areas have developed as a result of
the integration of

                                        2

<PAGE>

SMC into the Versar  corporate  group and represent a combination of traditional
services of SMC with Versar's traditional services offerings.

     Environmental  Services include the full range of scientific,  engineering,
and  construction  services to address the  prevention,  detection,  management,
control,  and cleanup of toxic substances and hazardous waste in the environment
and constituted the primary  business line of Versar prior to the acquisition of
SMC.  Versar  emphasizes  innovation in process and  technology  application  to
achieve  better  results  more  quickly  and at  less  cost  in  today's  highly
competitive market.  Versar's  Environmental Services Group works in partnership
with  government  and  industry by becoming an involved  member of our  clients'
organization.  We focus on a client-centered approach that builds relationships,
sets priorities,  ensures proper  allocation and control of resources,  supports
and  encourages  synergistic  activities  among  the  various  elements  of  the
organization,  and  monitors  results.  Our  goal is to help our  clients  build
environmental performance into each aspect of their organizational activities to
enhance  both their  environmental  performance  and improve  their bottom line.
Versar  achieves this goal by helping  clients  become more active in preventing
pollution,  better manage the spectrum of  environmental  compliance,  and apply
innovative and cost-effective  approaches to remediation or corrective action of
past problems in our environment.

     Today's  environmental  challenges require an integrated  multidisciplinary
team actively  assisting  clients in making informed  decisions and implementing
them at the least cost. These challenges are driven by:

     o    A Complex and changing  environmental  regulations  and the need for a
          more   strategic   approach  to  meet   national   and   international
          environmental  requirements  in a  way  that  allows  industry  to  be
          profitable and competitive in a global market.

     o    A Increased  emphasis on compliance  management and  recognition  that
          pollution prevention and waste minimization are necessary parts of the
          long-term sollution to local and national environmental challenges.

     o    A  Competition  for  limited  resources  and a need for new and better
          technology to achieve pollution  prevention and remediation goals more
          cost effectively.

Versar  helps its clients  meet these  challenges  as a  full-service  firm that
emphasizes:

Strategic  Planning  and  Pollution  Prevention.  These are  Versar's  trademark
environmental  services,  capitalizing  on its combined  strengths in regulatory
policy,  risk  assessment,   information  management,   pollution  control,  and
treatment technology, which emphasize pollution prevention. This service is also
fully integrated with and is part of Versar's Management  Services.  Versar also
provides  nationally  recognized  services  in the  area  of  natural  resources
management and ecological studies.

Total Compliance  Management  (TCM). TCM is a strategic  approach and process of
continuous  improvement  that permits  senior  management to view  environmental
compliance expenditures as a business investment thus creating an "Environmental
Balance Sheet." Versar consults at the highest levels of industry and government
where policy decisions are made. Versar supports its clients in implementing new
programs  and  approaches  as well as  managing  current  programs  on-site  and
outsourcing  through its Facilities and  Information  Services.  Versar has also
positioned  itself  to  be  a  leader  in  marketing  services  related  to  the
environmental  standards by the  International  Organization for Standards,  ISO
14000. A further  enhancement to the ISO 9000 quality standards  promulgated and
widely  adopted   several  years  ago,  ISO  14000  will   establish   voluntary
environmental compliance standards for the international business community.

Corrective/Remedial  Action.  Versar  provides  the full  range of  services  in
remedial/corrective   action   from   site   investigation,   remedial   design,
construction,  and operation and maintenance (O&M) of remedial systems. More and
more clients are asking how their project can be accomplished  more efficiently.
Versar  emphasizes   innovative   solutions  to  such  problems  as  groundwater
remediation. For example, Versar successfully demonstrated the

                                        3

<PAGE>

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.  Versar also brings to its clients a new alternative to conventional
remedial technologies, known as Bio-Injection. This method of remediation allows
the concurrent treatment of soils and groundwater with a mixture of bacteria and
nutrients.  This process typically requires a one-time treatment,  with positive
results  achieved within months instead of years at less cost than  conventional
treatment methods.

     Versar is applying these and other technologies as it focuses more and more
on emerging  opportunities in the  redevelopment of industrial  properties under
EPA and States' Brownfields programs. Versar has established alliances with real
estate  and  investment  firms to help  clients  bring  new  life to  abandoned,
contaminated sites in prime real estate areas.

     Versar's  Environmental  Services  address  management,   compliance,   and
remedial/corrective  needs  of  clients  in a  wide  range  of  technical  areas
including:

     o    Environmental Policy
     o    Air Quality
     o    Water/Groundwater Quality
     o    Waste Management
     o    Risk Assessment
     o    Ecological Studies
     o    Technology Evaluations
     o    Natural Resources Management
     o    Industrial Hygiene
     o    Asbestos and Lead Paint
     o    Tank Management

     Personal  Protection  Equipment  (PPE)/ChemDemil.  A specialty area for the
Company is our Chemical Surety  Laboratory and our related expertise in personal
protection  equipment.  Versar's  support to the U.S.  Army's  Chemical  Weapons
Demilitarization  program is an  important  business  area for Versar.  Versar's
subsidiary,  GEOMET Technologies,  Inc., is involved in the disposal of residual
chemical  weapons  material  at sites  throughout  the United  States.  GEOMET's
program,  now in its third year,  includes  outfitting  and operating the 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 is also in the business of developing and testing
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
an  individual  cooling  system  for the  worker.  GEOMET  is also a  commercial
supplier to remedial action  contractors  and others of PPE specially  qualified
for chemical protection.  Driven in part by the Sarin attack on the Tokyo subway
in 1995,  Versar has  significantly  expanded  offering  its  services to local,
State,  and  foreign  governments  in support of  counter-terrorism.  Management
believes the  opportunities  for commercial  application  will continue to grow.
GEOMET also has an energy services practice,  which involves energy auditing and
energy  conservation  services  to a variety of clients.  This  service is fully
integrated with and part of utility support services.

     Management  Services  include  strategic  planning and the  development and
implementation  of  comprehensive  programs to help  clients  optimize  resource
utilization to enhance  operating  performance,  improve the quality of products
and services, achieve sustainable environmental compliance as well as maintain a
competitive  advantage  and  return on  investment  goals.  Versar's  Management
Services Group assists its clients in identifying  areas requiring  improvement,
provides specific recommendations,  develops programs, and actively participates
in their  implementation.  Using a "Total Enterprise"  approach to productivity,
the Management Services Group helps clients

                                        4

<PAGE>

improve   profitability  by  more  effectively  employing  all  their  resources
(personnel,  materials,  equipment,  facilities,   organization,   science,  and
technology)  in day-to-day  operations  and adapting to ever  changing  business
conditions. A key focus is helping clients integrate environmental,  health, and
safety  performance into facility  operation in a way that reduces operating and
overhead  costs,  emissions  and waste  generation,  and the need for  expensive
"end-of-pipe"  control technology.  Key service areas of the Management Services
include:

     o    Profit Improvement and Sustainability
     o    Team Building and Improved Management Effectiveness
     o    Organizational Optimization
     o    Quality Improvement/Management
     o    Resources Management and Conservation
     o    Technology Management
     o    Risk Management
     o    Strategic Environmental Management
     o    Business Process Reengineering
     o    Logistics Support
     o    Documentation Reduction
     o    Facility O&M Performance Benchmarking and Improvement

     Versar has provided  management  consulting and program support services to
both  government and industry.  Versar has  significantly  expanded this service
offering with the  acquisition of SMC, one of whose core businesses is providing
senior  level  strategic  planning  and  management  consulting  services.   The
Management  Services  Group which  employs a variety of  proprietary  analytical
techniques   including  the   Work-Factor(R)   System,   a  widely   recognized,
predetermined  elemental  time system  developed  by SMC and used to measure the
human work component of highly-repetitive  manufacturing processes. SMC has also
developed other systems and techniques  designed to improve the  productivity of
administrative,   support,  and  professional  personnel  in  a  wide  range  of
functions.

     Facilities  and  Information  Management  Services  include a full range of
utility   infrastructure   (energy,   water,   wastewater)   support   services,
environmental  compliance  management  functions,  information  management,  and
business  recovery  services.  Versar provides  consulting  services and on-site
support with  dedicated  personnel,  and takes  responsibility  for and provides
specific services on an outsourcing basis.

     Versar provides utility infrastructure support services in three areas:

     o    A Consulting and  management  support in  evaluating,  procuring,  and
          implementing  alternative  options  for the  optimization  of  utility
          operations  and  maintenance   services.  A  key  focus  is  improving
          compliance  and the quality of utility  services,  while  reducing the
          costs of these services  through  better use of available  technology,
          training,  and  development  of  operating  personnel  and  innovative
          approaches to project financing.

     o    A Contract  operations  or  outsourcing  where  Versar  takes over the
          operations and maintenance of our clients' utility infrastructure.

     o    A Privatization  initiatives where Versar designs,  builds,  operates,
          and maintains a client's utility infrastructure needs.

Versar also offers  services to take over existing  utility assets on a purchase
or lease basis.  Versar will deliver the required  services on a contract  basis
and will assume responsibility for permitting and ensuring regulatory compliance
for all systems it manages whether  performed on a outsourcing  basis or under a
privatization initiative.

                                        5

<PAGE>

     Versar provides  environmental  compliance management services both on-site
and on an  outsourcing  basis to meet our  clients'  needs as they  continue  to
restructure, reduce their overhead costs, and improve productivity. Industry and
government are using new  technology to improve  environmental  performance  and
bolster  profits.  In doing so,  companies are turning to solutions that address
pollution prevention as an integral part of plant operations and control. Versar
brings  its  clients  knowledge  and  experience  in  the  application  of  such
technology.  An  integral  part  of  Versar's  services  is the  application  of
environmental  health  and  safety  management  information  systems  in helping
clients make more informed decisions.  Having long recognized the limitations of
regulatory driven environmental, health, and safety programs, Versar has focused
on the economic benefits of an alternative approach to environmental management.
This approach  places the  customer's  business  objectives at the center of the
decision-making process, and then addresses the environmental, health and safety
issues in such a way that they complement  those objectives while complying with
the regulations. Beyond regulatory compliance, this approach challenges Versar's
expertise  to develop and  implement  alternatives  that  enhance  the  client's
productivity  and reduce  the unit costs of  operations.  Versar  will  tailor a
program to suite a client's  needs as part of its  management  services and then
implement it through on-site support or on an outsourcing basis, as required.

     Versar's Business  Information  Systems ("BIS") services,  operated through
SMC, include systems support in Facilities  Management,  Business Recovery,  and
Professional Support Services.  Versar offers clients the full range of services
in managing,  staffing,  and operating data processing centers,  operations,  or
specific functions in accordance with client specifications.  Services performed
and functions  managed include data entry,  tape handling,  library  management,
maintenance,  and systems development.  Under multi-year  subcontracts from IBM,
Versar's BIS group currently  manages data centers in Connecticut and Tennessee,
performing a variety of activities for clients in several  industries.  With low
overhead and highly skilled  management,  Versar's BIS group offers  outsourcing
services at significantly  lower costs than larger  competitors.  The facilities
management   operations  of  BIS  have  built  an  excellent   service   record,
consistently  achieving  performance  reliability  targets  well  in  excess  of
contract requirements.

     In the business recovery area, Versar's BIS group offers a complete menu of
services  covering all aspects of business  continuation and recovery  services.
Through its highly qualified staff and consultants,  the BIS  professionally and
cost effectively  evaluates a client's business continuation and recovery needs,
creates specific  disaster recovery plans and programs,  and audits,  updates or
tests existing client plans for data backup and disaster  response.  Unlike many
of its competitors,  however,  BIS can also perform as a full solution provider,
offering  clients  online  backup  facilities  and  access  to  state of the art
alternate EDP operating  sites in its capacity as a business  partner to IBM and
other well known vendors. In this role, the BIS professionals  assist clients in
identifying and specifying  their needs,  arrange for backup or "hot sites" with
their  business  partners,  and support  implementation,  testing,  and periodic
update of the total business continuation or disaster recovery program.

     The professional  services support group included in the BIS group supports
all of its  services  and also  offers  clients  support in a variety of systems
needs,  including  network  and  internet  anti-virus  protection  programs  and
products.

     Engineering,  Design, and Construction Services operate through SMC McEver,
Inc.  ("SMC  McEver"),  a wholly  owned  subsidiary  of SMC and a  Houston-based
engineering and construction  company. SMC McEver provides design,  engineering,
and  construction  services to the process  industries.  Typical clients include
refinery  and  petrochemical  plants,  materials  handling  projects,  specialty
chemical plants,  bulk storage  terminals,  pipelines,  and other  manufacturing
facilities.  SMC  McEver  also  provides  consulting  services  for a variety of
projects  with  unique  engineering  and  construction  demands.  Environmental,
health, and safety support services, including site assessment,  permitting, and
cleanup  required  of past  contamination  problems,  are  provided  through the
Environmental Services.

                                        6

<PAGE>

     With specialized  expertise in the engineering and construction of refinery
and  petrochemical  plants,  SMC McEver  focuses its resources and experience on
providing services that encompass all relevant  disciplines from concept through
completion and startup. This includes:

     o    Site Assessment
     o    Detailed design and documentation
     o    Engineering specifications
     o    Equipment and materials procurement
     o    Cost analysis
     o    The preparation of bid packages
     o    Environmental impact statements
     o    Permitting and site preparation
     o    Construction and construction management

     SMC  McEver's  team  of  certified  professionals  are  experts  in all the
necessary  disciplines.  Assisted by a force of highly-skilled  engineers,  they
prepare  and  supervise  every  phase  of each  project.  Although  providing  a
comprehensive  set of services from a single  source,  SMC McEver offers clients
the choice of using any  individual  service,  or  combination  of  services  it
provides,  including  services  available from other Versar operating units. SMC
McEver was recently awarded a $15M contract for the design and construction of a
specialty chemical plant.

Markets

     Versar's  markets are evolving in response to our clients'  changing needs,
and market  opportunities  are being driven by the  availability  of  technology
aimed at  productivity  improvement.  Versar has  significantly  diversified its
business over the last year,  primarily  through the  acquisition of SMC, with a
much greater emphasis on (1) environmental  services with particular emphasis on
redevelopment  of industry  properties  and  conversion  of  military  bases for
alternative uses, (2) facilities and information  management support services to
respond to our clients'  increasing need to make more informed  decisions and to
outsource  non-core  functions,  (3)  services to design,  build,  finance,  and
operate utility  infrastructure and facilities for the process  industries,  and
(4) management services to help industry and government  restructure and improve
their operating performance.

     Versar is on the cutting edge of a number of growth markets. These include:

     o    A  Industry's   continued  focus  on  productivity   improvement,   in
          particular  opportunities  internationally  and  with  Versar's  (SMC)
          multinational clients.

     o    A  Deregulation  of the energy  industry  presents  opportunities  for
          Versar (GEOMET) as a certified energy service provider contractor.

     o    A  Continued  growth in  consumption  of fossil  fuel and  demand  for
          improved  process  technologies  that prevent  pollution will increase
          worldwide  opportunities  for Versar (SMC McEver) in process  facility
          design and construction.

     o    A Government  /commercial  interest in expanding capability to respond
          to  potential   terrorism  worldwide  will  provide  continued  growth
          opportunities  for Versar  (GEOMET)  services in personnel  protection
          equipment.

     o    Brownsfield  legislation and tax incentives will provide opportunities
          for growth of Versar's environmental cleanup services.

     o    A  Continued  demand  to  reduce  environmental  management  cost will
          provide  opportunities  for Versar to grow its  business in  pollution
          prevention, risk management, and resources management.

                                        7

<PAGE>

     Versar's  current client base,  including  clients of SMC, is well balanced
with 41 percent  industrial/commercial and 59 percent government.  Approximately
50 percent of Versar's  industrial/commercial  clients are in the petrochemical,
specialty chemical, and manufacturing industry. A major part of Versar's support
services to this client base  includes  the design and  construction  of process
facilities through SMC McEver, management services to multinationals and fortune
100 companies,  and environmental  management  services.  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 33 percent of our business base. DOD is going through many of the same
issues as are faced in private industry with restructuring and cost reduction in
response  to  increasing  budget   limitations.   DOD  also  has  an  aggressive
environmental  program to  cleanup,  realign,  and close bases  worldwide  as it
continues  to  restructure  to  a  smaller  force.  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 7 percent of Versar's
business and is growing in new areas such as water quality, risk assessment, and
natural  resources  management.  Versar thus maintains cutting edge knowledge of
regulatory trends and their impacts.  Other Federal clients make up 6 percent of
our business and include the  Departments  of Energy and the  Interior,  Federal
Housing Authority,  and Intelligence Agencies.  State and local governments make
up 13 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,  our competitors are larger and have more
financial  resources.   Versar  has  historically   competed  primarily  on  its
scientific,  technological,  and  engineering  expertise  as well as  costs.  As
Versar's  business  mix shifts  more  toward  providing  turnkey  infrastructure
support   services,   Versar   will   compete   with  more   facility   O&M  and
engineering/construction  contractors on projects that lend  themselves  more to
innovation in approach,  technology application,  and project financing -- areas
where Versar's senior  management are 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 substantial  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, 1997, total backlog for Versar, including unfunded tasks and
orders,  was  approximately  $340  million,  as compared to  approximately  $325
million as of June 30, 1996.  Funded  backlog for Versar was  approximately  $41
million,  an increase of 28 percent compared to approximately  $32 million as of
June 30,  1996.  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  and for which
Versar and the client are  contractually  obligated to perform.  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, 1997,  Versar had  approximately  554 full-time  employees,  of
which  approximately 369 were engineers,  scientists,  and other  professionals.
Sixty percent of the Company's  professional  employees have a bachelors degree,
24% have a masters degree, and 3% have doctorate degrees.

                                        8

<PAGE>

Item 2.  Properties

     The  Company's  executive  office is located in a building in  Springfield,
Virginia, a suburb of Washington, D.C. In June 1995, Versar leased 73,371 square
feet from Sarnia Corporation.  In June 1996, Versar reduced this leased space to
68,239 square feet. The rent is subject to a 4% escalation per year.  Both lease
streams are subject to adjustment on June 1, 1999 and 2004. In these years,  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.

     As of  September  1, 1997,  the  Company had under  lease an  aggregate  of
approximately  227,000  square  feet  of  office  and  laboratory  space  in the
following  locations:  Springfield,  VA; Tempe,  AZ;  Alameda and Fair Oaks, CA;
Northglenn,  CO;  Miami,  FL;  Lombard,  IL; North Andover and  Burlington,  MA;
Hopkins,  MN;  Columbia,  Gaithersburg  and  Germantown,  MD;  Bridgewater,  NJ;
Cincinnati,  OH; Bristol and King of Prussia,  PA; San Antonio and Houston,  TX;
American Fork,  UT; France and England.  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

     On June 28, 1990, Gary R. Windolph, a former officer and director of Versar
Architects  & Engineers,  Inc.  ("VA&E",  formerly  ARIX  Corporation,  a former
subsidiary  of Versar,  which was merged  into Versar in July 1993) and a former
officer of Versar, filed an action in the District Court for the City and County
of Denver,  State of Colorado,  entitled Gary R.  Windolph v. ARIX  Corporation,
Versar,  Inc.,  et al.,  Case NO.  90-CV-7155.  On October  21,  1991,  the jury
returned  verdicts for Mr. Windolph on two defamation claims against the Company
and  awarded  him  damages in the  amount of  $200,000.  The jury also  returned
verdicts for Mr.  Windolph on certain of his statutory and common law securities
claims and awarded  damages in the amount of $1.00 each on all such  claims.  On
January 6, 1992,  the Court ruled that,  based upon the  evidence  presented  at
trial,  the  $200,000  awarded to Mr.  Windolph by the jury was  excessive  as a
matter of law and  ordered a new damage  trial on those  claims.  The retrial of
damages on these  claims  ended on October  21,  1992 with the jury  returning a
verdict against Versar in the total amount of $1,000,001  including $500,000 for
damages to Mr.  Windolph's  reputation  and $500,001  for personal  humiliation,
mental anguish and suffering.

     Versar promptly filed appropriate  post-trial  motions seeking either a new
trial or the entry of  judgment in an amount  less than the jury's  verdict.  On
January 10, 1993,  the Court  granted  Versar's  motion,  in part,  and gave the
plaintiff  the  choice of  accepting  the  entry of  judgment  in the  amount of
$75,000,  or retrying for a third time the amount of damages for the  defamation
claim.  The Court also decided,  as a matter of law, that the maximum amount Mr.
Windolph  could  recover was $250,000 due to a statutory  limit on  non-economic
damages.  At the same time, the Court ordered the parties to participate in good
faith in a mandatory  settlement  conference  to try to settle this matter.  The
parties  were  unable  to  reach a  settlement  as a  result  of the  settlement
conference  held in April,  1993, and the plaintiff  rejected the opportunity to
have judgment entered for $75,000 or proceed with a new trial. On June 16, 1993,
the trial court entered final judgment on all outstanding issues.

     Both parties appealed to the Colorado Court of Appeals. On May 25, 1995 the
Court issued its decision  affirming in part,  reversing in part and remanding a
part of the case to the trial  court.  The Court of Appeals  reversed  the trial
court's  dismissal of Windolph's  promissory  estoppel claim,  and remanded with
directions  for a new trial on that matter only.  The Court of Appeals  affirmed
the trial court as to all other matters,  including the trial court's refusal to
enter  judgment in  Windolph's  favor on the two jury  verdicts  relating to the
defamation  claim.  Both parties filed  motions for rehearing  with the Court of
Appeals, which were denied on August 10, 1995.

                                        9

<PAGE>

     In  September  1995,  Windolph  sought  review of this case by the Colorado
Supreme Court which was denied on February 20, 1996. The case proceeded to trial
on the  promissory  estoppel  claim only. A bench trial without jury was held on
January 27, 1997. On April 3, 1997, the Court entered judgment for Versar on the
promissory  estoppel claim rejecting Windolph arguments on the basis of Delaware
and  Colorado  law.  Alternatively,  the Court held that even if its judgment is
overturned on appeal, the maximum liability to Windolph would be $11,000. On May
23, 1997, the parties entered into a Stipulation of Dismissal  pursuant to which
Versar  agreed to  withdraw  its demand for court costs and  Windolph  agreed to
waive his right to appeal the trial court's decision,  thereby fully terminating
this litigation without any payment to Windolph.

     As part of the agreement to sell its  laboratory  assets and  operations to
Kemron  Environmental  Services,  Inc.  (Kemron) in July 1994,  Versar agreed to
refer its analytical laboratory work for a period of 48 months after the closing
date to Kemron subject to certain  limitations and exclusions  including federal
procurement  requirements  and the  ability  of Kemron to perform  the  required
services.  On July 31,  1996,  Kemron  filed an action in the  Circuit  Court of
Fairfax  County,   Commonwealth  of  Virginia,   entitled  Kemron  Environmental
Services, Inc. vs. Versar Laboratories,  Inc. and Versar, Inc., Law No. L154205.
Kemron alleged the defendants breached certain covenants that Versar would refer
laboratory work to Kemron in the Asset Acquisition Agreement and alleged damages
in the amount of not less than $3,000,000.

     Versar  responded  by  denying  the  allegations  and filed a  counterclaim
alleging various material breaches of the Asset Acquisition  Agreement by Kemron
and seeking a  declaratory  judgment  that  Kemron's  breaches  have  terminated
Versar's obligations under the Agreement.  On June 16, 1997, the parties entered
into a settlement  agreement  extending  and amending the right of Kemron to the
referral of analytical services from Versar.

     In June 1996,  Flintlock Ltd, a client of SMC McEver,  (a subsidiary of SMC
which is a majority  owned  subsidiary of Versar),  filed an action in the 165th
Judicial District Court of Harris County,  Texas, entitled Flintlock Ltd. v. SMC
McEver, Inc., Case No. 96-002700.  Flintlock alleged that SMC McEver negligently
failed to manage the construction of a citronella candle project and negligently
misrepresented  the  project's  cost.  Flintlock  asserts that it incurred  over
$700,000 in damages.  SMC McEver has  counterclaimed  for over $244,000 which it
claims is due under the  contract  between the  parties.  The parties have taken
certain  discovery  which  remains  ongoing.  The parties  have also  engaged in
discussions regarding possible mediation. SMC McEver has retained counsel and is
defending  this matter  vigorously.  The Company  does not expect the outcome of
this litigation to have a material adverse effect on its financial  condition or
its results of operations.

     Versar and its  subsidiaries  are parties to various  other  legal  actions
arising in the normal course of business.  The Company believes that an ultimate
unfavorable  resolution  of these other 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 1997.

                                       10

<PAGE>

EXECUTIVE OFFICERS

     The current executive officers of Versar, and their ages as of September 2,
1997,  their current offices or positions and their business  experience for the
past five years are set forth below.

NAME                        AGE            POSITION WITH THE COMPANY
----                        ---            -------------------------

Benjamin M. Rawls            56            Chairman, Chief Executive
                                           Officer and President

Thomas S. Rooney             63            Executive Vice President and
                                           Chief Operating Officer

Robert L. Durfee             61            Executive Vice President,
                                           President, GEOMET Technologies, Inc.

Lawrence A. White            54            Executive Vice President,
                                           Corporate Development

Lawrence W. Sinnott          35            Vice President,
                                           Chief Financial Officer and Treasurer

James C. Dobbs               52            Vice President, General Counsel and
                                           Secretary

Gayaneh Contos               61            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.

     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  York.  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.

     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  Group  Vice
President of Roy F. Weston,  Inc.  between 1983 and 1990, where he managed major
programs  and  served  as  principal   consultant  to  numerous  government  and
industrial clients.

                                       11

<PAGE>

     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 a Senior Vice President in 1989.  Since 1980, she has been  responsible
for supervising the majority of the Company's contracts with EPA.

                                     PART II

Item 5.  Market for Registrant's Common Equity 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,  1997,  the  Company  had  746
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 1997 and 1996 are presented below.

    Fiscal Year                                      High          Low
    -----------                                      ----          ---
1997   4th Quarter...........................       $4.000       $3.188
       3rd Quarter...........................        4.188        3.000
       2nd Quarter...........................        3.250        2.563
       1st Quarter...........................        3.938        2.563


    Fiscal Year                                      High          Low
    -----------                                      ----          ---
1996   4th Quarter...........................       $4.688       $2.625
       3rd Quarter...........................        3.563        2.750
       2nd Quarter...........................        4.063        3.125
       1st Quarter...........................        4.813        3.000

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

                                       12

<PAGE>

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:

<TABLE>
<CAPTION>
                                                               For the Years Ended June 30,
                                                     -----------------------------------------------
                                                       1997      1996      1995      1994      1993
                                                       ----      ----      ----      ----      ----
                                                          (In thousands, except per share data)
<S>                                                  <C>       <C>       <C>       <C>       <C>    
Consolidated Statement of Operations related data:

Gross Revenue...................................     $48,517   $44,283   $39,090   $42,764   $43,012
Net Service Revenue.............................      33,570    31,919    29,347    31,032    32,980
Operating Income (Loss).........................       1,503       872       560    (1,269)      853
Income (Loss) from Continuing
  Operations....................................       1,256       992       458    (2,658)     (590)
Net Income (Loss)...............................       1,256       992       458    (4,367)   (1,093)
Income (Loss) per Share from Continuing
  Operations....................................     $   .24   $   .19   $   .09   $  (.59)  $  (.14)
Net Income (Loss) per Share.....................     $   .24   $   .19   $   .09   $  (.97)  $  (.27)
Weighted Average Shares Outstanding.............       5,286     5,248     4,834     4,481     4,093

Consolidated Balance Sheet related data:

Working Capital.................................     $ 9,141   $ 7,629   $ 5,425   $ 5,261   $ 7,627
Current Ratio...................................        1.83      2.14      1.64      1.68      1.98
Total Assets....................................      25,448    16,979    28,195    27,782    31,922
                                                     
Current Portion of Long-Term Debt...............         819       323       335     1,201     1,198
Long-Term Debt .................................       1,437         2         4        17    13,494
Mortgage Debt of Sarnia.........................          --        --    12,062    12,403        --
                                                     -------   -------   -------   -------   -------
Total Debt, excluding bank line of credit.......       2,256       325    12,401    13,621    14,692

Stockholders' Equity............................     $ 9,523   $ 7,776   $ 6,290   $ 5,261   $ 8,690
</TABLE>

     Certain  amounts in years prior to fiscal year 1994 have been  reclassified
to reflect  Versar  Laboratories,  Inc.  and  Gammaflux,  Inc.  as  discontinued
operations  for  comparative  purposes.  In  addition,  Versar has  included the
results of operations and financial  position of Sarnia through January 1, 1996.
Sarnia was spun-off to  stockholders  in fiscal year 1994,  but  continued to be
reflected  in  Versar's  financial  statements  due to the  guarantee  of all of
Sarnia's debt by Versar.  After the  completion of Sarnia's  refinancing  of its
debt,  Versar's guarantee was reduced from $12.4 million to $1.5 million and the
divestiture was considered complete for accounting purposes.  Fiscal year 1997's
data includes the financial position of Science Management  Corporation (SMC) in
which a majority  interest was  acquired by Versar on May 2, 1997.  As a result,
the SMC revenue and income for the two months  ended June 30, 1997 are  included
in Versar's income statement.  See Notes B, C and F of the Notes to Consolidated
Financial Statements for further information.

                                       13

<PAGE>

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 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,  the  integration of the recent or ongoing  acquisitions,
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;
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  revenues  for fiscal year 1997  totalled  $48,517,000,  or
$4,234,000  (10%) above  fiscal year 1996 gross  revenue of  $44,283,000.  Gross
revenue for fiscal year 1996 was  $5,193,000  (13%) above that reported in 1995.
The increase in Versar's  revenue in the last fiscal year was  primarily  due to
the acquisition of a majority interest in Science Management Corporation ("SMC")
on May 2, 1997.  Gross revenues of $3,854,000 of SMC are included in fiscal year
1997 from the date of  acquisition  of SMC.  The  increase in gross  revenues in
fiscal year 1996 was due to task orders being  performed in the Company's  Rocky
Mountain   and  Midwest   regions  in  support  of  the  Air  Force  Center  for
Environmental  Excellence  contract.  As  reflected  in the  table  on page  15,
government revenue represented 59% of the total revenue in 1997, compared to 66%
in 1996 and 64% in 1995.  The reduction is  attributable  to the addition of SMC
revenues, which are predominately commercial.

     Purchased services and materials for fiscal year 1997 totalled  $14,947,000
or $2,583,000 (21%) higher than fiscal year 1996 purchased  services.  Purchased
services  for fiscal year 1996 were  $2,621,000  (27%)  higher than  reported in
fiscal year 1995.  The increase in fiscal years 1996 and 1997 was  primarily due
to the increase in gross revenue 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.

     Direct costs of services and overhead  include the cost to Versar of direct
and overhead staff,  including  recoverable overhead costs and unallowable costs
that are directly attributable to overhead.

     The percentage of these costs to net service revenue  decreased to 80.5% in
1997 compared to 81.4% in 1996 and 81.0% in 1995.  The decreases in fiscal years
1997 and 1996 are  attributable to improved labor  utilization and reduced fixed
operating costs.

     Selling,  general and  administrative  expenses  approximated  15.1% of net
service  revenue  in 1997,  compared  to 15.5%  in 1996 and  17.0% in 1995.  The
decrease is primarily  due to the higher  volume of net service  revenue,  while
selling, general and administrative expenses increased by only 3% in fiscal year
1997.

     Other  income  includes  the  costs  and  revenues  that  are not  directly
attributable to contracts.  In 1997, the Company recognized the remainder of the
non-compete  income from the sale of its  majority-owned  subsidiary  Gammaflux,
Inc. of $42,000  compared to $28,000 in fiscal year 1996,  and $47,000 in fiscal
year 1995. In 1995,

                                       14

<PAGE>

the  remaining  $214,000 of other  income was due to the reversal of $174,000 of
anticipated  costs that were  ultimately not incurred as a result of winning new
contracts and the reduction of other operating reserves of $40,000.

     Losses on Sarnia  Corporation  ("Sarnia")  in fiscal  year 1996 of $142,000
were  recorded in the first six months of fiscal year 1996 compared to losses of
$270,000  in  fiscal  year  1995.  See  Note  C in  the  consolidated  financial
statements.  The Sarnia  losses were recorded as a separate line item due to the
spin-off of Versar's real estate entity to shareholders on June 30, 1994,  which
was completed as of January 25, 1996 for accounting purposes.

     Operating  income for 1997 was  $1,503,000,  an increase  of $631,000  over
fiscal year 1996. The increase is primarily due to a combination of lower direct
costs  of  services  and  selling,  general  and  administrative  expenses  as a
percentage of net service revenue as discussed above. Fiscal year 1996 operating
income   increased   by  $312,000  due  to   decreased   selling,   general  and
administrative expenses as a percentage of net service revenue.

     Interest expense in 1997 was $97,000,  an increase of $1,000 from 1996. The
increase is due to interest cost of $46,000  incurred  during the fourth quarter
associated with financing the acquisition of SMC.  Interest  expense in 1996 was
$96,000,  a decrease of $62,000  from 1995.  The  decrease is due to the reduced
debt in fiscal year 1996.

     Versar's income tax expense for fiscal year 1997 was $150,000 compared to a
tax benefit of $216,000 and $56,000 in fiscal years 1996 and 1995, respectively.
The Company reduced the valuation against the deferred tax assets in each of the
fiscal years due to the assessment of future earnings potential. Refer to Note H
of the Notes to Financial Statements.

     In  summary,  Versar's  net  income  was  $1,256,000  in fiscal  year 1997,
compared  to net  income  of  $992,000  in fiscal  year  1996 and net  income of
$458,000 in fiscal year 1995.

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,
                           -----------------------------------------------------
                                 1997              1996               1995
                           ---------------    ---------------    ---------------
                                   (In thousands, except for percentages)
Government
  EPA                      $ 3,339      7%    $ 3,787      9%    $ 5,375     14%
  State & Local              6,339     13%      6,733     15%      4,607     12%
  Department of Defense     15,952     33%     16,479     37%     13,194     34%
  Other                      2,972      6%      2,035      5%      1,707      4%
Commercial                  19,915     41%     15,249     34%     14,207     36%
                           -------    ----    -------    ----    -------    ----
Gross Revenue              $48,517    100%    $44,283    100%    $39,090    100%
                           =======    ====    =======    ====    =======    ====

     Liquidity and Capital Resources

     The  Company's  operating  activities  provided  $2,184,000 of cash in 1997
primarily from operations.  Non-cash expenses included $722,000 for depreciation
and amortization and stock issued to the ESSOP of $446,000.

                                       15

<PAGE>

     The Company utilized short-term bank financing to supplement its ability to
meet day-to-day  operating cash requirements.  At June 30, 1997, the Company had
$9,141,000 of working capital,  compared to $7,629,000 in 1996.  Working capital
increased by 20% primarily due to the earnings in fiscal year 1997.

     The Company's  accounts  receivable  balance increased by $5,149,000 due to
the acquisition of SMC.

     In  April  1997,  the  Company  moved  its  line  of  credit   facility  to
NationsBank,  N.A. The new line of credit is restricted to the borrowing base of
qualifying  receivables  less the $1,500,000  reserve for a guarantee of debt of
Sarnia and outstanding  acquisition loan balances  (approximately  $1,958,000 at
June 30, 1997).  Borrowings on the line of credit are at the lower of the 30 day
London  Interbank  Offered Rate  ("LIBOR")  plus 250 or the prime rate (8.22% at
June 30,  1997).  A 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 of the Company's
wholly owned subsidiaries  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, 1997 was
$2,688,000.  Advances on the line are due on November 30, 1998.  The Company was
in compliance with the financial covenants at June 30, 1997. Management believes
that cash  generated by operations and  borrowings  available  under the line of
credit will be adequate to meet the working capital needs for fiscal year 1998.

     As  previously  reported,  Versar has  guaranteed  a five year term loan of
$1,500,000 for Sarnia.  Versar has  established a reserve of $1,500,000  against
the loan.  As the term loan is repaid,  the reserve will be reduced and added to
Versar's equity. In fiscal year 1998, principal payments of $300,000 are due and
will be added back to Versar's equity as they are paid.

Acquisition of Science Management Corporation

     On May 2, 1997,  Versar acquired 53.5% of the outstanding  common stock and
all outstanding preferred stock of SMC for aggregate consideration of $2,870,000
paid 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,  1997) from  NationsBank,
N.A. The remaining  portion of $870,000 was paid with current  working  capital.
Principal payments on the term note of $520,833,  $750,000, and $687,500 are due
in fiscal years 1998, 1999 and 2000, respectively.  On July 29, 1997, Versar and
SMC entered into an Agreement  and Plan of Merger  pursuant to which Versar will
obtain the  remaining  SMC common stock for newly issued shares of Versar common
stock via a merger of SMC with a newly formed wholly owned subsidiary of Versar.
The merger is expected to occur in the second  quarter of fiscal year 1998.  The
transactions  costs associated with the merger are projected to be approximately
$400,000.

New Accounting Standards

     In March 1995, the Financial  Accounting Standard Board issued Statement of
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of" ("SFAS  121").
SFAS 121 is effective for fiscal year 1997, and requires that long-lived  assets
be reviewed for impairment whenever events or changes in circumstances  indicate
that the  carrying  amount of an asset may not be  recoverable.  The adoption of
SFAS  121 had no  material  effect  on the  financial  position  or  results  of
operations of the Company.

     SFAS 123, "Accounting for Stock-Based  Compensation" was issued in October,
1995 and is effective for fiscal year 1997. The Statement  encourages,  but does
not require,  adoption of the fair value based method of accounting for employee
stock  options  and other  stock  compensation  plans.  The Company has opted to
account  for its stock  option  plan in  accordance  with APB  Opinion  No.  25,
"Accounting  for Stock  Issued to  Employees."  The Company has made certain pro
forma  disclosures of net income and per share  information as if the fair value
based method for accounting defined in SFAS 123 had been applied.

                                       16

<PAGE>

     The Financial  Accounting  Standards  Board issued SFAS 128,  "Earnings per
Share" in  February  1997.  SFAS 128  requires a company  to  present  basic and
diluted earnings per share amounts on the face of the Consolidated Statements of
Operations.  The  Company is required to adopt the  provisions  of the  standard
during the second quarter of 1998, and when adopted, will require restatement of
prior years' earnings per share. The standard will not have a material impact on
historical earnings per share reported by the Company.

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.

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 1997 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  1997  fiscal  year  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 1997 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 1997 fiscal year.

                                       17

<PAGE>

                                     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, 1997 and 1996

     c)   Consolidated  Statements  of  Operations  for the Years Ended June 30,
          1997, 1996, and 1995

     d)   Consolidated  Statements  of Changes in  Stockholders'  Equity for the
          Years Ended June 30, 1997, 1996, and 1995

     e)   Consolidated  Statements  of Cash  Flows for the Years  Ended June 30,
          1997, 1996, and 1995

     f)   Notes to Consolidated Financial Statements

(2)  Financial Statement Schedules:

     a)   Schedule II - Valuation  and  Qualifying  Accounts for the years ended
          June 30, 1997, 1996, and 1995

     All other  schedules,  except those listed above,  are omitted because they
     are not applicable or the required information is shown in the consolidated
     financial statements or notes thereto.

(3)  Exhibits:

     The  exhibits to this Form 10-K are set forth in a separate  Exhibit  Index
     which is included on pages 19 through 23 of this report.

(B)  Reports on Form 8-K

     Form 8-K and Form 8-K/A which  provided  details on the  acquisition of SMC
     and the pro forma combined  financial  statements of such  transaction were
     filed on May 16 and July 15, 1997, respectively.

                                       18

<PAGE>
                                  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)

 10.3   Agreement dated July 31, 1990 between the Registrant and the
        U.S.  Army Natick  RD&E  Center and as modified  through May
        23,1991.....................................................    (G)

 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)

 10.14  Incentive Stock Option Plan of Gammaflux, Inc., a subsidiary
        of the Registrant...........................................    (D)

 10.15  Letter agreement dated  June 28, 1991  among the Registrant,
        Geomet Technologies, Inc., and Charles I. Judkins, Jr.......    (G)

 10.17  Deferred Compensation Agreements dated as follows:

        July 1, 1987 between the Registrant and the following persons:
        Charles I. Judkins, Jr......................................    (C)

        July 1, 1988 between the Registrant and Gayaneh Contos......    (F)

 10.26  Executive  Medical  Plan  dated  August 21, 1991,  effective
        July 1, 1991................................................    (G)

 10.28  The Riggs National Bank of Washington,  D.C.'s consent dated
        June 4, 1991 to the sale of substantially  all of the assets
        of  Gammaflux,  Inc., a partially  owned  subsidiary  of the
        Registrant..................................................    (G)

 10.34  Asset Purchase  Agreement  dated June 5, 1991 related to the
        sale of substantially all of the assets of Gammaflux,  Inc.,
        a majority owned subsidiary of the Registrant...............    (G)

 10.35  Promissory Note dated June 5, 1991 between Gammaflux,  Inc.,
        a  majority  owned  subsidiary  of the  Registrant  and  CHC
        Acquisition Partners, L.P...................................    (G)

 10.36  Noncompetition  Agreement  dated  June 5, 1991  between  the
        Registrant and CHC Acquisition Partners, L.P................    (G)

                                       19

<PAGE>

                                                                    Page Number/
Item No.                        Description                          Reference
--------                        -----------                          ---------

 10.38  Agreement   dated   September   24,  1990   between   Geomet
        Technologies  Inc., a subsidiary of the  Registrant  and the
        U.S.  Army Troop Support  Command as modified  through March
        25, 1992....................................................  (G),(H)

 10.39  Agreement   dated   September   30,  1988   between   Geomet
        Technologies  Inc., a subsidiary of the  Registrant  and the
        U.S. Army Troop Support Command Natick Research, Development
        and Engineering Center as modified through April 26, 1993...  (H),(I)

 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)

 10.44  Agreement dated March 30, 1990 between the  Registrant,  the
        Department  of the  Army,  U.S.  Army  Toxic  and  Hazardous
        Materials Agency, as modified through March 29, 1993........  (H),(I)

 10.47  Bankruptcy  Court-approved  Settlement  Agreement and Mutual
        Release  between Versar  Architects and Engineers,  Inc. and
        the City of Sterling, Colorado..............................     (H)

 10.49  Agreement   dated  March  27,  1992  among   Versar,   Inc.,
        Fluxagamm,  Inc.,  Maurice  I.  Stein  and  Gammaflux,  L.P.
        accelerating payment of certain notes, non-competition,  and
        stock repurchase agreements.................................     (H)

 10.52  Incentive  Stock Option Plan of Versar,  Inc. dated December
        1, 1992*....................................................     (I)

 10.58  Agreement  dated March 10, 1993 between the  Registrant  and
        the Environmental Protection Agency.........................     (I)

 10.64  Asset  Purchase   Agreement  dated  July  29,  1994  between
        Registrant  and  Kemron  Environmental   Services,  Inc.  of
        certain assets of the  registrants  wholly-owned  subsidiary
        Versar Laboratories, Inc....................................     (K)

 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)

                                       20

<PAGE>

                                                                    Page Number/
Item No.                        Description                          Reference
--------                        -----------                          ---------

 10.67  Agreement  dated January 18, 1994 between the Registrant and
        OHM Services Remediation Corporation........................    (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)

 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)

 10.77  The Riggs  National Bank of Washington  D.C.'s letter dated,
        September  15,  1995  modifying  certain  provisions  of the
        Revolving Loan and Security Agreement, dated April 9, 1994..    (M)

 10.78  Loan and Security  Agreement  between the Registrant and the
        Riggs  National  Bank of  Washington,  D.C dated January 25,
        1996........................................................    (N)

 10.79  Employment  Agreement  dated  September  1, 1996 between the
        Registrant and Benjamin M. Rawls*...........................    (N)

 10.80  Employment  Agreement  dated  September  1, 1996 between the
        Registrant and Thomas S. Rooney*............................    (N)

 10.81  Change of Control  Severance  Agreement  dated  September 1,
        1996 between the Registrant and Lawrence W. Sinnott*........    (N)

 10.82  Change of Control  Severance  Agreement  dated  September 1,
        1996 between the Registrant and James C. Dobbs*.............    (N)

 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.........................     26

                                       21

<PAGE>

                                                                    Page Number/
Item No.                        Description                          Reference
--------                        -----------                          ---------

 10.85  Revolving Promissory Note, dated March 27, 1997, between the
        Registrant and NationsBank, N.A.............................     37

 10.86  Financing  and  Security  Agreement,  dated March 27,  1997,
        between the Registrant and NationsBank, N.A.................     48

 10.87  Amendment to Financing and Security  Agreement,  dated April
        30, 1997, between the Registrant and NationsBank, N.A.......     93

 11     Statement Re: Computation of Per Share Earnings.............    100

 22     Subsidiaries of the Registrant..............................    101

 23     Consent of Arthur Andersen LLP..............................    102

 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.

                                       22

<PAGE>

(H)  Incorporated  by  reference  to  the  similarly  numbered  exhibit  to  the
     Registrant's  Form 10-K  Annual  Report for Fiscal Year Ended June 30, 1992
     ("FY 1992 Form 10-K") filed with the Commission on September 28, 1992.

(I)  Incorporated  by  reference  to  the  similarly  numbered  exhibit  to  the
     Registrant's  Form 10-K  Annual  Report for Fiscal Year Ended June 30, 1993
     ("FY 1993 Form 10-K") filed with the Commission on September 22, 1993.

(J)  Incorporated  by reference  Sarnia  Corporation  Information  Statement for
     distribution to shareholders of Versar,  Inc. of the outstanding  shares of
     its wholly-owned subsidiary, Sarnia Corporation, dated June 30, 1994.

(K)  Incorporated  by  reference  to  the  similarly  numbered  exhibit  to  the
     Registrant's  Form 10-K  Annual  Report for Fiscal Year Ended June 30, 1994
     ("FY 1994 Form 10-K") filed with the Commission on September 27, 1994.

(L)  Incorporated  by  reference  to  the  similarly  numbered  exhibit  to  the
     Registrant's  Form 10-K/A Annual Report for Fiscal Year Ended June 30, 1994
     ("FY 1994 Form 10-K/A") filed with the Commission on May 31, 1995.

(M)  Incorporated  by  reference  to  the  similarly  numbered  exhibit  to  the
     Registrant's  Form 10-K  Annual  Report for Fiscal Year Ended June 30, 1995
     ("FY 1995 Form 10-K") filed with the Commission on September 28, 1995.

(N)  Incorporated  by  reference  to  the  similarly  numbered  exhibit  to  the
     Registrant's  Form 10-K  Annual  Report for Fiscal Year Ended June 30, 1996
     ("FY 1996 Form 10-K") filed with the Commission on September 24, 1996.

(O)  Incorporated  by  reference  to  the  similarly  numbered  exhibit  to  the
     Registrant's Form S-4 registration number 333-33167.

Exhibit item numbers are as outlined by item 601 of Regulation S-K.

                                       23

<PAGE>

                                   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 29, 1997               /s/ Benjamin M. Rawls
                                        ----------------------------
                                        Benjamin M. Rawls
                                        Chairman, Chief Executive Officer,
                                        President, 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, Chief Executive      September 29, 1997
---------------------------    Officer, President, and
Benjamin M. Rawls              Director


/s/ James A. Skidmore, Jr.     Vice Chairman and Director     September 29, 1997
---------------------------
James A. Skidmore, Jr.


/s/ Robert L. Durfee           Executive Vice President       September 29, 1997
---------------------------    and Director
Robert L. Durfee


/s/ Lawrence W. Sinnott        Vice President, Chief          September 29, 1997
---------------------------    Financial Officer, Treasurer,     
Lawrence W. Sinnott            and Principal Accounting Officer            


/s/ Michael Markels, Jr.       Chairman Emeritus and          September 29, 1997
---------------------------    Director
Michael Markels, Jr.


/s/ Thomas J. Shields          Director                       September 29, 1997
---------------------------
Thomas J. Shields


/s/ John E. Gray               Director                       September 29, 1997
---------------------------
John E. Gray


/s/ Charles I. Judkins, Jr.    Director                       September 29, 1997
---------------------------
Charles I. Judkins, Jr.


/s/ M. Lee Rice                Director                       September 29, 1997
---------------------------
M. Lee Rice

                                       24

<PAGE>

                    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, 1997 and 1996, and the
related consolidated statements of operations,  changes in stockholders' equity,
and cash flows for each of the three  years in the period  ended June 30,  1997.
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  generally   accepted  auditing
standards.  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, 1997 and 1996, and the results of their  operations
and their  cash flows for each of the three  years in the period  ended June 30,
1997, in conformity with generally accepted accounting principles.

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



Washington, D.C.
September 29, 1997

                                       F-1

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                  June 30,
                                                             -------------------
                                                               1997       1996
                                                               ----       ----
<S>                                                          <C>        <C>
ASSETS
   Current assets
      Cash...............................................    $   437    $    83
      Accounts receivable, net...........................     17,525     12,376
      Prepaid expenses and other current assets..........      1,489      1,365
      Deferred income taxes..............................        652        473
                                                             -------    -------
        Total current assets.............................     20,103     14,297

   Property and equipment, net...........................      2,275      2,038
   Deferred income taxes.................................        257        300
   Goodwill..............................................      2,501         94
   Other assets..........................................        312        250
                                                             -------    -------
        Total assets.....................................    $25,448    $16,979
                                                             =======    =======
LIABILITIES AND STOCKHOLDERS' EQUITY
   Current liabilities
      Accounts payable...................................    $ 4,959    $ 2,098
      Bank line of credit................................        274        492
      Current portion of long-term debt..................        819        323
      Accrued salaries and vacation......................      1,627      1,619
      Other liabilities..................................      3,283      2,136
                                                             -------    -------
        Total current liabilities........................     10,962      6,668

   Long-term debt........................................      1,437          2
   Other long-term liabilities...........................      2,026      1,033
   Reserve on guarantee of real estate debt..............      1,500      1,500
                                                             -------    -------
        Total liabilities................................     15,925      9,203
                                                             -------    -------
   Commitments and contingencies (Note J)

   Stockholders' equity
      Common stock, $.01 par value; 30,000,000 shares
       authorized; 5,151,792 shares and 4,994,693 shares
       issued and outstanding at June 30, 1997 and 1996,
       respectively......................................         52         50
      Capital in excess of par value.....................     13,788     13,299
      Accumulated deficit................................     (4,317)    (5,573)
                                                             -------    -------
        Total stockholders' equity.......................      9,523      7,776
                                                             -------    -------
        Total liabilities and stockholders' equity.......    $25,448    $16,979
                                                             =======    =======
</TABLE>

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

                                       F-2

<PAGE>

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

<TABLE>
<CAPTION>
                                                        Years Ended June 30,
                                                    ----------------------------
                                                      1997      1996      1995
                                                      ----      ----      ----
<S>                                                 <C>       <C>       <C>
GROSS REVENUE....................................   $48,517   $44,283   $39,090
   Purchased services and materials, at cost.....    14,947    12,364     9,743
                                                    -------   -------   -------
NET SERVICE REVENUE..............................    33,570    31,919    29,347

   Direct costs of services and overhead.........    27,024    25,973    23,785
   Selling, general, and administrative expenses.     5,085     4,960     4,993
   Other income, net.............................       (42)      (28)     (261)
   Losses on Sarnia operations...................        --       142       270
                                                    -------   -------   -------
OPERATING INCOME.................................     1,503       872       560

OTHER EXPENSE
   Interest expense..............................        97        96       158
   Income tax expense (benefit)..................       150      (216)      (56)
                                                    -------   -------   -------
NET INCOME.......................................   $ 1,256   $   992   $   458
                                                    =======   =======   =======

NET INCOME PER SHARE.............................   $   .24   $   .19   $   .09
                                                    =======   =======   =======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING...............................     5,286     5,248     4,834
                                                    =======   =======   =======
</TABLE>

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

                                       F-3

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES
           Consolidated Statements of Changes in Stockholders' Equity
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                   Total
                                          Number            Capital in                             Stock-
                                            of     Common    Excess of   Accumulated   Treasury   holders'
                                          Shares    Stock    Par Value     Deficit       Stock     Equity
                                          ------    -----    ---------     -------       -----     ------
                                                     Years Ended June 30, 1997, 1996, and 1995
                                                     -----------------------------------------
<S>                                        <C>       <C>      <C>          <C>           <C>       <C>   
Balance, June 30, 1994..................   4,609    $ 46      $12,238      $(7,023)      $  --     $5,261

Exercise of stock options...............      58       1          136           --          --        137
Common stock issued to ESSOP............     146       1          442           --          --        443
Purchase of common stock for treasury...     (26)     --           --           --         (76)       (76)
Issuance of treasury stock for stock 
  awards................................      23      --           --           --          67         67
Net income..............................      --      --           --          458          --        458
                                           -----    ----      -------      -------       -----     ------
Balance, June 30, 1995..................   4,810      48       12,816       (6,565)         (9)     6,290
                                           -----    ----      -------      -------       -----     ------
Exercise of stock options...............     119       1          278           --          --        279
Common stock issued for Valu Add........      30      --           97           --          --         97
Common stock issued to ESSOP............      32       1          108           --          --        109
Purchase of common stock for treasury...     (18)     --           --           --         (63)       (63)
Issuance of treasury stock for stock
  awards................................       7      --           --           --          22         22
Issuance of treasury stock for ESSOP....      15      --           --           --          50         50
Net income..............................      --      --           --          992          --        992
                                           ------   ----      -------      -------       -----     ------
Balance, June 30, 1996..................   4,995      50       13,299       (5,573)         --      7,776
                                           ------   ----      -------      -------       -----     ------
Exercise of stock options...............      18      --           45           --          --         45
Common stock issued to ESSOP............     139       2          444           --          --        446
Purchase of common stock for treasury...     (40)     --           --           --        (140)      (140)
Issuance of treasury stock for ESSOP....      40      --           --           --         140        140
Net income..............................      --      --           --        1,256          --      1,256
                                           ------   ----      -------      -------       -----     ------
Balance, June 30, 1997..................   5,152    $ 52      $13,788      $(4,317)      $  --     $9,523
                                           ======   ====      =======      =======       =====     ======
</TABLE>

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

                                       F-4

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                  Years Ended June 30,
                                                              ----------------------------
                                                                1997      1996      1995
                                                                ----      ----      ----
<S>                                                           <C>       <C>       <C>    
Cash flows from operating activities
  Net income...............................................   $ 1,256   $   992   $   458
  Adjustments to reconcile net income to
    net cash provided by operating activities
      Depreciation and amortization........................       722       684       699
      Loss on sale of property and equipment...............        36        14        --
      Provision for doubtful accounts receivable...........        (4)      (37)        1
      Common stock issued to ESSOP.........................       586       181       510
      Deferred tax benefit.................................      (358)     (250)       --
                                                              -------   -------   -------
        Subtotal...........................................     2,238     1,584     1,668
                                                              -------   -------   -------
  Changes in assets and liabilities
    Decrease (increase) in accounts receivable.............       135      (616)   (1,031)
    Decrease (increase) in prepaids and other assets.......       105      (500)      287
    Increase in accounts payable...........................       453       148       474
    (Decrease) increase in accrued salaries and vacation...      (156)      228       121
    (Decrease) increase in other liabilities...............      (591)      659      (807)
    Net change in assets and liabilities of Sarnia.........        --       142       270
                                                              -------   -------   -------
      Net cash from continuing operations..................     2,184     1,645       982
    Changes in net liabilities of discontinued operations..        --      (615)     (176)
                                                              -------   -------   -------
      Net cash provided by operating activities............     2,184     1,030       806
                                                              -------   -------   -------
Cash flows from investing activities
  Purchases of property and equipment......................      (638)   (1,261)     (440)
  Proceeds from sale of fixed assets.......................        60        --        --
  Acquisition of business..................................    (2,870)       --        --
                                                              -------   -------   -------
      Net cash used in investing activities................    (3,448)   (1,261)     (440)
                                                              -------   -------   -------
Cash flows from financing activities
  Net (payment) borrowings on bank line of credit..........      (218)       54       438
  Principal payments on long-term debt.....................       (69)      (14)     (879)
  Borrowing for acquisition of SMC.........................     2,000        --        --
  Purchase of treasury stock...............................      (140)      (63)      (76)
  Proceeds from issuance of the Company's common stock.....        45       279       137
                                                              -------   -------   -------
      Net cash provided by (used in) financing activities..     1,618       256      (380)
                                                              -------   -------   -------
Net increase (decrease) in cash............................       354        25       (14)
Cash at the beginning of the year..........................        83        58        72
                                                              -------   -------   -------
Cash at the end of the year................................   $   437   $    83   $    58
                                                              =======   =======   =======
</TABLE>

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

                                       F-5

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A  SIGNIFICANT ACCOUNTING POLICIES

     Principles  of  consolidation:   The  accompanying  consolidated  financial
statements  include  the  accounts  of  Versar,   Inc.  and  its  majority-owned
subsidiaries ("Versar" or the "Company").  All significant intercompany balances
and  transactions  have  been  eliminated  in  consolidation.   The  results  of
operations  of Sarnia  Corporation  ("Sarnia")  were  included in the  Company's
financial statements through January 1, 1996.

     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.

     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 Valu Add,  which was  primarily  contract  vehicles.  The
purchase  resulted in the Company recording  goodwill of $97,500,  which will be
amortized over a five year period.  On May 2, 1997, Versar acquired 53.5% of the
outstanding  common  stock  and  all  outstanding  preferred  stock  of  Science
Management  Corporation  ("SMC"). The Company recorded goodwill of $2,452,000 to
be amortized over fifteen years. Versar believes the customer  relationships and
the  value of  SMC's  business  reputation  were and  continue  to be  long-term
intangible  assets with an almost infinite life. Versar has selected a period of
15 years for  amortization  of the goodwill,  which is  reasonable  based on the
mature businesses of SMC and the compatibility of these businesses with Versar's
business.  Amortization  expense  was  $46,000  and  $19,000  for 1997 and 1996,
respectively. Refer to Note B for further information.

                                       F-6

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     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.

     Net income per share:  Per share  amounts are  computed by dividing the net
income by the fully diluted weighted average number of common shares outstanding
during the applicable period being reported upon.

     Income  taxes:  The  Company  follows  Statement  of  Financial  Accounting
Standards  No. 109,  "Accounting  for Income  Taxes"  (SFAS 109).  The  standard
requires the recognition of deferred tax liabilities and assets for the expected
future tax  consequences of temporary  differences  between the carrying amounts
and the tax bases of other assets and liabilities.

     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 $990,000 and $965,000 at June 30, 1997
and 1996, respectively. Versar purchased key-man life insurance policies to fund
the amounts due under the deferred compensation agreements.  The Company borrows
against  the cash  surrender  value of the  policies to pay  premiums.  The cash
surrender value of the policies, net of loans, was $215,000 and $236,000 at June
30, 1997 and 1996, respectively.

     Statements  of cash  flows:  For  statements  of cash flows  purposes,  all
investments with an original  maturity of three months or less are considered to
be cash equivalents.

     Impact of  accounting  standards:  SFAS 123,  "Accounting  for  Stock-Based
Compensation" was issued in October, 1995 and is effective for fiscal year 1997.
The Statement encourages, but does not require, adoption of the fair value based
method of accounting  for employee  stock  options and other stock  compensation
plans.  The Company has opted to account for its stock option plan in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
has made certain pro forma  disclosures of net income and per share  information
as if the fair value based  method for  accounting  defined in SFAS 123 had been
applied.

     The Financial  Accounting  Standards  Board issued SFAS 128,  "Earnings per
Share" in  February  1997.  SFAS 128  requires a company  to  present  basic and
diluted earnings per share amounts on the face of the Consolidated Statements of
Operations.  The  Company is required to adopt the  provisions  of the  standard
during the second quarter of 1998, and when adopted, will require restatement of
prior years' earnings per share. The standard will not have a material impact on
historical earnings per share reported by the Company.

NOTE B  ACQUISITION

     On May 2, 1997,  Versar acquired 53.5% of the outstanding  common stock and
all outstanding preferred stock of SMC for aggregate consideration of $2,870,000
paid 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,  1997) from  NationsBank,
N.A. The remaining  portion of $870,000 was paid with current  working  capital.
Principal payments of $520,833,  $750,000, and $687,500 on the term loan are due
in fiscal years 1998, 1999 and 2000,  respectively.  Versar and SMC have entered
into an  Agreement  and Plan of Merger  pursuant to which Versar will obtain the
remaining  SMC  common  stock for newly  issued  shares of Versar  common  stock
subject to the approval of SMC's shareholders. The transactions costs associated
with the merger are projected to be approximately $400,000.

     This  transaction  has been  accounted  for  under the  purchase  method of
accounting.  Operating  results  of SMC have  been  included  with  those of the
Company since the closing date of May 2, 1997.

                                       F-7

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     The  following  pro  forma  combined  financial  information  presents  the
historical results of operations of the Company and SMC for the years ended June
30, 1997 and 1996 with pro forma  adjustments  as if SMC had been acquired as of
the beginning of the periods presented.  SMC was in bankruptcy proceedings until
July 1996 and lacked working capital to enhance operating  performance.  The pro
forma  information  is  not  necessarily  indicative  of  what  the  results  of
operations  actually would have been if the transaction had occurred on the date
indicated, or of future results of operations.

                                                  Years Ended June 30,
                                                 ---------------------
                                                  1997           1996
                                                  ----           ----
        (Unaudited)                     (In thousands, except per share amount)

     Gross revenue......................        $70,403        $72,901
     Net income (loss)..................        $   585        $  (611)
     Net income (loss) per share........        $  0.11        $ (0.11)

NOTE C  ASSET DISPOSITIONS

     Gammaflux,    Inc.:   Gammaflux,   Inc.   (Gammaflux),   a   majority-owned
manufacturing subsidiary of the Company, sold substantially all of its assets to
CHC Acquisition Partners,  L.P., an Illinois limited partnership (CHC), pursuant
to an Asset  Purchase  Agreement,  dated June 5, 1991  (effective  May 1, 1991),
among Gammaflux,  the Company,  CHC, the minority shareholder of Gammaflux,  the
general partner of CHC, and the principals of CHC. As a part of the transaction,
CHC agreed to assume certain liabilities of Gammaflux.

     On May 1, 1992,  Versar agreed to the early payout for the note  receivable
and the non-competition agreements. The net cash generated from the early payout
was  approximately  $1,727,000  and was  used to  reduce  debt.  Versar  and the
previous  minority  shareholder  are still bound by the terms of the non-compete
agreement,  and  therefore,  the  Company  has  deferred  certain  income  to be
recognized over the life of the agreement.

     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  guaranty  of Sarnia's  $12.4
million 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.  Versar has
taken a reserve of $1,500,000 against the guarantee. Therefore, 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.
Sarnia's  results of operations  through January 1, 1996 are presented as single
line items in the Consolidated Statements of Operations.

                                       F-8

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE D  ACCOUNTS RECEIVABLE

                                                            June 30,
                                                     ---------------------
                                                       1997         1996
                                                       ----         ----
                                                         (In thousands)
     Billed receivables
       U.S. Government.........................      $ 5,683      $ 6,143
       Commercial..............................        7,367        2,716
     Unbilled receivables
       U.S. Government.........................        3,197        3,029
       Commercial..............................        2,073        1,191
                                                     -------      -------
                                                      18,320       13,079
     Allowance for doubtful accounts...........         (795)        (703)
                                                     -------      -------
                                                     $17,525      $12,376
                                                     =======      =======

     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, 1997 unbilled receivables will be substantially billed and collected in
fiscal year 1998. Of the $17,525,000 accounts  receivable,  $5,280,000 represent
receivables of SMC.

NOTE E  PROPERTY AND EQUIPMENT

                                        Estimated             June 30,
                                       Useful Life      --------------------
                                         in Years         1997        1996
                                         --------         ----        ----
                                                           (In thousands)

     Furniture and fixtures.........        5           $ 1,655     $ 1,987
     Equipment......................     3 to 10          6,345       6,505
     Leasehold improvements.........  Life of lease       1,433       1,408
                                                        -------     -------
                                                          9,433       9,900
     Accumulated depreciation
        and amortization............                     (7,158)     (7,862)
                                                        -------     -------
                                                        $ 2,275     $ 2,038
                                                        =======     =======

     Depreciation and amortization of property and equipment included as expense
in  the  accompanying   Consolidated  Statements  of  Operations  was  $676,000,
$665,000,  and  $668,000  for the years  ended June 30,  1997,  1996,  and 1995,
respectively.

     Maintenance  and  repair  expenses  approximated  $248,000,  $301,000,  and
$246,000 for the years ended June 30, 1997, 1996, and 1995, respectively.

                                       F-9

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE F  DEBT
                                                               June 30,
                                                          -----------------
                                                            1997      1996
                                                            ----      ----
                                                            (In thousands)

     Bank line of credit, Riggs National Bank..........   $    --     $ 492
     Bank line of credit, NationsBank, N.A.............       274        --
     Acquisition promissory note.......................     1,958        --
     Other.............................................       298       325
                                                          -------     -----
          Total debt...................................     2,530       817
     Current portion of long-term debt.................    (1,093)     (815)
                                                          -------     -----
     Long-term debt....................................   $ 1,437     $   2
                                                          =======     =====

     Until  April  1997,  Versar  maintained  a bank line of credit for  working
capital  purposes with Riggs National Bank.  Prior to January 25, 1996, the line
provided for advances up to $1,500,000.  On January 25, 1996,  Versar obtained a
new line of credit with Riggs  National  Bank which  provides for advances up to
$3,000,000. Borrowings on the line were at the prime rate of interest plus 1/2%.
In April  1997,  Versar  changed  its line of  credit  facility  from the  Riggs
National Bank to NationsBank, N.A. The new line of credit  provides for advances
up to $3,000,000 based on qualifying  receivables less the $1,500,000  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 fifty basis points  (8.22% at June 30,
1997).  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, 1997 was $2,688,000.  Advances under
the line are due upon  demand or on  November  30,  1998.  The loan has  certain
covenants  related to  maintenance  of  financial  ratios.  The  Company  was in
compliance with the financial  covenants at June 30, 1997.  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 1998.

     Versar obtained a $2,000,000  promissory note from NationsBank on April 30,
1997 for the  acquisition of Science  Management  Corporation  (See Note B). The
interest on the note is based on prime rate plus one half of one percent  (.50%)
per annum (9% at June 30, 1997). Principal payment commenced on May 31, 1997 and
is scheduled to be paid in full on April 30, 2000.

     Versar has guaranteed certain debt of Sarnia  Corporation  (formerly Versar
Virginia,  Inc., which was spun-off to Versar shareholders on June 30, 1994). On
January 25, 1996,  Sarnia  refinanced its  outstanding  debt. As a result of the
refinancing,   Versar's   guarantee  of  Sarnia's   debt  has   decreased   from
approximately  $12,400,000  to $1,500,000.  The $1,500,000  note matures in five
years with $300,000 principal payment per year starting July 1, 1997. Versar has
established  a reserve  of  $1,500,000  against  the  loan.  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  for the years  ended  June 30,  1997,  1996,  and  1995,  approximated
$306,000,  $673,000,  and  $544,000,  respectively,  and  the  weighted  average
interest rates for such periods were 8.78%,  10.82%,  and 10.79%,  respectively.
The  maximum  amount  outstanding  approximated  $1,146,000,   $1,500,000,   and
$1,375,000  during fiscal years 1997,  1996,  and 1995,  respectively.  Weighted
average  interest  rates are computed by relating  the  interest  expense to the
average month-end balance.

                                      F-10

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     Interest payments were $62,000,  $89,000, and $157,000 for the fiscal years
ended June 30, 1997, 1996, and 1995, respectively.

NOTE G  STOCK OPTIONS

     In November  1996, the  stockholders  approved the Versar 1996 Stock Option
Plan to provide employees and directors of the Company and certain other persons
an  incentive  to remain as  employees  of the Company and  encourages  superior
performance  for the  Company's  benefit.  At June 30, 1997,  91,750 shares were
granted under the 1996 Plan to SMC employees in connection with the acquisition.
The Company also maintains the Versar 1992 Stock Option Plan, the 1982 Incentive
Stock Option Plan, and a Non-Qualified Option Plan adopted in 1987. Options have
been granted from these plans to purchase the Company's common stock.

     At June 30, 1997,  options to purchase an  aggregate  of 924,280  shares of
common stock were  outstanding  under the 1996,  1992 and 1982  Incentive  Stock
Option  Plans at per share  exercise  prices  ranging  from $2.375 to $3.940 and
options to purchase an aggregate of 368,835  shares were  outstanding  under the
Non-Qualified Stock Option Plan at per share exercise prices ranging from $2.375
to $3.563.

     Under the 1992 Plan,  options  have been  granted and may be granted to key
employees at the fair market  value on the date of grant and become  exercisable
during  the  four-year  period  from  the  date of the  grant  at 20% per  year.
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.

     Options under the Incentive  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, 1994.....     952     $2.063  to  $3.940     $2,582
  Issued.........................      62      2.000  to   3.375        184
  Exercised......................     (30)     2.000  to   2.437        (67)
  Cancelled......................     (42)     2.000  to   3.940       (108)
                                    -----                            ------

Outstanding at June 30, 1995.....     942      2.063  to   3.940      2,591
  Issued.........................     389      2.813  to   3.625      1,178
  Exercised......................     (80)     2.063  to   2.563       (185)
  Cancelled......................     (35)     2.063  to   3.940        (96)
                                    -----                            ------

Outstanding at June 30, 1996.....   1,216      2.125  to   3.940      3,488
  Issued.........................      99      2.719  to   3.563        349
  Exercised......................     (14)     2.125  to   2.688        (35)
  Cancelled......................    (377)     2.125  to   3.940       (949)
                                    -----                            ------

Outstanding at June 30, 1997.....     924     $2.375  to  $3.940     $2,853
                                    =====                            ======

                                      F-11

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     At June 30, 1997, 1996, and 1995, options of 560,731,  807,408, and 667,515
shares were exercisable under the 1982, 1992 and 1996 Plans.

     On April 30, 1987,  the Board of Directors  adopted a  Non-Qualified  Stock
Option  Plan.   Participants   in  the  Plan  include   employees,   independent
contractors,  and, in certain circumstances,  Directors of the Company.  Options
are granted by the Board of  Directors  at a price not less than 50% of the fair
market  value at the date of grant  and for a period  not to  exceed  10  years.
Generally, options are issued at 100% of the market value at the date of grant.

     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, 1994.....     178     $2.375  to  $2.500     $  437
  Issued.........................      --         --  to      --         --
  Cancelled......................      --         --  to      --         --
  Exercised......................     (28)     2.500  to   2.500        (70)
                                     ----                            ------

Outstanding at June 30, 1995.....     150      2.375  to   2.500        367
  Issued.........................     264      3.000  to   3.563        804
  Cancelled......................      (2)     2.437  to   2.437         (5)
  Exercised......................     (39)     2.375  to   2.437        (93)
                                     ----                            ------

Outstanding at June 30, 1996.....     373      2.375  to   3.563      1,073
  Issued.........................      --         --  to      --         --
  Cancelled......................      --         --  to      --         --
  Exercised......................      (4)     2.500  to   2.500        (10)
                                     ----                            ------

Outstanding at June 30, 1997.....     369     $2.375  to  $3.563     $1,063
                                     ====                            ======

     Non-Qualified  stock options of 212,134,  163,367,  and 150,000 shares were
exercisable at June 30, 1997, 1996, and 1995, respectively.

                                      F-12

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     The Company  applies APB 25 and related  interpretations  in accounting for
its  plan.  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 this plan  consistent  with the
method of SFAS 123, the Company's net income and net income per share would have
been reduced to the pro forma amounts indicated as follows:

                                                    1997         1996
                                                    ----         ----
                                                  (In thousands, except
                                                     per share data)

     Net Income:                 As Reported       $1,256       $  992
                                 Pro Forma          1,073          840

     Net Income Per Share:       As Reported       $ 0.24       $ 0.19
                                 Pro Forma           0.20         0.16

     In  accordance  with SFAS 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 $1.56 and $1.35
during 1997 and 1996,  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 1997 and 1996:  expected  volatility of
40.5% for both years;  risk-free interest rate of 6%; and expected lives of five
years after the grant date.

NOTE H  INCOME TAXES

     At June 30, 1997, the Company had $74,000 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.

                                      F-13

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     The provision (benefit) for income taxes consists of the following:

                                                     Years Ended June 30,
                                                  --------------------------
                                                   1997      1996      1995
                                                   ----      ----      ----
                                                        (In thousands)
     Currently payable
       Federal..............................      $ 208     $   2     $ (67)
       State................................         77        32        11
     Deferred
       Federal..............................       (135)     (250)       --
       State................................         --        --        --
                                                  -----     -----     -----
                                                  $ 150     $(216)    $ (56)
                                                  =====     =====     =====

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

                                                 June 30,     June 30,
                                                   1997         1996
                                                   ----         ----
     Deferred Tax Assets:
       Employee benefits....................      $  627       $  564
       Bad debt reserve.....................         175          239
       All other reserves...................         384          332
       Alternative minimum tax credits......          74          182
       Other business tax credits...........          --          230
                                                  ------       ------
           Total Deferred Tax Assets........       1,260        1,547

     Deferred Tax Liabilities:
       Depreciation.........................         (17)         (65)
       Other................................          (1)          (1)
                                                  ------       ------
           Total Deferred Tax Liabilities...         (18)         (66)

     Net Deferred Tax Assets................       1,242        1,481

     Valuation Allowance....................        (333)        (708)
                                                  ------       ------
     Net Deferred Tax Asset.................      $  909       $  773
                                                  ======       ======

     Due to Versar's losses in previous years,  the Company was unable to record
a tax benefit of $333,000 until the  probability of realization of these amounts
becomes more certain.

                                      F-14

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     The tax (benefit) provision was composed of the following:

                                                        Years Ended June 30,
                                                    ----------------------------
                                                     1997       1996       1995
                                                     ----       ----       ----
                                                          (In thousands)

Expected provision at federal statutory rate...     $ 478      $ 264      $ 137
Change in valuation allowance..................      (375)      (552)      (512)
State income tax, net of federal benefit.......        77         32         11
Losses on Sarnia operations not deductible.....        --         48         92
Other  ........................................       (30)        (8)       216
                                                    -----      -----      -----
                                                    $ 150      $(216)     $ (56)
                                                    =====      =====      =====

     Income  taxes paid for the years ended June 30, 1997,  1996,  and 1995 were
$307,000, $7,000, and $140,000, respectively.

     Science  Management  Corporation  has net operating loss  carryforwards  of
approximately  $9,500,000 for federal income tax purposes,  which will expire in
the years 1997 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 which limits the recoverable  amount to approximately  $4,500,000.  SMC
also  has net  operating  loss  carryforwards  available  for use in the  United
Kingdom of approximately $1,000,000,  which are available indefinitely,  as well
as minor amounts available for use in other  jurisdictions.  In conjunction with
the proposed Agreement and Plan of Merger (see Note B), the Company is analyzing
its alternatives  with respect to treatment of the acquisition for tax purposes.
Versar will file  consolidated  tax returns  including SMC after it acquires the
remaining 46.5% of SMC common stock. Due to the annual limitations and questions
surrounding the Company's  ability to utilize these  carryforwards,  the Company
has not recorded any benefit or valuation allowances,  effectively reserving the
full amount of the net operating loss  carryforwards.  The Company will finalize
the tax  treatment  in fiscal  year 1998,  as the second  phase of the merger is
finalized.

NOTE I   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.  To be
eligible to participate in the plan, an employee must have been employed for one
year with at least 1,000 hours of service.  The plan includes an Employee  Stock
Ownership Plan (ESOP) and an Employee Savings Plan (401(k)).

     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 1997, 1996, and
1995, 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 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,  which will be invested by the plan's  trustees  in the  Company's  stock.
Company

                                      F-15

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

matching contributions approximated $492,000, $473,000, and $434,000, for fiscal
years 1997, 1996, and 1995, 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,  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  in fiscal years 1997 and 1996,  but $29,000 for fiscal year 1995.
Vesting occurs over time, such that an employee is 100% vested after seven years
of participation.

NOTE J  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 1993 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  consolidated  financial  position  and
results of operations.

     The Company  leases  approximately  227,000  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)
         1998......................................       $ 3,320
         1999......................................         2,450
         2000......................................         1,964
         2001......................................         1,460
         2002......................................         1,234
         2003 and thereafter.......................         7,586
                                                          -------
                                                          $18,014
                                                          =======

     Certain of the lease  payments are subject to  adjustment  for increases in
utility  costs  and  real  estate  taxes.  Total  rental  expense   approximated
$2,658,000, $2,467,000, and $2,938,000 for 1997, 1996, and 1995, 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.

                                      F-16

<PAGE>

                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE K  CUSTOMER INFORMATION

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

                                                   Years Ended June 30,
                                              -----------------------------
                                                1997       1996       1995
                                                ----       ----       ----
                                                      (In thousands)

     U.S. Department of Defense               $15,952    $16,479    $13,194
     U.S. Environmental Protection Agency       3,339      3,787      5,375
     Other U.S. Government Agencies             2,972      2,035      1,707
                                              -------    -------    -------
         Total U.S. Government                $22,263    $22,301    $20,276
                                              =======    =======    =======

     The  Company's  largest  contract   generated   revenues  of  approximately
$10,768,000  and  $7,951,000  in fiscal  years 1997 and 1996,  respectively.  No
contracts individually exceeded 10% of total revenues in fiscal year 1995.

NOTE L  QUARTERLY FINANCIAL INFORMATION  (UNAUDITED)

     Quarterly  financial  information  for  fiscal  years  1997  and 1996 is as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                          Fiscal Year 1997                        Fiscal Year 1996
                               -------------------------------------    ------------------------------------
       Quarter ending           Jun 30    Mar 31    Dec 31   Sept 30    Jun 30    Mar 31    Dec 31   Sept 30
----------------------------   -------   -------   -------   -------   -------   -------   -------   -------
<S>                            <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>    
Gross Revenue...............   $15,583   $10,727   $10,749   $11,458   $10,597   $11,389   $11,807   $10,490

Net Service Revenue.........    10,251     7,705     7,740     7,874     7,951     8,224     8,130     7,614

Operating income............       597       373       222       311       121       245       293       213

Net income..................   $   384   $   216   $   391   $   265   $   374   $   213   $   230   $   175
                               =======   =======   =======   =======   =======   =======   =======   =======

Net income per share........   $   .07   $   .04   $   .08   $   .05   $   .07   $   .04   $   .04   $   .03
                               =======   =======   =======   =======   =======   =======   =======   =======

Weighted average number of
  shares outstanding........     5,380     5,240     5,073     5,127     5,276     5,216     5,170     5,178
                               =======   =======   =======   =======   =======   =======   =======   =======
</TABLE>

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

                                      F-17

<PAGE>

                                                                     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

1995                    $1,351,609       $    770      $(395,180)      $957,199

1996                       957,199        (36,710)      (217,262)       703,227

1997                       703,227         (3,862)      (183,585)       515,780


                                      F-18