<PAGE>   1
                       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, 1998                                   NO. 1-9309
                                                                            
                    -------------------------------------

                                  VERSAR INC.
             (Exact name of registrant as specified in its charter)
<TABLE>
<S>                                                             <C>
               DELAWARE                                                     54-0852979
     (State or other jurisdiction of                            (I.R.S. employer identification no.)
     incorporation or organization)                         
6850 VERSAR CENTER, SPRINGFIELD, VIRGINIA                                       22151
(Address of principal executive offices)                                      (Zip code)
</TABLE>

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

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

                          COMMON STOCK, $.01 PAR VALUE
                                (Title of Class)

                            AMERICAN STOCK EXCHANGE
                  (Name of each exchange on which registered)
        Securities registered pursuant to Section 12(g) of Act:    NONE

         Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
 Yes  X   No 
     ---     ---

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

         The aggregate market value of the voting stock held by non-affiliates
of the registrant as of September 1, 1998 was approximately $9,516,483.

         The number of shares of Common Stock outstanding as of September 1,
1998 was 6,108,349.

         The Exhibit Index required by 17 CFR Part 240.0-3(c) is located on
Pages 18 through 22 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 1998 Annual Meeting of
Stockholders scheduled to be held on November 18, 1998 are incorporated by
reference into Part III hereof.





<PAGE>   2
                                     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; the possibility that acquired entities may
not perform as well as expected; 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.

         In May 1997, Versar acquired a majority interest in the equity of
Science Management Corporation ("SMC") and, thereafter in October 1997,
acquired the remaining outstanding equity by merging SMC into a wholly owned
subsidiary of Versar.  During the second half of 1998, Versar discontinued the
management services and engineering, design and construction businesses
acquired from SMC as a result of poor performance and the lack of anticipated
contract backlog.  The discontinuance of the engineering, design and
construction business was a result of declining oil prices and its impact on
the process industries.  The management services business acquired from SMC
suffered from the loss of three major contracts, which constituted 75% of its
revenues. Continuing to operate SMC in its current state would have severely
impacted the viability of the entire Company.  Versar has developed a plan for
the discontinuance of SMC or the sale of the entities.  Versar has set up
appropriate reserves to shut down the existing businesses or sell them to third
parties.

         Versar is a diversified international professional services firm,
helping clients in the private and public sectors enhance their performance
while reducing costs, conserving energy, and achieving environmental
excellence.  Versar combines science, technology, and people with specialized
skills to identify problems and develop and implement solutions to assist
clients achieve their long term goals.  As part of these services, we design
facilities, systems, and equipment to improve operating performance, conserve
resources, reduce emissions and waste generation, which ultimately increase
productivity and profitability and protect worker health and safety and our
environment.

         Versar's three remaining major business areas include:  (1)
environmental services; (2) energy service; and (3) facilities infrastructure
services.  As is indicated below, certain of these business areas have
developed as a result of the integration of The Greenwood Partnership ("TGP")
into the Versar corporate group and represent a combination of TGP's services
with Versar's traditional service offerings.

         ENVIRONMENTAL SERVICES includes a full range of scientific,
engineering, and construction services to address the prevention, detection,
control, management, and cleanup of toxic substances and hazardous waste in the
environment and constituted the primary business line of Versar prior to the
acquisition of TGP. Versar emphasizes innovation in process and technology
application to achieve better results more quickly and at less cost in today's
highly competitive market.  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, and
applying innovative and cost-





                                       2
<PAGE>   3
effective approaches to achieving sustainable growth while maintaining
compliance and taking corrective actions to cleanup past problems.

         Today's business challenges require viewing environmental management
as integral to a business's, operations so that informed decisions can be made
based on the economics of alternate solutions and their impact on productivity
and profitability.  These challenges are driven by:

    -    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.

    -    Increased emphasis on managing compliance as part of operations and
         recognition that pollution prevention and waste minimization are
         necessary parts of the long-term solution to local and national
         environmental challenges.

    -    Competition for limited resources and a need for new and better
         technology to eliminate waste, reduce emissions,  and to achieve
         remediation goals more cost effectively.

Versar provides the following services to help its clients meet these
challenges:

Consulting/Engineering.  Capitalizing on Versar's combined strengths in
regulatory policy, risk assessment, information management, pollution control,
and treatment technology, which emphasize pollution prevention and waste
reduction.  Versar provides nationally recognized expert services in the area
of natural resources management and ecological assessments to assist in
establishing policies that address issues such as nonpoint source pollution,
and health and ecological impacts of industrial effluent discharge practices.
Versar also provides consulting and engineering services to industry and
government agencies in assessing alternative compliance strategies and their
impacts on our customers' operations and profits.

Versar provides turnkey services in evaluating state-of-the-art environmentally
friendly and energy efficient technology and designing and installing systems
that both enhance operating performance and reduce costs - in most cases
providing pollution prevention solutions to compliance problems.  For example,
Versar redesigned the water cycle of an industrial laundry in the Northeast so
that it would recycle and reuse process water.  This both reduced water use and
operating costs with less than a two year payback.  On another project Versar
applied an alternative technology and paint formulation for coating mass
transit vehicles eliminating the need to install a $4M fume collection system.

Outsourcing.  Versar is increasingly providing on-site and off-site support to
help our customers manage their   environmental programs.  Over the last 5
years we have been providing a full range of pollution prevention, compliance
management, cleanup, and O&M services for the Washington, D.C. Metropolitan
Transit Authority.  Versar also has a total of 19 on-site support staff at DOD
installations and industrial facilities across the country managing a wide
spectrum of customer's environmental management functions ranging from
underground storage tanks (USTs), asbestos abatement programs, air
compliance/permitting, real property transfers, and on-site hazardous material
pharmacies.

Corrective/Remedial Action.  Versar provides the full range of services in
remedial/corrective action from site investigation, remedial design, and
construction to the operation and maintenance (O&M) of remedial systems.  A
major accomplishment of the Company in FY98 was the award of a worldwide
environmental remedial action services contract (RAC) to support the Air Force
Center of Environmental Excellence.  This contract has an estimated value of
$40M over 5 years and clearly indicates recognition of Versar as a remedial
construction contractor which is where the environmental market has been moving
over the last few years.  Versar brings to its customers innovative solutions
to cleanup that are more cost effective and permanent.  For example, Versar has





                                       3
<PAGE>   4
successfully demonstrated the effectiveness of a passive reactive wall
consisting of iron fillings placed in a trench to remove halogenated organic
compounds from groundwater at Lowry Air Force Base.  This eliminated the need
to pump and treat the groundwater.  Under an existing contract to the Air Force
Armstrong Labs, Versar is separating reusable materials from bomb range
residues, used targets, and other scrap materials at Nellis Air Force Base.
Versar is brokering reusable material to aluminum processors and scrap metal
smelters and is saving the government an estimated $3.5M in offsets to the
total cleanup cost of $8.6M.  Versar is also applying innovative approaches
that include creative financing, and stop loss insurance to cleanup
opportunities in the redevelopment of industrial properties under EPA and
States' Brownfields programs.  For example, Versar is in the process of
redeveloping a Petroleum Refinery in the Western U.S. where we have assisted
the customer in creatively financing of the project through previous insurers
of the property.  Versar primarily focuses on the enhancement of assets in the
cleanup of sites and the redevelopment of industrial facilities and commercial
properties.  Versar has established alliances with real estate and investment
firms to help clients bring new life to other abandoned, contaminated sites in
prime real estate locations.

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

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

    Personal Protection Equipment (PPE)/ChemDemilitarization.  A specialty area
for the Company is its Chemical Surety Laboratory and its 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 fourth 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 a personal ice cooling system (PICS) for the
worker.  In July 1998, GEOMET was awarded a $27.5M contract for the production
and fielding of the Army's Self-Contained Toxic Environment Protection Outfit
(STEPO) System at 73 installations through the year 2002.  The system will be
used to recover, render safe, store and dispose of unexploded chemical and
biological weapons.  GEOMET is also a commercial supplier to remedial action
contractors and emergency responders of PPE specially qualified for chemical
protection.  Driven in part by the sarin nerve gas attack on the Tokyo subway
in 1995, Versar has significantly expanded this division's offering its
services to local, state, United States, and foreign governments in support of
counter-terrorism.  Management believes the opportunities for commercial
application of its products and services will continue to grow in this area.

    ENERGY CONSERVATION SERVICES.  With the acquisition of The Greenwood
Partnership ("Greenwood" or "TGP"), Versar now includes energy conservation
services as part of its core business.  This not only helps diversify the





                                       4
<PAGE>   5
Company's business it provides a new entry to existing and new customers in an
emerging growth market. GEOMET Technologies Inc., Versar's subsidiary, has for
many years provided demand side management support to utilities in the
identification and implementation of efforts to reduce energy consumption.
GEOMET has provided energy auditing and energy conservation services for a
variety of clients.  The Greenwood Partnership brings to Versar, engineering,
design, and construction management expertise in the upgrade of plant
infrastructure to reduce energy consumption.

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

    Major utilities in the ESPC market are driven by the opportunity to develop
alliances with government and industry customers as deregulation of this
industry occurs in the U.S.  The current market in the Federal sector is driven
by Executive Order 12902 that requires government facilities to reduce energy
consumption by 30% by 2005.  However, it is generally believed that an even
larger market for energy conservation services exists in the private and
commercial sectors.

    FACILITY INFRASTRUCTURE SERVICES include a full range of architectural and
engineering services in industrial/commercial facilities and supporting central
mechanical and electrical utilities and building systems.  It also includes O&M
outsourcing services.

    Facility Infrastructure Services is the core business of TGP which has been
integrated with Versar's engineering capabilities of Versar's core
environmental engineering services.  This combined capability allows the
Company to bring state-of-the-art technology to its customers in reducing
waste, minimizing emissions, and in recovering and reusing resources to achieve
a sustainable business environment.  For example, TGP recently designed a
microchip manufacturing facility deploying state-of-the-art material handling,
waste treatment, and utility infrastructure support technology.

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

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

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

    -    Retrofit and Renovations
    -    Energy Management Studies and Audits
    -    Fire Protection
    -    Life Safety
    -    Performance Contracting





                                       5
<PAGE>   6
    -    Life-Cycle Analysis
    -    Heating and Cooling Distribution Systems
    -    Electrical Power and Lighting
    -    Building HVAC Systems

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


MARKETS

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

Versar is participating in a number of growth markets.  These include:

    -    Industry's continued focus on productivity improvement with increased
         need for services in upgrading plant and utility infrastructure.

    -    Deregulation of the energy industry presents opportunities for Versar
         through TGP in energy conservation projects.

    -    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.

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

    -    Continued pressure to reduce environmental management cost will
         provide opportunities for Versar to grow its business in pollution
         prevention, and outsourcing services.

    Versar's current client base is well balanced with 44 percent
industrial/commercial and 56 percent government.  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 its 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.  The major focus over the
next few years will be the to reduce its infrastructure.  Versar is a major
support contractor to DOD, offering the same range of services as in the
private sector.  The U.S. Environmental Protection Agency (EPA) makes up 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
extensive knowledge of regulatory trends and their impacts.  Other Federal
clients make up 5 percent of our business and include NASA, the Departments of
Energy and the Interior, Federal Housing Authority, and Intelligence Agencies.
State and local governments make up 11 percent of Versar's business.





                                       6
<PAGE>   7
COMPETITION

    Versar traditionally has faced substantial competition in each market in
which it operates and expects to continue to face substantial competition as it
diversifies its business.  Many times, its competitors are larger and have
greater financial resources.  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 and
resources management 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, 1998, total backlog for Versar, including unfunded tasks and
orders, was approximately $301 million, as compared to approximately $340
million as of June 30, 1997.  Funded backlog for Versar was approximately $30
million, a decrease of 27 percent compared to approximately $41 million as of
June 30, 1997, as a result of the discontinuance of the operations of SMC,
which made up approximately $15 million of the fiscal year 1997 backlog.
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, 1998, Versar had approximately 441 full-time employees, of
which approximately 394 were engineers, scientists, and other professionals.
Seventy-five percent of the Company's professional employees have a bachelors
degree, 30% have a masters degree, and 4% have doctorate degrees.

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 in two buildings from Sarnia Corporation.  In October
1997, Versar reduced this leased space to 68,414 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, 1998, the Company had under lease an aggregate of
approximately 209,000 square feet of office and laboratory space in the
following locations:  Springfield, Lynchburg, Richmond, and Williamsburg, VA;
Tempe, AZ; Alameda and Fair Oaks, CA; Northglenn, CO; Miami, FL; Lombard, IL;
Burlington, MA; Hopkins, MN; Columbia, Gaithersburg and Germantown, MD;
Bristol, PA; San Antonio, TX; and American Fork, UT.  These leases are
generally for terms of five years or less.

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





                                       7
<PAGE>   8
ITEM 3.  LEGAL PROCEEDINGS

         In December 1994, SMC Environmental Services Group, Inc., an indirect
subsidiary of Versar, a former employee of SMC, and two other entities were
sued by Edward A. Long, an employee of an operator of a municipal waste
transfer station.  Mr. Long alleges that in October 1992, while transferring
leachate from a holding tank to a tanker truck, he blacked-out and suffered
serious personal injuries.  The lawsuit, entitled Edward A. Long v. Lehigh
Valley Recycling, Inc. et al., No. 94-20222, was filed in the Court of Common
Pleas of Montgomery County, Pennsylvania, Civil Division.  SMC Environmental
and its employee, who had been retained by the owner of the municipal waste
transfer station to help finalize a permit application with the Pennsylvania
Department of Environmental Protection in 1988, filed an answer denying the
allegations.  The parties have undertaken certain discovery which remains
ongoing.  Because this claim arose prior to the acquisition of SMC and its
subsidiaries by Versar, the Company is reviewing the insurance coverage
available to the Company.  Based upon consultation with outside counsel,
management does not believe the ultimate outcome of this lawsuit will have a
material impact on Versar's consolidated 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 1998.

EXECUTIVE OFFICERS

The current executive officers of Versar, and their ages as of September 1,
1998, their current offices or positions and their business experience for the
past five years are set forth below.

<TABLE>
<CAPTION>
NAME                                AGE                       POSITION WITH THE COMPANY
----                                ---                       -------------------------
<S>                                 <C>                       <C>
Benjamin M. Rawls                   57                        Chairman, Chief Executive
                                                              Officer and President
                                        
Thomas S. Rooney                    64                        Executive Vice President and
                                                              Chief Operating Officer
                                        
Robert L. Durfee                    62                        Executive Vice President,
                                                              President, GEOMET Technologies, Inc.
                                        
Lawrence A. White                   55                        Executive Vice President,
                                                              Corporate Development
                                        
Lawrence W. Sinnott                 36                        Vice President,
                                                              Chief Financial Officer and Treasurer
                                        
James C. Dobbs                      53                        Vice President, General Counsel and
                                                              Secretary
                                        
Gayaneh Contos                      62                        Senior Vice President
</TABLE>





                                       8
<PAGE>   9
         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 Jersey.  Between 1987 and 1989, he was President of Orfa
Corporation, a company that built and operated plants that recycle municipal
solid waste into useful end products.

         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.

         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.





                                       9
<PAGE>   10
                                    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, 1998, the Company had 856
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 1998 and 1997 are presented below.

<TABLE>
<CAPTION>
           Fiscal Year                                                       High              Low  
-------------------------------                                             -------         --------
<S>      <C>                                                                <C>              <C>
1998     4th Quarter    . . . . . . . . . . . . . . . . . . .               $ 6.750          $ 3.875
         3rd Quarter    . . . . . . . . . . . . . . . . . . .                 5.875            4.250
         2nd Quarter    . . . . . . . . . . . . . . . . . . .                 6.250            4.813
         1st Quarter    . . . . . . . . . . . . . . . . . . .                 5.750            3.500
</TABLE>


<TABLE>
<CAPTION>
           Fiscal Year                                                       High              Low  
-------------------------------                                            --------         --------
<S>      <C>                                                                <C>              <C>
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
</TABLE>

         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.





                                       10
<PAGE>   11
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,                  
                                                                 ---------------------------------------------------------------
                                                                     1998           1997       1996         1995        1994    
                                                                 ------------   ----------- ----------- ----------- ------------
                                                                             (In thousands, except per share data)
<S>                                                                 <C>         <C>         <C>       <C>         <C>
Consolidated Statement of Operations
   related data:

Gross Revenue . . . . . . . . . . . . . . . . . . . . . . . .       $ 50,420    $ 44,935    $ 44,283   $  39,090   $   42,764
Net Service Revenue . . . . . . . . . . . . . . . . . . . . .         34,895      31,696      31,919      29,347       31,032
Operating Income (Loss) . . . . . . . . . . . . . . . . . . .            378       1,266         872         560       (1,269)
Income (Loss) from Continuing                                                 
  Operations    . . . . . . . . . . . . . . . . . . . . . . .            276       1,109         992         458       (2,658)
(Loss) Income from Discontinued                                               
  Operations    . . . . . . . . . . . . . . . . . . . . . . .         (8,829)        147         ---         ---          ---
Net (Loss) Income . . . . . . . . . . . . . . . . . . . . . .         (8,553)      1,256         992         458       (4,367)
Income (Loss) per share from Continuing                                       
  Operations - Diluted  . . . . . . . . . . . . . . . . . . .       $    .05    $    .21    $    .19   $     .09   $     (.59)
(Loss) Income per share from Discontinued                                     
  Operations - Basic and Diluted  . . . . . . . . . . . . . .          (1.55)        .03         ---         ---          ---
Net (Loss) Income per share - Diluted . . . . . . . . . . . .       $  (1.50)   $    .24    $    .19   $     .09   $     (.97)
Weighted Average Shares Outstanding - . . . . . . . . . . . .          5,695       5,286       5,248       4,834        4,481
  Diluted

Consolidated Balance Sheet related data:

Working Capital . . . . . . . . . . . . . . . . . . . . . . .       $  4,720    $  9,140    $  7,629   $   5,425   $    5,261
Current Ratio . . . . . . . . . . . . . . . . . . . . . . . .           1.39        2.21        2.14        1.64         1.68
Total Assets    . . . . . . . . . . . . . . . . . . . . . . .         21,564      21,870      16,979      28,195       27,782

Current Portion of Long-Term Debt . . . . . . . . . . . . . .          1,114         819         323         335        1,201
Long-Term Debt  . . . . . . . . . . . . . . . . . . . . . . .            688       1,437           2           4           17
Mortgage Debt of Sarnia . . . . . . . . . . . . . . . . . . .            ---         ---         ---      12,062       12,403 
                                                                    ---------   ---------   ---------  ----------  -----------
Total Debt, excluding bank line of credit . . . . . . . . . .          1,802       2,256         325      12,401       13,621

Stockholders' Equity  . . . . . . . . . . . . . . . . . . . .       $  4,991    $  9,523    $  7,776   $   6,290   $    5,261
</TABLE>

         Certain amounts in 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 in January
1996, Versar's guarantee was reduced from $12.4 million to $1.5 million and the
divestiture was considered complete for accounting purposes. Certain amounts in
fiscal year 1997 have been reclassified to reflect the two segments of SMC,
engineering, design and construction services and management services, as 
discontinued operations for comparative purposes.





                                       11
<PAGE>   12
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; the possibility that acquired entities may
not perform as well as expected; 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 results of operations include the financial results that are
part of the continuing operations of the Company.  In May 1997, Versar acquired
a majority equity interest in SMC and, thereafter in October 1997, the
remaining outstanding equity.  Following its acquisition, SMC's engineering,
design and construction services and management services segments failed to 
perform in accordance with the expectations of Versar's management due to
significant business shortfalls in these segments.  In September 1998, Versar's
Board of Directors authorized management to discontinue the operations of
Science Management Corporation constituting the engineering, design and
construction services and management services segments of Versar.  Therefore, 
results of operations of SMC's two segments have been netted together and 
presented on one line, as a loss from discontinued operations. The following 
discussion relates to continuing operations only, unless specifically noted.

         Versar's gross revenues from continuing operations for fiscal year
1998 totaled $50,420,000, or $5,485,000 (12.2%) above fiscal year 1997 gross
revenue of $44,935,000.  Gross revenue for fiscal year 1997 was $652,000
(1.5%) above that reported in 1996.  The increase in Versar's gross revenue in
fiscal year 1998 was due to five months of revenue from the acquisition of the
Greenwood Partnership ("TGP") of $2,300,000 and the remaining balance of the
increase was with Versar's base business.  As reflected in the table on page
14, government revenue represented 56.0% of the total revenue in 1998, compared
to 64.0% in 1997 and 66.0% in 1996.  The reduction is attributable to the
addition of TGP and additional Versar commercial revenues.

         Purchased services and materials for fiscal year 1998 totaled
$15,525,000 or $2,286,000 (17.3%) higher than fiscal year 1997 purchased
services.  Purchased services for fiscal year 1997 were $875,000 (7.1%) higher
than reported in fiscal year 1996. The increase in 1998 is due to subcontracted
efforts on a remediation project in the Company's Northeast operation.

         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 increased to 84.3% in 1998 compared to 80.1% in
1997 and 81.4% in 1996.  The increase is due to operating losses of EIMS
software business and ValuAdd municipal operations of $422,000, lower labor
multipliers in TGP and lower margins on existing projects than Versar's base
business.





                                       12
<PAGE>   13
         Selling, general and administrative expenses approximated 13.7% of net
service revenue in 1998, compared to 16.0% in 1997 and 15.5% in 1996.  The
decrease in fiscal years 1998 and 1997 are attributable to the higher net
service revenue, while the corporate costs for the Company were reduced.

         Other income includes the costs and revenues that are not directly
attributable to contracts.  In 1998, the Company had no other income or costs
compared to $42,000 and $28,000 of income in fiscal years 1997 and 1996
associated with a non-compete agreement from the sale of its majority-owned
subsidiary Gammaflux, Inc.

         In fiscal year 1998, the Company recorded a special charge of $330,000
to write off of receivables and write-off of goodwill for the ValuAdd
operations.  The Company's decision to shut down the ValuAdd operations is a
result of significant business shortfalls in the ValuAdd operations.

         Operating income for 1998 was $378,000, a decrease of $888,000 over
fiscal year 1997.  The decrease is primarily due to the special charge as
mentioned above and the $422,000 of operating losses on EIMS and ValuAdd
operations, which were closed in fiscal year 1998.

         Interest expense during 1998 was $251,000, an increase of $154,000
from 1997.  The increase is due to the cost of financing for the acquisition of
SMC of approximately $150,000.

         Versar's income tax benefit for fiscal year 1998 was $149,000 compared
to a tax expense of $60,000 in fiscal year 1997.  Due to the losses in the
current fiscal year and the non-deductible goodwill from SMC, the Company
increased its valuation on deferred tax assets until the earnings improve to
ensure the utilization of the tax assets.  Refer to Note I of the Notes to
Financial Statements.

         In fiscal year 1998, the Company recorded a loss from discontinued
operations for the two segments acquired from SMC of $8,829,000 net of $90,000
tax benefit including the write-off of goodwill associated with its acquisition
of $5,064,000 and operating losses for a total of $5,776,000 (net of tax) and
accrued reserves of $3,053,000 to finalize the disposition of SMC.  As part of
the accrued reserves the Company reserved approximately $1,700,000 for
operating losses in the phase out of the two segments. (Refer to Note C and I
of the Notes to Financial Statements for further information on the
discontinuance of the engineering, design and construction services and
management services segments of SMC and the related tax impact to the Company.)

         In summary, Versar's net loss was $8,553,000 in fiscal year 1998,
compared to net income of $1,256,000 in fiscal year 1997 and net income of
$992,000 in fiscal year 1996.





                                       13
<PAGE>   14
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:


<TABLE>
<CAPTION>
                                                                        For the Years Ended June 30,         
                                               -------------------------------------------------------------------------------

                                                        1998                         1997                         1996         
                                               ---------------------      ----------------------         ---------------------
                                                                       (In thousands, except for percentages)
<S>                                                    <C>         <C>          <C>            <C>         <C>           <C>
Government
         EPA                                            $  3,493        7%       $  3,339        7%        $  3,787        9%
         State & Local                                     5,460       11%          6,339       14%           6,733       15%
         Department
            of Defense                                    16,771       33%         15,952       36%          16,479       37%
         Other                                             2,385        5%          2,972        7%           2,035        5%
Commercial                                                22,311       44%         16,333       36%          15,249       34%
                                                        --------   -------       --------      ----        --------      ----
Gross Revenue                                           $ 50,420      100%       $ 44,935      100%        $ 44,283      100%
                                                        ========   =======       ========      ====        ========      ====
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

         The Company's operating activities utilized $1,667,000 of cash in 1998
primarily for working capital requirements at SMC and delayed receipt of
receivables.

         The Company utilized short-term bank financing to supplement its
ability to meet day-to-day operating cash requirements.  At June 30, 1998, the
Company had $4,720,000 of working capital, compared to $9,140,000 in 1997.
Working capital decreased by 48% primarily due to poor operating performance of
SMC, working capital requirements of SMC and the acquisition of The Greenwood
Partnership.

         In April 1997, the Company moved its line of credit facility to
NationsBank, N.A.  The new line of credit of $5,000,000 is restricted to the
borrowing base of qualifying receivables less the balance of $1,200,000 reserve
for a guarantee of debt of Sarnia and outstanding acquisition loan balances
(approximately $1,437,500 at June 30, 1998).  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 (8.16% at June 30, 1998).  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, 1998 was approximately $1,336,000.  Advances on the
line are due on November 30, 1998.  The Company's covenants were modified as of
June 30, 1998, due to the discontinuance of the two segments acquired from SMC.
Management believes that cash generated by operations and borrowings available
under the line of credit and extension of the line will be adequate to meet the
working capital needs for fiscal year 1999.

         As previously reported, Versar has guaranteed a five year term loan
with an original balance of $1,500,000 and a current balance of $1,200,000 for
Sarnia.  Versar's reserve against the loan as of June 30, 1998 is $1,200,000.
As the term loan is repaid, the reserve will be reduced and added to Versar's
equity. Starting in fiscal year 1998, principal payments of $300,000 are due
each year and will be added back to Versar's equity as they are paid by Sarnia.





                                       14
<PAGE>   15
ACQUISITION OF THE GREENWOOD PARTNERSHIP

         On January 30, 1998, Versar completed the acquisition of The Greenwood
Partnership, P.C.  As a part of the acquisition, the Company increased its
current line of credit by $2,000,000 to $5,000,000 and retired existing debt of
Greenwood of approximately $672,000, paid $300,000 in cash, recorded additional
notes payable to Greenwood stockholders of $450,000 payable over 4 years, and
issued 228,572 shares of common stock. The transaction was accounted for as a
purchase of assets and goodwill recorded as part of the transaction was
approximately $1.1 million.  The assets of Greenwood are now included as
collateral under the Company's line of credit.

IMPACT OF INFLATION

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

BUSINESS SEGMENT

         In June 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131).  SFAS No. 131 becomes
effective in Versar's fiscal year 1999.  SFAS No. 131 requires disclosure of
operating segments of the Company so that the reader can better understand and
assess the business enterprise performance taken as a whole. Versar currently
has three business segments:  environmental services, energy conservation
services, and facility infrastructure services.  Currently, the energy
conservation and facility infrastructure services segments do not meet the
reporting requirements under those required by SFAS No. 131 or SFAS No. 14. 
During fiscal year 1999, the growth in these segments may require the Company
to provide financial disclosure as required under SFAS No. 131.

YEAR 2000

         Certain computer programs have been written using two digits rather
than four to define the applicable year, which could result in the computer
recognizing a date using "00" as the year 1900 rather than the year 2000.
This, in turn, could result in major system failures and in miscalculations,
and is generally referred to as the "Year 2000" problem.  On August 4, 1998,
the Company's Board of Directors adopted a comprehensive Strategy for Achieving
Year 2000 Compliance program for Versar and its subsidiaries.  Subsequently,
management has begun to implement the eight step program to identify both
internally and externally the extent of any Year 2000 problem, the cost to the
Company to mitigate any Year 2000 effects and identify any significant client
or subcontractor compliance issues. Among other things, Versar is in the
process of evaluating the different options that are available to upgrade the
Company's existing data, business processing and financial reporting software
applications to be Year 2000 compliant.  Presently, Versar does not believe
that Year 2000 compliance will result in any material investments, nor does
Versar have any information that the Year 2000 problem will have material
adverse effects on the business operations or financial performance of Versar.
In addition, Versar is not aware of any Year 2000 problems of its customers,
suppliers or network affiliates that will have a material adverse effect on the
business, operations or financial performance of Versar. However, the
implementation of our in-house and outside survey has just begun, so there can
be no assurance that the year 2000 problem will not adversely affect Versar and
its business.  It is expected to cost between $100,000 to $300,000.  Versar
expects that the Company will be in Year 2000 compliance by June 30, 1999.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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





                                       15
<PAGE>   16
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 1998 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 1998 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 1998 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 1998 fiscal year.

                                    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, 1998 and 1997

                 c)  Consolidated Statements of Operations for the Years Ended
                     June 30, 1998, 1997, and 1996

                 d)  Consolidated Statements of Changes in Stockholders' Equity
                     for the Years Ended June 30, 1998, 1997, and 1996





                                       16
<PAGE>   17
                 e)  Consolidated Statements of Cash Flows for the Years Ended
                     June 30, 1998, 1997, and 1996

                 f)  Notes to Consolidated Financial Statements

    (2)  Financial Statement Schedules:

                 a)  Schedule II - Valuation and Qualifying Accounts for the 
                     years ended June 30, 1998, 1997, and 1996

                 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 17 through 21 of this
                 report.

(B)  Reports on Form 8-K

         None.





                                        17
<PAGE>   18
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                                  Page Number/
Item No.                                               Description                                                   Reference 
--------                                               -----------                                                 -----------
  <S>            <C>                                                                                                  <C>
   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)

  10.38          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)
</TABLE>





                                       18
<PAGE>   19
<TABLE>
<CAPTION>
                                                                                                                  Page Number/
Item No.                                       Description                                                           Reference 
--------                                       -----------                                                         -----------
  <S>            <C>                                                                                                  <C>
  10.40          Option Exchange Offer dated April 16, 1991 between the Registrant and
                 participants of the Incentive Stock Option Plan and the Nonqualified
                 Stock Option Plan  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (G)

  10.41          Securities and Exchange Commission response dated September 23, 1991
                 to certain question regarding the Registrant's Option Exchange Offer . . . . . . . . . . . . .            (G)


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

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

  10.58          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)

  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)
</TABLE>





                                       19
<PAGE>   20
<TABLE>
<CAPTION>
                                                                                                                  Page Number/
Item No.                                       Description                                                           Reference 
--------                                       -----------                                                         -----------
  <S>               <C>                                                                                                 <C>
  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.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (P)

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

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

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

  10.88             The Greenwood Partnership Asset Acquisition Agreement   . . . . . . . . . . . . . . . . . .          25-67

  10.89             Modification to NationsBank loan to increase to $5M   . . . . . . . . . . . . . . . . . . .          68-82

  10.90             AFCEE RAC Contract  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         83-185
</TABLE>





                                       20
<PAGE>   21
<TABLE>
<CAPTION>
                                                                                                                   Page Number/
Item No.                                       Description                                                           Reference 
--------                                       -----------                                                          -----------
  <S>    <C>                                                                                                            <C>
  11     Statement Re:  Computation of Per Share Earnings . . . . . . . . . . . . . . . . . . . . . . . . . .           186

  22     Subsidiaries of the Registrant . . . . . . . . .  . .  . . . . . . . . . . . . . . . . . . . . . . . .         187

  27     Financial Data Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>

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

* Indicates management contract or compensatory plan or arrangement

  (A)    Incorporated by reference to the similarly numbered exhibit to the
         Registrant's Form S-1 Registration Statement ("Registration
         Statement") effective November 20, 1986 (File No. 33-9391).

  (B)    Incorporated by reference to the similarly numbered exhibit to the
         Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
         30, 1987 ("FY 1987 Form 10-K") filed with the Commission on September
         28, 1987.

  (C)    Incorporated by reference to the similarly numbered exhibit to the
         Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
         30, 1988 ("FY 1988 Form 10-K") filed with the Commission on September
         28, 1988.

  (D)    Incorporated by reference to the similarly numbered exhibit to the
         Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
         30, 1989 ("FY 1989 Form 10-K") filed with the Commission on September
         28, 1989.

  (E)    Incorporated by reference to the similarly numbered exhibit to the
         Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
         30, 1990 ("FY 1990 Form 10-K") filed with the Commission on September
         28, 1990.

  (F)    Incorporated by reference to the similarly numbered exhibit to the
         Registrant's Form 10-Q for the quarter ended September 30, 1989 ("1st
         Quarter FY 1990 Form 10-Q").

  (G)    Incorporated by reference to the similarly numbered exhibit to the
         Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
         30, 1991 ("FY 1991 Form 10-K") filed with the Commission on October
         15, 1991.

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

  (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.





                                       21
<PAGE>   22
  (K)    Incorporated by reference to the similarly numbered exhibit to the
         Registrant's Form 10-K Annual Report for Fiscal Year Ended June 30,
         1994 ("FY 1994 Form 10-K") filed with the Commission on September 27,
         1994.

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

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

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

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

  (P)    Incorporated by reference to similarly numbered exhibit to the
         Registrant's Form 10-K Annual Report for Fiscal Year Ended June 30,
         1997 ("FY 1997 Form 10-K") filed with the Commission on September 29,
         1997.

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





                                       22
<PAGE>   23
                                  SIGNATURES

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


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


Date:  September 28, 1998                /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.

<TABLE>
<CAPTION>
SIGNATURES                                                TITLE                                        DATE
----------                                                -----                                        ----
<S>                                                       <C>                                         <C>
/S/ Benjamin M. Rawls                                     Chairman, Chief Executive Officer,          September 28, 1998
-----------------------------------                       President, and Director                                       
Benjamin M. Rawls                                                                


/S/ James A. Skidmore, Jr.                                Vice Chairman and Director                  September 28, 1998
-----------------------------------                                                                                     
James A. Skidmore, Jr.


/S/ Robert L. Durfee                                      Executive Vice President and                September 28, 1998
-------------------------------------                     Director                                                      
Robert L. Durfee                                                  


/S/ Lawrence W. Sinnott                                   Vice President, Chief Financial             September 28, 1998
-----------------------------------                       Officer, Treasurer, and                                       
Lawrence W. Sinnott                                       Principal Accounting Officer
                                                                                      

/S/ Michael Markels, Jr.                                  Chairman Emeritus and Director              September 28, 1998
-------------------------------------                                                                                   
Michael Markels, Jr.


/S/ Thomas J. Shields                                     Director                                    September 28, 1998
-------------------------------------                                                                                   
Thomas J. Shields


/S/ Constantine G. Caras                                  Director                                    September 28, 1998
------------------------------------                                                                                    
Constantine G. Caras
</TABLE>





                                       23
<PAGE>   24
<TABLE>
<S>                                                       <C>                                         <C>
/S/ Pat H. Moore                                          Director                                    September 28, 1998
-------------------------------------                                                                                   
Pat H. Moore


/S/ David Gladstone                                       Director                                    September 28, 1998
------------------------------------                                                                                    
David Gladstone


/S/ Charles I. Judkins, Jr.                               Director                                    September 28, 1998
--------------------------------------                                                                                  
Charles I. Judkins, Jr.


/S/ M. Lee Rice                                           Director                                    September 28, 1998
--------------------------------------                                                                                  
M. Lee Rice
</TABLE>





                                      24
<PAGE>   25




                    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, 1998 and 1997, 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,
1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998, 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 23, 1998





                                     F-1

<PAGE>   26
                          VERSAR, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                   June 30,
                                                            ------------------------
                                                              1998            1997
                                                            --------        --------
<S>                                                         <C>             <C>     
ASSETS
   Current assets
     Cash and cash equivalents........................      $     72        $     96
     Accounts receivable, net.........................        14,631          12,655
     Prepaid expenses and other current assets........         1,378           1,354
     Deferred income taxes............................           784             652
     Assets of discontinued operations, net...........            76           1,952
                                                            --------        --------
       Total current assets...........................        16,941          16,709

   Property and equipment, net........................         2,779           2,098
   Deferred income taxes..............................           502             257
   Goodwill...........................................         1,069           2,501
   Other assets.......................................           273             305
                                                            --------        --------
       Total assets...................................      $ 21,564        $ 21,870
                                                            ========        ========

LIABILITIES AND STOCKHOLDERS' EQUITY
   Current liabilities
     Accounts payable.................................      $  3,303        $  2,883
     Bank line of credit..............................         3,664             274
     Current portion of long-term debt................         1,114             819
     Accrued salaries and vacation....................         1,495           1,487
     Other liabilities................................         2,645           2,106
                                                            --------        --------
       Total current liabilities......................        12,221           7,569

   Long-term debt.....................................           688           1,437
   Other long-term liabilities........................         2,084           1,015
   Liabilities of discontinued operations, net........           380             826
   Reserve on guarantee of real estate debt...........         1,200           1,500
                                                            --------        --------
       Total liabilities..............................        16,573          12,347
                                                            --------        --------

   Commitments and contingencies (Note K)

   Stockholders' equity
      Common stock, $.01 par value; 30,000,000 shares
      authorized; 6,071,887 shares and 5,151,792
      shares issued and outstanding at June 30, 1998
      and 1997, respectively..........................            61              52
      Capital in excess of par value..................        17,458          13,788
      Accumulated deficit.............................       (12,528)         (4,317)
                                                            --------        --------
       Total stockholders' equity.....................         4,991           9,523
                                                            --------        --------

       Total liabilities and stockholders' equity.....      $ 21,564        $ 21,870
                                                            ========        ========
</TABLE>



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


                                       F-2

<PAGE>   27
                          VERSAR, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                     Years Ended June 30,
                                                           ----------------------------------------
                                                             1998            1997            1996
                                                           --------        --------        --------
<S>                                                        <C>             <C>             <C>     
GROSS REVENUE                                              $ 50,420        $ 44,935        $ 44,283
   Purchased services and materials, at cost..........       15,525          13,239          12,364
                                                           --------        --------        --------
NET SERVICE REVENUE...................................       34,895          31,696          31,919

   Direct costs of services and overhead..............       29,418          25,387          25,973
   Selling, general, and administrative expenses......        4,769           5,085           4,960
   Other income, net..................................          ---             (42)            (28)
   Losses on Sarnia operations........................          ---             ---             142
   Special charge.....................................          330             ---             ---
                                                           --------        --------        --------
OPERATING INCOME......................................          378           1,266             872

OTHER EXPENSE
   Interest expense...................................          251              97              96
   Income tax (benefit) expense.......................         (149)             60            (216)
                                                           --------        --------        --------

INCOME FROM CONTINUING OPERATIONS.....................          276           1,109             992

DISCONTINUED OPERATIONS (NOTE C)
   (Loss) income from discontinued operations
     (net of tax benefit of $90 at June 30,
         1998 and tax expense of $90 at
         June 30, 1997)...............................       (5,776)            147             ---
   Loss on disposal of discontinued operations,
         including provision of $1,700 for operating
         losses during phase out period (less
         applicable income taxes of $0)...............       (3,053)            ---             ---
                                                           --------        --------        --------

(LOSS) INCOME FROM DISCONTINUED
  OPERATIONS..........................................       (8,829)            147             ---
                                                           --------        --------        --------

NET (LOSS) INCOME.....................................     $ (8,553)       $  1,256        $    992
                                                           ========        ========        ========


INCOME PER SHARE FROM CONTINUING
  OPERATIONS - BASIC..................................     $    .05        $    .22        $    .20
                                                           ========        ========        ========

INCOME PER SHARE FROM CONTINUING
  OPERATIONS - DILUTED................................     $    .05        $    .21        $    .19
                                                           ========        ========        ========

(LOSS) INCOME PER SHARE FROM
  DISCONTINUED OPERATIONS - BASIC
  AND DILUTED.........................................     $  (1.55)       $    .03       $     ---
                                                           ========        --------        ========

NET (LOSS) INCOME PER SHARE - BASIC...................     $  (1.50)       $    .25        $    .20
                                                           ========        ========        ========

NET (LOSS) INCOME PER SHARE - DILUTED.................     $  (1.50)       $    .24        $    .19
                                                           ========        ========        ========

WEIGHTED AVERAGE NUMBER OF SHARES
  OUTSTANDING - BASIC.................................        5,695           5,041           4,905
                                                           ========        ========        ========

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED.........................         5,695           5,286           5,248
                                                           ========        ========        ========
</TABLE>

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

                                       F-3

<PAGE>   28
                          VERSAR, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (In thousands)


<TABLE>
<CAPTION>
                                                              Years Ended June 30, 1998, 1997, and 1996
                                                --------------------------------------------------------------------


                                                                                                              Total
                                               Number                  Capital in   Accumu-                   Stock-
                                                 of          Common    Excess of    lated        Treasury     holders'
                                                Shares        Stock    Par Value    Deficit       Stock       Equity
                                                ------        -----    ---------    -------       -----       ------

<S>                                         <C>          <C>           <C>          <C>          <C>          <C>      
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 ValuAdd..........         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
                                            ---------     ---------    ----------   ----------   ----------   ---------

Exercise of stock options................         71           ---           206          ---          ---          206
Common stock issued for acquisitions.....        773             8         3,061          ---          ---        3,069
Common stock issued to ESSOP.............         76             1           403          ---          ---          404
Decrease in guarantee of Sarnia debt.....        ---           ---           ---          300          ---          300
Tax benefit of exercised options.........        ---           ---           ---           42          ---           42
Net loss.................................        ---           ---           ---       (8,553)         ---       (8,553)
                                            ---------     ---------    ----------   ----------   ----------   ----------
Balance, June 30, 1998...................      6,072      $     61     $  17,458    $ (12,528)   $     ---    $   4,991
                                            =========     =========    ==========   ==========   ==========   ==========
</TABLE>




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

                                       F-4

<PAGE>   29
                          VERSAR, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                            Years Ended June 30,
                                                                     -------------------------------------
                                                                       1998           1997           1996
                                                                     -------        -------        -------
<S>                                                                  <C>            <C>            <C>    
Cash flows from operating activities
   Net (loss) income .............................................   $(8,553)       $ 1,256        $   992
   Adjustments to reconcile net (loss) income to
     net cash provided by continuing operating activities
         Loss (income) from discontinued operations...............     8,829           (147)           ---
         Depreciation and amortization............................       731            695            684
         Goodwill write-off.......................................        55            ---            ---
         Loss on sale of property and equipment...................        80             36             14
         Provision for doubtful accounts receivable...............       269             (4)           (37)
         Common stock issued to ESSOP.............................       404            586            181
         Deferred tax benefit.....................................      (300)          (358)          (250)
                                                                     -------        -------        -------
              Subtotal............................................     1,515          2,064          1,584
                                                                     -------        -------        -------

   Changes in assets and liabilities
         Increase in accounts receivable.........................     (2,244)          (275)          (616)
         (Increase) decrease  in prepaids and other assets.......       (716)           427           (500)
         Increase in accounts payable............................        420            785            148
         Increase (decrease) in accrued salaries and vacation....          8           (132)           228
         Increase (decrease) in other liabilities................      1,608            (47)           659
         Net change in assets and liabilities of Sarnia..........        ---            ---            142
                                                                     -------        -------        -------
              Net cash provided by continuing
              operations.........................................        591          2,822          1,645
         Changes in net assets/liabilities of discontinued
              operations.........................................     (2,258)          (979)          (615)
                                                                     -------        -------        -------
              Net cash (used in) provided by operating 
                  activities.....................................     (1,667)         1,843          1,030
                                                                     -------        -------        -------

Cash flows from investing activities
   Purchases of property and equipment...........................       (482)          (638)        (1,261)
   Proceeds from sale of fixed assets............................        ---             60            ---
   Cash used by discontinued operations..........................        (77)           ---            ---
   Acquisition of businesses.....................................       (940)        (2,870)           ---
                                                                     -------        -------        -------
              Net cash used in investing activities..............     (1,499)        (3,448)        (1,261)
                                                                     -------        -------        -------

Cash flows from financing activities
   Net borrowings (payment) on bank line of credit...............      3,390           (218)            54
   Principal payments on long-term debt..........................       (520)           (69)           (14)
   Notes payable for leases......................................         66            ---            ---
   Borrowing for acquisition of SMC..............................        ---          2,000            ---
   Purchase of treasury stock....................................        ---           (140)           (63)
   Proceeds from issuance of common stock........................        206             45            279
                                                                     -------        -------        -------
              Net cash provided by financing activities..........      3,142          1,618            256
                                                                     -------        -------        -------

Net (decrease) increase in cash..................................        (24)            13             25
Cash at the beginning of the year................................         96             83             58
                                                                     -------        -------        -------

Cash at the end of the year......................................    $    72        $    96        $    83
                                                                     =======        =======        =======
</TABLE>

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

                                       F-5

<PAGE>   30
                          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. In September 1998, the Company
decided to discontinue its management services and engineering, design and
construction services businesses which are classified as discontinued
operations. Both of these businesses came from the acquisition of SMC in May
1997 (see Note B). The Company's remaining business segments are environmental
services, energy conservation services and facility infrastructure services. The
energy conservation and facility infrastructure segments are collectively less
than 10% of consolidated revenues, operating profit and identifiable assets and
therefore separate segment reporting is not required under Statement of
Financial Accounting Standards (SFAS) No. 14 "Financial Reporting for Segments
of a Business Enterprise". Both segments are expected to grow and may become
separate reportable segments in fiscal year 1999.

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

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

         It is the Company's policy to provide reserves for the collectibility
of accounts receivable when it is determined that it is probable that the
Company will not collect all amounts due and the amount of reserve requirements
can be reasonably estimated.

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


                                       F-6

<PAGE>   31
                        VERSAR, INC. AND SUBSIDIARIES
                                      
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



         Intangible assets: On April 29, 1996, Versar purchased for 30,000
common shares the assets of ValuAdd. The purchase resulted in the Company
recording goodwill of $97,500, which was being amortized over a five year
period. In fiscal year 1998, the Company recorded a special charge of $330,000
to write off of receivables and write off of goodwill for the ValuAdd
operations. The Company's decision to shut down the ValuAdd operations is a
result of significant business shortfalls in the ValuAdd operations. The
remaining balance of approximately $55,000 was written off as of June 30, 1998
as the Company determined that the goodwill was impaired. On May 2, 1997, Versar
acquired 53.5% of the outstanding common stock and all outstanding preferred
stock of Science Management Corporation ("SMC") for cash. Versar had selected a
period of 15 years for amortization of the goodwill, which was determined to be
reasonable based on the mature businesses of SMC.

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

         In accordance with SFAS No. 121, in the fourth quarter of fiscal year 
1998, the Company determined that the projected future cash flows over the 
next 14 years, based on current information, will not be sufficient to offset 
the goodwill amortization related to the SMC acquisition. The Company further
determined that the goodwill was fully impaired and, accordingly, wrote off the
entire balance of $5,064,000 of goodwill resulting from the SMC acquisition.

         On January 30, 1998, Versar completed the acquisition of The Greenwood
Partnership, P.C. ("Greenwood" or "TGP"). As a part of the acquisition, the
Company increased its current line of credit by $2,000,000 and retired existing
debt of Greenwood of approximately $672,000, paid $300,000 in cash, recorded
additional notes payable to Greenwood stockholders of $450,000 payable over 4
years, and issued 228,572 shares of common stock. The transaction was accounted
for as a purchase. Goodwill recorded as part of the transaction was
approximately $1.1 million. Versar is amortizing the goodwill related to the
acquisition over 15 years, which was determined to be reasonable based on the
mature business of Greenwood. The assets of Greenwood are now included as
collateral as part of the Company's line of credit.

         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 (loss) income per share: The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share," which requires
companies to present basic earnings per share and diluted earnings per share.
The Standard requires additional informational disclosures along with the
restatement of earnings per share for all prior periods reported.

         Income taxes: The Company follows Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 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 $1,026,868 and $990,000 at June 30,
1998 and 1997, respectively. Versar purchased key-man life insurance policies to
fund the amounts due under the deferred compensation agreements. The cash
surrender value of the policies, net of loans, was $194,000 and $215,000 at June
30, 1998 and 1997, respectively.


                                       F-7

<PAGE>   32
                        VERSAR, INC. AND SUBSIDIARIES
                                      
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




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

         New Accounting Pronouncements: In June 1997, the Financial Accounting
Standard Board issued Statement of Financial Accounting Standard No. 131
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS No. 131 becomes effective in Versar's fiscal year 1999. SFAS No. 
131 requires disclosure of operating segments of the Company so that the reader
can better understand and assess the business enterprise performance taken as a
whole. Versar currently has three business segments: environmental services,
energy conservation services, and facility infrastructure services. Currently,
the energy conservation and facility infrastructure services segments do not
meet the reporting requirements under those required by SFAS No. 131 or SFAS
No. 14. During fiscal year 1999, the growth in these segments may require the
Company to provide financial disclosure as required under SFAS No. 131.

NOTE B  ACQUISITIONS

         On May 2, 1997, Versar acquired 53.5% of the outstanding common stock
and all outstanding preferred stock of SMC for $2,870,000 in cash. The
acquisition was financed by a three year $2,000,000 term note at a prime rate of
interest plus 1/2% (9% at June 30, 1998) from NationsBank, N.A. The remaining
portion of $870,000 was paid with current working capital. This transaction was
accounted for under the purchase method of accounting.

         On October 22, 1997, the shareholders of SMC approved the Agreement and
Plan of Merger between Versar and SMC, and SMC was merged into a wholly-owned
subsidiary of Versar effective October 23, 1997. In connection with the merger,
Versar issued approximately 533,433 shares of Versar's common stock to SMC
stockholders other than Versar and SMC became a wholly-owned subsidiary of
Versar. The issuance of the 533,433 shares increased goodwill and equity of
Versar during the second quarter of fiscal year 1998 by $2,898,000. SMC
represented the engineering, design, and construction services and management
services segments of the company in fiscal year 1997. The entire balance of the
goodwill was written off in fiscal year 1998 as the SMC businesses are
presented as discontinued operations in fiscal year 1998.

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

NOTE C  DISCONTINUED OPERATIONS

         As a result of poor performance following its acquisition of SMC, the
Company determined to discontinue operations of its management services and
engineering, design and construction services segments (acquired from SMC),
which provides services to the commercial and the petrochemical industries. 
The engineering, design and construction services segment was severely impacted
by the recent downturn in the petrochemical industry and the winding down of a
$20 million construction project, which reduced their sales volume by over 80%.
Such a downturn could not be reasonably anticipated as several pending projects
were put on hold or cancelled because the reduced oil prices did not make it
economically feasible for the projects. The management services segment of SMC
also suffered from loss of three large contracts which represented 75% of the
sales volume. The Company is pursuing sale of these two businesses and expects
that such sales will occur within fiscal year 1999. The Company has identified
potential buyers, but, if a sale does not occur within a reasonable period it
is likely that a shut down will be required. A shut down would



                                       F-8
<PAGE>   33

                         VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


not result in further material loss to the Company. SMC's sales for fiscal year
1998 were $34,769,000 and $3,582,000 for the two months of fiscal year 1997.

         In conjunction with the decision for discontinuance of these
businesses, the Company recorded a loss from discontinued operations of
$8,829,000 net of $90,000 tax benefit due to the write-off of goodwill
associated with its acquisition and operating losses of $5,776,000 (net of tax)
and accrued reserves of $3,053,000 to finalize the disposition. As part of the 
accrued reserves, the Company reserved approximately $1,700,000 for operating 
losses in the period prior to the sale or shut down.

         Current assets of discontinued operations consist primarily of accounts
receivable. Long term liabilities consist primarily of previous SMC bankruptcy
obligations prior to 1996. (see Note I concerning the tax effect of the
discontinuance.)

         Summarized financial results of the discontinued operations are as 
follows:

<TABLE>
<CAPTION>
                                                       Years Ended June 30,
                                                      ----------------------
                                                        1998          1997
                                                      -------        -------
Balance Sheet                                             (In thousands)

<S>                                                   <C>            <C>    
      Cash and cash equivalents..................     $   203        $   341
      Accounts receivable, net...................       6,068          4,870
      Prepaid expenses and other current assets..         366            134
                                                      -------        -------
        Total current assets.....................       6,637          5,345

      Property and equipment, net................         128            177
      Other assets...............................          95              8
                                                      -------        -------
        Total assets.............................     $ 6,860        $ 5,530
                                                      =======        =======


      Accounts payable...........................     $ 2,397        $ 2,076
      Other current liabilities..................       4,164          1,317
                                                      -------        -------
        Total current liabilities................       6,561          3,393

      Other liabilities..........................         603          1,011
                                                      -------        -------
        Total liabilities........................       7,164          4,404
                                                      -------        -------

      Net (liabilities) assets of                
        of discontinued operations...............     $  (304)       $ 1,126
                                                      =======        =======
</TABLE>




                                       F-9

<PAGE>   34


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



<TABLE>
<CAPTION>
                                                        Years Ended June 30,
                                                      ------------------------
                                                        1998            1997
                                                      --------        --------
Income Statement                                           (In thousands)

<S>                                                   <C>             <C>     
      Gross Revenue...............................    $ 34,769        $  3,582
      Costs and expenses..........................      35,571           3,345
                                                      --------        --------
      Operating (loss) income from discontinued
         operations...............................        (802)            237
      Goodwill write-off..........................       5,064             ---
      Income tax (benefit) expense................         (90)             90
                                                      --------        --------
      (Loss) income from discontinued
         operations...............................      (5,776)            147
      
      Loss on disposal of operations..............      (3,053)            ---
                                                      --------        --------
      Total (loss) income from discontinued
               operations.........................    $ (8,829)       $    147
                                                      ========        ========
</TABLE>

NOTE D  ASSET DISPOSITIONS

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

     On January 25, 1996, Sarnia obtained new financing which reduced Versar's
guarantee of Sarnia's indebtedness from $12,400,000 to $1,500,000. Sarnia has
paid down the debt that Versar has guaranteed to $1,200,000 at June 30, 1998,
and accordingly Versar's current reserve is $1,200,000 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-10
<PAGE>   35


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE E  ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                    June 30,
                                            ------------------------
                                              1998            1997
                                            --------        --------
                                                 (In thousands)

<S>                                         <C>             <C>     
      Billed receivables
              U.S. Government...........    $  4,550        $  5,683
              Commercial................       4,665           3,405
      Unbilled receivables
              U.S. Government...........       3,696           3,197
              Commercial................       2,336             960
                                            --------        --------
                                              15,247          13,245
      Allowance for doubtful accounts...        (616)           (590)
                                            --------        --------
                                            $ 14,631        $ 12,655
                                            ========        ========
</TABLE>

     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, 1998 unbilled receivables will be substantially billed and collected in
fiscal year 1999.

NOTE F  PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                       
                                                           Estimated                     June 30,
                                                          Useful Life           ---------------------------
                                                            in Years               1998             1997
                                                         --------------         ----------       ----------
                                                                                       (In thousands)
<S>                                                      <C>                  <C>              <C>       
     Furniture and fixtures..........................           5               $   1,815        $    1,586
     Equipment.......................................        3 to 10                7,176             6,238
     Leasehold improvements..........................     Life of lease             2,207             1,432
                                                                                ----------       ----------
                                                                                   11,198             9,256
     Accumulated depreciation
        and amortization.............................                              (8,419)           (7,158)
                                                                                ----------       -----------
                                                                                $   2,779        $    2,098
                                                                                ==========       ==========
</TABLE>

         Depreciation and amortization of property and equipment included as
expense in the accompanying Consolidated Statements of Operations was $681,000,
$676,000, and $665,000 for the years ended June 30, 1998, 1997, and 1996,
respectively.

         Maintenance and repair expenses approximated $279,000, $248,000, and
$301,000 for the years ended June 30, 1998, 1997, and 1996, respectively.





                                      F-11
<PAGE>   36


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE G  DEBT
<TABLE>
<CAPTION>
                                                                                          June 30,
                                                                                ----------------------------
                                                                                   1998             1997
                                                                                ----------       -----------
                                                                                       (In thousands)

<S>                                                                             <C>              <C>       
     Bank line of credit, NationsBank, N.A.............................             3,664               274
     Acquisition promissory note.......................................             1,438             1,958
     Other.............................................................               364               298
                                                                                ----------       -----------
          Total debt...................................................             5,466             2,530
     Current portion of long-term debt.................................            (4,778)           (1,093)
                                                                                ----------       -----------
     Long-term debt....................................................         $     688        $    1,437
                                                                                ==========       ===========
</TABLE>

         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 $5,000,000 based on qualifying receivables less the $1,200,000
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 (8.16% at
June 30, 1998). 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, 1998 was approximately
$1,336,000. 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's covenants were modified at June 30, 1998 due to the SMC goodwill write
off discontinuance of SMC segments. Management believes that cash generated by
operations and borrowings available from the bank line of credit and the
extension of the line will be adequate to meet the working capital needs for
fiscal year 1999.

         Versar obtained a $2,000,000 promissory note from NationsBank on April
30, 1997 for the acquisition of SMC (See Note B). The interest on the note is
based on prime rate plus one half of one percent (.50%) per annum (9% at June
30, 1998). Principal payment commenced on May 31, 1997 and is scheduled to be
paid in full on April 30, 2000. At June 30, 1998, approximately $1,438,000 was
remaining on this loan.

         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 fiscal year 1997.
Sarnia's balance due on the term loan was $1,200,000 at June 30, 1998 and
accordingly, Versar reduced its reserve to $1,200,000 as of June 30, 1998. 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, 1998, 1997, and 1996, approximated
$2,126,000, $306,000, and $673,000, respectively, and the weighted average
interest rates for such periods were 8.19%, 8.78%, and 10.82%, respectively. The
maximum amount outstanding approximated $4,449,700, $1,146,000, and $1,500,000
during fiscal years 1998, 1997, and 1996, respectively. Weighted average
interest rates are computed by relating the interest expense to the average
month-end balance.

         Interest payments were $339,000, $62,000, and $89,000 for the fiscal
years ended June 30, 1998, 1997, and 1996, respectively.



                                      F-12
<PAGE>   37


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE H  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 to encourage
superior performance. 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, 1998, options to purchase an aggregate of 1,170,240 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 $5.375 and
options to purchase an aggregate of 343,835 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:

<TABLE>
<CAPTION>
                                                   Optioned          Option Price
                                                    Shares            Per Share             Total
                                                    ------    -------------------------     -----
                                                        (In thousands, except per share price)

<S>                                                 <C>       <C>             <C>         <C>     
     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
             Issued.........................          326         3.375  to       5.375      1,466
             Exercised......................          (61)        2.375  to       3.940       (176)
             Cancelled......................          (19)        2.375  to       3.940        (61)
                                                    ------                                ---------

     Outstanding at June 30, 1998...........        1,170     $   2.375  to   $   5.375   $  4,082
                                                    ======                                ========
</TABLE>






                                      F-13
<PAGE>   38


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         At June 30, 1998, 1997, and 1996, options of 685,274, 560,731, and
807,408 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. This Plan
has expired and no additional options may be granted under its terms. The
Company will continue to maintain the Plan until all options previously granted
under it have been exercised or have expired without exercise.

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

<TABLE>
<CAPTION>
                                                   Optioned         Option Price
                                                    Shares            Per Share             Total
                                                    ------    -------------------------   ---------
                                                        (In thousands, except per share price)

<S>                                                 <C>       <C>             <C>         <C>     
     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
             Issued.........................          ---           ---  to         ---        ---
             Cancelled......................          (15)        3.125  to       3.125        (47)
             Exercised......................          (10)        3.125  to       3.125        (31)
                                                    ------                                ---------

     Outstanding at June 30, 1998...........          344     $   2.375  to   $   3.563   $    985
                                                    ======                                =========
</TABLE>

         Non-Qualified stock options of 249,901, 212,134, and 163,367 shares
were exercisable at June 30, 1998, 1997, and 1996, respectively.

         The Company applies APB 25 and related interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized for stock options. Had compensation cost for stock options



                                      F-14
<PAGE>   39


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

been determined based on the fair value at the grant dates for awards under
these plans consistent with the method of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated as follows:

<TABLE>
<CAPTION>
                                                                                1998            1997
                                                                              -------         ------
                                                                              (In thousands, except
                                                                                   per share data)

<S>                                                  <C>                 <C>             <C>      
         Net (Loss) Income:                          As Reported         $     (8,553)   $   1,256
                                                     Pro Forma                 (8,724)       1,085

         Net (Loss) Income Per Share - Basic:        As Reported         $      (1.50)   $    0.24
                                                     Pro Forma                  (1.53)        0.21
</TABLE>

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

         The weighted average fair value of options granted was $2.05 and $1.56
during 1998 and 1997, 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 1998 and 1997: expected volatility of
47.5% for both years; risk-free interest rate of 5%; and expected lives of five
years after the grant date.

NOTE I  INCOME TAXES

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

<TABLE>
<CAPTION>
                                            Years Ended June 30,
                                     -------------------------------
                                      1998         1997         1996
                                     -----        -----        -----
                                               (In thousands)
<S>                                  <C>          <C>          <C>  
             Currently payable
                Federal ......       $  95        $ 118        $   2
                State ........          43           77           32

             Deferred
                Federal ......        (287)        (135)        (250)
                State ........         ---          ---          ---
                                     -----        -----        -----
                                     $(149)       $  60        $(216)
                                     =====        =====        =====
</TABLE>





                                      F-15
<PAGE>   40


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

<TABLE>
<CAPTION>
                                                    June 30,       June 30,
                                                      1998           1997
                                                    -------        -------
<S>                                                 <C>            <C>    
Deferred Tax Assets:
   Employee benefits ........................       $   687        $   701
   Bad debt reserves ........................           314            196
   All other reserves .......................           988            417
   Discontinued operations reserves .........           704            ---
   Alternative minimum tax credits ..........            22             74
   Net operating loss of purchased
     business ...............................         1,000          1,000
   State tax net operating losses ...........           262            262
   Depreciation .............................            50            ---
                                                    -------        -------
                    Total Deferred Tax Assets         4,027          2,650

Deferred Tax Liabilities:
   Depreciation .............................           ---            (20)
   Other ....................................            (1)            (1)
                                                    -------        -------
           Total Deferred Tax Liabilities ...            (1)           (21)

Net Deferred Tax Assets .....................         4,026          2,629

Valuation Allowance .........................        (2,740)        (1,720)
                                                    -------        -------

Net Deferred Tax Asset ......................       $ 1,286        $   909
                                                    =======        =======
</TABLE>

      Realization of deferred tax assets is dependent upon generation of
sufficient income by Versar and in some cases sufficient income in specific
jurisdictions and by specific office locations. At June 30, 1997, the Company
had $132,000 of alternative minimum tax credit carryforwards which can be
carried forward indefinitely. The alternative minimum tax credit carryforward
may be used to offset regular tax liability in future years to the extent it
exceeds the alternative minimum tax liability. These carryforwards are reflected
as deferred tax assets. The Company has established a valuation allowance until
the probability of realization of these amounts becomes more certain.




                                      F-16
<PAGE>   41


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


<TABLE>
<CAPTION>
                                                                        Years Ended June 30,
                                                             -------------------------------------------
                                                               1998              1997             1996
                                                             ---------         --------         --------
                                                                           (In thousands)

<S>                                                           <C>               <C>             <C>    
      Expected provision at federal
             statutory rate..........................         $    43           $   397         $   264
      Change in valuation allowance..................            (300)             (375)           (552)
      State income tax, net of federal benefit.......              28                77              32
      Permanent items................................              66                40              32
      Losses on Sarnia operations not deductible.....             ---               ---              48
      Other  ........................................              14               (79)            (40)
                                                             ---------         --------         --------
                                                             $   (149)         $    60          $  (216)
                                                             =========         ========         ========
</TABLE>

      Income taxes paid for the years ended June 30, 1998, 1997, and 1996 were
$414,000, $307,000, and $7,000, respectively.

         The tax (benefit) provision applicable to losses from discontinued
operations was composed of the following:


<TABLE>
<CAPTION>
                                                                 Years Ended June 30,
                                                              ---------------------------
                                                                 1998              1997
                                                              ----------        ---------
                                                                   (In thousands)

<S>                                                           <C>               <C>      
         Expected (benefit) provision at federal
         statutory rate..............................         $  (3,032)        $      81
         Permanent items.............................             1,816                 9
         Change in valuation allowance...............             1,092               ---
         Other.......................................                34               ---
                                                              ----------        ---------
                                                              $    ( 90)        $      90
                                                              ==========        =========
</TABLE>

         SMC 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. The
utilization of the net operating losses is limited to approximately $300,000 per
year for the 13 remaining years. If the net operating losses are utilized, they
will favorably impact the results of operations as the related deferred tax
asset is fully reserved. 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.

NOTE J   EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN

         The Company has established an Employee Savings and Stock Ownership
Plan (ESSOP) for the benefit of its employees and those of its subsidiaries. To
be eligible to participate in the plan, an employee must have been 



                                      F-17
<PAGE>   42

                         VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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
1998, 1997, and 1996, 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 matching contributions approximated $514,000, $492,000, and $473,000,
for fiscal years 1998, 1997, and 1996, 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. In fiscal year 1998
contributions approximated $25,000, but there were no contributions in fiscal
years 1997 and 1996. Vesting occurs over time, such that an employee is 100%
vested after seven years of participation.

NOTE K  COMMITMENTS AND CONTINGENCIES

         Versar has a substantial number of U.S. Government contracts, the costs
of which are subject to audit by the Defense Contract Audit Agency. All fiscal
years through 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 210,000 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:

<TABLE>
<CAPTION>
                                                                Total
         Years Ending June 30,                                  Amount
         ---------------------                                  ------
                                                            (In thousands)

<S>                                                         <C>       
             1999....................................         $    3,362
             2000....................................              2,631
             2001....................................              2,114
             2002....................................              1,858
             2003....................................              1,816
             2004 and thereafter.....................              7,132
                                                              ----------
                                                              $   18,913
                                                              ==========
</TABLE>





                                      F-18
<PAGE>   43


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

         Certain of the lease payments are subject to adjustment for increases
in utility costs and real estate taxes. Total rental expense approximated
$2,898,000, $2,658,000 and $2,467,000, for 1998, 1997 and 1996, 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.

NOTE L  CUSTOMER INFORMATION

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

<TABLE>
<CAPTION>
                                                                 Years Ended June 30,
                                                     ---------------------------------------------
                                                        1998              1997             1996
                                                     -----------       ----------       ----------
                                                                     (In thousands)
<S>                                                  <C>               <C>              <C>       
      U.S. Department of Defense                     $   16,771        $   15,952       $   16,479
      U.S. Environmental Protection Agency                3,493             3,339            3,787
      Other U.S. Government Agencies                      2,385             2,972            2,035
                                                     -----------       ----------       ----------

             Total U.S. Government                   $   22,649        $   22,263       $   22,301
                                                     ===========       ==========       ==========
</TABLE>

      The Company's largest contract with the U.S. Air Force generated revenues
of approximately $10,513,000 and $10,768,000 and $7,951,000 in fiscal years
1998, 1997 and 1996, respectively.



                                      F-19
<PAGE>   44


                          VERSAR, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE M  QUARTERLY FINANCIAL INFORMATION  (UNAUDITED)

         Quarterly financial information for fiscal years 1998 and 1997 is as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                     Fiscal Year 1998                                     Fiscal Year 1997
                               --------------------------------------------------- ------------------------------------------------

   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...............   $  14,699    $ 13,505     $ 11,378     $ 10,838     $ 12,001     $ 10,727     $  10,749    $  11,458

Net Service Revenue.........      10,002       8,944        8,103        7,846        8,377        7,705         7,740        7,874

Operating (loss) income from
  continuing operations.....        (299)        112          379           84          237          216           391          265

Operating (loss) income from
  discontinued operations...      (8,842)        (77)         (29)         119          147          ---           ---          ---

Net (loss) income...........   $  (9,141)  $      35    $     350     $    203     $    384     $    216     $     391    $     265
                               ===========  =========    =========    =========    =========    =========    ==========   =========

(Loss) income per share from
  continuing operations -
  diluted...................   $   (.05)    $    .02     $    .06     $    .02     $    .04     $    .04     $     .08    $     .05
                               =========    =========    =========    =========    =========    =========    ==========   =========

(Loss) income per share from
  discontinued operations -
  diluted...................   $  (1.46)    $   (.01)    $    ---     $    .02     $    .03     $    ---     $     ---    $     ---
                               =========    =========    =========    =========    =========    =========    ==========   =========

Net (loss) income per
  share - diluted...........   $  (1.51)    $   (.01)    $    .06     $    .04     $    .07     $    .04     $     .08    $     .05
                               =========    =========    =========    =========    =========    =========    ==========   =========

Weighted average number of
  shares outstanding -
  diluted...................      6,060        6,393        6,109        5,597        5,380        5,240         5,073       5,127
                               =========    =========    =========    =========    =========    =========    ==========   =========
</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-20
<PAGE>   45
                                                                     SCHEDULE II
                          VERSAR, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS





<TABLE>
<CAPTION>
                                                    ADDITIONS
                               BALANCE AT           CHARGED TO                            BALANCE AT
                              BEGINNING OF          COSTS AND                               END OF
                                  YEAR               EXPENSES         CHARGE OFF             YEAR
                              ------------          ----------        ----------          ----------


ALLOWANCE FOR DOUBTFUL
ACCOUNTS


<S>                            <C>                  <C>               <C>                 <C>       
1996                           $  957,199           $ (36,710)        $ (217,262)         $  703,227

1997                              703,227              (3,862)          (109,826)            589,539

1998                              589,539             268,485           (242,194)            615,830
</TABLE>





                                      F-21