UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended July 1, 2011		Commission File No. 1-9309

(Exact name of registrant as specified in its charter)

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

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

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
(Title of Class)

NYSE Amex
(Name of each exchange on which registered)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

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

Large accelerated filer o		Accelerated filter o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 2010 was approximately $24.6 million.

The number of shares of Common Stock outstanding as of September 2, 2011 was 9,608,372.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement to be filed with the Securities and Exchange Commission with respect to the 2010 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

 

 

PART I

Item 1.		Business

Unless this report indicates otherwise the terms ”Versar,” the “Company,” “we,” “us,” and “our” refer to Versar, Inc. and its consolidated subsidiaries. Versar’s financial year end is based upon a 52 week year and therefore does not close on a calendar month end.

Cautionary Statement Regarding Forward-Looking Statements

This report contains certain forward-looking statements that are based on current expectations. Actual results may differ materially. The forward-looking statements include, without limitation, those regarding the continued award of future work or task orders from government and private clients, cost controls and reductions, the expected resolution of delays in billing of certain projects, and the possible impact of current and future claims against the Company based upon negligence and other theories of liability. Forward-looking statements involve numerous risks and uncertainties that could cause actual results to differ materially, including, but not limited to, the possibility that the demand for the Company’s services may decline as a result of possible changes in general and industry specific economic conditions and the effects of competitive services and pricing; the possibility that the Company will not be able to perform work within budget or contractual limitations; one or more current or future claims made against the Company may result in substantial liabilities; the possibility that the Company will not be able to attract and retain key professional employees; changes to or failure of the Federal or municipal governments to fund certain programs in which the Company participates; delays in project funding; loss of anticipated new contract vehicles either due to funding changes or competitive factors, and such other risks and uncertainties set forth in this report and in other reports and other documents filed by the Company from time to time with the Securities and Exchange Commission.

Business Overview

Versar, Inc. is a Delaware corporation organized in 1969. As a global project management company we provide sustainable value oriented solutions to government and commercial clients in these market areas:

•

Construction Management

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Environmental Services and Sustainability

•

Munitions Response

•

Telecommunication and Technology Integration

We also provide tailored and secure solutions in harsh environments and offer specialized abilities in rapid response, classified projects, and hazardous material management. Our operations in our various market areas are organized into four primary business segments:

•

Program Management

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Compliance and Environmental Programs

•

Professional Services

•

National Security

During fiscal year 2011, we delivered solid financial results reflected by increases in gross revenue and net income compared to fiscal year 2010. In addition, we have a strong balance sheet which reflects both improved liquidity and working capital. On one hand, we experienced continued effects of the recessionary environment in the government and commercial sectors with resulting uncertainty in funding for projects. But this, in turn, has caused an increased focus by our customers on the value of services provided, with both the commercial and government sectors adjusting their needs to the new economic environment of reduced budgets and staffing, which compel greater productivity and value-oriented solutions from their service providers.

Selling into this new economic environment has meant increased emphasis on managing customer risk, whether that risk is related to construction oversight, as is the case with our work in Afghanistan and Iraq, or sustainability risk, as is the case with our commercial and US-based government work. Selling into the new economic environment has also meant investing heavily in business development activities designed to specifically tailor responses to a customer’s value solution and sustainability needs. We have invested in new internal technologies to streamline productivity and have realized benefits from continued cost reduction efforts concentrated on our fixed and controllable expenses.

While we did not complete any acquisitions in fiscal year 2011, we remain focused on identifying additional complementary businesses to integrate within our existing business segments to strengthen our overall depth and breadth. Our fiscal year 2010 acquisitions continued to provide increased revenue and have opened various marketing channels in fiscal year 2011 which have not existed in the past.

•

In January 2010, we acquired Professional Protection Systems, Ltd. (“PPS”), which is located in Milton Keynes, United Kingdom. PPS manufactures and sells personal protective equipment primarily to the nuclear industry, including protective suits, decontamination showers, and emergency shelters. The operations of PPS added approximately $4.9 million to our fiscal year 2011 revenue. Acquiring PPS enabled us to cross sell Versar’s existing personal protective offerings along with PPS offerings internationally, an example being shelter sales to Scotland. PPS has been integrated into our National Security business segment’s existing line of personal protective equipment for chemical and biological warfare protection.

•

In March 2010, we acquired ADVENT Environmental, Inc. (“ADVENT”), which is headquartered in Charleston, South Carolina. ADVENT is a full service environmental contractor and has significant capabilities in Military Munitions Response Plans (“MMRP”) and Unexploded Ordinance (“UXO”) clean-up. The operations of ADVENT added approximately $15.7 million to our fiscal year 2011 revenue. ADVENT provides us with access to several additional contract vehicles within the Department of Defense (“DoD”).

As a service-based company, our revenue is primarily derived through the provision of labor based services, rather than capital-intensive service offerings. Our revenue opportunities are driven by our ability to retain existing clients as well as attract new ones, providing quality and responsive value-oriented project management at competitive rates, and identifying and retaining a qualified team of employees.

Business Segments

Our four business segments are described below. See Note B Business Segments of the Notes to the Consolidated Financial Statements included elsewhere in this report on Form 10-K for additional information regarding our business segments.

Program Management Business Segment

This business segment performs Title I Design Services, Title II Construction Management Services, Title III Construction, and other related engineering and construction type services both in the United States and internationally. Title I Design entails a broad-range of expertise including project scoping/development, cost estimation, value engineering, and feasibility studies. Title II services involve construction oversight, configuration management, inspection, job site evaluations, and construction documentation among other areas. Other related services include system optimization, scheduling, and quality assurance/control involving engineering consultations. Title III services are the actual construction services. Staff members in this business segment also have national security clearances enabling Versar to provide services for classified construction efforts.

Work in this segment consists of federal, local, and commercial clients. Examples of federal work involves Air Force construction management, quality assurance work and personal services including electrical and engineering support to the U.S. Army Corps of Engineers, and other construction efforts. Work has also been concentrated in the local/municipal marketplace where we manage water and wastewater infrastructure projects.

This segment also continues to expand its business line via the pursuit of commercial and defense projects related to telecommunication integration. The segment maintains joint relationships with several firms designed to enhance our pursuit of telecommunications related technologies and infrastructure. In addition, this segment continues to expand and develop opportunities in energy/green initiatives in conjunction with the Compliance and Environmental Programs Business Segment.

Compliance and Environmental Programs Business Segment

This business segment provides full service environmental solutions and includes our remediation and compliance, exposure and risk assessment, natural resources, UXO/MMRP, air, greenhouse gas, energy, and cultural resources services. Clients include a wide-range of federal and state agencies. Some examples include the following:

•

We have supported the US Environmental Protection Agency (“EPA”) for the past 25 years providing a wide-range of mandated services involving exposure assessment and regulatory review. Furthermore, we provide support to the U.S. Army Corps of Engineers and many local municipal entities assisting with environmental compliance, biological assessments, and natural resource management.

•

For more than 30 years, Versar has supported the states of Virginia, Maryland, New York, Pennsylvania and Delaware on a variety of different projects. For example, we have supported the State of Maryland in the assessment of the ecological health and natural resources risk of the Chesapeake Bay. Versar continues to assess the Delaware River (PA, NJ, and DE) and how it is affected by dredging programs. We assist several counties in Maryland and Virginia with their watershed programs identifying impaired watersheds and providing cost-effective solutions for their restoration programs. We provide energy feasibility review, measurement and verification to the State of New York.

The services in this segment have involved advisory, evaluative assessment, and implementation of risk reduction measures for federal, state, local and commercial clients. Many of these services are mandated by regulation.

Professional Services Business Segment

Versar provides onsite environmental management and professional services to DoD installations and industrial facilities. Our onsite professional services are attractive in the new economic environment as DoD shifts emphasis to its core military mission and begins to downsize due to increasing budgetary pressure. Key outsourcing services we offer are:

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Net Zero (energy secure and energy efficient DoD bases), sustainability and mission program support

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Restoration and reuse of military bases

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Base realignment and closure (“BRAC”) support

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Pollution prevention (“P2”) and waste management

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Natural and cultural resources management services

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Facility services

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Public outreach and training services

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Biological and physical sciences support.

This segment provides a cost-effective solution to our clients in order to meet their requirements. This segment is consistent with our philosophy of selling into government business and supporting them in areas where their capabilities and capacities are lacking.

National Security Business Segment

Versar provides national security services primarily through the operations of our subsidiaries GEOMET Technologies, LLC (“GEOMET”) and PPS. The National Security business segment operates in several markets which require ongoing services and support and which have received funding priority. These include:

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Onsite range support services

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Unexploded ordnance cleanup (called “UXO”)

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Chemical agent testing, equipment and related services.

We hold a key UXO removal contract supporting one of the largest Air Force testing and training ranges in the country and support (via a subcontract) a large DoD chemical warfare agent testing center. We exclusively provide UXO cleanup services at Ft. Irwin, CA, which is the National Training Center for DoD. This center is the size of Rhode Island and provides live fire training for U.S. Army forces. We are also undertaking a large chemical warfare munitions destruction project for the U.S. Army. The technology used to destroy the chemical warfare munitions is unique and is being applied for the first time in the United States.

We continue to provide to first responders, a Disposable Toxicological Agent Protective System (“DTAPS^®”) Level B coverall chemical/biological protective suit, which is the first in the industry to be certified by the Safety Equipment Institute (“SEI”) to the National Fire Protection Association (“NFPA”) Class 2 standards. In addition, we own and operate the only declared Schedule I chemical agent laboratory in the United States under the Chemical Weapons Convention, which is overseen by the Department of Commerce. The laboratory provides cost-effective materials testing services to the U.S. government and to private industries, particularly manufacturers of chemical protective equipment and clothing.

Revenue Earned by Geographic Location

Our consolidated gross revenue for fiscal year 2011 was $137.6 million, of which approximately $132 million was funded with U.S. currency and approximately $4.9 million of the remainder was derived from our PPS subsidiary in the United Kingdom. Approximately 36% of our fiscal year 2011 business was conducted in international locations, which included our reconstruction work in Iraq and Afghanistan. Substantially all of our consolidated gross revenue in fiscal years 2010 and 2009 was funded with U.S. currency, with approximately 40% and 65% of our work conducted in international locations in fiscal year 2010 and 2009, respectively.

Our Strategy

For the near-term, it appears that the economy will continue to be challenged by reduced government funding, high unemployment, a weak financial market, and debt reduction pressures that affect government spending patterns. We believe that each of our business segments have the expertise to address the challenges raised by these national economic issues and is positioned in the coming year to address these concerns. This is because of value-driven economic metrics that are dictating more efficient services for our clients, coupled with mandated government program areas that utilize our services (e.g. UXO, cleanup, etc.). Continued diversification in telecommunications and other areas will allow us to undertake effective infrastructure projects and create value added solutions with substantial savings to clients.

Specifically, we see the following three elements driving our strategy:

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Pursuit of larger contract opportunities. Our move to a large-business, coincident with development of a strong internal infrastructure and associated technologies, is allowing us to focus on pursuing larger prime contract opportunities. Strategic partnering, joint-ventures, and long-lead positioning coupled with Versar branding should provide increased growth and services.

•

Leveraging of our services. This will allow us to work efficiently in the new economic environment whether that is selling of sustainability risk management utilizing our energy and environmental skill-sets, or via effective use of our construction management skills in relation to complex project oversight. Our existing core capabilities coupled with new and emerging capabilities provides us with the understanding and insight necessary to reduce client risk.

•

Expanding our international footprint. While strong internationally in the construction management business, incorporation of our non-construction services into our overseas client-base will allow for replication of our proven domestic skills into the international market and will help us meet growing overseas client needs.

Competition

We face substantial competition in each market in which we operate as our markets become more crowded and price sensitive. We expect this trend to continue and we will look to diversify our business to improve our competitive standing. Competitors are often larger and have greater financial resources than Versar, which means that we have to be selective in our marketing and sales program efforts. However, we believe that our larger size and diversified service offerings relative to many of the smaller, niche companies with which we also compete provide us with competitive advantage.

Our market segments of Program Management, Compliance and Environmental Programs, Professional Services, and National Security reflect a mix of business that we continue to believe will provide stability, while retaining our core capability. The synthesis of our core capabilities, however, is an important selling feature as customers look for one source to meet their needs. We believe that we are among the few firms that combine environmental health and safety/risk assessment, hard engineering design and construction, and chemical and biological defense capability in one package and we are actively pursuing customers that require these combined services as we sell into the new economic environment.

We continue to adjust our pricing structure to ensure that we remain competitive across all business segments, while remaining conscious of the need to drive overall corporate profitability. Similarly, we are concentrating our marketing efforts on getting the most return on investment, through expanding support for existing customers, developing tasks under existing contracts, and collaborating with firms that need our specialized expertise.

Backlog

We report “funded” backlog, which represents orders for goods and services for which firm contractual commitments have been received. We also report “total contract” backlog which includes two components: “funded” backlog and “expected” backlog. Expected backlog reflects management’s estimate of future revenue from existing written contracts, such as master contracts with large corporations and large federal, state and municipal multi-year contracts for which funding for work or tasks has not yet been authorized in writing by the other contracting party. Based on past experience, the Company believes that at least 90% of funded backlog will be performed in the succeeding twelve month period. However, no assurance can be given that we will ultimately realize our full backlog. Additionally, other companies with similar types of contracts to ours may not calculate backlog, particularly expected backlog, in the same manner we do, because their calculations are based on different subjective factors or because they use a different methodology. Therefore, information presented by us regarding funded backlog and total contract backlog may not be comparable to similar presentations by others.

As of July 1, 2011, funded backlog was approximately $78 million, flat compared to the total at the end of the fiscal year 2010. As of July 1, 2011, total contract backlog, including unfunded expected government task orders was approximately $719 million, a decrease of 3% compared to approximately $745 million as of June 25, 2010.

Employees

At July 1, 2011, we had approximately 550 full-time employees, of which eight-five percent are engineers, scientists, and other professionals. Seventy-five percent of our professional employees have a bachelor’s degree, fifteen percent have a master’s degree, and three percent have a doctorate degree.

Item 1A.		Risk Factors

We are dependent on government contracts for the majority of our revenue, and a reduction or delay in spending by government agencies could adversely affect our business and operating results.

Contracts with agencies of the United States government and various state and local governments represented approximately 96% of our revenue in fiscal year 2011, with only 4% of our revenue coming from commercial sources. Therefore, the majority of our revenue and the success of our business are materially dependent on contracts with governmental agencies. Companies engaged in government contracting are subject to certain unique business risks not shared by the general commercial sector. Among these risks are:

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a competitive procurement process with no guaranty of being awarded contracts;

	•		dependence on congressional and state appropriations and administrative allotment of funds;
	•		policies and regulations that can be changed at any time by Congress or a presidential administration;

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competing political priorities and changes in the political climate regarding funding and operations of the services;

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changes in and delays or cancellations of government programs or requirements;

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government contracts that are usually awarded for relatively short periods of time and are subject to renewal options in favor of the government; and

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many contracts with Federal government agencies require annual funding and may be terminated at the agency’s discretion.

The Federal government contracting laws provide that the United States government is to do business only with responsible contractors. Accordingly, Federal agencies have the authority under certain circumstances to suspend or debar a contractor from bidding on government contracts.

A reduction or shift in spending priorities by Federal government agencies could limit or eliminate the continued funding of our existing government contracts or awards of new contracts or new task orders under existing contracts. These reductions or shifts in spending, if significant, could have a material adverse effect on our business.

Continued inability of the legislative and executive branches of the Federal government to agree on a budget for key agencies or to enact appropriations in a timely manner could delay and has delayed the award of contracts, which delays, if significant, could have a material adverse effect on our operating results.

Our government contracts are subject to audit and potential reduction of costs and fees.

Contracts with the Federal government and many other state and local governmental agencies are subject to audit by governmental agencies, which could result in the disallowance of certain fees and costs. These audits can result in the disallowance of significant costs and expenses if the auditing agency determines, in its discretion, that certain costs and expenses were not warranted or were excessive. Disallowance of costs and expenses, if pervasive or significant, could have a material adverse effect on our business.

As a government contractor, we are subject to a number of procurement laws and regulations; a violation of any such law or regulation could result in sanctions, contract termination, forfeiture of profit, harm to our reputation or loss of our status as an eligible government contractor.

We must comply with and are affected by federal, state and local laws and regulations regarding the formation, administration and performance of government contracts. These laws and regulations affect how we transact business with our government clients and, in some instances, impose additional costs on our business operations. Even though we take precautions to prevent and deter fraud, misconduct and non-compliance, we face the risk that our personnel or outside partners may engage in misconduct, fraud or improper activities. Government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit and/or suspension of payment, any of which could make us lose our status as an eligible government contractor and could cause our reputation to suffer serious harm. Loss of our status as an eligible government contractor would have a material adverse effect on our operations and financial condition.

Since we depend on federal, state and local governments for a significant portion of our revenue, our inability to win or renew government contracts could harm our operations and financial condition.

Our inability to win or renew government contracts could harm our operations and significantly reduce or eliminate any potential profits. Government contracts are typically awarded through a heavily regulated procurement process. Some government contracts are offered to multiple competitors, causing increases in overall competition and pricing pressure. The competition and pricing pressure may require us to seek to reduce costs in order to realize revenues under these contracts. If we are not successful in reducing the amounts of costs we anticipate, our profitability on these contracts will be negatively impacted. Further, even if we are qualified to work on a government contract, we may not be awarded the contract if a competitor is selected or because of certain government policies.

Robust enforcement of regulations is important to our financial success.

Our business is materially dependent on the continued enforcement by local, state and federal governments of various environmental regulations. From time to time, depending on political pressures, local, state and federal agencies relax environmental clean-up standards to promote economic growth and to discourage industrial businesses from relocating. Any relaxation in environmental and compliance standards could impact our ability to secure additional contracting work with such agencies or with other federal agencies that operate or manage contaminated property. Further, in a period of relaxed environmental standards, private industry may be less willing to allocate funds to consulting services designed to prevent or remediate environmental problems.

A large portion of our backlog is subject to cancellation and adjustments which makes backlog an uncertain indicator of future operating results.

Our funded backlog was approximately $78 million as of July 1, 2011. Funded backlog represents orders for goods and services for which firm contractual commitments have been received. Such contractual commitments may take the form of a signed contract, a written task order under a large contract vehicle, a master contract or other types of written authorization, including change orders to existing written agreements. In the case of contracts with governments or governmental agencies, amounts are included in funded backlog when the firm contractual commitment is supported by funding that has been appropriated and authorized for expenditure.

Our total contract backlog was $719 million as of July 1, 2011. Total contract backlog includes two components: funded backlog and expected backlog. Expected backlog reflects management’s estimate of future revenue from existing written contracts, such as master contracts with large corporations and large federal, state and municipal multi-year contracts for which funding for work or tasks has not yet been authorized in writing by the other contracting party. The amount of expected backlog included in total contract backlog is not exact or guaranteed; however, it represents what we reasonably believe will become funded backlog over the next five to seven years, based upon subjective factors such as past experience with the particular clients, the type of work and present budgetary expectations and information about the clients’ needs, and other business circumstances. These estimates are based upon the information in our possession at the time the estimate is made. If Versar’s management does not accurately assess each of these factors, or if it does not include all of the variables that affect the revenue it will recognize from existing contracts in the estimating process, the potential value of these contracts, and accordingly, reported total contract backlog, will not reflect the potential revenue expected from contracts and task orders.

As a result, there can be no assurance that we will ultimately receive amounts included in total contract backlog that are not included in funded backlog or that total contract backlog includes all revenue that we may ultimately receive under contracts existing at any one time. Further, many factors that affect the scheduling of projects could alter the actual timing of revenue on projects included in total contract backlog. There is also the possibility that contracts could be adjusted or cancelled in a manner that would affect the realization of revenues reflected in backlog. Due to these uncertainties, our funded backlog and our total contract backlog as of any particular date may not be an accurate indicator of our future revenues or earnings.

We could face potential liability for failure to properly design remediation.

A part of our business involves the design and implementation of remediation at environmental clean-up sites. If we fail to properly design and build a remediation system or if someone claims that we did, we could face expensive litigation and settlement costs. If we failed to successfully defend against such a lawsuit, it could materially affect our business.

Our failure to properly manage projects may result in additional costs or claims.

Our engagements often involve complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our clients, and to effectively manage the projects and deploy appropriate resources in a timely manner. If we miscalculate the resources or time we need to complete a project with capped or fixed fees our operating results could be adversely affected. Further, any defects or errors, or failures to meet our client’s expectations, could result in claims for damages against us.

Our services expose us to significant risks of liability and it may be difficult to obtain or maintain adequate insurance coverage.

Our services involve significant risks of professional and other liabilities that may exceed the fees we derive from performance. Our business activities could expose us to potential liability under various environmental laws and under workplace health and safety regulations. In addition, we sometimes may assume liability by contract under indemnification agreements. We are not able to predict the magnitude of any such liabilities.

We obtain insurance from third parties to cover our potential risks and liabilities. It is possible that we may not be able to obtain adequate insurance to meet our needs, may have to pay an excessive amount for the insurance coverage we want, or may not be able to acquire any insurance for certain types of business risks.

Economic downturn.

Because of the present worldwide economic downturn and increasing competition we may not be able to win all the competitive work expected or that we have in the past. This could adversely affect our financial performance while this situation exists.

If our partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation or reduced profits.

We, from time to time, enter joint venture agreements and other contractual arrangements with outside partners to jointly bid on and execute a particular project. The success of these joint projects depends in part on the satisfactory performance of the contractual obligations by our partners. If any of our partners fail to satisfactorily perform their contractual obligations, we may be required to make additional investments and provide additional services to complete projects, increasing our cost on those projects. If we are unable to adequately address a partner’s performance issues, then our client could terminate the joint project, exposing us to legal liability, loss of reputation or reduced profits.

Loss of our status as a “small business” may adversely affect our ability to compete for certain federal government contracts.

Historically, we have been classified as a small business as determined by the Small Business Administration based upon the North American Industry Classification Systems (NAICS) and product specific codes which are regulated in the United States by the Small Business Administration. Such status, generally based on the number of employees, has enabled us to compete for federal contracts which are set aside for small businesses as a key element of our strategy. Based on our growth strategy, we lost our designation as a small business during the third quarter of fiscal year 2011 (except for telecommunications projects in our Program Management business segment). As a result of loss of this designation, we are not able to propose on small business set-aside programs, except as a subcontractor to a prime contractor that qualifies as a small business and for existing contracts where we are required to periodically recertify our small business status; we may be ineligible for future work. As a result, the loss of small business status could adversely impact our ability to compete for certain government contracts and limit our ability to partner with other business entities which are seeking to team with small business entities as may be required under specific programs. As a result, we may be required to modify our competitive strategy going forward.

We operate in highly competitive industries.

The markets for many of our services are highly competitive. There are numerous professional architectural, engineering, construction management, and environmental consulting firms, and other organizations which offer many of the same services offered by us. We compete with many companies, many of which have greater resources than us and we cannot provide assurance that such competitors will not substantially increase the resources devoted to their business in a manner competitive with the services provided by us. Competitive factors include reputation, performance, price, geographic location and availability of technically skilled personnel. In addition, we face competition from the use by our clients of in-house environmental, engineering and other staff.

Future acquisitions may require us to incur costs and liabilities or have other unexpected consequences which may adversely affect our operating results and financial condition.

In addition to internal growth, our current strategy involves growth through acquisitions of complementary businesses as well as acquisitions that would diversify our service offerings. Like other companies with similar growth strategies, we may be unable to continue to implement our growth strategy, and this strategy may be ultimately unsuccessful. A portion of our expected future growth in revenues may result from acquisitions. We frequently engage in evaluations of potential acquisitions and negotiations for possible acquisitions, certain of which, if consummated, could be significant to us. Although it is our general objective only to acquire companies in transactions which will be accretive to both earnings and cash flow, any potential acquisitions may result in material transaction expenses, increased interest and amortization expense, increased depreciation expense and increased operating expense, any of which could have a material adverse effect on our operating results. Acquisitions may entail integration and management of the acquired businesses to realize economies of scale and control costs. In addition, acquisitions may involve other risks, including diversion of management resources otherwise available for ongoing development of our business and risks associated with entering new markets. We may not be able to identify suitable acquisition candidates in the future, obtain acceptable financing or consummate any future acquisitions. Finally, as a result of acquisitions of other businesses, we may be subject to the risk of unanticipated business uncertainties or legal liabilities relating to those acquired businesses for which the sellers of the acquired businesses may not indemnify us. Future acquisitions may also result in potentially dilutive issuances of securities.

Our quarterly and annual revenue, expenses and operating results may fluctuate significantly, which could have a negative effect on the price of our common stock.

Our quarterly and annual revenues, expenses and operating results have and may continue to fluctuate significantly because of a number of factors, including:

•

the seasonality of the spending cycle of our public sector clients, notably the Federal government, and the spending patterns of our private sector clients;

•

employee hiring and utilization rates in the United States and internationally;

•

the number and significance of client engagements commenced and completed during the period;

•

delays incurred in connection with an engagement because of weather or other factors;

•

ability to work within foreign countries’ regulations, tax requirements and obligations;

•

business, financial, and security risks related to working in foreign countries;

•

the ability of clients to terminate engagements without penalties;

•

the creditworthiness and solvency of clients;

•

the size and scope of engagements;

•

the ability to perform contracts within budget or contractual limitations;

•

the timing of expenses incurred for corporate initiatives;

•

threatened or pending litigation matters;

•

reductions in the prices of services offered by our competitors;

•

winning re-bids of our existing large government contracts;

•

general economic and political conditions;

•

volatility of currencies in foreign countries; and

•

the integration of any acquisition or the ability of an acquisition to continue to perform as in the past.

Variations in any of these factors could cause significant fluctuations in our operating results from quarter to quarter and could result in net losses and have a material adverse affect on our stock price.

We are highly dependent on key personnel.

Our business is managed by a number of key management and operating and professional personnel, the loss of certain of who could have a material adverse effect on the Company. The market for these professionals is competitive and we believe that our ability to manage planned growth successfully will depend in large part on our continued ability to attract and retain highly skilled and qualified personnel.

Item 1B.		Unresolved Staff Comments

Not Applicable.

Item 2.		Properties

Our executive office is located in Springfield, Virginia, a suburb of Washington, D.C. Versar currently leases 47,222 square feet from Springfield Realty Investors, LLC. The rent is subject to a two and one half percent escalation per year through November 30, 2015.

As of July 1, 2011, we had under lease an aggregate of approximately 148,000 square feet of office, laboratory and manufacture space in the following locations: Springfield, Lynchburg, Richmond, and Virginia Beach, VA; Sacramento, CA; Westminster, CO; Louisville, KY; Baltimore, Columbia, Gaithersburg, and Germantown, MD; Dillsburg, PA; Charleston, SC; San Antonio, TX; Makati City, the Republic of Philippines; Milton Keynes, U.K. and Abu Dhabi, United Arab Emirates. The lease terms primarily range from two to six years with the exception of the Lynchburg office lease, which expires in 2020.

Our National Security business segment office space is located in the Germantown and Gaithersburg, MD facilities listed above with the remainder of the office space being used by our other business segments.

Item 3.		Legal Proceedings

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

EXECUTIVE OFFICERS OF THE REGISTRANT

The current executive officers of Versar, and their ages as of September 19, 2011, their current offices or positions and their business experience for at least the past five years are set forth below.

NAME		AGE				POSITION WITH THE COMPANY
Anthony L. Otten			55			Chief Executive Officer
Jeffrey A. Wagonhurst			63			President
Cynthia A. Downes			50			Executive Vice President, Chief Financial Officer and Treasurer
J. Joseph Tyler			62			Senior Vice President, Director of Corporate Initiatives & Integration (“CI2”)
James C. Dobbs			66			Senior Vice President, General Counsel and Secretary
Michael J. Abram			55			Senior Vice President and Chief Administrative Officer
Gina L. Foringer			43			Senior Vice President, Professional Services Business Segment
Lee A. Staab			54			Senior Vice President and President, Versar International, Inc.
Jeffrey M. Moran			48			Senior Vice President, Compliance and Environmental Programs Business Segment
Peter J. Cooper			62			Senior Vice President, National Security Business Segment
Daniel J. Cummings			49			Senior Vice President, Telecommunications and Technology Group

Anthony L. Otten, BS, MPP, joined Versar as Chief Executive Officer (“CEO”) in February of 2010. Prior to becoming CEO, he had served on Versar’s Board of Directors for two prior years as an independent board member. Mr. Otten served as Managing Member of Stillwater, LLC from July 2009 to February 2010, as an Operating Partner of New Stream Asset Funding, LLC from 2007 to June 2009 and Managing Member of Stillwater, LLC from 2004 to 2007. Mr. Otten has a B.S. degree from MIT and a Masters in Public Policy from Harvard’s Kennedy School of Government.

Jeffrey A. Wagonhurst, MBC, MBA, joined Versar in February 1999 as an Army Program Manager. In 2001, he was elected Vice President of Human Resources and Facilities. In September 2006, he was elected Senior Vice President to lead the business unit that is now our Program Management business segment. In May 2009, Mr. Wagonhurst was promoted to Executive Vice President, Program Management Group. In February 2010, Mr. Wagonhurst was promoted to President. Mr. Wagonhurst concluded his 30 year career with the U.S. Army and retired in May 1997 as a Colonel. He commanded a Combat Engineer Brigade and Battalion during this period. He also served as a Deputy District Commander of the Mobile District, U.S. Army Corps of Engineers.

Cynthia A. Downes, MBA, CPA, joined Versar in April 2011 as Executive Vice President, Chief Financial Officer (“CFO”) and Treasurer. From April 2009 to April 2011 Ms. Downes was Vice President and Chief Financial Officer of Environmental Design International, an engineering firm, based in Chicago, specializing in environmental and civil engineering. From January 2007 to April 2009, she was Vice President of Finance of GDI Advanced Protection Solutions and during 2005 to 2007, she was a consultant at Huron Consulting Group, Inc. Also, from 1990 to 2005, Ms. Downes spent 15 years at Tetra Tech, ultimately serving as Vice-President and Chief Financial Officer of Tetra Tech, EM Inc.

J. Joseph Tyler, BS, MPA, PE joined Versar in March 2010 and was elected Senior Vice President for Corporate Initiatives and Integration. He concluded a 40 year career with the U.S. Army Corps of Engineers in January 2010 when he retired as a member of the Senior Executive Service in the position of the Director of Military Programs in the Headquarters, U.S. Army Corps of Engineers. He was promoted to the position of the Director in March 2008 from the position of Deputy Director. He was the Chief of the Program Integration/Management Division in the Headquarters from April 2001 until February 2006, when he became the Deputy Director. He held various technical, management and executive positions throughout the U.S. Army Corps of Engineers in the US and overseas during his career.

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

Michael J. Abram, BS, joined Versar in 2001 as Director of Acquisition Strategy. In 2002, he was appointed Vice President of the former Architect and Engineering Operations and in 2004 elected as a Corporate Vice President in charge of quality assurance. In July 2006, Mr. Abram became a Vice President of Versar supporting the former Infrastructure and Management Services segment which is now part of the Compliance and Environmental Programs business segment. He was elected Senior Vice President in September 2007 and promoted to Senior Vice President and Chief Administrative Officer in May 2009. Mr. Abram oversees the Company’s Mergers and Acquisitions, Strategic Planning, Investor Relations, Information Technology, and Human Resource functions. Prior to joining Versar, Mr. Abram worked 15 years for Mobil Oil Corporation.

Gina L. Foringer, MBA, PMP joined Versar in September 1999 as Senior Project Manager to support Army programs. In November 2003, she was elected Vice President of the Professional Services business segment. In April 2006, Ms. Foringer was elected Senior Vice President for Outsourcing and the Professional Services Group. Prior to joining Versar, Ms. Foringer served as a U.S. Army Transportation Officer both stateside and in Mogadishu Somalia during Operation Continue Hope in 1993. After leaving the Army, she worked for the Norfolk District, U.S. Army Corps of Engineers as an outsourced employee managing the Military Support Program valued over $60 million.

Lee A. Staab joined Versar in July 2008 as Vice President and Chief Operations Officer of Versar International. Additionally, he served as Country Manager for Versar operations in the United Arab Emirates. In January 2010, he was elected as Versar Senior Vice President and President of Versar International responsible for all of Versar’s International Programs. Mr. Staab concluded his 27 year career with the United States Army and retired in October 2006 as a colonel. His last assignment on active duty was as the Assistant Division Commander for the 24^th Infantry Division at Fort Riley, Kansas. He also served as the Commander of the Europe District of the U.S. Army Corps of Engineers and Executive Officer for the Assistant Secretary of the Army, Installations and Environment.

Jeffrey M. Moran, PE, was elected a Senior Vice President for Versar’s Compliance and Environmental Programs business segment in May 2009. Mr. Moran brings more than 20 years of experience to Versar and most recently has worked in management positions for Tetra Tech from February 1992 to June 1995; Dewberry from June 1995 to June 2003 and Tetra Tech from June 2003 to May 2009. Mr. Moran has managed over $50 million in United States Army Corps of Engineer contracts. He is a Civil Engineer registered in the states of Maryland, Virginia and the District of Columbia. Mr. Moran is also active in the Society of American Military Engineers (SAME) where he has held various executive posts with the Northern Virginia Chapter and the Mid-Atlantic Region.

Peter J. Cooper joined Versar in April 2008, and during the past fiscal year, re-established GEOMET’s revenue and profit in each of its core competencies: Laboratory Services, Personal Protective Equipment, and outsourced Test and Evaluation service. Mr. Cooper has over 23 years experience in government manufacturing and developing international network of sales operations. Mr. Cooper has an HND in electrical engineering from the United Kingdom and has resided in the United States for the past 20 years. Prior to joining Versar, Mr. Cooper worked for TVI Corporation, an international supplier of personal protection products, from 2004 to 2008. From 2008 as VP & GM of GEOMET, he redirected the products group to commercial opportunities, the acquisition of PPS UK LTD being part of that strategy. Mr. Cooper supported the establishment of GEOMET’s strategy regarding UXO and Chem demilitarization contract awards.

Daniel J. Cummings, MS, PE, PMP, LEED AP joined Versar in January 2009 as Vice President of US Engineering and Construction Division. In September 2009 he was elected as Senior Vice President of US Engineering and Construction Group responsible for all of Versar’s domestic Engineering and Construction. In November 2010, Mr. Cummings was assigned as Group Manager of a new business line, Versar’s Telecommunications and Technology Group (VT2). Mr. Cummings concluded his 26 year career with the U.S. Army and retired in January 2009 as an Engineer Colonel. His last assignment on active duty was as the Executive Director, Military Programs Directorate, Headquarters, U.S. Army Corps of Engineers. He also served as Deputy District Commander of Savannah District, USACE; Commander 84^th Engineer Battalion, Schofield Barracks, Hawaii; and as Deputy Chief of Staff, G3/5/7 on the Army Staff in the Pentagon.

PART II

Item 5.		Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock

Our common stock is traded on the NYSE Amex LLC under the symbol VSR. At July 1, 2011, the Company had 925 stockholders of record, excluding stockholders whose shares were held in nominee name. The quarterly high and low sales prices as reported on the NYSE Amex during fiscal years 2011 and 2010 are presented below.

Fiscal Year 2011		High				Low
4th Quarter		$	3.45			$	2.90
3rd Quarter			3.94				3.16
2nd Quarter			3.86				2.75
1st Quarter			3.34				1.98

Fiscal Year 2010		High				Low
4th Quarter		$	4.74			$	2.90
3rd Quarter			3.90				2.53
2nd Quarter			4.71				2.90
1st Quarter			5.70				3.50

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 our business and does not anticipate paying cash dividends in the foreseeable future. Under the terms of our revolving line of credit, approval would be required from our primary bank for the payment of any dividends.

We have established equity compensation plans to attract, motivate and reward good performance of high caliber employees, directors and service providers serving Versar, Inc. and its affiliates. Currently, there are five stock option plans under which options remain outstanding, which were previously approved by the stockholders: 2010, 2005 and 2002 Stock Incentive Plans, the 1996 Stock Option Plan, and the 1992 Stock Option Plan. We do not maintain any equity compensation plans not approved by stockholders.

Equity Compensation Plan Information

Number of securities

remaining available for

Number of Securities

future issuance under

to be issued upon

Weighted-average

equity compensation

exercise of

exercise price of

plans [excluding

outstanding options,

outstanding options,

securities reflected in

warrants and rights

warrants and rights

column (a)]

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

249,000

$

3.30

731,000

During the last quarter of fiscal year 2011, our employees surrendered shares of common stock to us to pay tax obligations due upon the vesting of restricted stock units as reflected in the table below. The purchase price of this stock was based on the closing price of our common stock on the NYSE Amex on the date of surrender.

Purchase of Equity Securities

										Total Number of				Maximum Number (or
										Shares Purchased				Approximate Dollar
										as Part of				Value) of Shares that
		Total Number				Average				Publicly				May Yet be Purchased
		of Shares				Price Paid				Announced Plans				Under the Plans or
Period		Purchased				Per Share				or Programs				Programs
April 1-30, 2011			2,957			$	3.16				—				—
May 1-31, 2011			—			$	—				—				—
June 1-30, 2011			2,342			$	3.32				—				—
Total			5,299			$	3.23				—				—

The following graph compares the cumulative 5-year total return provided shareholders on our common stock relative to the cumulative total returns of the S&P 500 index, and a customized peer group of four companies that includes: Arcadis N.V., Michael Baker Corp., Ecology & Environment, Inc., and Matrix Service Company. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in the peer group and the index on June 30, 2006 and its relative performance is tracked through June 30, 2011.

		6/06				6/07				6/08				6/09				6/10				6/11
Versar, Inc.			100.00				204.17				116.50				96.36				77.67				77.86
S&P 500			100.00				120.59				104.77				77.30				88.46				115.61
Peer Group			100.00				190.07				155.76				124.46				123.12				154.13

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Item 6.		Selected Financial Data (unaudited)

The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and notes thereto. The financial data is as follows:

		For the Years Ended
		July 1,				June 25,				June 26,				June 27,				June 29,
		2011				2010				2009				2008				2007
		(In thousands, except per share and ratio data)
Consolidated Statements of Operations Related Data:
Gross revenue		$	137,599				100,763			$	112,196			$	115,602			$	102,726
Gross profit			14,333				6,011				14,480				13,788				10,822
Operating income (loss)			5,885				(3,652	)			5,604				5,491				4,153
Net income (loss)			3,447				(2,294	)			3,169				3,391				5,282
Income (loss) per share from continuing operations — diluted		$	.37				(.25	)		$	.35			$	.36			$	.62
Net income (loss) per share — diluted		$	.37				(.25	)		$	.35			$	.36			$	.62
Weighted average shares outstanding — diluted			9,283				9,141				9,150				9,331				8,466
Consolidated Balance Sheets Related Data:
Working capital		$	19,591				15,330			$	25,513			$	22,271			$	16,176
Current ratio			1.90				1.72				3.04				2.67				2.01
Total assets			53,376				49,864				42,594				39,828				36,817
Stockholders’ equity		$	30,226				26,417			$	28,654			$	25,053			$	19,422

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

Financial Trends

In the 2011 fiscal year we delivered solid financial results that reflected improvement in net income and gross revenue compared to the 2010 fiscal year. Our improved performance was driven by both an aggressive growth strategy and cost reduction efforts targeted at our fixed and controllable expenses. For instance, in fiscal 2011 we continued to shift our emphasis to Afghanistan in an attempt to maintain and expand our business there in order to replace revenues from the reconstruction efforts in Iraq that were significantly reduced during fiscal year 2010. We also continued to invest heavily in business development activities and our internal technology infrastructure, and we recognized increased revenue from our acquisitions completed during the third quarter of fiscal year 2010. We remained focused on identifying additional complementary businesses to integrate into our existing business segments to compliment organic growth and strengthen the Company’s overall depth and backlog.

We foresee continued pressure and weakness in the United States and world economies with slow and gradual economic recovery. During periods of economic uncertainty and volatility, our Federal government business has historically been the most stable and predictable. However, the growing Federal deficit and uncertainty in our Federal government and DoD future budgets may impact our future revenue and in that regard we have experienced some delays in project funding and contract awards.

Our business continues to be operated through the following four business segments: Program Management, Compliance and Environmental Programs, Professional Services, and National Security. Program Management remains our largest business.

These segments were segregated based on the nature of the work, business processes, customer base and the business environment in which each of the segments operates.

There are a number of risk factors or uncertainties that could significantly impact our future financial performance, including the following:

	•		General economic or political conditions;
	•		Threatened or pending litigation;
	•		The timing of expenses incurred for corporate initiatives;
	•		Employee hiring, utilization, and turnover rates;
	•		The seasonality of spending in the federal government and for commercial clients;
	•		Delays in project contracted engagements;
	•		Unanticipated contract changes impacting profitability;
	•		Reductions in prices by our competitors;
	•		The ability to obtain follow-on work;
	•		Failure to properly manage projects resulting in additional costs;
	•		The cost of compliance for our laboratories;
	•		The results of a negative government audit potentially impacting our costs, reputation and ability to work with the federal government;
	•		Loss of key personnel;
	•		The ability to compete in a highly competitive environment;
	•		Federal funding delays due to wars in Iraq and Afghanistan; and
	•		Integration of acquisitions and their ability to perform as expected

Consolidated Results of Operations

The table below sets forth our consolidated results of operations for the years ended July 1, 2011, June 25, 2010, and June 26, 2009. The dollar amounts are in thousands:

		For the Years Ended
		July 1, 2011				June 25, 2010				June 26, 2009
GROSS REVENUE		$	137,599			$	100,763			$	112,196
Purchased services and materials, at cost			71,417				55,378				60,583
Direct costs of services and overhead			51,849				39,374				37,133
GROSS PROFIT		$	14,333			$	6,011			$	14,480
Gross profit percentage			10	%			6	%			13	%
Selling, general and administrative expenses			8,025				8,651				8,876
Other expense			423				1,012				—
OPERATING INCOME (LOSS)			5,885				(3,652	)			5,604
OTHER EXPENSE (INCOME)
Loss on marketable securities			—				—				328
Interest income			(182	)			(143	)			—
Interest expense			175				104				36
INCOME (LOSS) BEFORE INCOME TAXES		$	5,892			$	(3,613	)		$	5,240

Fiscal Year 2011 Compared to Fiscal Year 2010

Gross revenue for fiscal year 2011 was $137.6 million, an increase of 37% compared to $100.8 million during the 2010 fiscal year. A significant amount of this increase resulted from revenue generated by the Tooele Chemical Demilitarization project that commenced during the second quarter of fiscal year 2011. Additionally, ADVENT and PPS, which were acquired during the third quarter of fiscal year 2010, contributed a full year of gross revenue in fiscal year 2011. For fiscal year 2011 ADVENT contributed $15.7 million of gross revenue and PPS contributed $4.9 million, compared to $3.8 million and $1.6 million in fiscal year 2010, respectively.

Purchased services and materials for fiscal year 2011 was $71.4 million, an increase of 29% compared to $55.4 million during the 2010 fiscal year. The increase was due to additional subcontractor costs primarily related to the Tooele Chemical Demilitarization project.

Direct costs of services and overhead for fiscal year 2011 were $51.8 million, an increase of 31% compared to $39.4 million during the 2010 fiscal year due to the fact that we achieved increased direct labor utilization increasing our labor costs and revenue growth from three of the four business segments.

Gross profit for fiscal year 2011 was $14.3 million, an increase of 138% compared to $6.0 million during the 2010 fiscal year. The increase in gross profit was primarily due to the overall increased labor utilization and improved performance in the Compliance and Environmental Programs business segment and the positive contributions from ADVENT and PPS.

Selling, general and administrative expenses for fiscal year 2011 were $8.0 million, as compared to $8.7 million during the 2010 fiscal year. Our cost reduction efforts, combined with ongoing efficiencies resulted in the slight decrease in selling, general and administrative expenses during fiscal 2011 even as our gross revenue increased 37% during that period. Our selling, general and administrative expenses in fiscal year 2011 also included severance costs of $250,000 related to the former Chief Financial Officer.

Other operating expenses for fiscal year 2011 were $0.4 million, as compared to $1.0 million during the 2010 fiscal year. The operating expenses for the 2010 fiscal year included costs associated with our two acquisitions during that year. Additionally, the fiscal year 2010 expenses included costs associated with closing two offices which were in connection with our cost reduction plan.

Operating income for fiscal year 2011 was $5.9 million as compared to an operating loss of $3.7 million during the 2010 fiscal year. The change from an operating loss to operating income resulted from increased gross revenue and improved operating margins during fiscal year 2011.

Income tax expense for fiscal year 2011 was $2.4 million as compared to income tax benefit of $1.3 million during the 2010 fiscal year. During fiscal year 2011 income before income taxes was $5.9 million compared to a loss before income taxes of $3.6 million during the 2010 fiscal year. The effective tax rate of (36%) was lower in fiscal year 2010 compared to a rate of 41.5% in fiscal year 2011, due to discrete tax items and book versus tax expense variances.

Net income for fiscal year 2011 was $3.4 million as compared to net loss of $2.3 million during the 2010 fiscal year. Net income per share for fiscal year 2011 was $0.37 as compared to net loss per share of $0.25 during the 2010 fiscal year. The return to profitability represented by the change to net income and net income per share from net loss and net loss per share was driven by the increase in gross profit experienced in most of our business segments.

Fiscal Year 2010 Compared to Fiscal Year 2009

Gross revenue for fiscal year 2010 was $100.8 million, a decrease of 10% compared to $112.2 million during the 2009 fiscal year. A majority of the decrease was attributable to the winding down of our efforts in support of the U.S. Air Force in Iraq. Also contributing to the decrease was reduced municipal and state and local business activity due to declining municipal and state budgets and continued changes in spending priorities in those markets as a result of poor economic conditions throughout the fiscal year. The decrease in gross revenue was partially offset by increases due to professional services work obtained from the U.S. Army to provide additional personnel in support of their missions; additional revenues attributed to PPS since its acquisition in January 2010; and additional revenue from the Tooele Chemical Demilitarization project won during fiscal year 2010.

Purchased services and materials for fiscal year 2010 were $55.4 million, a decrease of 9% compared to $60.6 million during the 2009 fiscal year. The decrease was primarily due to lower subcontracted costs as a result of the decrease in operations in Iraq.

Direct costs of services and overhead for fiscal year 2010 were $39.4 million, an increase of 6% compared to $37.1 million during the 2009 fiscal year. The increase was attributable to the costs associated with the increased gross revenue in the Professional Services and National Security business segments in the 2010 fiscal year.

Gross profit for fiscal year 2010 was $6.0 million, a decrease of 58% compared to $14.5 million during the 2009 fiscal year. The decrease was attributable to the winding down of our work in Iraq for the Air Force and the loss of the associated higher margins on this work; the significant negative impact on the Compliance and Environmental business segment from the global recession and the decline in the U.S. real estate market; continued financial pressure associated with and decline in business in the aquatic construction and renovation markets and the loss of the associated robust margins; continued financial pressure on our municipal and state and local markets; and costs associated with the upgrading and required facility maintenance of the chemical facility laboratory along with delayed sales of personal protective equipment as a result of budget constraints in the U.S. Federal market.

Selling, general and administrative expenses for fiscal year 2010 were $8.7 million, compared to $8.9 million during the 2009 fiscal year. The slight decrease in fiscal year 2010 was due to the cost reduction efforts taken during the year to balance costs with the reduced business volume.

Other operating expenses for fiscal year 2010 were $1.0 million as compared to no other operating expenses incurred during the 2009 fiscal year. These expenses are associated with our cost reduction plan and the costs incurred for the PPS and ADVENT acquisitions during the third quarter of fiscal year 2010.

Operating loss for fiscal year 2010 was $3.7 million as compared to operating income of $5.6 million during the 2009 fiscal year. The operating loss for fiscal year 2010 primarily resulted from our inability to replace the lost revenues in Iraq in the our Program Management business segment, along with the decline in business due to severe budget constraints faced by our municipal and state and local clients in the Compliance and Environmental business segments.

Income tax benefit for fiscal year 2010 was $1.3 million as compared to income tax expense of $2.1 million during the 2009 fiscal year. The tax benefit is attributable to operating losses experienced during fiscal year 2010, which we anticipate we will be able to carry back to prior fiscal years to obtain refunds for taxes paid. The effective taxes rates for fiscal years 2010 and 2009 were (36%) and 40%, respectively. The decreased effective tax rate in fiscal year 2010 was due to discrete tax items and book versus tax expense variance.

Net loss for fiscal year 2010 was $2.3 million as compared to net income of $3.2 million during the 2009 fiscal year. The reduction in net income was primarily due to the reduction in Iraq revenues in the Program Management business segment, reduced municipal and state and local revenues in the Compliance and Environmental Programs business segment, the cost reduction efforts taken in the third quarter of fiscal year 2010, and additional costs associated with the facility upgrades in the chemical laboratory facility.

Results of Operations by Reportable Segment

The tables below set forth our operating results by reportable segment for the fiscal years ended July 1, 2011, June 25, 2010, and June 26, 2009. The dollar amounts are in thousands:

Program Management

		For the Years Ended
		July 1, 2011				June 25, 2010				June 26, 2009
GROSS REVENUE		$	56,889			$	57,826			$	71,526
Purchased services and materials, at cost			32,757				31,458				37,856
Direct costs of services and overhead			20,470				22,366				23,203
GROSS PROFIT		$	3,662			$	4,002			$	10,467
Gross profit percentage			6	%			7	%			15	%

Fiscal Year 2011 Compared to Fiscal Year 2010

Gross revenue for fiscal year 2011 was $56.9 million, a slight decrease compared to $57.8 million during the 2010 fiscal year. Gross profit for fiscal year 2011 was $3.7 million, an 8% decrease compared to $4.0 million during the 2010 fiscal year. The decreases in gross revenue and gross profit during the 2011 fiscal year primarily resulted from the continued reduction of business in Iraq during the current fiscal year.

Fiscal Year 2010 Compared to Fiscal Year 2009

Gross revenue for fiscal year 2010 was $57.8 million, a decrease of 19% compared to $71.5 million during the 2009 fiscal year. A majority of the decrease is attributable to the winding down of our efforts in support of the U.S. Air Force in Iraq, which was in part offset by increased construction work in the United States.

Gross profit for fiscal year 2010 was $4.0 million, a decrease of 62% compared to $10.5 million during the 2009 fiscal year. The reduction in gross profit in fiscal year 2010 was primarily due to the winding down of our work in Iraq for the Air Force and the associated loss of the higher margins on this work. The balance of the shortfall in gross profit was due to project losses incurred in some of the continental United States based construction operations during fiscal year 2010.

Compliance and Environmental Programs

		For the Years Ended
		July 1, 2011				June 25, 2010				June 26, 2009
GROSS REVENUE		$	33,139			$	17,271			$	19,649
Purchased services and materials, at cost			15,369				10,313				11,634
Direct costs of services and overhead			12,201				7,333				7,131
GROSS PROFIT		$	5,569			$	(375	)		$	884
Gross profit percentage			17	%			(2	)%			4	%

Fiscal Year 2011 Compared to Fiscal Year 2010

Gross revenue for fiscal year 2011 was $33.1 million, an increase of 91% compared to $17.3 million during the 2010 fiscal year. The increase was a result of $15.7 million of gross revenue from ADVENT in fiscal year 2011 compared to $3.8 million in fiscal year 2010 and from new awards in our risk assessment and regulatory compliance areas of this segment.

Gross profit for fiscal year 2011 was $5.6 million, a substantial increase from a negative gross profit of $0.4 million during the 2010 fiscal year. The increase in gross profit was primarily due to the overall increased labor utilization and improved performance in this business segment and the positive impact of the ADVENT acquisition completed during the third quarter of fiscal year 2010.

Fiscal Year 2010 Compared to Fiscal Year 2009

Gross revenue for fiscal year 2010 was $17.3 million, a decrease of 12% compared to $19.6 million during the 2009 fiscal year. The decrease in gross revenue came primarily from a decline in municipal and state and local business activity due to reduced municipal and state budgets and continued changes in spending priorities in those markets as a result of poor economic conditions throughout the fiscal year.

Gross profit for fiscal year 2010 was negative $0.4 million, a decrease of $1.3 million compared to the 2009 fiscal year. This business segment was significantly impacted by the global recession and a decline in work in the U.S. real estate market. In fiscal 2010 there was continued financial pressure associated with the aquatic construction and renovation markets and a loss of the robust margins. During fiscal year 2010 there was also continued financial pressure on our municipal and state and local markets. As such, we took steps in the third quarter of fiscal year 2010 to reduce costs to balance the reduced business volume for this business segment, which returned to profitability in the fourth quarter of fiscal year 2010.

Professional Services

		For the Years Ended
		July 1, 2011				June 25, 2010				June 26, 2009
GROSS REVENUE		$	13,930			$	12,637			$	11,476
Purchased services and materials, at cost			3,242				5,206				5,040
Direct costs of services and overhead			7,846				5,413				4,702
GROSS PROFIT		$	2,842			$	2,018			$	1,734
Gross profit percentage			20	%			16	%			15	%

Fiscal Year 2011 Compared to Fiscal Year 2010

Gross revenue for fiscal year 2011 was $13.9 million, an increase of 10% compared to $12.6 million during the 2010 fiscal year. This increase was the result of realized revenue growth at various U.S. Army installations, to include Joint Base Lewis McChord in Washington State.

Gross profit for fiscal year 2011 was $2.8 million, an increase of 40% compared to $2.0 million during the 2010 fiscal year. The increase in gross profit resulted from increased efficiencies in internal processes and increasing volume without increasing core support staff.

Fiscal Year 2010 Compared to Fiscal Year 2009

Gross revenue for fiscal year 2010 was $12.6 million, an increase of 10% compared to $11.5 million during the 2009 fiscal year. The increase in gross revenue is attributable to additional professional services work obtained from the U.S. Army to provide additional personnel in support of their missions.

Gross profit for fiscal year 2010 was $2.0 million, an increase of 18% compared to $1.7 million during the 2009 fiscal year. The increases in gross profit in the Professional Services business segment were due to increased gross revenue during the past two years as a result of continued aggressive business development activities in this segment and the provision of superior performance to our clients to ensure continuity of service for now and in the future.

National Security

		For the Years Ended
		July 1, 2011				June 25, 2010				June 26, 2009
GROSS REVENUE		$	33,641			$	13,029			$	9,545
Purchased services and materials, at cost			20,049				8,401				6,053
Direct costs of services and overhead			11,332				4,262				2,097
GROSS PROFIT		$	2,260			$	366			$	1,395
Gross profit percentage			7	%			3	%			15	%

Fiscal Year 2011 Compared to Fiscal Year 2010

Gross revenue for fiscal year 2011 was $33.6 million, an increase of 158% compared to $13.0 million during the 2010 fiscal year. Gross profit for fiscal year 2011 was $2.3 million, compared to gross profit of $0.4 million during the 2010 fiscal year. The improvement in revenue and gross profit is a result of continuing work on the Tooele Chemical Demilitarization project in Utah, the performance of our Military Munitions Program in California and Nevada, and the positive effect of the PPS acquisition. Gross revenue from the acquisition of PPS was $4.9 million in fiscal year 2011 compared to $1.6 million in fiscal year 2010.

Fiscal Year 2010 Compared to Fiscal Year 2009

Gross revenue for fiscal year 2010 was $13.0 million, an increase of 37% compared to $9.5 million during the 2009 fiscal year. The increase in gross revenue is attributable to revenue from PPS subsequent to its acquisition in January 2010 and to revenue generated by the Tooele Chemical Demilitarization project that we won during fiscal year 2010.

Gross profit for fiscal year 2010 was $0.4 million, a decrease of 71% compared to $1.4 million during the 2009 fiscal year. The decrease in gross profit in fiscal year 2010 was primarily due to the costs associated with the upgrading and required facility maintenance of the chemical facility laboratory along with delayed sales of personal protective equipment as a result of budget constraints in the U.S. Federal market.

Gross Revenue By Client Base

Our business segments provide services to various industries, serving government and commercial clients. A summary of gross revenue generated from our client base is as follows:

		For the Years Ended
		July 1, 2011								June 25, 2010								June 26, 2009
		(In thousands)
Government
EPA		$	3,662				3	%		$	1,725				2	%		$	1,891				2	%
State & Local			7,331				5	%			4,928				5	%			8,589				7	%
Department of Defense			110,000				80	%			78,022				77	%			92,583				83	%
Other			11,043				8	%			6,180				6	%			2,576				2	%
Commercial			5,563				4	%			9,908				10	%			6,557				6	%
Gross Revenue		$	137,599				100	%		$	100,763				100	%		$	112,196				100	%

Liquidity and Capital Resources

Our working capital as of July 1, 2011 was approximately $19.6 million, an increase of $4.3 million compared to the 2010 fiscal year. In addition, our current ratio at July 1, 2011 was 1.90 compared to 1.72 from the prior fiscal year.

In March 2010, we modified our line of credit facility with United Bank (the “Bank”) to increase its aggregate borrowing capacity from $7.5 million to $10 million in anticipation of higher working capital requirements resulting from the acquisitions of PPS and ADVENT. The modification also reduced the minimum tangible net worth requirement and revised certain letter of credit and fee provisions of the credit facility. The line of credit is subject to certain covenants related to the maintenance of financial ratios. As modified, these covenants require a minimum tangible net worth of $17.5 million; a maximum total liabilities to tangible net worth ratio not to exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to 1. Interest accrues on borrowings under the line of credit at the prime rate of interest less 0.5% with a floor interest rate of 3.5%. Borrowing rates at fiscal years 2011, 2010, and 2009 were approximately 4.5%, 3.5%, and 2.8%, respectively. Failure to meet the covenant requirements gives the Bank the right to demand outstanding amounts due under the line of credit, which may impact our ability to finance our working capital requirements. We were in compliance with all covenant requirements as of July 1, 2011 and June 26, 2010. We borrowed and repaid $27.2 million under this line of credit during fiscal year 2011 and had no outstanding borrowings under the line of credit as of July 1, 2011 and June 25, 2010.

We have a letter of credit of approximately $455,000 outstanding under the line of credit facility which serves as collateral for surety bond coverage provided by our insurance carrier against project construction work. The letter of credit reduces our availability on the line of credit. Availability under the line of credit at July 1, 2011 was approximately $9.5 million. Obligations under the credit facility are guaranteed by the Company and each domestic subsidiary individually and are secured by accounts receivable, equipment and intangibles, plus all insurance policies on property constituting collateral of the Company and its domestic subsidiaries. The line of credit matures on September 25, 2011. We are currently in the process of extending the line of credit for another year at similar terms.

We financed a portion of the acquisitions of PPS and ADVENT through seller notes of approximately $2.7 million. At July 1, 2011, the principal balances of the notes payable were approximately $391,000 and $656,000 for PPS and ADVENT, respectively. We anticipate the cash flows from the newly acquired entities will cover such obligations in the foreseeable future.

We believe that with our current cash balance of over $6.0 million along with anticipated cash flows from operations, and the pending extension of our line of credit that working capital will be sufficient to meet our liquidity needs within the next fiscal year. Expected capital requirements for fiscal year 2012 are approximately $1.1 million, to be used primarily for upgrades to maintain our existing information technology systems, equipment related to our range management projects, and upgrades to our personal protective equipment manufacturing. These capital requirements will be funded through existing working capital.

As part of our diversification and expansion efforts, in fiscal year 2009 and fiscal year 2010 the Company provided short term financing to two business partners to help accelerate those business opportunities. See Note I, Notes Receivable, of the financial statements for further details.

Contractual Obligations

At July 1, 2011, we had short-term and long-term obligations of approximately $11.3 million, including short-term obligations of approximately $4.5 million, which will become due over the next twelve months in fiscal year 2012. We have contractual obligations primarily related to lease commitments and notes payable related to the acquisitions of PPS and ADVENT. The table below specifies the total contractual payment obligations as of July 1, 2011.

						Less than				1-3				4-5				After 5
Contractual Obligations		Total				1 year				Years				Years				Years
(in thousands)
Operating lease obligations		$	9,820			$	3,051			$	4,265			$	2,150			$	354
Notes payable to sellers			1,417				1,417				—				—				—
Estimated interest obligations			26				26				—				—				—
Total contractual obligations		$	11,263			$	4,494			$	4,265			$	2,150			$	354

Critical Accounting Policies and Related Estimates That Could Have a Material Effect on Our Consolidated Financial Statements

Critical Accounting Policies and Estimates

Below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial position and results of operations which require management judgments and estimates, or involve uncertainties. Information regarding our other accounting policies is included in the notes to our consolidated financial statements included elsewhere in this report on Form 10-K.

Revenue recognition: Contracts in process are stated at the lower of actual costs incurred plus accrued profits or incurred costs reduced by progress billings. 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. We record income from major fixed-price contracts, extending over more than one accounting period, using the percentage-of-completion method. During the performance of such contracts, estimated final contract prices and costs are periodically reviewed and revisions are made as required. Fixed price contracts can be significantly impacted by changes in contract performance, contract delays, liquidated damages and penalty provisions, and contract change orders, which may affect the revenue recognition on a project. Revisions to such estimates are made when they become known. Detailed quarterly project reviews are conducted with project managers to review all project progress accruals and revenue recognition.

There is the possibility that there will be future and currently unforeseeable adjustments to our estimated contract revenues, costs and margins for fixed price contracts, particularly in the later stages of these contracts. Such adjustments are common in the construction industry given the nature of the contracts. These adjustments could either positively or negatively impact our estimates due to the circumstances surrounding the negotiations of change orders, the impact of schedule slippage, subcontractor claims and contract disputes which are normally resolved at the end of the contract.

Allowance for doubtful accounts: Disputes arise in the normal course of our business on projects where we are contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability and collectibility. Such disputes, whether claims or unapproved change orders in 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. Management reviews outstanding receivables on a quarterly basis and assesses the need for reserves, taking into consideration past collection history and other events that bear on the collectibility of such receivables. All receivables over 60 days old are reviewed as part of this process.

Share-based compensation: Share-based compensation is measured at the grant date, based on the fair value of the award. The majority of the Company’s equity awards granted in fiscal years 2011 and 2010 have been restricted stock unit awards. Share-based compensation cost for restricted stock unit awards is based on the fair market value of the Company’s stock on the date of grant. Stock-based compensation cost for stock options is calculated on the date of grant using the fair value of stock options, as calculated using the black-scholes pricing model.

Net deferred tax asset: We have approximately $1.2 million in net deferred tax assets as of July 1, 2011. These deferred tax assets are comprised of accrued expenses, reserves, employee benefits and are offset against deferred tax liabilities related to depreciation and amortization. We expect these net deferred tax assets to be fully utilized except for net operating loss carryforwards from our Philippine branch in the amount of $55,000 for which, consistent with prior years, a valuation allowance has continued to be maintained.

Long-lived assets: We are required to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss is recognized if the carrying value exceeds the fair value. We review the cash flows of the operating units to ensure the carrying values do not exceed the cash flows that they support. Any write-downs are treated as permanent reductions. We believe our long-lived assets as of July 1, 2011 are fully realizable.

Goodwill: The carrying value of our goodwill was approximately $5.8 million as of July 1, 2011 and June 25, 2010. This goodwill was generated from the acquisitions of PPS and ADVENT in fiscal year 2010 and the acquisition of Versar Global Solutions, Inc. in fiscal year 1998. In performing the goodwill impairment analysis, management utilized a market-based valuation approach to determine the estimated fair value of our four business segments, which represent our five reporting units (our National Security business segment has two reporting units). Management engaged outside professionals and valuation experts to assist in performing this analysis and would test more often if events and circumstances warranted it. We have elected to perform the annual goodwill impairment assessment on the last day of each fiscal year. As part of the impairment assessment an analysis was performed on public companies and company transactions to prepare a market-based valuation. Based upon the analysis, the estimated fair value of our reporting units exceeded the carrying value of the net assets as of July 1, 2011. Accordingly the goodwill impairment test for fiscal year 2011 concluded that none of our goodwill was impaired. Should the financial performance of the reporting units not meet estimates, then impairment of goodwill would have to be further assessed to determine whether a write down of goodwill value would be warranted. If such a write down were to occur, it would negatively impact our financial position and results of operations. However, it would not impact our cash flow or financial debt covenants.

Other intangible assets: We had intangible assets with a net carrying amount of approximately $1.5 million and $1.9 million as of July 1, 2011 and June 25, 2010, respectively. The intangible assets include technology-based assets, customer related assets, and marketing related assets. The intangible assets are amortized over a 5 year or 7 year life. We are required to review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset might not be recoverable. An impairment loss is recognized if the carrying value exceeds the fair value. We review the cash flows of the reporting units to ensure the carrying values do not exceed the cash flows that they support. Any impairments of the asset are treated as permanent reductions. We believe that our intangible assets were not impaired during fiscal years 2011 and 2010.

Asset retirement obligation: During 2007 we recorded an asset retirement obligation associated with the estimated clean-up costs for its chemical laboratory in the National Security business segment. We estimated the costs to clean up the laboratory and return it to its original state at a present value of approximately $497,000. If we determine that the estimated cleanup cost is larger than expected such adjustments will be reflected when they become known. At July 1, 2011, we have accrued approximately $663,000 as a current liability to clean up the chemical laboratory.

New Accounting Pronouncements

Recently Adopted Accounting Guidance during Fiscal Year 2011

In July 2010, the FASB issued authoritative guidance that enhances disclosures about the credit quality of financing receivables and the allowance for credit losses. The guidance is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. On December 31, 2010, we began to disclose the required information about the credit quality of our receivables. On January 1, 2011, we began to disclose the required information about the activity of our allowance for doubtful accounts. The adoption of this guidance did not impact our consolidated financial position, results of operations or cash flows, as its requirements are disclosure-related in nature.

Recently Issued Accounting Guidance

In June 2011, the FASB issued authoriative guidance which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective for us beginning with our 2012 fiscal year. We do not expect the guidance to impact our financial statements, as it only requires a change in the format of presentation.

In May 2011, the FASB issued authoritative guidance on how to measure fair value; expanding fair value disclosure requirements; and offering guidance on what disclosures to make about fair value measurements. The guidance is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. generally accepted accounting principles and International Financial Reporting Standards. The guidance does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The guidance is effective for interim and annual periods beginning after December 15, 2011 (our 2012 fiscal year), and should be applied prospectively. Early adoption is not permitted for publically traded entities. Upon adoption, we do not expect the guidance to have a material impact on our financial statements.

In December 2010, the FASB issued authoritative guidance on the goodwill impairment test for reporting units with zero or negative carrying amounts. The new accounting guidance modifies step 1 of the impairment test whereby an entity should consider whether there are any adverse qualitative factors that may exist that would indicate it is more likely than not that a goodwill impairment exists. This may result in companies reporting goodwill impairments sooner as compared to under the current accounting guidance. This new accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010 (our 2012 fiscal year). Early adoption of this guidance is not permitted. We will evaluate the impact of this guidance on our financial condition, and results of operation upon adoption.

In December 2010, the FASB issued interpretive guidance on the pro forma revenue and earnings disclosure requirements for business combinations. The interpretive guidance specifies that an entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual reporting period. Also, supplemental pro forma disclosures should be expanded to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This new accounting guidance is effective for a business combination with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2010 (which is July 1, 2011 for us). Early adoption of this guidance is permitted. We will implement this guidance for any future business combinations.

Impact of Inflation

We protect ourselves from the effects of inflation. The majority of contracts we perform are for a period of a year or less and are firm fixed price contracts. Multi-year contracts provide for projected increases in labor and other costs.

Business Segments

We currently have four business segments: Program Management, Compliance and Environmental Programs, Professional Services, and National Security. Additional details regarding these segments are contained in Note B Business Segments of the Notes to the Consolidated Financial Statements included elsewhere in this report on Form 10-K.

Item 7A.		Quantitative and Qualitative Disclosures About Market Risk

We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to interest rate risk and other relevant market risk is not material.

Item 8.		Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

Board of Directors and
Shareholders of Versar, Inc.

We have audited the accompanying consolidated balance sheets of Versar, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of July 1, 2011 and June 25, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended July 1, 2011. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Versar, Inc. and subsidiaries as of July 1, 2011 and June 25, 2010 and the results of their operations and their cash flows for each of the three fiscal years in the period ended July 1, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/S/ Grant Thornton LLP

McLean, Virginia
September 19, 2011

VERSAR, INC. AND SUBSIDIARIES

(In thousands, except share and per share amounts)

		As of
		July 1,				June 25,
		2011				2010
ASSETS
Current assets
Cash and cash equivalents		$	6,017			$	1,593
Accounts receivable, net			29,500				26,807
Inventory			1,386				1,293
Notes receivable, current			1,040				1,146
Prepaid expenses and other current assets			1,511				2,449
Deferred income taxes			1,554				904
Income tax receivable, net			424				2,339
Total current assets			41,432				36,531
Notes receivable, non-current			—				187
Property and equipment, net			3,828				3,970
Deferred income taxes, non-current			—				619
Goodwill			5,758				5,758
Intangible assets, net			1,539				1,885
Other assets			819				914
Total assets		$	53,376			$	49,864
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	10,022			$	12,422
Accrued salaries and vacation			3,039				2,091
Other current liabilities			7,363				4,301
Notes payable, current			1,417				2,387
Total current liabilities			21,841				21,201
Notes payable, non-current			—				1,059
Deferred income taxes			332				—
Other long-term liabilities			977				1,187
Total liabilities			23,150				23,447
Commitments and contingencies
Stockholders’ equity
Common stock, $.01 par value; 30,000,000 shares authorized; 9,585,474 shares and 9,467,324 shares issued; 9,340,280 shares and 9,258,617 shares outstanding			95				95
Capital in excess of par value			28,806				28,474
Retained earnings (deficit)			2,768				(679	)
Treasury stock, at cost (245,194 and 208,707 shares, respectively)			(1,142	)			(1,021	)
Accumulated other comprehensive loss, foreign currency translation			(301	)			(452	)
Total stockholders’ equity			30,226				26,417
Total liabilities and stockholders’ equity		$	53,376			$	49,864

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

VERSAR, INC. AND SUBSIDIARIES

(In thousands, except per share amounts)

		Years Ended
		July 1,				June 25,				June 26,
		2011				2010				2009
GROSS REVENUE		$	137,599			$	100,763			$	112,196
Purchased services and materials, at cost			71,417				55,378				60,583
Direct costs of services and overhead			51,849				39,374				37,133
GROSS PROFIT			14,333				6,011				14,480
Selling, general and administrative expenses			8,025				8,651				8,876
Other expense			423				1,012				—
OPERATING INCOME (LOSS)			5,885				(3,652	)			5,604
OTHER EXPENSE/(INCOME)
Loss on marketable securities			—				—				328
Interest income			(182	)			(143	)			—
Interest expense			175				104				36
INCOME (LOSS) BEFORE INCOME TAXES			5,892				(3,613	)			5,240
Income tax expense (benefit)			2,445				(1,319	)			2,071
NET INCOME (LOSS)		$	3,447			$	(2,294	)		$	3,169
NET INCOME (LOSS) PER SHARE — BASIC		$	0.37			$	(0.25	)		$	0.35
NET INCOME (LOSS) PER SHARE — DILUTED		$	0.37			$	(0.25	)		$	0.35
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING — BASIC			9,261				9,141				9,123
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING — DILUTED			9,283				9,141				9,150

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

VERSAR, INC.

Years Ended July 1, 2011, June 25, 2010, and June 26, 2009

(in thousands)

																										Accumu-
																										lated
														(Accumu-												Other
										Capital in				lated												Compre-				Total
										Excess				Deficit)												hensive				Stock-
		Common Stock								of Par				Retained				Treasury								Income				holders’
		Shares				Amount				Value				Earnings				Shares				Amount				(Loss)				Equity
Balance, June 27, 2008			9,059				91				27,115				(1,554	)			(84	)			(578	)			(21	)			25,053
Exercise of stock options			26				—				48				—				—				—				—				48
Issuance of restricted stock units			109				1				691				—				—				—				—				692
Treasury stock			—				—				—				—				(35	)			(128	)			—				(128	)
Tax shortfall in exercise of stock options			—				—				(120	)			—				—				—				—				(120	)
Comprehensive income:
Net income			—				—				—				3,169				—				—				—				3,169
Other comprehensive loss:
Foreign currency translation adjustments			—				—				—				—				—				—				(60	)			(60	)
Total comprehensive income			—				—				—				—				—				—				—				3,109
Balance, June 26, 2009			9,194				92				27,734				1,615				(119	)			(706	)			(81	)			28,654
Exercise of stock options			100				1				237				—				—				—				—				238
Issuance of restricted stock units			95				1				211				—				—				—				—				212
Issuance of stock for acquisition			78				1				239				—				—				—				—				240
Treasury stock			—				—				—				—				(90	)			(315	)			—				(315	)
Share-based compensation			—				—				106				—				—				—				—				106
Tax shortfall in exercise of stock options			—				—				(53	)			—				—				—				—				(53	)
Comprehensive loss:
Net loss			—				—				—				(2,294	)			—				—				—				(2,294	)
Other comprehensive loss:
Foreign currency translation adjustments			—				—				—				—				—				—				(371	)			(371	)
Total comprehensive loss			—				—				—				—				—				—				—				(2,665	)
Balance, June 25, 2010			9,467			$	95			$	28,474			$	(679	)			(209	)		$	(1,021	)		$	(452	)		$	26,417
Exercise of stock options			65				—				157				—				—				—				—				157
Issuance of restricted stock units			53				—				94				—				—				—				—				94
Treasury stock			—				—				—				—				(36	)			(121	)			—				(121	)
Share-based compensation			—				—				93				—				—				—				—				93
Tax shortfall in exercise of stock options			—				—				(12	)			—				—				—				—				(12	)
Comprehensive income:
Net income			—				—				—				3,447				—				—				—				3,447
Other comprehensive income:
Foreign currency translation adjustments			—				—				—				—				—				—				151				151
Total comprehensive income			—				—				—				—				—				—				—				3,598
Balance, July 1, 2011			9,585			$	95			$	28,806			$	2,768				(245	)		$	(1,142	)		$	(301	)		$	30,226

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

VERSAR, INC. AND SUBSIDIARIES

		Years Ended
		July 1,				June 25,				June 26,
		2011				2010				2009
Cash flows from operating activities
Net income (loss)		$	3,447			$	(2,294	)		$	3,169
Adjustments to reconcile net income to net cash provided by (used in) continuing operations:
Depreciation and amortization			1,553				1,303				958
Loss on sale of property and equipment			79				—				1
Provision for doubtful accounts receivable			595				107				155
Loss on marketable securities			—				—				328
(Gain) loss on life insurance policy cash surrender value			(76	)			34				116
Deferred tax expense (benefit)			274				(220	)			(114	)
Share-based compensation			187				318				692
Changes in assets and liabilities:
(Increase) decrease in accounts receivable			(4,160	)			1,382				(6,256	)
Decrease (increase) in income tax receivables			1,915				(2,339	)			—
Decrease (increase) in prepaid expenses and other assets			1,264				(3,767	)			193
Increase in inventory			(12	)			(1,160	)			(133	)
(Decrease) increase in accounts payable			(1,703	)			4,357				(260	)
Increase in accrued salaries and vacation			947				132				240
Increase (decrease) in other liabilities			2,442				3,762				(823	)
Net cash provided by (used in) operating activities			6,752				1,615				(1,734	)
Cash flows from investing activities
Purchase of property and equipment			(1,213	)			(2,356	)			(1,172	)
Payment for ADVENT, net of cash acquired			—				(498	)			—
Payment for PPS, net of cash acquired			—				(4,330	)			—
Purchase of marketable securities			—				—				(3,000	)
Proceeds from sale of marketable securities			—				—				2,672
Premium paid on life insurance policies			(35	)			(36	)			(38	)
Proceeds from (investment in) notes receivable			293				(1,070	)			(200	)
Net cash used in investing activities			(955	)			(8,290	)			(1,738	)
Cash flows from financing activities
Purchase of treasury stock			(20	)			(77	)			(128	)
Borrowings on line of credit			27,189				10,755				—
Repayments on line of credit			(27,189	)			(10,755	)			—
Repayment of notes payable			(1,458	)			—				—
Proceeds from exercise of stock options			56				—				48
Net cash used in financing activities			(1,422	)			(77	)			(80	)
Effect of exchange rate changes			49				(55	)			14
Net increase (decrease) in cash and cash equivalents			4,424				(6,807	)			(3,538	)
Cash and cash equivalents at the beginning of the year			1,593				8,400				11,938
Cash and cash equivalents at the end of the year		$	6,017			$	1,593			$	8,400
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest		$	175			$	58			$	60
Income taxes		$	2,495			$	1,392			$	1,762
Supplemental disclosures of non-cash financing activities:
Exercise of stock options		$	101			$	238			$	—
Acquisition of treasury stock for restricted stock units		$	(101	)		$	(238	)		$	—
Supplemental disclosures of non-cash investing activities:
Issuance of notes payable for acquisition		$	—			$	2,690			$	—
Issuance of stock for PPS acquisition		$	—			$	240			$	—