VERSAR INC (Form: 10-Q, Received: 11/08/2010 17:30:45)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the Quarterly Period Ended September 24, 2010


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-9309

(Exact name of registrant as specified in its charter)


DELAWARE		54-0852979

(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

6850 Versar Center
Springfield, Virginia		22151

(Address of principal executive offices)		(Zip Code)

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

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.


Class of Common Stock		Outstanding at November 1, 2010

$.01 par value		9,290,153

VERSAR, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q


	PAGE

PART I — FINANCIAL INFORMATION

ITEM 1 - Financial Statements — Unaudited

Consolidated Balance Sheets as of September 24, 2010 and June 25, 2010		3

Consolidated Statements of Operations for the Three-Months Ended September 24, 2010 and September 25, 2009		4

Consolidated Statements of Cash Flows for the Three-Months Ended September 24, 2010 and September 25, 2009		5

Notes to Consolidated Financial Statements		6-13

ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-19

ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk		20

ITEM 4 — Controls and Procedures		20

PART II — OTHER INFORMATION

ITEM 1 — Legal Proceedings		21

ITEM 2 — Unregistered Sales of Equity Securities and Use of Proceeds		21

ITEM 5 — Other Information		21

ITEM 6 — Exhibits		21

SIGNATURES		22

EXHIBITS

Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

VERSAR, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands, except share data)


	September 24,			June 25,
	2010			2010
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	1,721		$	1,593
Accounts receivable, net		26,273			26,807
Inventory		1,356			1,293
Notes receivable, current		1,332			1,146
Prepaid expenses and other current assets		2,277			2,449
Deferred income taxes, current		1,144			904
Income tax receivable		1,877			2,339

Total current assets		35,980			36,531

Notes receivable, non-current		—			187
Property and equipment, net		4,206			3,970
Deferred income taxes, non-current		437			619
Goodwill		5,758			5,758
Intangible assets, net		1,758			1,885
Other assets		795			914

Total assets	$	48,934		$	49,864


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	10,605		$	12,422
Accrued salaries and vacation		2,834			2,091
Accrued bonus		684			424
Other current liabilities		3,836			3,877
Notes payable, current		2,016			2,387

Total current liabilities		19,975			21,201

Notes payable, non-current		568			1,059
Other long-term liabilities		1,186			1,187

Total liabilities		21,729			23,447


Commitments and contingencies

Stockholders’ equity
Common stock, $.01 par value; 30,000,000 shares authorized; 9,470,824 shares and 9,467,324 shares issued; 9,261,062 shares and 9,258,617 shares outstanding		95			95
Capital in excess of par value		28,506			28,474
Accumulated deficit		(141	)		(679	)
Treasury stock, at cost (209,762 and 208,707 shares, respectively)		(1,024	)		(1,021	)
Accumulated other comprehensive loss		(231	)		(452	)

Total stockholders’ equity		27,205			26,417


Total liabilities and stockholders’ equity	$	48,934		$	49,864

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

VERSAR, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited — in thousands, except per share amounts)


	For the Three-Months Ended
	September 24,			September 25,
	2010			2009
GROSS REVENUE	$	29,296		$	24,714
Purchased services and materials, at cost		14,474			12,770
Direct costs of services and overhead		11,937			9,591

GROSS PROFIT		2,885			2,353

Selling, general and administrative expenses		2,009			1,975

OPERATING INCOME		876			378

OTHER (INCOME) EXPENSE
Interest (income)		(82	)		(32	)
Interest expense		43			13

INCOME BEFORE INCOME TAXES		915			397

Income tax expense		376			160


NET INCOME	$	539		$	237


NET INCOME PER SHARE — BASIC	$	0.06		$	0.03


NET INCOME PER SHARE — DILUTED	$	0.06		$	0.03


WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING — BASIC		9,258			9,011


WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING — DILUTED		9,276			9,146

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

VERSAR, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited — in thousands)


	For the Three-Months Ended
	September 24,			September 25,
	2010			2009
Cash flows from operating activities
Net income	$	539		$	237
Adjustments to reconcile net income to net cash Provided by operating activities
Depreciation and amortization		435			248
Provision for doubtful accounts receivable		499			1
Gain (loss) on life insurance policy cash surrender value		42			(38	)
Share based compensation		31			82
Deferred taxes		(58	)		157

Changes in assets and liabilities
Decrease in accounts receivable		91			2,221
Decrease (increase) in prepaids and other assets		847			(488	)
Increase in inventories		(10	)		—
Decrease in accounts payable		(1,835	)		(757	)
Increase in accrued salaries and vacation		743			528
Decrease in other liabilities		(654	)		(1,466	)

Net cash provided by operating activities		670			725


Cash flows used in investing activities
Purchase of property and equipment		(550	)		(462	)
Premium paid on life insurance policies		(24	)		(16	)
Investments in notes receivable		—			(950	)

Net cash used in investing activities		(574	)		(1,428	)


Cash flows from financing activities
Purchase of treasury stock		(3	)		—


Net cash used in financing activities		(3	)		—


Effect of exchange rate changes		35			4


Net increase (decrease) in cash and cash equivalents		128			(699	)
Cash and cash equivalents at the beginning of the period		1,593			8,400

Cash and cash equivalents at the end of the period	$	1,721		$	7,701


Supplementary disclosure of cash flow information:
Cash paid during the period for
Interest	$	14		$	12
Income taxes		13			657

Supplemental disclosures of non-cash financing activities:
Exercise of stock options		—			238
Acquisition of treasury stock		—			(238	)

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

VERSAR, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(A) Basis of Presentation

The accompanying consolidated condensed financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in Versar, Inc.’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission. These financial statements should be read in conjunction with the Company’s Annual Report filed on Form 10-K for the fiscal year ended June 25, 2010 for additional information.

The accompanying consolidated financial statements include the accounts of Versar, Inc. and its wholly-owned subsidiaries (“Versar” or the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The financial information has been prepared in accordance with the Company’s customary accounting practices. Certain adjustments to the financial statements are necessary for fair presentation and are of a normal recurring nature as part of the operations of the business. In the opinion of management, the information reflects all adjustments necessary for a fair presentation of the Company’s consolidated financial position as of September 24, 2010, and the results of operations for the three-month periods ended September 24, 2010 and September 25, 2009. The results of operations for such periods, however, are not necessarily indicative of the results to be expected for a full fiscal year.

(B) Accounting Estimates

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

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

(D) Income Taxes

At September 24, 2010, the Company had approximately $1.6 million in net deferred income tax assets, which primarily relate to temporary differences between financial statement and income tax reporting. Such differences include depreciation, deferred compensation, accruals and reserves. A valuation allowance is established, as necessary, to reduce deferred income tax assets to the amount expected to be realized in future periods. Management has determined that no valuation allowance is required at September 24, 2010 or June 25, 2010.

VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

(E) Debt

The Company has a line of credit facility with United Bank (the Bank) that provides for advances up to $10 million based upon qualifying receivables. The line of credit is subject to certain covenants related to the maintenance of financial ratios. 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. Borrowings under the line of credit bear interest at prime less ¹ / 2 % with a floor interest rate of 4.5%. Failure to meet the covenant requirements gives the Bank the right to demand outstanding amounts due under the line of credit, which may impact the Company’s ability to finance its working capital requirements. As of September 24, 2010, the Company had no outstanding borrowings and was in compliance with the financial covenants of the facility. The Company has 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 the Company’s insurance carrier against project construction work. The letter of credit reduces the Company’s availability on the line of credit. Availability under the line of credit at September 24, 2010 was approximately $9.5 million. Obligations under the credit facility are guaranteed by Versar and each of its domestic subsidiaries individually and are secured by accounts receivable, equipment and intangibles, plus all insurance policies on property constituting collateral of Versar and its domestic subsidiaries. The line of credit matures on September 25, 2011.

(F) Notes Receivable

In June and July 2009, the Company provided interim debt financing to General Power Green Energy, LLC (GPC), with a current principal balance of $550,000, to fund certain GPC project start up costs. The project involves the construction of a 15 mega watt co-generation plant that burns landfill gas in turbine engines equipped with a steam generation unit. The note carries an annual interest rate of 10%, currently is due on December 1, 2010 and is secured by the assets of GPC. Accrued interest receivable on the GPC note is approximately $59,000, at September 24, 2010. In addition, upon project financing, Versar may be engaged to purchase the equipment and construct the facility. Versar received a 20% ownership interest in GPC in connection with providing the loan. The Company has not assigned a value to the 20% ownership interest due to the fact that GPC is in its developmental stage, and no value can be determined at this time.

In July 2009, the Company provided a $750,000 loan to Lemko Corporation for the purchase of long lead telecommunication equipment for several upcoming projects. The note bears interest at a rate of 12% and was originally due May 31, 2010. On May 28, 2010, the Company extended the loan to Lemko through September 30, 2011, and agreed to equal quarterly payments commencing on December 31, 2010 of $187,500 plus accrued interest. In August 2010, Lemko paid approximately $62,000 interest related to the note receivable. On September 24, 2010, accrued interest on the Lemko note is approximately $7,000. In addition, the Company received warrants from Lemko to purchase 182,400 shares of its common stock with an exercise price of $4.11 per share that expire on June 30, 2015. No value was given to the warrants as Lemko is a private corporation and any value assigned would be immaterial. This note is partially secured by the equipment inventory purchased.

VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

(G) Intangible Assets

As part of the acquisitions of PPS and Advent in fiscal year 2010, the Company recorded intangible assets of $1,312,000 and $677,000, respectively. The intangible assets for PPS are primarily related to technology based intangible assets and customer related and marketing related intangible assets. The intangible assets for Advent are primarily related to customer related intangibles and marketing related intangible assets. The intangible assets for PPS and Advent are amortized over a 7 year and 5 year period, respectively.

Intangible Assets
(In thousands)


							9/24/10
	PPS			Advent			Balance
Customer Related Intangibles	$	329		$	511		$	840
Marketing Related Intangibles	$	142		$	166		$	308
Technology Related Intangibles	$	841		$	—		$	841

Total Intangible Assets	$	1,312		$	677		$	1,989

Accumulated Amortization	$	(164	)	$	(67	)	$	(231	)

Net Intangible Assets	$	1,148		$	610		$	1,758

Amortization expense of intangible assets was $127,000 for the first three months of fiscal year 2011. Expected future amortization expense is as follows (in thousands):


Years	Total Amount
2011 (9 months)		242
2012		322
2013		322
2014		322
2015		289
Thereafter		261

Total		1,758

(H) Net Income Per Share

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share also includes common stock equivalents outstanding during the period, if dilutive. The Company’s common stock equivalent shares consist of shares to be issued under outstanding stock options and unvested shares of restricted stock.


	For the Three-Month Periods Ended
	September 24,		September 25,
	2010		2009

Weighted average common shares outstanding — basic		9,258,408		9,011,036

Effect of assumed exercise of options and vesting of restricted stock awards (treasury stock method)		17,265		134,915


Weighted average common shares outstanding — Diluted		9,275,673		9,145,951

For the three month periods ended September 24, 2010 and September 25, 2009, options to purchase approximately 332,000 and 167,000 shares of common stock, respectively, were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.

VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

(I) Common Stock

The Company has implemented an Employee Stock Purchase Plan (ESPP) to allow eligible employees of Versar the opportunity to acquire an ownership interest in the Company’s common stock. As amended, the ESPP permits employees to purchase shares of Versar common stock from the open market at 95% of its fair market value. The ESPP qualifies as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

(J) Stock-Based Compensation

In September 2010, the Company awarded 24,000 shares of restricted stock to executive officers and employees. The awards were issued pursuant to the Versar 2005 Incentive Stock Plan and vest over a period of two years. Stock-based compensation expense relating to all outstanding restricted stock and option awards totaled $31,000 and $82,000 for the three months ended September 24, 2010 and September 25, 2009, respectively. These expenses were included in the direct costs of services and overhead lines of the Consolidated Statements of Operations.

In November 2005, the stockholders approved the Versar, Inc. 2005 Stock Incentive Plan (the “2005 Plan”). The 2005 Plan provides for grants of incentive awards, including stock options, SARS, restricted stock, restricted stock units and performance based awards, to directors, officers and employees of the Company and its affiliates as approved from time to time by the Company’s Compensation Committee. Only employees may receive stock options classified as “incentive stock options”, also known as “ISO’s”. The per share exercise price for options and SARS granted under the 2005 Plan may not be less than the fair market value of the common stock on the date of grant. A maximum of 400,000 shares of common stock may be awarded under the 2005 Plan. No single director, officer, or employee may receive awards of more than 100,000 shares of common stock during the term of the 2005 Plan. The ability to make awards under the 2005 Plan will terminate in November 2015. As of September 24, 2010, approximately 19,000 shares are available for future grant under the 2005 Plan.

The Company also maintains the Versar 2002 Stock Incentive Plan (the “2002 Plan”), the Versar 1996 Stock Option Plan (the “1996 Plan”) and the Versar 1992 Stock Option Plan (the “1992 Plan”).

Under the 2002 Plan, restricted stock and other types of stock-based awards may be granted to any employee, service provider or director to whom a grant is approved from time to time by the Company’s Compensation Committee. A “service provider” is defined for purposes of the 2002 Plan as an individual who is neither an employee nor a director of the Company or any of its affiliates but who provides the Company or one of its affiliates substantial and important services. As of September 24, 2010, approximately 3,800 shares are available for future grant and vested options to purchase 234,700 shares of common stock are outstanding under the 2002 Plan.

Under the 1996 Plan, options were granted to key employees, directors and service providers at the fair market value on the date of grant. Each option expires on the earlier of the last day of the tenth year after the date of grant or after expiration of a period designated in the option agreement. The 1996 Plan has expired and no additional options or other stock-based awards may be granted under this plan. The Company will continue to maintain the plan until all previously granted options have been exercised, forfeited or expire. As of September 24, 2010, there were vested options to purchase 45,974 shares of common stock outstanding under the 1996 Plan.

Under the 1992 Plan, options were granted to key employees at the fair market value on the date of grant and became exercisable during the five-year period from the date of the grant at 20% per year. Options were granted with a ten year term and expire if not exercised by the tenth anniversary of the grant date. The 1992 Plan has expired and no additional options or other stock-based awards may be granted under this plan. The Company will continue to maintain the plan until all previously granted options have been exercised, forfeited or expire. As of September 24, 2010, there were vested options to purchase 81,500 shares of common stock outstanding under the 1992 Plan.

VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

A summary of activity under the Company’s stock incentive plans for both ISOs and non-qualified options as of September 24, 2010, and changes during the first three months of fiscal year 2010 are presented below:


					Weighted-
			Weighted-		Average	Aggregate
			Average		Remaining	Intrinsic
	Shares		Exercise		Contractual	Value
Options	(in thousands)		Price		Term	($000)
Outstanding at June 25, 2010		419	$	3.27
Granted		—		—
Exercised		—		—
Cancelled		—		—

Outstanding at September 24, 2010		419	$	3.27	3.63 yrs.	$	314


Exercisable at September 24, 2010		409	$	3.16	3.42 yrs.	$	262

As of September 24, 2010, there were unvested options to purchase approximately 10,000 shares outstanding under the plans.

(K) New Accounting Pronouncements

In September 2009, the FASB ratified the final consensus on Revenue With Multiple Deliverables by issuing ASU 2009-13, which supersedes ASC 605-25 (formerly EITF Issue 00-21, Revenue Arrangements With Multiple Deliverables ). The ASU addresses how arrangement consideration should be allocated to separate units of accounting, when applicable. This guidance retains the criteria from ASC 605-25 for when delivered items in a multiple deliverable arrangement should be considered separate units of accounting, it removes the previous separation criterion under ASC 605-25 that objective and reliable evidence of the fair value of any undelivered items exist for the delivered items to be considered as a separate unit or separate units of accounting. The final consensus is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply it prospectively to new or materially modified arrangements after the effective date or retrospectively for all periods presented. The Company implemented ASU 2009-13 on June 26, 2010. The adoption of ASU 2009-13 did not have any impact on the Company’s financial position or results of operations.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities, or VIEs. The elimination of the concept of qualifying special-purpose entities, or QSPEs, removes the exception from applying the consolidation guidance within this amendment. This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Additionally, the amendment requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company adopted the guidance effective June 26, 2010 and adoption did not have an impact on the condensed consolidated financial statements.

Other new accounting standards and updates issued but not effective are not expected to have a significant effect on the Company’s financial position or results of operations.

VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

(L) Fair Value Measures

Financial assets and liabilities

The Company analyzes its financial assets and liabilities measured at fair value and categorizes them within the fair value hierarchy based on the level of judgment associated with the inputs used to measure their fair value in accordance with the authoritative guidance for fair value instruments and the fair value option for financial assets and financial liabilities.

The levels as defined by the fair value hierarchy are as follows:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly at the measurement date.

Level 3 — Inputs are unobservable for the asset or liability and usually reflect the reporting entity’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Non financial assets and liabilities

The Company applies fair value techniques on a non-recurring basis associated with (1) valuing potential impairment losses related to goodwill which are accounted for pursuant to the authoritative guidance for intangibles — goodwill and other, (2) valuing potential impairment losses related to long-lived assets which are accounted for pursuant to the authoritative guidance for property, plant and equipment, and (3) valuing an asset retirement liability initially measured at fair value under the authoritative guidance for asset retirement obligations.

The Company currently has four separate business segments. Goodwill impairment is tested at the reporting unit level. During this reporting period, goodwill is associated with the Program Management business segment, Professional Protection Systems, Inc. (“PPS”), which is part of the National Security business segment and Advent Environmental, Inc. (“Advent”), which is part of the Compliance and Environmental Programs business segment. The Company determines the fair value of these business segments based on a combination of inputs including the market capitalization of the Company as well as Level 3 inputs such as discounted cash flows which are not observable from the market, directly or indirectly. The Company conducts the goodwill impairment analysis annually during the fourth quarter of the fiscal year, or upon the occurrence of certain triggering events.

The Company tests for the impairment of long-lived assets when triggering events occur and such impairment, if any, is measured at fair value. The inputs for fair value of the long lived assets would be based on Level 3 inputs as data used for such fair value calculations would be based on discounted cash flows which are not observable from the market, directly or indirectly. In fiscal year 2011, there have been no triggering events associated with reporting units carrying long lived assets and thus no impairment analysis was conducted during the period.

The carrying amounts of Versar’s cash and cash equivalents, accounts receivable, accounts payable and amounts included in other current assets and current liabilities that meet the definition of a financial instrument approximate fair value because of the short-term nature of these amounts.

(M) Inventory

As part of the Company’s acquisition of PPS, the Company acquired inventory. Such inventory was initially recorded at fair value. The Company’s inventory was subsequently valued at the lower of cost or market and is accounted for on a first-in first-out basis.

On September 24, 2010, there were approximately $549,000 of raw materials, $89,000 of demo stock, $554,000 of finished goods in the PPS inventory account for a total of $1,192,000. The Company’s other subsidiary, GEOMET Technologies, LLC, also carries certain personal protective suits in its inventory. The inventory amount at September 24, 2010 was approximately $164,000 of finished goods. Total net inventory for the Company is $1,356,000.

VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

(N) Other Current Liabilities

Other current liabilities include accrued 401k benefits, accrued tax withholdings, lease liabilities, and miscellaneous accruals.

(O) Business Segments

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

The Company’s business is currently operated through four business segments as follows: Program Management, Compliance and Environmental Programs, Professional Services, and National Security.

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.

The Program Management business segment manages larger more complex projects with business processes and management different from the rest of the Company. The Compliance and Environmental Programs business segment provides regulatory and environmental consulting support to several federal government and municipal agencies. The Professional Services business segment provides outsourced personnel to various government agencies providing our clients with cost-effective resources. The National Security business segment provides unique solutions to government and commercial clients including testing and evaluation and personal protective systems.

VERSAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

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


	For the Three-Month Periods Ended
	September 24,			September 25,
	2010			2009
	(In thousands)
GROSS REVENUE
Program Management	$	12,100		$	16,403
Compliance and Environmental Programs		8,340			3,525
Professional Services		2,976			2,738
National Security		5,880			2,048

	$	29,296		$	24,714


GROSS PROFIT (A)
Program Management	$	1,315		$	1,872
Compliance and Environmental Programs		555			(52	)
Professional Services		452			444
National Security		563			89

	$	2,885		$	2,353

Selling, general and administrative Expenses		(2,009	)		(1,975	)


OPERATING INCOME	$	876		$	378


(A)		Gross Profit is defined as gross revenue less purchased services and materials and direct costs of services and overhead.


	Periods Ended
	September 24,		June 25,
	2010		2010
	(In thousands)
IDENTIFIABLE ASSETS
Program Management	$	12,820	$	13,072
Compliance and Environmental Programs		10,495		9,386
Professional Services		2,183		3,349
National Security		12,877		13,271
Corporate and Other		10,559		10,786


Total Assets	$	48,934	$	49,864

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain forward-looking statements which are based on current expectations. Actual results may differ materially. The forward-looking statements include, 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 government to fund certain programs in which the Company participates; delays in project funding; and such other risks and uncertainties, described in our Form 10-K for fiscal year ended June 25, 2010 and in other reports and other documents filed by the Company from time to time with the Securities and Exchange Commission.

Financial Trends

In fiscal year 2010, the Company managed the anticipated wind down of approximately $24 million of work for the Air Force in Iraq leading to a reduction in revenue for the fiscal year. This reduction in revenue was further compounded by a worsening economy in the United States that significantly reduced our municipal and commercial work. The Company pursued several business opportunities to offset this business downturn, but due to the lag time associated with the ramping up of these alternatives, the Company had to reduce its work force by ten percent and closed two offices during the year to balance its costs with its revenues on a going forward basis.

Due to the financial successes experienced in prior fiscal years, the Company’s balance sheet remained strong during fiscal year 2010. The Company was well positioned with its cash balance on hand to handle the business downturn while also pursuing merger and acquisition activity. The Company is focused on identifying additional complementary businesses to integrate with its existing four business segments to strengthen the Company’s overall depth and breadth in those business market areas.

In January 2010, the Company acquired Professional Protection Systems, Ltd. (“PPS”), which is located in Milton Keynes, United Kingdom. PPS manufactures and sells personal protective equipment to the nuclear industry, including protective suits, decontamination showers, and emergency shelters. The acquisition of PPS is expected to add approximately $5 million to Versar’s annual revenue base and enabled the Company to cross sell Versar’s existing personal protective offerings along with PPS offerings internationally. PPS has been integrated into the Company’s National Security business segment’s existing line of personal protective equipment for chemical and biological protection.

In March 2010, the Company 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 acquisition of Advent is expected to add approximately $12 million annually to Versar’s revenue base and has provided the Company with access to several new contract vehicles within the Department of Defense. Advent has been integrated into the Company’s Compliance and Environmental business segment.

During fiscal year 2010, the Company was successful in winning a follow on contract with the U.S. Air Force Center for Engineering and Environment (“AFCEE”) as part of sixteen small business contractors for a $3 billion ID/IQ contract to provide environmental restoration, construction and services in support of the MMRP for AFCEE. Historically, the Company has performed more than $35 million of work for AFCEE under the predecessor contract. Also, the Company added additional contract capacity through the U.S. Army and the U.S. Environmental Protection Agency (“EPA”). This capacity includes a new five year $29.5 million contract with the U.S. Army Corps of Engineers to support the range clean up at Ft. Irwin, California, a $13 million contract in Tooele, Utah to destroy chemical munitions and a 5 year, $7 million contract with the EPA to support the EPA’s toxic and substances exposure and risk assessment programs. The combination of these new acquisitions and new contract vehicles provide for a stronger business base platform going into fiscal year 2011.

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

During the first quarter of fiscal year 2011, the Company’s gross revenues increased by 19% compared to the same period in the prior fiscal year, primarily as a result of increased revenues in the Company’s Compliance and Environmental and National Security business segments. Approximately $5,207,000 of the increase in revenues was attributable to the contribution from the operations of Advent and PPS. In addition, approximately $3,440,000 of additional revenues were generated as a result of the contract wins mentioned above. The combination of the acquisitions and internal growth enabled the Company to more than offset the reduction of work in Iraq in the Program Management business segment. This trend is expected to continue for the remainder of fiscal year 2011.

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 the Company’s 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; and
	•		Federal funding delays due to wars in Iraq and Afghanistan.

Results of Operations

First Quarter Comparison of Fiscal Year 2011 and 2010


	For the Three-Month Periods Ended
	September 24,		September 25,
	2010		2009

GROSS REVENUE
Program Management	$	12,100	$	16,403
Compliance and Environmental Programs		8,340		3,525
Professional Services		2,976		2,738
National Security		5,880		2,048


	$	29,296	$	24,714

Gross revenue for the first quarter of fiscal year 2011 was $29,296,000, an increase of $4,582,000 (19%) compared to gross revenue for the first quarter of fiscal year 2010. Gross revenue in the Program Management business segment for the first quarter of fiscal year 2011 was $12,100,000, a decrease of $4,303,000 (26%) compared to that reported for the first quarter of fiscal year 2010. Approximately sixty-nine percent of the decrease is due to the winding down of our efforts in support of the U.S. Air Force in Iraq and the balance resulted from reduced construction work in the United States. Gross revenue from Program Management business segment includes approximately $2.2 million from the Company’s newest telecommunications division. Gross revenue for the Compliance and Environmental Programs business segment for the first quarter of fiscal year 2011 was $8,340,000, an increase of $4,815,000 (137%) compared to that reported for the first quarter of fiscal year 2010. The increase is due to increased revenues associated with the Company’s military munitions response programs for the U.S. Army and the additional revenues of approximately $3,973,000 attributable to the gross revenue from Advent.

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Gross revenue for the Professional Services business segment for the first quarter of 2011 was $2,976,000, an increase of $238,000 (9%) compared to that reported for the first quarter of fiscal year 2010. The increase is attributable to additional task order work performed during the first quarter of fiscal year 2011. Gross revenue for the National Security business segment for the first quarter of fiscal year 2011 was $5,880,000, an increase of $3,832,000 (187%) from that reported for the first quarter of fiscal year 2010. The increase is primarily due to increased revenues from work to support Nellis AFB and Ft. Irwin range clean up and revenue of approximately $1,234,000 contributed by PPS.

Purchased services and materials increased by $1,704,000 (13%) in the first quarter of fiscal year 2011 compared to the first quarter of fiscal year 2010. The increase is attributable to the increased gross revenue in the Compliance and Environmental and National Security business segments which was offset in part by decreased purchased services and materials as work continued to slow in the Program Management business segment as mentioned above.

Direct costs of services and overhead include the cost to Versar of direct and overhead staff, including recoverable and unallowable costs that are directly attributable to contracts. Direct costs of services and overhead increased by $2,346,000 (24%) in the first quarter of fiscal year 2011 compared to that reported in the first quarter of fiscal year 2010. Approximately 79% of the increase is attributable to the additional costs and overhead attributable to Advent and PPS, which were acquired in the third quarter of fiscal year 2010. Such additional costs were incurred in the Compliance and Environmental and the National Security business segments, respectively.

Gross profit for the first quarter of fiscal year 2011 was $2,885,000, an increase of $532,000 (23%) compared to that reported for the first quarter of fiscal year 2010. The increase is primarily due to the increased gross revenue in the Compliance and Environmental and the National Security business segments as mentioned above.


	For the Three-Month Periods Ended
	September 24,		September 25,
	2010		2009

GROSS PROFIT
Program Management	$	1,315	$	1,872
Compliance and Environmental Programs		555		(52	)
Professional Services		452		444
National Security		563		89

	$	2,885	$	2,353

Gross profit for the Program Management business segment for the first quarter of fiscal year 2011 was $1,315,000, a decrease of $557,000 (30%) from that reported in the first quarter of fiscal year 2010. The decrease was attributable to the decreased gross revenue and the loss of the associated margins during the first quarter of fiscal year 2011 which was offset by $250,000 gross profit from the telecommunications division. Gross profit for the Compliance and Environmental business segment for the first quarter of fiscal year 2011 was $555,000, an increase of $607,000 compared to the loss reported in the first quarter of fiscal year 2010. The increase is due to increased revenues, improved operating margins as a result of cost reductions taken in fiscal year 2010 and the contribution by Advent of approximately $140,000. Gross profit for the Professional Services business segment for the first quarter of fiscal year 2011 was $452,000, an increase of $8,000 (2%) compared to that reported in the first quarter of fiscal year 2010. The slight increase is attributable to the increased gross revenues as mentioned above. Gross profit for the National Security business segment was $563,000, an increase of $474,000 compared to that reported in the first quarter of fiscal year 2010. The increase was due to the additional margins associated with the increase in gross revenue and a gross profit contribution of $153,000 from PPS.

Selling, general and administrative expenses were $2,009,000, an increase of $34,000 (2%) during the first quarter of fiscal year 2011 compared to that reported in the first quarter of fiscal year 2010. The increase primarily resulted from higher annual audit and tax costs due to the acquisitions of Advent and PPS.

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating income for the first quarter of fiscal year 2011 was $876,000, an increase of $498,000 from that reported for the first quarter of fiscal year 2010. The increase is attributable to the increased gross revenue and improved operating margins in the Compliance and Environmental and National Security business segments during the quarter.

Interest income for the first quarter of fiscal year 2011 was $82,000, an increase of $50,000 from that reported in the first quarter of fiscal year 2010. The increase is due to interest accrued on the Company’s notes receivable, which become due within the next twelve months.

Interest expense for the first quarter of fiscal year 2011 was $43,000, an increase of $30,000 from that reported in the first quarter of fiscal year 2010. The increase is due to the financing of the Company’s corporate insurance policies and interest paid on the notes payable issued in the acquisitions of Advent and PPS.

Income tax expense for the first quarter of fiscal year 2011 was $376,000, a $216,000 increase from that reported in the first quarter of fiscal year 2010. The effective tax rates were 41% and 40% for the first quarter of fiscal year 2011 and 2010, respectively.

Versar’s net income for the first quarter of fiscal year 2011 was $539,000 compared to $237,000 in the first quarter of fiscal year 2010.

Liquidity and Capital Resources

The Company’s working capital as of September 24, 2010 was approximately $16,005,000, compared to $15,330,000 at June 25, 2010. The Company’s current ratio at September 24, 2010 was 1.80, compared to 1.72 reported on June 25, 2010. The Company’s financial ratios continued to improve during the first quarter of fiscal year 2011 with expected improved operating performance.

The Company has a line of credit facility with United Bank (the Bank) that provides for advances up to $10 million based upon qualifying receivables. The line of credit is subject to certain covenants related to the maintenance of financial ratios. 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. Borrowings under the line of credit bear interest at prime less ¹ / 2 % with a floor interest rate of 4.5%. Failure to meet the covenant requirements gives the Bank the right to demand outstanding amounts due under the line of credit, which may impact the Company’s ability to finance its working capital requirements. As of September 24, 2010, the Company had no outstanding borrowings and was in compliance with the financial covenants. The Company has a letter of credit of approximately $455,000 under the line of credit facility which serves as collateral for surety bond coverage provided by the Company’s insurance carrier against project construction work. The letter of credit reduces the Company’s availability on the line of credit. Availability under the line of credit at September 24, 2010 was approximately $9.5 million. Obligations under the credit facility are guaranteed by Versar and each of its domestic subsidiaries individually and are secured by accounts receivable, equipment and intangibles, plus all insurance policies on property constituting collateral of Versar and its domestic subsidiaries. The line of credit matures on September 25, 2011.

The Company believes that its current cash balances along with anticipated cash flows from operations, and short term utilization of the Company’s line of credit, will be sufficient to meet the Company’s liquidity needs during the current fiscal year. Expected capital requirements for fiscal year 2011 are approximately $1,000,000, primarily for upgrades to maintain the Company’s existing information technology systems and facility improvements. Such capital requirements will be funded through existing working capital.

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Critical Accounting Policies and Related Estimates That Have a Material Effect on Versar’s Consolidated Financial Statements

Below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding the Company’s 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-Q and in our annual report on Form 10-K filed for fiscal year 2010.

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. The Company records 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 the Company’s business on projects where the Company is contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability 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.

Asset retirement obligation : The Company recorded an asset retirement obligation associated with the estimated clean-up costs for its chemical laboratory in its National Security business segment. In accordance with ASC-410-20-05 (formerly SFAS 143, Accounting for Asset Retirement Obligation), the Company estimated the costs to clean up the laboratory and return it to its original state at a present value of approximately $497,000. The Company currently estimates the amortization and accretion expense to be approximately $13,000 for the remainder of fiscal year 2011.

Goodwill and other intangible assets : The carrying value of goodwill is approximately $5,758,000 relating to the acquisition of Versar Global Solutions, Inc., Professional Protection Systems, Limited and Advent Environmental, Inc. In performing its goodwill impairment analysis, management has utilized a market-based valuation approach to determine the estimated fair value of the acquired entities in the business segments where those entities reside. Management engages outside professionals and valuation experts annually, as necessary, to assist in performing this analysis and will test more often if events and circumstances warrant it. Should the business segment’s financial performance 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 the Company’s financial position and results of operations. However, it would not impact the Company’s cash flow or financial debt covenants.

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Share-based compensation : The Company records stock based compensation in accordance with the fair value provisions of ASC 718-10-1 (formerly SFAS No. 123R, “Share-Based Payment”). This statement requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (the “fair-value-based” method).

In the first quarter of fiscal year 2011, the Company awarded 24,000 shares of restricted stock to key employees in recognition of their outstanding performance in the prior year, and recorded compensation expense of $31,000 for the first quarter of fiscal year 2011.

New accounting pronouncements : In September 2009, the FASB ratified the final consensus on Revenue With Multiple Deliverables by issuing ASU 2009-13, which supersedes ASC 605-25 (formerly EITF Issue 00-21, Revenue Arrangements With Multiple Deliverables ). The ASU addresses how arrangement consideration should be allocated to separate units of accounting, when applicable. This guidance retains the criteria from ASC 605-25 for when delivered items in a multiple deliverable arrangement should be considered separate units of accounting, it removes the previous separation criterion under ASC 605-25 that objective and reliable evidence of the fair value of any undelivered items exist for the delivered items to be considered as a separate unit or separate units of accounting. The final consensus is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply it prospectively to new or materially modified arrangements after the effective date or retrospectively for all periods presented. The Company implemented ASU 2009-13 on June 26, 2010. The adoption of ASU 2009-13 did not have any impact on the Company’s financial position or results of operations.

Other new accounting standards and updates issued but not effective are not expected to have a significant effect on the Company’s financial position or results of operations.

Impact of Inflation

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

Contingencies

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

Business Segments

Versar currently has four business segments: Program Management, Compliance and Environmental Programs, Professional Services, and National Security.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

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

Item 4 — Controls and Procedures

As of the last day of the period covered by this report, the Company carried out an evaluation, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, as of such date, to ensure that required information will be disclosed on a timely basis in its reports under the Exchange Act.

Further, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures have been designed to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosure.

There were no changes in the Company’s internal control over financial reporting during the last quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

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

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

During the first quarter of fiscal year 2011, employees of the Company surrendered shares of common stock to the Company to pay the vested price of the restricted shares. The purchase price of this stock was based on the closing price of the Company’s common stock on the NYSE Amex on the date of surrender.

Purchases of Equity Securities

Maximum

Number (or

Approximate

Dollar Value) of

Shares that May

Total Number of Shares

Yet Be

Total Number

Average Price

Purchased as Part of

Purchased Under

of Shares

Paid Per

Publicly Announced

the Plans or

Period

Purchased

Plans or Programs

Programs

September 1-30, 2010

1,055

2.07

—

Total

1,055

2.07

—

Item 5 — Other Information

On September 30, 2010, the Company extended its existing $10 million line of credit with United Bank to September 25, 2011.

Item 6 — Exhibits


Exhibit No.				Description

10.1				Change in Control Severance Agreement entered into on July 2, 2010 and effective as of May 24, 2010 between the Company and Anthony L. Otten (incorporated by reference to exhibit 10.1 to the Company’s current report on Form 8-K filed on July 9, 2010).

10.2				Ninth Modification Agreement of the Revolving Commercial Note, dated September 30, 2010, between Registrant and United Bank.

31.1 and 31.2				Certification pursuant to Securities Exchange Act Section 13a-14.

32.1 and 32.2				Certification under Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	VERSAR, INC. (Registrant)
	By:	/S/ Anthony L. Otten
		Anthony L. Otten
		Chief Executive Officer

	By:	/S/ Lawrence W. Sinnott
		Lawrence W. Sinnott
		Executive Vice President, Chief Financial Officer and Treasurer

Date: November 8, 2010

EXHIBIT 10.1

CHANGE IN CONTROL

SEVERANCE AGREEMENT

TABLE OF CONTENTS


1. Purpose			1
2. Your Agreement			1
3. Events That Trigger Severance Benefits			1
a. Termination After a Change in Control			1
b. Termination After a Potential Change in Control			1
c. Successor Fails to Assume This Agreement			1
4. Events That Do Not Trigger Severance Benefits			2
5. Termination Procedures			2
6. Severance Benefits			2
a. In General			2
b. Lump-Sum Payment in Lieu of Future Compensation			2
c. Incentive Compensation and Options			2
d. Group Insurance Benefit Continuation			3
e. Group Benefit Continuation			3
f. Officer Benefits			3
g. Medical Benefits			3
7. Time for Payment			3
8. Payment Explanation			4
9. Potential Limitations			4
a. Golden Parachute Limitation			4
b. Section 162(m) Limitation			4
10. Disability			4
11. Effect of Reemployment			5
12. Successors			5
a. Assumption Required			5
b. Heirs and Assigns			5
13. Amendments			5
14. Governing Law			5
15. Claims			5
a. When Required; Attorneys’ Fees			5
b. Initial Claim			5
c. Claim Decision			6
d. Appeal of Denied Claims			6
e. Appeal Decision			6
f. Procedures			6
g. Arbitration			7
16. Limitation on Employee Rights			7
17. Validity			7
18. Counterparts			7
19. Giving Notice			7
a. To the Company			7
b. To You			7

- i -


20. Definitions			8
a. Agreement			8
b. Beneficial Owner			8
c. Board			8
d. Cause			8
e. Change in Control			8
(1) Acquisition of Controlling Interest			8
(2) Change in Board Control			8
(3) Merger Approved			9
(4) Sale of Assets			9
(5) Liquidation or Dissolution			9
(6) Private Transaction			9
f. Code			9
g. Company			9
h. Disability			9
i. Exchange Act			9
j. Good Reason			10
(1) Demotion			10
(2) Pay Cut			10
(3) Relocation			10
(4) Breach of Contract			10
(5) Improper Termination			10
k. Incentive Compensation			10
l. Management Action			11
m. Person			11
n. Potential Change in Control			11
(1) Agreement Signed			11
(2) Notice of Intent to Seek Change in Control			11
(3) Board Declaration			11
o. Separation from Service			11
p. Severance Benefits			11
q. Term of this Agreement			11
(2) Change in Control			12
21. Section 409A			12

- ii -

CHANGE IN CONTROL
SEVERANCE AGREEMENT

This Agreement between Anthony L. Otten (“you”) and VERSAR, INC.(“Company”) has been entered into as of May 24, 2010. This Agreement promises you severance benefits if, following a Change of Control, you are terminated without Cause or resign for Good Reason during the Term of this Agreement. Capitalized terms are defined in the last section of this Agreement.

1. Purpose

The Company considers a sound and vital management team to be essential. Management personnel who become concerned about the possibility that the Company may undergo a Change in Control may terminate employment or become distracted. Accordingly, the Board has determined that appropriate steps should be taken to minimize the distraction certain executives may suffer from the possibility of a Change in Control. One step is to enter into this Agreement with you while you hold the position as Chief Executive Officer. Once you no longer hold this position, except following or in connection with the triggering of severance benefits as set forth in Section 3 below, this Severance Agreement shall immediately terminate and be null and void as set forth in Section 20q hereof.

2. Your Agreement

If one or more Potential Changes in Control occur during the Term of this Agreement, you agree not to resign for at least six full calendar months after a Potential Change in Control occurs, except as follows: (a) you may resign after a Change in Control occurs; (b) you may resign if you are given Good Reason to do so; and (c) you may terminate employment on account of retirement on or after age 65 or because you become unable to work due to serious illness or injury.

3. Events That Trigger Severance Benefits

Termination After a Change in Control

You will receive Severance Benefits under this Agreement if, during the Term of this Agreement and after a Change in Control has occurred, your employment is terminated by the Company without Cause (other than on account of your Disability or death) or you resign for Good Reason.

Termination After a Potential Change in Control

You also will receive Severance Benefits under this Agreement if, during the Term of this Agreement and after a Potential Change in Control has occurred but before a Change in Control actually occurs, your employment is terminated by the Company without Cause or you resign for Good Reason, but only if either: (i) you are terminated at the direction of a Person who has entered into an agreement with the Company that will result in a Change in Control; or (ii) the event constituting Good Reason occurs at the direction of such Person.

Successor Fails to Assume This Agreement

You also will receive Severance Benefits under this Agreement if, during the Term of this Agreement, a successor to the Company fails to assume this Agreement, as provided in Section 12(a).

- 1 -

4. Events That Do Not Trigger Severance Benefits

You will not be entitled to Severance Benefits if your employment ends because you are terminated for Cause or on account of Disability or because you resign without Good Reason, retire, or die. Except as provided in Section 3(c), you will not be entitled to Severance Benefits while you remain protected by this Agreement and remain employed by the Company, its affiliates, or their successors.

5. Termination Procedures

If you are terminated by the Company after a Change in Control and during the Term of this Agreement, the Company shall provide you with 30 days’ advance written notice of your termination, unless you are being terminated for Cause. The notice will indicate why you are being terminated and will set forth in reasonable detail the facts and circumstances claimed to provide a basis for your termination. If you are being terminated for Cause, your notice of termination will include a copy of a resolution duly adopted by the affirmative vote of not less than 51 % of the entire membership of the Board (at a meeting of the Board called and held for the purpose of considering your termination (after reasonable notice to you and an opportunity for you and your counsel to be heard before the Board)) finding that, in the good faith opinion of the Board, Cause for your termination exists and specifying the basis for that opinion in detail. If you are purportedly terminated without the notice required by this Section, your termination shall not be effective.

6. Severance Benefits

In General

If you become entitled to Severance Benefits under this Agreement, you will receive all of the Severance Benefits described in this Section.

Lump-Sum Payment in Lieu of Future Compensation

In lieu of any further cash compensation for periods after your employment ends, other than cash compensation paid pursuant to any agreement governing the terms of a Change in Control payable to all similarly situated persons, you will be paid a cash lump sum equal to 2 times your annual base salary in effect when your employment ends or, if higher, in effect immediately before the Change in Control, Potential Change in Control, or Good Reason event for which you terminate employment. In addition, and without duplication, you will be paid a cash lump sum equal to 2 times the higher of the amounts paid to you (if any) under any existing bonus or incentive plans in the calendar year preceding the calendar year in which your employment ends or in the calendar year preceding the calendar year in which the Change in Control occurred (or in which the Potential Change in Control occurred, if benefits are payable under Section 3(b)hereof).

Incentive Compensation and Options

The Company will pay you a cash lump sum equal to any unpaid incentive compensation (that is not otherwise paid to you) that you have been allocated or awarded under any existing bonus or incentive plans for measuring periods completed before you became entitled to Severance Benefits under this Agreement. All unvested options to purchase Company common stock will immediately vest and remain exercisable for the longest period of time permitted under the applicable stock option plan. All unvested restricted stock awards awarded to you will immediately vest.

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Group Insurance Benefit Continuation

During the period that begins when you become entitled to Severance Benefits under this Agreement and ends on the last day of the 18th calendar month beginning thereafter, the Company shall provide, at no cost to you or your spouse or dependents, health and dental insurance benefits (or substantially similar benefits) it was providing to you and your spouse and dependents immediately before you became entitled to Severance Benefits under this Agreement. The Company subsidized health and dental insurance coverage shall be treated as satisfying the Company’s COBRA obligations. After this subsidized coverage ends, you, your spouse and dependents may continue any remaining COBRA coverage at your sole cost and expense.

Group Benefit Continuation

During the period that begins when you become entitled to Severance Benefits under this Agreement and ends on the last day of the 24 ^th calendar month beginning thereafter, the Company shall provide, at no cost to you or your spouse or dependents, the life, disability and accident benefits (or substantially similar benefits) it was providing to you and your spouse and dependents before you became entitled to Severance Benefits under this Agreement (or immediately before a benefit reduction that constitutes Good Reason, if you terminate employment for that Good Reason).

Officer Benefits

In lieu of the medical and tax accounting benefits available to the Company’s officers, you will be entitled to a lump sum payment of $16,000.00.

Medical Benefits

The Company provides certain medical benefits to retired CEO’s and Vice Presidents. If you become entitled to Severance Benefits under this Agreement, then you are deemed to have retired for purposes of this benefit and the Company shall provide, at no cost to you, continued medical benefits it was providing you and your spouse and dependents immediately before you became entitled to Severance Benefits under this Agreement.

7. Time for Payment

Subject to the provisions of Section 21 hereof, you will be paid your cash Severance Benefits within five days after you become entitled to Severance Benefits under this Agreement (e.g., within five days following your termination of employment). If the amount you are due cannot be finally determined within that period, you will receive the minimum amount to which you are clearly entitled, as estimated in good faith by the Company. The Company will pay the balance you are due (together with interest at the rate provided in Internal Revenue Code Section 1274(b)(2)(B)) as soon as the amount can be determined, but in no event later than 30 days after you terminate employment. If your estimated payment exceeds the amount you are due, the excess will be a loan to you, which you must repay to the Company within five business days after demand by the Company (together with interest at the rate provided in Code Section 1274(b)(2)(B)). In no event will any cash Severance Benefits be paid to you later than March 15 of the calendar year following the calendar year in which you become entitled to such Severance Benefits.

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8. Payment Explanation

When payments are made to you, the Company will provide you with a written statement explaining how your payments were calculated and the basis for the calculations. This statement will include any opinions or other advice the Company has received from auditors or consultants as to the calculation of your benefits. If your benefit is affected by the golden parachute limitation in Section 9, the Company will provide you with calculations relating to that limitation and any supporting materials you reasonably need to permit you to evaluate those calculations.

9. Potential Limitations

Golden Parachute Limitation

Your aggregate payments and benefits under this Agreement and all other contracts, arrangements, or programs shall not exceed the maximum amount that may be paid without triggering golden parachute penalties under Section 280G and related provisions of the Internal Revenue Code, as determined in good faith by the Company’s independent auditors. The preceding sentence shall not apply to the extent the shareholder approval requirements of Code Section 280G(b)(5) are satisfied. If your benefits must be reduced to avoid triggering such penalties, the Company shall reduce your benefits that are not considered deferred compensation subject to Code Section 409A before it reduces any benefits that are considered deferred compensation subject to Code Section 409A. If an amount in excess of the limit set forth in this Section is paid to you, you must repay the excess amount to the Company on demand, with interest at the rate provided in Code Section 1274(b)(2)(B). You and the Company agree to cooperate with each other reasonably in connection with any administrative or judicial proceedings concerning the existence or amount of golden parachute penalties on payments or benefits you receive.

Section 162(m) Limitation

To the extent payments or benefits under this Agreement would not be deductible under Code Section 162(m) if made or provided when otherwise due under this Agreement, they shall be made or provided later, immediately after Section 162(m) ceases to preclude their deduction, with interest thereon at the rate provided in Code Section 1274(b)(2)(B).

10. Disability

Following a Change in Control, while you are absent from work as a result of physical or mental illness, the Company will continue to pay you your full salary and provide you all other compensation and benefits payable to you under the Company’s compensation or benefit plans, programs, or arrangements. These payments will stop if and when your employment is terminated by the Company for Disability as described in Section 20(h) hereof or at the end of the Term of this Agreement, whichever is earlier. Severance Benefits under this Agreement are not payable if you are terminated on account of your Disability.

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11. Effect of Reemployment

Your Severance Benefits will not be reduced by any other compensation you earn or could have earned from another source.

12. Successors

Assumption Required

In addition to obligations imposed by law on a successor to the Company, during the Term of this Agreement the Company will require any successor to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company was required to perform. If the Company fails to obtain such an assumption and agreement before the effective date of a succession, you will be entitled to Severance Benefits as if you were terminated by the Company without Cause on the effective date of that succession.

Heirs and Assigns

This Agreement will inure to the benefit of, and be enforceable by, your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If you die while any amount is still payable to you under this Agreement, that amount will be paid to the executor, personal representative, or administrator of your estate.

13. Amendments

This Agreement may be modified only by a written agreement executed by you and an authorized officer of the Company.

14. Governing Law

This Agreement creates a “top hat” employee benefit plan subject to the Employee Retirement Income Security Act of 1974, and it shall be interpreted, administered, and enforced in accordance with that law; the Company is the “plan administrator.” To the extent that state law is applicable, the statutes and common law of the State of Virginia (excluding its choice of laws statutes or common law) shall apply.

15. Claims

When Required; Attorneys’ Fees

You do not need to present a formal claim to receive benefits payable under this Agreement. However, if you believe that your rights under this Agreement are being violated, you must file a formal claim with the Company in accordance with the procedures set forth in this Section. The Company will pay your reasonable attorneys’ fees and related costs in enforcing your rights under this Agreement.

Initial Claim

Your claim must be presented to the Company in writing. Within 30 days after receiving the claim, a claims official appointed by the Company will consider your claim and issue his or her determination thereon in writing. With your consent, the initial claim determination period can be extended further. If you can establish that the claims official failed to respond to your claim in a timely manner, you may treat the claim as having been denied by the claims official.

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Claim Decision

If your claim is granted, the benefits or relief you are seeking will be provided. If your claim is wholly or partially denied, the claims official shall, within three days, provide you with written notice of the denial, setting forth, in a manner calculated to be understood by you: (i) the specific reason or reasons for the denial; (ii) specific references to the provisions on which the denial is based; (iii) a description of any additional material or information necessary for you to perfect your claim, together with an explanation of why the material or information is necessary; and (iv) an explanation of the procedures for appealing denied claims. If you establish that the claims official has failed to respond to your claim in a timely manner, you may treat the claim as having been denied by the claims official.

Appeal of Denied Claims

You may appeal the claims official’s denial of your claim in writing to an appeals official designated by the Company (which may be a person, committee, or other entity) for a full and fair appeal. You must appeal a denied claim within five days after your receipt of written notice denying your claim, or within 60 days after such written notice was due, if the written notice was not sent. In connection with the appeals proceeding, you (or your duly authorized representative) may review pertinent documents and may submit issues and comments in writing. You may only present evidence and theories during the appeal that you presented during the initial claims stage, except for information the claims official requested you to provide to perfect the claim. You will irrevocably waive any theories you do not in good faith pursue through the appeal stage, such as by failing to file a timely appeal request.

Appeal Decision

The decision by the appeals official will be made within 60 days after your appeal request, unless special circumstances require an extension of time, in which case the decision will be rendered as soon as possible, but not later than ten days after your appeal request, unless you agree to a greater extension of that deadline. The appeal decision will be in writing, set forth in a manner calculated to be understood by you; it will include specific reasons for the decision, as well as specific references to the pertinent provisions of this Agreement on which the decision is based.

Procedures

The Company will adopt procedures by which initial claims and appeals will be considered and resolved; different procedures may be established for different claims. All procedures will be designed to afford you full and fair consideration of your claim.

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Arbitration

In the event that any dispute arises, following satisfaction of the claim procedures outlined in this Section 15, related to the validity, interpretation, enforcement or performance of this Agreement, the dispute shall be submitted to binding arbitration in accordance with the Employment Rules of the American Arbitration Association. The aggrieved party must give written notice of any claim to the other party no later than the expiration of the statute of limitations (deadline for filing) that the law prescribes for the claim. Otherwise, the claim shall be void and deemed waived. The arbitrator may award any remedy that would otherwise be available to a court of competent jurisdiction. The decision of the arbitrator shall be final and binding and shall be fully enforceable in any court having jurisdiction and venue over the parties. The arbitrator shall have no power to alter, modify, ignore, or otherwise deviate from the express terms of this Agreement, and the arbitrator shall be bound by controlling law. The arbitrator’s decision shall be provided to the parties in writing and shall succinctly set forth the arbitrator’s findings of fact, conclusions of law, and remedy, if any. The cost of such arbitration shall be paid by the Company, except you shall pay an administrative fee equivalent to the filing fee to initiate a similar claim in the local court of general jurisdiction if you are the party initiating the claim. The parties hereto agree that any action to compel arbitration pursuant to this Agreement may be brought in the appropriate Virginia state court, and in connection with such action to compel, the laws of Virginia shall control. Application may also be made to such court for confirmation of any decision or award of the arbitrator, for an order of enforcement and for any other remedies which may be necessary to effectuate such decision or award. The parties hereto hereby consent to the jurisdiction of the arbitrator and of such court and waive any objection to the jurisdiction of such arbitrator and court.

16. Limitation on Employee Rights

This Agreement does not give you the right to be retained in the service of the Company.

17. Validity

The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

18. Counterparts

This Agreement may be executed in several counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.

19. Giving Notice

To the Company

All communications from you to the Company relating to this Agreement must be sent to the Company to its principal business office in Springfield, Virginia, in writing, by registered or certified mail, or delivered personally.

To You

All communications from the Company to you relating to this Agreement must be sent to you in writing, by registered or certified mail, or delivered personally, addressed as indicated at the end of this Agreement.

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20. Definitions

Agreement

“Agreement” means this contract, as amended.

Beneficial Owner

“Beneficial Owner” has the meaning set “forth in Rule 13d-3 under the Exchange Act.

Board

“Board” means the Board of Directors of the Company.

Cause

“Cause” means any of the following:

(1)

you fail to carry out assigned duties after being given prior warning and an opportunity to remedy the failure,

(2)

you breach any material term of any employment agreement with the Company,

(3)

you engage in fraud, dishonesty, willful misconduct, gross negligence, or breach of fiduciary duty (including without limitation any failure to disclose a conflict of interest)in the performance of your duties for the Company, or

(4)

you are convicted of a felony or crime involving moral turpitude.

Change in Control

“Change in Control” means the first of the following to occur after the date of this Agreement:

(1)

Acquisition of Controlling Interest

Any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company’s then outstanding securities. In applying the preceding sentence, securities acquired directly from the Company or its affiliates with the company’s approval by or for the Person shall not be taken into account.

(2)

Change in Board Control

During the term of this Agreement, individuals who constituted the Board as of the date of this Agreement (or their approved replacements, as defined in the next sentence) cease for any reason to constitute a majority of the Board. A new director shall be considered an “approved replacement” director if his or her election (or nomination for election) was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or were themselves approved replacement directors; provided that any individual whose initial assumption of office occurs as a result of an actual or threatened election contest (as the term is used in Rule 14a-11 of Regulation 14A issued under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be considered an “approved replacement”.

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(3)

Merger Approved

The shareholders of the Company approve a merger or consolidation of the Company with any other corporation unless: (a) the voting securities of the Company outstanding immediately before the merger or consolidation would continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; and (b) no Person acquires more than 25% of the combined voting power of the Company’s then outstanding securities.

(4)

Sale of Assets

The shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

(5)

Liquidation or Dissolution

A complete liquidation or dissolution of the Company.

(6)

Private Transaction

Any transaction or series of transactions not covered in paragraphs (1) through (5) above the result of which is the suspension of the Company’s duty to file reports under the Exchange Act as a result of the remaining number of holders of the Company’s common stock following such transaction or series of transactions.

Code

“Code” means the Internal Revenue Code of 1986, as amended.

Company

“Company” means Versar, Inc. and any successor to its business or assets that (by operation of law, or otherwise) assumes and agrees to perform this Agreement. However, for purposes of determining whether a Change in Control has occurred in connection with such a succession, the successor shall not be considered to be the Company.

Disability

“Disability” means that, due to physical or mental illness which is determined to be total and permanent by a physician selected by the Company or its insurer and acceptable to you or your legal representative: (i) you have been absent on a full-time basis from your duties with the Company for 180 consecutive business days; (ii) the Company has notified you more than 30 days prior to your intended termination date that it intends to terminate you on account of Disability; and (iii) you do not resume the full-time performance of your duties within 30 days after receiving notice of your intended termination on account of Disability. Following the expiration of the 30 day period specified above, unless you have resumed full- time performance of your duties, your employment with the Company shall terminate immediately.

Exchange Act

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

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Good Reason

“Good Reason” means the occurrence of any of the following events arising without your consent:

(1)

Demotion

Your duties and responsibilities are materially and adversely altered from those in effect immediately before the Change in Control (or, with respect to Section 3(b), the Potential Change in Control), or there is a material and adverse change in your reporting responsibilities or in the size of the budget you administer in effect immediately before the Change in Control (or, with respect to Section 3(b), the Potential Change in Control), provided that no demotion will be deemed to occur solely as a result of the Company ceasing to be a public company, a change in your title, or your transfer to an affiliate.

(2)

Pay Cut

Your annual base salary is materially reduced.

(3)

Relocation

Your principal office is materially relocated, which increases your one-way commute to work by more than 50 miles, based on your residence when the transfer was announced.

(4)

Breach of Contract

The Company materially breaches this Agreement, your employment agreement or any other agreement between you and the Company pursuant to which you perform services for the Company or compensation and benefits are provided to you.

(5)

Improper Termination

The Company terminates your employment, other than pursuant to a notice of termination satisfying the requirements of Section 5 hereof.

However, an event that is or would constitute Good Reason shall cease to be Good Reason if: (a) you fail to provide written notice to the Company within 90 days following the initial existence of the event described in paragraphs (1) through (4) above; (b) the Company reverses or otherwise cures the event within 30 days of receiving such notice; (c) you do not terminate employment within 180 days after the event occurs; or (d) you were a primary instigator of the Good Reason event and the circumstances make it inappropriate for you to receive benefits under this Agreement (e.g., you agree temporarily to relinquish your position on the occurrence of a merger transaction you negotiate). If you have Good Reason to terminate employment, you may do so even if you are on a leave of absence due to physical or mental illness or any other reason.

Incentive Compensation

“Incentive Compensation” means the amount of cash and/or securities paid to you under all bonus, incentive or other programs for performance adopted by the Company for its executive officers and other key employees.

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Management Action

“Management Action” means any event, circumstance, or transaction occurring during the six-month period following a Potential Change in Control that results from the action of a Management Group.

Person

“Person” has the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Section 13(d) of that Act, and shall include a “group,” as defined in Rule 13d-5 promulgated thereunder. However, a Person shall not include: (i) the Company or any of its subsidiaries; (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries; (iii) an underwriter temporarily holding securities pursuant to an offering of such securities; or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

Potential Change in Control

“Potential Change in Control” means that any of the following has occurred during the term of this Agreement, excluding any event that is Management Action:

(1)

Agreement Signed

The Company enters into an agreement that will result in a Change in Control.

(2)

Notice of Intent to Seek Change in Control

The Company or any Person publicly announces an intention to take or to consider taking actions that will result in a Change in Control.

(3)

Board Declaration

With respect to this Agreement, the Board adopts a resolution declaring that a Potential Change in Control has occurred.

Separation from Service

“Separation from Service” shall have the meaning set forth in Treas. Reg. § 1.409A-1(h).

Severance Benefits

“Severance Benefits” means your benefits under Section 6 of this Agreement.

Term of this Agreement

“Term of this Agreement” means the period that commences on the date of this Agreement and ends on the

(1)

earlier of:

May 23, 2012; or

Your ceasing to serve in the position of Chief Executive Officer prior to the occurrence of a Potential Change in Control or Change in Control; or

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(2)

Change in Control

The last day of the 24th calendar month beginning after the calendar month in which a Change in Control occurred during the Term of this Agreement. After a Change in Control occurs, the end of the Term of this Agreement shall solely be determined under this Section 20 (q)(2).

21. Section 409A

Notwithstanding anything in this Agreement to the contrary, if any amounts that become due under this Agreement on account of your termination of employment constitute “nonqualified deferred compensation” within the meaning of Code Section 409A, payment of such amounts shall not commence until you incur a Separation from Service.

Notwithstanding any provision to the contrary in this Agreement (other than Section 21(c) below) no payments to which you become entitled under this Agreement shall be made or paid to you prior to the earlier of (1) the expiration of the six-month period measured from the date of your Separation from Service with the Company or (2) the date of your death, if you are deemed at the time of the Separation from Service a “specified employee” within the meaning of Code Section 409A, and such delayed commencement is otherwise required in order to avoid a prohibited distribution under Code Section 409A(a)(2). Upon expiration of the applicable deferral period, all payments deferred pursuant to this Section 21(b) shall be paid to you in a lump sum, and any remaining payments due under this Agreement shall be paid in accordance with the remaining payment dates specified herein.

The six-month holdback set forth in Section 21(b) above shall not be applicable to any cash Severance Benefits under Section 6 that are paid to you by March 15 of the calendar year following the calendar year in which you become entitled to Severance Benefits.

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IN WITNESS WHEREOF, the parties have executed this Agreement as if the date set forth above.


Date June 29, 2010		By: Versar, Inc.

		/s/ Paul J. Hoeper Chairman of the Board

Date July 2, 2010		/s/ Anthony L. Otten Anthony L. Otten

Company notices to you shall be addressed as follows (or in any other manner you notify the Company to use):

4821 Woodway Lane, N.W.

Washington, DC 20016

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EXHIBIT 10.2

NINTH MODIFICATION AGREEMENT
(Extension)

THIS NINTH MODIFICATION AGREEMENT (this “ Agreement ”), effective as of the 30 ^th day of September 2010, is by and between UNITED BANK, a Virginia banking corporation (the “ Bank ”); and VERSAR, INC. a Delaware corporation, GEOMET TECHNOLOGIES, LLC, a Maryland limited liability company, VERSAR GLOBAL SOLUTIONS, INC., a Virginia corporation, VEC CORP., a Pennsylvania corporation and successor to Versar Environmental Company, Inc., VERSAR INTERNATIONAL, INC., a Delaware corporation, formerly known as VIAP, Inc., and ADVENT ENVIRONMENTAL, INC., a Kentucky corporation (individually and collectively, the “ Borrower ”).

WITNESSETH THAT:

WHEREAS, the Bank is the owner and holder of that certain Revolving Commercial Note dated September 26, 2003, in the original principal amount of Five Million and No/100 Dollars ($5,000,000.00), made by the Borrower payable to the order of the Bank and bearing interest and being payable in accordance with the terms and conditions therein set forth (as modified by the modification agreements described in the next following Recital, the “ Note ”); and

WHEREAS, the Note is issued pursuant to the terms of a certain Loan and Security Agreement dated September 26, 2003, between the Borrower and the Bank (as modified in accordance with that certain First Modification Agreement dated as of May 12, 2004, that certain Third Modification Agreement dated as of November 30, 2005 (a second modification having been drafted but never executed and delivered), that certain Fourth Modification Agreement dated as of September 28, 2006, as increased to Seven Million Five Hundred Thousand and No/100 Dollars (7,500,000.00) pursuant to that certain Fifth Modification Agreement dated as of September 24, 2007, that certain Sixth Modification Agreement dated September 30, 2009, that certain Seventh Modification Agreement dated January 5, 2010, and as increased to Ten Million and No/100 Dollars ($10,000,000.00) pursuant to that certain Eighth Modification Agreement dated March 17, 2010, and as otherwise amended, extended, increased, replaced and supplemented from time to time, the “ Loan Agreement ”);

WHEREAS, the Borrower has requested that the Bank extend the maturity date of the Note, and the Bank has consented to such request subject to the execution of this Agreement and the satisfaction of the conditions specified herein.

NOW, THEREFORE, for Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Definitions . All capitalized terms used in this Agreement will have the respective meanings assigned thereto in the Loan Agreement unless otherwise defined in this Agreement.

2. Amendments to Note and Loan Agreement . From and after the effective date of this Agreement, the Loan Agreement and Loan Documents are hereby amended as follows:

(a) Extension of Maturity Date of Note . The maturity date of the Note is hereby extended to September 25, 2011. The definition of “Date of Maturity” in the Note and the Loan Agreement is hereby changed to “September 25, 2011”.

(b) Change to Interest Rate . From and after the effective date hereof interest on the unpaid principal balance of the Note shall accrue at a rate per annum equal at all times to the Prime Rate (as defined in the Note) minus one-half of one percent (0.50%); provided, however, at no time shall the interest rate on the Note be less than four and one-half percent (4.5%) per annum.

3. Representations and Warranties of the Borrower . The Borrower represents and warrants to the Bank that:

(a) It has the power and authority to enter into and to perform this Agreement, to execute and deliver all documents relating to this Agreement, and to incur the obligations provided for in this Agreement, all of which have been duly authorized and approved in accordance with the Borrower’s organizational documents

(b) This Agreement, together with all documents executed pursuant hereto, shall constitute when executed the valid and legally binding obligations of the Borrower and all guarantors, if any, as the case may be, in accordance with their respective terms;

(c) Except with respect to events or circumstances occurring subsequent to the date thereof and known to the Bank, all representations and warranties made in the Loan Agreement are true and correct as of the date hereof, with the same force and effect as if all representations and warranties were fully set forth herein;

(d) The Borrower’s obligations under the Loan Documents remain valid and enforceable obligations;

(e) As of the date hereof, the Borrower has no offsets or defenses against the payment of any of the Obligations and no claims against the Bank; and

(f) As of the date hereof, no Default exists.

4. Waiver of Claims . As a specific inducement to the Bank without which the Borrower acknowledges the Bank would not enter into this Agreement and the other documents executed in connection herewith, the Borrower hereby waives any and all claims that it may have against the Bank, as of the date hereof, arising out of or relating to the Loan Agreement or any Loan Document whether sounding in contract, tort or any other basis.

5. Loan Documents . The other “Loan Documents”, as defined in the Note, are hereby modified to the extent necessary to carry out the purposes of this Agreement.

6. Outstanding Balance . The Borrower hereby acknowledges and agrees that, as of the effective date hereof, the unpaid principal balance of the Note is Zero Dollars ($0.00) and that there are no set-offs or defenses against the Note, the Loan Agreement, or the other Loan Documents.

7. No Impairment . This Agreement shall become a part of the Loan Agreement by reference and nothing herein contained shall impair the security now held for the Obligations, nor waive, annul, vary or affect any provision, condition, covenant or agreement contained in the Loan Agreement except as herein amended, nor affect or impair any rights, powers or remedies under the Loan Agreement as hereby amended. Furthermore, the Bank does hereby reserve all rights and remedies it may have as against all parties who may be or may hereafter become primarily or secondarily liable for the repayment of the Obligations.

8. No Novation . The parties to this Agreement do not intend that this Agreement be construed as a novation of the Note, the Loan Agreement, or any of the other Loan Documents.

9. Ratification . Except as hereby expressly modified, the Note and Loan Agreement shall otherwise be unchanged, shall remain in full force and effect, and are hereby expressly approved, ratified and confirmed. A legend shall be placed on the face of the Note indicating that its terms have been modified hereby, and the original of this Agreement shall be affixed to the original of the Note.

10. Applicable Law; Binding Effect . This Agreement shall be governed in all respects by the laws of the Commonwealth of Virginia and shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns.

11. Counterparts; Telecopied Signatures . This Agreement may be executed in any number of counterparts and by different parties to this Agreement on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute one and the same instrument. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature to this Agreement.

[Signatures Appear on the Following Pages]

WITNESS the following signatures and seals.


UNITED BANK		[SEAL]

By:	/s/ E. Allen Schirmer

	E. Allen Schirmer
	Senior Vice President


VERSAR, INC.			[SEAL]

By:	/s/ Lawrence W. Sinnott

	Name:	Lawrence W. Sinnott
	Title:	EVP and CFO

GEOMET TECHNOLOGIES, LLC			[SEAL]

By:	/s/ Lawrence W. Sinnott

	Name:	Lawrence W. Sinnott
	Title:	V.P.

VERSAR GLOBAL SOLUTIONS, INC.			[SEAL]

By:	/s/ Lawrence W. Sinnott

	Name:	Lawrence W. Sinnott
	Title:	V.P.

VEC CORP.			[SEAL]

By:	/s/ Lawrence W. Sinnott

	Name:	Lawrence W. Sinnott
	Title:	V.P.

VERSAR INTERNATIONAL, INC.			[SEAL]

By:	/s/ Lawrence W. Sinnott

	Name:	Lawrence W. Sinnott
	Title:	V.P.

ADVENT ENVIRONMENTAL, INC.			[SEAL]

By:	/s/ Lawrence W. Sinnott

	Name:	Lawrence W. Sinnott
	Title:	V.P.

Exhibit 31.1

CERTIFICATION BY ANTHONY L. OTTEN PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14

I, Anthony L. Otten, of Versar, Inc., certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Versar, Inc. (the “Registrant”);

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.		The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 and 15d-15(f)) for the Registrant and we have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 8, 2010


	/s/ Anthony L. Otten
	Anthony L. Otten
	Chief Executive Officer

Exhibit 31.2

CERTIFICATION BY LAWRENCE W. SINNOTT PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13a-14

I, Lawrence W. Sinnott, of Versar, Inc., certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Versar, Inc. (the “Registrant”);

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.		The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 and 15d-15(f)) for the Registrant and we have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 8, 2010


	/s/ Lawrence W. Sinnott
	Lawrence W. Sinnott
	Executive Vice President, Chief Financial Officer and Treasurer

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Versar, Inc. (the “Company”) on Form 10-Q for the period ending September 24, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony L. Otten, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.


	/s/ Anthony L. Otten
	Anthony L. Otten
	Chief Executive Officer

November 8, 2010

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Versar, Inc. (the “Company”) on Form 10-Q for the period ending September 24, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lawrence W. Sinnott, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.


	/s/ Lawrence W. Sinnott
	Lawrence W. Sinnott
	Executive Vice President, Chief Financial Officer and Treasurer

November 8, 2010

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