VERSAR INC (Form: 10-K, Received: 09/18/2012 08:23:25)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended	Commission File
June 29, 2012	No. 1-9309

X:/TQDATA/VINEYARD/LIVE JOBS/2012/09 SEP/10 SEP/SHIFT II/V321049 - VERSAR - FORM 10K/DRAFT/03-PRODUCTION

(Exact name of registrant as specified in its charter)

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

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

(703) 750-3000

(Registrant’s telephone number, including area code)

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

Common Stock, $.01 par value

(Title of Class)

NYSE MKT

(Name of each exchange on which registered)

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

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

Yes

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

Yes

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

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

Yes

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

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

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

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

Yes

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 30, 2011 was approximately $27.4 million

The number of shares of Common Stock outstanding as of September 7, 2012 was 9,683,286.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement to be filed with the Securities and Exchange Commission with respect to the 2012 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

PART I

Item 1. Business

Unless this report indicates otherwise the terms ”Versar,” the “Company,” “we,” “us,” and “our” refer to Versar, Inc. and its consolidated subsidiaries. Versar’s fiscal year end is based upon a 52 or 53 week year ending on the last Friday of the fiscal period and therefore does not close on a calendar month end. The Company’s fiscal year 2012 included 52 weeks, its fiscal year 2011 included 53 weeks, and its fiscal year 2010 included 52 weeks.

Cautionary Statement Regarding Forward-Looking Statements

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

Business Overview

Versar, Inc. is a Delaware corporation incorporated in 1969. We are a global project management company providing sustainable value oriented solutions to government and commercial clients. We also provide tailored and secure engineering solutions in extreme environments and offer specialized abilities in staff augmentation, performance based remediation, and hazardous material management.

During fiscal year 2012 Versar’s management undertook a strategic initiative to assess the Company’s internal processes and organizational structures with the intention of identifying efficiencies to streamline and improve these areas. As a result of this strategic initiative the Company streamlined its organizational structure, which resulted in changes to the Company’s reported business segments. The Company’s resulting three business segments are as follows:

Engineering and Construction Management

Environmental Services

Professional Services

During fiscal year 2012 we delivered solid financial results reflected by an increase in net income and gross profit margins compared to fiscal year 2011. Our balance sheet remains strong and is a reflection of improved liquidity and working capital. We experienced continued effects of the recessionary environment in the government and commercial sectors with resulting uncertainty in funding for projects. However, this has caused an increased focus by our customers on the value of services provided. Both the commercial and government sectors are adjusting their needs to the new economic environment of constrained budgets and staffing, which is compelling greater productivity and value-oriented solutions from service providers.

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

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

On May 31, 2012, we acquired Charron Construction Consulting, Inc. (“Charron”), which is located in Dulles, Virginia. Charron, a national construction project management firm, has provided project and construction management services since 1992 for a broad spectrum of projects including office, retail, industrial, civic, and various government facilities. We are integrating Charron into our Engineering and Construction Management business segment. We remain focused on identifying additional complementary businesses to integrate within our existing business segments to strengthen our overall depth and breadth. Charron’s operating results are consolidated by the Company post acquisition date. Accordingly, during the post-acquisition month of June 2012 Charron contributed approximately $0.3 million of gross revenue to the Company.

Business Segments

During fiscal year 2012, management realigned the Company’s organizational structure resulting in the Company’s operations being reorganized into three business segments, which are described below. For additional information regarding our business segments see Note B - Business Segments, of the Notes to the Consolidated Financial Statements included elsewhere in this report on Form 10-K.

Engineering and Construction Management

This business segment, which was previously referred to as Program Management and now includes the majority of our operations that were formerly included in our National Security business segment, performs Title I Design Services, Title II Construction Management Services, and Title III Construction Services, which are discussed further in the initial bullet below. This business segment also provides other related engineering and construction type services both in the United States and internationally and provides national security services in several markets that require ongoing services and support and which have received funding priority. Our services in this segment include the following:

Title I services entails a broad-range of expertise including project scoping/development, design, cost estimation, value engineering, and feasibility studies. Title II services involve construction oversight, configuration management, inspection, job site evaluations, and construction documentation among other areas. Other related services include system optimization, scheduling, and quality assurance/control. Title III services are the actual construction services. Staff members in this business segment also hold security clearances enabling Versar to provide services for classified construction efforts.

This segment consists of federal, state, local, international, and commercial clients. Examples of federal work include construction and construction management services for the U.S. Air Force, construction management and personal services including electrical and engineering support to the U.S. Army Corps of Engineers, project and construction management services for the District of Columbia Courts, and other construction efforts. Work has also been concentrated in the local/municipal marketplace where we manage and construct water and wastewater infrastructure projects.

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

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

Environmental Services

This business segment, which was previously referred to as Compliance and Environmental Programs and now includes the remainder of our operations formerly included in our National Security business segment, provides full service environmental solutions and includes our remediation and compliance, exposure and risk assessment, natural resources, unexploded ordnance (“UXO”)/military munitions response program (“MMRP”), air, greenhouse gas, energy, and cultural resources services. Clients include a wide-range of federal and state agencies. Some examples include the following:

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

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

We hold a key UXO removal contract supporting one of the largest U.S. Air Force testing and training ranges in the country and support (via a subcontract) a large Department of Defense (“DoD”) chemical warfare agent testing center. We exclusively provide UXO clean-up services at Ft. Irwin, CA, which is the National Training Center for DoD. This center is the size of Rhode Island and provides live fire training for U.S. Army forces.

Professional Services

This business segment provides onsite environmental management, planning and engineering services to DoD installations and to the U.S. Department of Commerce (“DOC”). Versar’s provision of on-site services, or staff augmentation, serves to enhance the mission of the customer with subject matter experts fully dedicated to mission objectives. These services are particularly attractive in this economic environment as DoD shifts emphasis to its core military mission and downsizes due to increasing budgetary pressure. Primarily at the U.S. Army Installation level or DoD Joint Base level (two or more DoD facilities realigning management functions to establish a single entity) this segment serves government business by supporting customers in areas where their capabilities and capacities are lacking.

This business segment provides expert services for Net Zero (Energy, Waste, and Water), sustainability and mission program support for U.S. Army installations. Our professionals facilitate strategic initiatives, develop implementation plans, conduct outreach, and apply technologies to deliver progress towards site-specific goals and objectives.

This segment has Installation Restoration managers fielded under the Defense Environmental Restoration Program to clean-up landfill and disposal sites throughout the nation and in Puerto Rico.

Versar serves the Joint Base communities with facility and utilities integration, National Environmental Policy Act considerations, water program management and wildlife program management.

We manage hazardous materials and waste for large quantity generator sites through application of green procurement philosophies and hazardous material control program concepts.

This segment provides staff augmentation ranging from field support of archaeological investigations to senior level advisors. Our archaeological and historic preservation professionals advise government officials regarding the protection of our nation’s cultural resources.

We provide biological and physical sciences support to the National Oceanic Atmospheric Administration to ensure efficiencies and accuracies in the lab environment.

Revenue Earned by Geographic Location

Our consolidated gross revenue for fiscal year 2012 was $119.0 million, of which approximately $114.8 million was funded with U.S. currency and approximately $3.7 million of the remainder was derived from our PPS subsidiary in the United Kingdom. Approximately 45% of our fiscal year 2012 business was conducted in international locations, which included our reconstruction work in Iraq and Afghanistan.

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

Our Strategy

For the near-term, we believe the United States economy will continue to be sluggish. The fact that 2012 is an election year, combined with constrained federal funding, high unemployment, weak European financial markets, and debt reduction pressures, should continue to put pressure on the economy. We believe that Versar’s business segments have the expertise to identify and respond to the challenges raised by these global economic issues and that Versar is positioned in the coming year to address these concerns. In this challenging economic environment, we focus on those opportunities where funding is non-discretionary such as Sustainable Range Management, Unexploded Ordnance, and Performance Based Remediation as well as provision of services to clients that operate in challenging and extreme environments worldwide. We will also continue to focus on areas that we believe offer attractive returns to our clients so that they will continue to fund projects, such as improvements in energy efficiency or facility upgrades.

Specifically, the following four elements are driving our strategy:

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

Leveraging of our services. This will allow us to work efficiently in the new economic environment whether through selling sustainable risk management services, utilizing our energy and environmental skill-sets or via effective use of our project and construction management skills in relation to complex project oversight. Expansion of our existing core capabilities in a broader and more comprehensive manner provides us with the understanding and insight necessary to reduce client risk.

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

Geographic and client expansion through acquisition. We have an active acquisition strategy and are focused on expanding our ability to offer our technical services to both new geographic areas and new clients, such as the U.S. Navy and the U.S. Department of State.

Competition

We face substantial competition in each market in which we operate as our markets become more crowded and price sensitive. Our competitors are often larger and have greater financial resources than us, which means that we have to be selective in our marketing and sales efforts and more adept in developing strategic partnerships to enhance our competitive advantage. We also believe that our larger size and diversified service offerings relative to many of the smaller, niche companies with which we also compete provide us with a competitive advantage.

Our reorganized business segments during fiscal year 2012 (consisting of Engineering and Construction Management, Environmental Services, and Professional Services) reflect a mix of business that we continue to believe will provide stability, while continuing to represent our core capabilities. Additionally, the combination of our core capabilities is an important selling feature as customers look for one source to meet their needs. We have seen that we are competitive among the firms that combine environmental health and safety/risk assessment, engineering design and construction, and chemical and biological defense capability in one package. We are actively pursuing customers that require these combined services as we leverage our capabilities into the changing economic environment.

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

Backlog

We report “funded” backlog, which represents orders for goods and services for which firm contractual commitments have been received. Based on past experience, the Company believes that at least 90% of funded backlog will be performed in the succeeding twelve month period. However, no assurance can be given that we will ultimately realize our full backlog. Additionally, other companies with similar types of contracts to ours may not calculate backlog in the same manner we do, because their calculations are based on different subjective factors or because they use a different methodology. Therefore, information presented by us regarding funded backlog may not necessarily be comparable to similar presentations by others.

As of June 29, 2012, funded backlog was approximately $93 million, an increase of approximately 19% compared to approximately $78 million of funded backlog at the end of the fiscal year 2011. This increase reflects the award of several large long term contracts and is indicative of the high quality proposals that were developed as a result of proposal preparation staff training and business development investments earlier this fiscal year. This increase also reflects funded backlog of approximately $7 million, contributed by Charron, which we acquired in May 2012.

Our proposal pipeline is strong with multiple large long-term contract proposals awaiting award results that hold the possibility for further increasing our backlog. The outlook for the future indicates the ability to further increase our backlog as a result of our continued strong proposal efforts and pipeline.

Employees

At June 29, 2012, we had approximately 550 full-time employees, of which eighty-five percent are engineers, scientists, and other professionals. Seventy-eight percent of our professional employees have a bachelor’s degree, twenty eight percent have a master’s degree, and three percent have a doctorate degree.

Item 1A. Risk Factors

Our line of credit contains, and our future debt agreements may contain, covenants that may restrict our ability to engage in activities that may be in our long-term best interest, including financing future operations or capital needs or engaging in other business activities that require us to maintain specific financial ratios or levels .

Our line of credit restricts, among other things, our ability and the ability of our subsidiaries to:

incur additional debt;

pay dividends or distributions on our capital stock;

purchase, redeem or retire capital stock;

make acquisitions and investments;

create liens on our assets;

enter into certain transactions with affiliates;

merge or consolidate with another company; or

transfer or sell assets outside the ordinary course of business.

In addition, our line of credit requires that we maintain compliance with certain financial ratios and levels, such as a minimum tangible net worth and a minimum current ratio. It is possible that these covenants may adversely impact our ability to finance our future operations or capital needs to pursue available business opportunities. Additionally, a failure to comply with any of these covenants could lead to a default under our line of credit which could result in an acceleration of indebtedness and prevent us from having access to the line of credit for future borrowings to fund our cash and working capital needs.

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

Contracts with agencies of the United States government and various state and local governments represented approximately 96% of our revenue in fiscal year 2012, with only 4% of our revenue coming from commercial sources. Therefore, the majority of our revenue and the success of our business are materially dependent on contracts with governmental agencies. Companies engaged in government contracting are subject to certain unique business risks not shared by the general commercial sector. Among these risks are:

a competitive procurement process with no firm schedule or guarantee of contracts being awarded;

competitive pricing pressure that may require reductions in costs in order to realize revenue under contracts;

award of work to competitors and not to us due to policy reasons;

dependence on congressional and state appropriations and administrative allotment of funds;

policies and regulations that can be changed at any time by governing bodies;

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

shifts in buying practices and policy changes regarding the use of private contractors;

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

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

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

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

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

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

We place greater reliance on financial and operational integrity of Small Business firms due to greater Small Business contract award requirements on government agencies and greater emphasis on Small Business subcontracting plans upon award to Versar.

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

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

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

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

Actual or perceived conflicts of interest may prevent us from being able to bid on or perform contracts.

U.S. government agencies have conflict of interest policies that may prevent us from bidding on or performing certain contracts. When dealing with U.S. government agencies that have conflict of interest policies, we must decide, at times with insufficient information, whether to participate in the procurement process in light of the fact that such performance could preclude us from participating in a related procurement. We have, on occasion, declined to bid on particular projects because of actual or perceived conflicts of interest. We are likely to continue encountering such conflicts of interest in the future. Future conflicts of interest could cause us to be unable to secure key contracts with U.S. government customers.

Robust enforcement of environmental regulations is important to our financial success.

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

Many of our U.S. government customers procure goods and services through indefinite delivery / indefinite quantity (“ID/IQ”), government wide acquisition contract (“GWAC”) or GSA Schedule contracts under which we must compete for post-award orders.

Budgetary pressures and reforms in the procurement process have caused many U.S. government customers to purchase goods and services through ID/IQ, GSA Schedule contracts and other multiple award and/or GWAC contract vehicles. These contract vehicles increase competition and pricing pressure requiring us to make sustained post-award efforts to obtain awards and realize revenue. There can be no assurance that we will increase revenue or otherwise sell successfully under these contract vehicles. Our failure to compete effectively in this procurement environment could harm our business, financial condition, operating results, cash flows and our ability to meet our financial obligations.

If we fail to recover at-risk contract costs, we may have reduced fees or losses.

We are at risk for any costs we incur before a contract is executed, modified or renewed. A customer may choose not to pay us for these costs. While such costs are typically associated with specific anticipated contracts and funding modifications, we cannot be certain that our customers will execute these contracts or contract renewals or that they we pay us for all our related at-risk costs. If unrecovered at-risk costs are significant, we may experience a decline in contract margins or experience losses on certain contracts or in certain periods, resulting in reduced profitability.

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

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

Environmental laws and regulations and our use of hazardous materials may subject us to significant liabilities.

Our operations are subject to U.S. federal, state and local environmental laws and regulations, as well as environmental laws and regulations in the various countries in which we operate. We are also subject to environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal and remediation of regulated substances and waste products, such as radioactive, biochemical or other hazardous materials and explosives. We may incur substantial costs in the future because of: modifications to current laws and regulations; new laws and regulations; new guidance or new interpretation of existing laws or regulations; violations of environmental laws or required operating permits; or discovery of previously unknown contamination.

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

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

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

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

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

We are exposed to risks associated with operating internationally.

A large portion of our business is conducted internationally. Consequently, we are subject to a variety of risks that are specific to international operations, including the following:

export regulations that could erode profit margins or restrict exports;

compliance with the U.S. Foreign Corrupt Practices Act;

compliance with the U.K Bribery Act;

the burden and cost of compliance with foreign laws, treaties and technical standards and changes in those regulations;

contract award and funding delays;

potential restrictions on transfers of funds;

foreign currency fluctuations;

import and export duties and value added taxes;

transportation delays and interruptions;

uncertainties arising from foreign local business practices and cultural considerations; and

potential military conflicts, civil strife and political risks

While we have and will continue to adopt measures to reduce the potential impact of losses resulting from the risks of our foreign business, we cannot ensure that such measures will be adequate.

Political destabilization or insurgency in the regions in which we operate may have a material adverse effect on our operating performance.

Certain regions in which we operate are highly unstable. Insurgent activities in the areas in which we operate may cause further destabilization in these regions. There can be no assurance that the regions in which we operate will continue to be stable enough to allow us to operate profitably or at all. During fiscal years 2012, 2011, and 2010, revenue generated from our operations in international locations, which included our reconstruction work in Iraq and Afghanistan, contributed 45%, 36%, and 40% of our revenue, respectively. We have been required to increase compensation to our personnel as an incentive to deploy them to these regions. To date, we have been able to recover this added cost under our contracts, but there is no guarantee that future increases, if required, will be able to be transferred to our customers through our contracts. To the extent that we are unable to transfer such increased compensation costs to our customers, our operating margins would be adversely impacted, which could adversely affect our operating performance. In addition, increased insurgent activities or destabilization, including civil unrest or a civil war in Iraq or Afghanistan, may lead to a determination by the U.S. government to halt our operations in a particular location, country or region and to perform the services using military personnel. Furthermore, in extreme circumstances, the U.S. government may decide to terminate all U.S. government activities, including our operations under U.S. government contracts in a particular location, country or region and to withdraw all military personnel. Any of the foregoing could adversely affect our operating performance and may result in additional costs and expenses and loss of revenue.

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

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

We operate in highly competitive industries.

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

Future acquisition candidates may be unsuccessful. Acquisitions that are consummated may require us to incur costs and liabilities or have other unexpected consequences which may adversely affect our operating results and financial condition.

In addition to internal or organic growth, our current growth strategy involves growth through acquisitions of complementary businesses as well as growth from acquisitions that would diversify our current service offerings. Like other companies with similar growth strategies, we may be unable to successfully implement our growth strategy as we may not be able to identify suitable acquisition candidates in the future, obtain acceptable financing, or consummate any future acquisitions. We frequently engage in evaluations of potential acquisitions and negotiations for possible acquisitions, certain of which, if consummated, could be significant to us. Although it is our general objective only to acquire companies in transactions which will be accretive to both earnings and cash flow, any potential acquisitions may result in material transaction expenses, increased interest and amortization expense, increased depreciation expense and increased operating expense, any of which could have a material adverse effect on our operating results. Acquisitions may entail integration and management of the acquired businesses to realize economies of scale and control costs. In addition, acquisitions may involve other risks, including diversion of management resources otherwise available for ongoing development of our business and risks associated with entering new markets. Future acquisitions may also result in potentially dilutive issuances of securities. As a result of the consummation of acquisitions of other businesses, we may be subject to the risk of unanticipated business uncertainties or legal liabilities relating to those acquired businesses for which the sellers of the acquired businesses may not indemnify us. We may not realize the full anticipated benefit of any acquired business that has operated as small business (as determined by the Small Business Administration based upon the North American Industry Classification Systems) if following their acquisition by us certain of their contracts are revoked or not renewed because they fail to continue to maintain small business status.

An economic downturn may have a material adverse effect on our business.

In an economic recession, or under other adverse economic conditions that may arise from natural or man-made events, customers and vendors may be less likely to meet contractual terms and payment or delivery obligations. In particular, if the U.S. government changes its operational priorities in Iraq and/or Afghanistan, reduces the DoD Operations and Maintenance budget or reduces funding for Department of State initiatives in which we participate, our business, financial condition and results of operations could be adversely affected.

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

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

•

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

•

the hiring and utilization rates of employees in the United States and internationally;

•

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

•

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

•

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

•

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

•

the ability of clients to terminate engagements without penalties;

•

the creditworthiness and solvency of clients;

•

the size and scope of engagements;

•

the delay in federal, state and local government procurements;

•

the ability to perform contracts within budget or contractual limitations;

•

the timing of expenses incurred for corporate initiatives;

•

any threatened or pending litigation matters;

•

periodic reductions in the prices of services offered by our competitors;

•

the likelihood of winning the re-bids of our existing large government contracts;

•

the general economic and political conditions;

•

the volatility of currencies in foreign countries; and

•

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

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

We are highly dependent on key personnel and our business could suffer if we fail to continue to attract, train and retain skilled employees.

Our business is managed by a number of key management and operating and professional personnel. The loss of key personnel could have a material adverse effect on the Company.

Availability of highly trained and skilled professional, administrative and technical personnel is critical to our future growth and profitability. Even in the current economic climate, competition in our industry for scientists, engineers, technicians, management and professional personnel is intense and competitors aggressively recruit key employees. Competition for experienced personnel, particularly in highly specialized areas, has made it more difficult for us to timely meet all our staffing needs. We cannot be certain we will be able to continue to attract and retain required staff. Any failure to do so could have a material adverse effect on our business, financial condition, operating results and our ability to meet our financial obligations. Failure to recruit and retain a sufficient number of these employees could adversely affect our ability to maintain or grow our business. Some of our contracts require us to staff a program with personnel the customer considers key to successful performance. If we cannot provide these key personnel or acceptable substitutes, the customer may terminate the contract, and we may not be able to recover our costs.

In order to succeed, we will have to keep up with a variety of rapidly changing technologies. Various factors could affect our ability to keep pace with these changes.

Our success will depend on our ability to keep pace with changing technologies which can change rapidly in our core business segments. Even if we keep up with the latest developments and available technology, newer services or technologies could negatively affect our business.

Our employees may engage in misconduct or other improper activities, which could harm our business.

We are exposed to the risk of employee fraud or other misconduct. Employee misconduct could include intentional failures to comply with U.S. government procurement regulations, unauthorized activities, attempts to obtain reimbursement for improper expenses, or submission of falsified time records. Employee misconduct could also involve improper use of our customers’ sensitive or classified information, which could result in regulatory sanctions against us. Negative press reports regarding employee misconduct could harm our reputation with the government agencies with which we work. If our reputation with these agencies is negatively affected, or if we are suspended or debarred from contracting with government agencies for any reason, our future revenues and growth prospects would be adversely affected. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could harm our business, financial condition, operating results and our ability to meet our financial obligations.

Internal system or service failures could disrupt our business and impair our ability to effectively provide our services and products to our customers, which could damage our reputation and adversely affect our revenue, profitability and operating results.

Our information technology systems are subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. Failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Any system or service disruptions if not anticipated and appropriately mitigated could have a material adverse effect on our business including, among other things, an adverse effect on our ability to bill our customers for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our results of operations could be materially and adversely affected

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate executive office is located in Springfield, Virginia, which is a suburb of Washington, D.C. Versar currently leases 40,507 square feet from Springfield Realty Investors, LLC. The rent is subject to two percent escalation per year through December 31, 2021.

As of June 29, 2012, we had under lease an aggregate of approximately 152,000 square feet of office, laboratory and manufacturing space in the following locations: Dulles, Springfield, Lynchburg, Richmond, and Virginia Beach, VA; Chandler, AZ; Sacramento, CA; Westminster, CO; Louisville, KY; Baltimore, Columbia, Gaithersburg, and Germantown, MD; Dillsburg, PA; Charleston, SC; San Antonio, TX; Makati City, the Republic of Philippines; Milton Keynes, U.K. and Abu Dhabi, United Arab Emirates. The lease terms primarily range from two to six years.

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

The current executive officers of Versar, their ages as of September 18, 2012, their current offices or positions and their business experience for at least the past five years are set forth below.

NAME	AGE	POSITION(S) WITH THE COMPANY

Anthony L. Otten	56	Chief Executive Officer

Jeffrey A. Wagonhurst, Sr.	64	President and Chief Operating Officer

Cynthia A. Downes	51	Executive Vice President, Chief Financial Officer,
		Treasurer and Principal Accounting Officer

J. Joseph Tyler	63	Senior Vice President, Corporate
		Initiatives & Integration

Joshua J. Izenberg	39	Senior Vice President, General Counsel,
		Secretary and Corporate Compliance Officer

Michael J. Abram	56	Senior Vice President and Chief Administrative Officer

Gina L. Foringer	43	Senior Vice President, Professional Services Group

Jeffrey M. Moran	49	Senior Vice President, Environmental Services Group

Lee A. Staab	55	Senior Vice President, Engineering and Construction
		Management and President, Versar International, Inc.

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

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

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

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

Joshua J. Izenberg, BS, LLB, MBA, joined Versar in June 2012 as Senior Vice President, General Counsel, Secretary and Corporate Compliance Officer. From September 2011 to May 2012, he served as Chief Operating Officer and General Counsel of Modus Create, Inc. From March 2005 to August 2011, Mr. Izenberg served as in-house counsel at Alion Science and Technology Corporation, most recently as Corporate Vice President and Deputy General Counsel, where he had responsibility for corporate and securities matters. Mr. Izenberg was with Baker & McKenzie LLP from June 1999 until February 2005. He joined the firm out of law school and became an Associate in the Corporate & Securities Group in August 2000.

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

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

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

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

PART II

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

Common Stock

Our common stock is traded on the NYSE MKT (formerly NYSE Amex) under the symbol VSR. At June 29, 2012, the Company had 903 stockholders of record, excluding stockholders whose shares were held in nominee name. The quarterly high and low sales prices as reported on the NYSE MKT during fiscal years 2012 and 2011 are presented below.

Fiscal Year 2012	High		Low

4 ^th Quarter—————	$	3.25	$	2.14
3 ^rd Quarter—————		3.20		2.55
2 ^nd Quarter—————		3.35		2.60
1 ^st Quarter—————		3.22		2.37

Fiscal Year 2011	High		Low

4 ^th Quarter—————	$	3.45	$	2.90
3 ^rd Quarter—————		3.94		3.16
2 ^nd Quarter—————		3.86		2.75
1 ^st Quarter—————		3.34		1.98

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

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

Equity Compensation Plan Information

Plan Category		Number of Securities to be issued upon exercise of outstanding options, warrants and rights (a)				Weighted-average exercise price of outstanding options, warrants and rights (b)				Number of securities remaining available for future issuance under equity compensation plans, excluding securities reflected in column (a) (c)
Equity compensation plans approved by security holders			186,000			$	3.10				857,500

Purchase of Equity Securities

During the last quarter of fiscal year 2012, our employees surrendered shares of common stock to us to pay tax obligations due upon the vesting of restricted stock units as reflected in the table below. The purchase price of this stock was based on the closing price of our common stock on the NYSE MKT on the date of surrender.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs

April 1-30, 2012		1,875	$	2.68		—		—
May 1-31, 2012		1,015		2.40		—		—
June 1-29, 2012		—		—		—		—
Total		2,890	$	2.58		—		—

The following graph compares the cumulative 5-year total return provided stockholders of our common stock relative to the cumulative total returns of the S&P 500 index, and a customized peer group of four companies that includes: Arcadis N.V., Michael Baker Corp., Ecology & Environment, Inc., and Matrix Service Company. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in the peer group and the index on June 30, 2007 and its relative performance is tracked through June 30, 2012.

	6/07		6/08		6/09		6/10		6/11		6/12

Versar, Inc.		100.00		57.06		47.19		38.04		38.14		35.78
S&P 500		100.00		86.88		64.10		73.35		95.87		101.09
Peer Group		100.00		81.95		65.48		64.78		81.09		75.69

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

Item 6. Selected Financial Data (unaudited)

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

	For the Years Ended
	June 29, 2012		July 1, 2011		June 25, 2010			June 26, 2009		June 27, 2008
	(in thousands, except share, per share, and ratio data)
Consolidated Statements of Operations Data:

Gross revenue	$	119,040	$	137,599	$	100,763		$	112,196	$	115,602
Gross profit	$	15,999	$	14,333	$	6,011		$	14,480	$	13,788
Operating income (loss)	$	7,717	$	5,885	$	(3,652	)	$	5,604	$	5,491
Net income (loss)	$	4,195	$	3,447	$	(2,294	)	$	3,169	$	3,391
Net income (loss) per share - diluted	$	0.45	$	0.37	$	(0.25	)	$	0.35	$	0.36

Weighted average shares outstanding – diluted		9,381		9,283		9,141			9,150		9,331

Consolidated Balance Sheet Data:

Working capital	$	22,323	$	19,591	$	15,330		$	25,513	$	22,271
Current ratio		2.32		1.90		1.72			3.04		2.67
Total assets	$	53,377	$	53,376	$	49,864		$	42,594	$	39,828
Stockholders’ equity	$	34,383	$	30,226	$	26,417		$	28,654	$	25,053

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

Financial Trends

During the 2012 fiscal year we delivered solid financial results reflected by an increase in net income and gross profit margins compared to fiscal year 2011. Additionally, we continued to have a strong balance sheet, which reflects both improved liquidity and working capital compared to fiscal year 2011 .

For the near-term, it appears that the United States economy will continue to be sluggish. We believe these conditions will continue based on a variety of factors, including the fact that we are in an election year with constrained federal funding, the continued effects of high unemployment, the continuing weak European financial markets, and the existence of debt reduction pressures that will continue to put pressure on economic recovery.

In this challenging economic environment, we focus on those opportunities where funding is non-discretionary for our customers such as Sustainable Range Management, Unexploded Ordnance, Performance Based Remediation, and construction contract management. We will also continue to focus on areas that we believe offer attractive enough returns to our clients that they will continue to fund efforts, such as construction type services both in the United States and internationally, improvements in energy efficiency, and facility upgrades. We have been investing heavily in business development activities designed to specifically tailor responses to a customer’s value solution and sustainability needs. We have invested in new internal technologies to streamline productivity and have realized benefits from continued cost reduction efforts concentrated on our fixed and controllable expenses.

During fiscal year 2012, we reorganized our operations eliminating one business segment by reallocating its operations to two other existing business segments. These changes resulted from an initiative designed to identify the best organizational structure to increase operating and business efficiencies and to streamline internal reporting authorities based on strategic alignment of our various operations. We believe that Versar’s realigned business segments have the expertise to identify and respond to the challenges raised by the global economic issues we face and are positioned in the coming year to address these concerns. Our business now operates through the following three business segments: Engineering and Construction Management, Environmental Services, and Professional Services. Prior segment results have been recast to conform to the current presentation. The Engineering and Construction Management business segment remains our largest business.

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

There are risk factors or uncertainties that could significantly impact our future financial performance. A sample of these risks is listed below. For a complete discussion of these risk factors and uncertainties refer to Item A. Risk Factors, herein.

•

We operate in highly competitive industries;

•

A reduction or delay in pending by government agencies could adversely affect us;

•

Our inability to win or renew government contacts could adversely affect us;

•

We are exposed to risks associated with operating internationally;

•

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

•

An economic downturn may adversely affect our business;

•

In order to succeed we need to keep up with a variety of rapidly changing technologies;

•

We are highly dependent on key personnel;

•

Future acquisitions may not go as expected and may have unexpected costs and consequences;

•

The government may adopt new contract laws or regulations at any time.

Consolidated Results of Operations

The table below sets forth our consolidated results of operations for the fiscal years ended June 29, 2012, July 1, 2011, and June 25, 2010. The dollar amounts are in thousands:

	For the Fiscal Years Ended
	June 29, 2012			July 1, 2011			June 25, 2010
GROSS REVENUE	$	119,040		$	137,599		$	100,763
Purchased services and materials, at cost		53,010			71,417			55,378
Direct costs of services and overhead		50,031			51,849			39,374
GROSS PROFIT	$	15,999		$	14,333		$	6,011
Gross profit percentage		13	%		10	%		6	%

Selling, general and administrative expenses	$	8,083		$	8,025		$	8,651
Other expense		199			423			1,012
OPERATING INCOME (LOSS)		7,717			5,885			(3,652	)

OTHER EXPENSE (INCOME)
Write-off of uncollectible financing receivable		694			—			—
Interest income		(70	)		(182	)		(143	)
Interest expense		193			175			104
INCOME (LOSS) BEFORE INCOME TAXES	$	6,900		$	5,892		$	(3,613	)

Fiscal Year 2012 Compared to Fiscal Year 2011

Gross revenue for fiscal year 2012 was $119.0 million, a decrease of 14% compared to $137.6 million during the 2011 fiscal year. This current year decrease partially resulted from nonrecurring equipment purchase revenue recorded during the 2011 fiscal year of approximately $8.4 million attributable to the Tooele Chemical Demilitarization project in our Engineering and Construction Management business segment. Additionally, the decrease resulted from the fact that fewer projects were awarded to our Environmental Services business segment during the current year. In the second half of fiscal year 2012 the Environmental Services business segment submitted a large number of business proposals in an attempt to bolster their pipeline and increase the number or projects awarded. The decrease in revenue was partially offset by an increase in revenue during the current fiscal year within our Engineering and Construction Management business segment resulting from additional awards of Title II Construction Management Services projects and electrical inspection projects.

Purchased services and materials for fiscal year 2012 was $53.0 million, a decrease of 26% compared to $71.4 million during the 2011 fiscal year. The decrease largely resulted from the nonrecurring equipment purchase and subcontractor costs for the Tooele Chemical Demilitarization project that occurred in the 2011 fiscal year and also from a decrease in projects awarded to our Environmental Services business segment.

Direct costs of services and overhead for fiscal year 2012 were $50.0 million, a decrease of 3% compared to $51.8 million during the 2011 fiscal year. The decrease was attributable to reduced activity related to the anticipated close out of the Tooele Chemical Demilitarization project, partially offset by increased work in our Engineering and Construction Management business segment from the Title II Construction Management Services projects and electrical inspection projects.

Gross profit for fiscal year 2012 was $16.0 million, an increase of 12% compared to $14.3 million during the 2011 fiscal year. This increase results from the improved performance in the Engineering and Construction Management business segment during the current year, partially offset by a decline in gross profit in the Environmental Services business segment.

Selling, general and administrative expenses for fiscal year 2012 were $8.1 million, relatively flat when compared with the 2011 fiscal year. The current fiscal year included expenditures to enhance our information technology backbone and to create a more efficient work environment by moving significant amounts of our document management and technology collaboration on-line. Fiscal year 2011 included approximately $0.2 million of severance costs related to the departure of our former Chief Financial Officer.

Other operating expenses for fiscal year 2012 were $0.2 million, relatively flat when compared to the 2011 fiscal year. This line item includes costs associated with acquisitions.

Operating income for fiscal year 2012 was $7.7 million, an increase of 31% compared to $5.9 million during the 2011 fiscal year. The increase in operating income primarily resulted from an increase in gross profit during fiscal year 2012.

The “write-off of uncollectible financing receivable” line item above includes the write-off of approximately $0.7 million that resulted from the determination during fiscal year 2012 that a financing receivable was uncollectible. The background related to this financing receivable and its write-off are discussed in detail in Note H - Notes Receivable, of the Notes to the Consolidated Financial Statements included elsewhere in this report on Form 10-K.

Income tax expense for fiscal year 2012 was $2.7 million as compared to income tax expense of $2.4 million during the 2011 fiscal year. During fiscal year 2012 income before taxes was $6.9 million compared to income before taxes of $5.9 million during the 2011 fiscal year, based on the reasons cited above. The effective tax rate of 41.5% was higher in fiscal year 2011 compared to a rate of 39.2% in fiscal year 2012, due to discrete tax items and book versus tax expense variances.

Net income for fiscal year 2012 was $4.2 million, an increase of 24% compared to net income of $3.4 million during the 2011 fiscal year. Net income per share, basic and diluted, for fiscal year 2012 was $0.45 compared to net income per share, basic and diluted, of $0.37 during the 2011 fiscal year. The increase in net income and net income per share primarily resulted from an increase in gross profit, partially offset by the write-off of the uncollectible financing receivable.

Fiscal Year 2011 Compared to Fiscal Year 2010

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

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

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

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

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

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

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

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

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

Results of Operations by Business Segment

During fiscal year 2012 management realigned the Company’s organizational structure resulting in its operations being reorganized into the following three business segments: (1) Engineering and Construction Management, (2) Environmental Services, and (3) Professional Services.

The tables below set forth the operating results for these three business segments for the fiscal years ended June 29, 2012, July 1, 2011, and June 25, 2010. The presentation of our business segments operating results during fiscal years 2011 and 2010 have been reclassified to conform to the fiscal year 2012 segment structure.

Engineering and Construction Management

	For the Fiscal Years Ended
	June 29, 2012			July 1, 2011			June 25, 2010
	(in thousands)

GROSS REVENUE	$	73,224		$	81,633		$	66,540
Purchased services and materials, at cost		40,609			52,021			39,530
Direct costs of services and overhead		22,198			26,295			22,737
GROSS PROFIT	$	10,417		$	3,317		$	4,273
Gross profit percentage		14	%		4	%		6	%

Fiscal Year 2012 Compared to Fiscal Year 2011

Gross revenue for fiscal year 2012 was $73.2 million, a decrease of 10% compared to $81.6 million during the corresponding period of the 2011 fiscal year. This decrease was largely from nonrecurring equipment purchase revenue earned in the last fiscal year of approximately $8.4 million attributable to the Tooele Chemical Demilitarization project. Additionally, we had fewer construction projects awarded to our U.S. based construction group during fiscal year 2012 and experienced decreased government spending for electrical inspection services. This decrease in gross revenue, however, was partially offset by increased government spending earlier in the fiscal year 2012 for Title II services.

Gross profit for fiscal year 2012 was $10.4 million, an increase of 215% compared to $3.3 million during the corresponding period of the 2011 fiscal year. This increase resulted from our effective project management and tight control over all costs related to the Title II Construction Management Services projects and our electrical inspection projects. Additionally, our U.S. based construction group continued to reduce costs relative to the decrease in gross revenue, thus contributing to the improved gross margin in fiscal year 2012.

Fiscal Year 2011 Compared to Fiscal Year 2010

Gross revenue for fiscal year 2011 was $81.6 million, an increase of 23% compared to $66.5 million during the 2010 fiscal year. This increase was a result of continuing work on the Tooele Chemical Demilitarization project in Utah and the impact of recognizing a full year of gross revenue contributed by PPS of $4.9 million in fiscal year 2011 compared to $1.6 million in the fiscal year 2010, the year of its acquisition. This increase in gross revenue was partially offset by the continued reduction of business in Iraq during the 2011 fiscal year.

Gross profit for fiscal year 2011 was $3.3 million, a 23% decrease compared to $4.3 million during the 2010 fiscal year. The decrease in gross profit during the 2011 fiscal year primarily resulted from the continued reduction of business in Iraq.

Environmental Services

	For the Fiscal Years Ended
	June 29, 2012			July 1, 2011			June 25, 2010
	(in thousands)

GROSS REVENUE	$	30,925		$	42,036		$	21,586
Purchased services and materials, at cost		8,857			16,154			10,642
Direct costs of services and overhead		19,296			17,708			11,224
GROSS PROFIT	$	2,772		$	8,174		$	(280	)
Gross profit percentage		9	%		19	%		(1	)%

Fiscal Year 2012 Compared to Fiscal Year 2011

Gross revenue for fiscal year 2012 was $30.9 million, a decrease of 26% compared to $42.0 million during the 2011 fiscal year. This decrease was primarily the result of the award to us of fewer contracts during this period.

Gross profit for fiscal year 2012 was $2.8 million, a decrease of 66% compared to $8.2 million during the corresponding 2011 fiscal year. The decrease was primarily a result of increased overhead costs incurred during fiscal year 2012 related to our increased efforts to identify business opportunities and an expanded proposal process to gain additional contracts. Additionally, the decrease in revenue during the 2012 fiscal year contributed to the decrease in gross profit. These decreases were partially offset by the positive contribution from our operations in Ft. Irwin, CA.

Fiscal Year 2011 Compared to Fiscal Year 2010

Gross revenue for fiscal year 2011 was $42.0 million, an increase of 94% compared to $21.6 million during the 2010 fiscal year. The increase was a result of the contribution of $15.7 million of gross revenue by ADVENT in fiscal year 2011 compared to $3.8 million in fiscal year 2010, the year of its acquisition, and from new awards in our risk assessment and regulatory compliance areas. Additionally, the increase in gross revenue resulted from the positive performance of our Military Munitions Response Programs in California and Nevada.

Gross profit for fiscal year 2011 was $8.2 million, a substantial increase from a negative gross profit of $0.3 million during the 2010 fiscal year. The increase in gross profit was primarily due to the overall increased labor utilization and improved performance in this business segment and the positive impact of the ADVENT acquisition completed during the third quarter of fiscal year 2010. Additionally, the increase resulted from the positive performance of our Military Munitions Response Programs in California and Nevada.

Professional Services

	For the Fiscal Years Ended
	June 29, 2012			July 1, 2011			June 25, 2010
	(in thousands)

GROSS REVENUE	$	14,891		$	13,930		$	12,637
Purchased services and materials, at cost		3,544			3,242			5,206
Direct costs of services and overhead		8,537			7,846			5,413
GROSS PROFIT	$	2,810		$	2,842		$	2,018
Gross profit percentage		19	%		20	%		16	%

Fiscal Year 2012 Compared to Fiscal Year 2011

Gross revenue for fiscal year 2012 was $14.9 million, an increase of 7% compared to $13.9 million during the 2011 fiscal year. This increase was primarily the result of certain Joint Bases adding staff to manage increased responsibilities. The DoD at these locations is charged with managing extensive resources across military services and has turned to Versar because of its strong reputation for on-site employee care and customer responsiveness.

Gross profit for fiscal year 2012 was $2.8 million, relatively flat when compared to the 2011 fiscal year. During fiscal year 2012 there was an increase in the volume of work without an equivalent increase in off-site staffing levels during the current period. The U.S. Army budget cuts precipitated higher operational expectations with lower margins. Further, offsetting any resulting gross margin improvement was our investment in market diversification efforts and in the training and development of existing staff on new management systems during the current period.

Fiscal Year 2011 Compared to Fiscal Year 2010

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

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

Gross Revenue by Client Base

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

	For the Years Ended
	June 29, 2012				July 1, 2011				June 25, 2010
	(in thousands)
Government:
DoD	$	97,630	82	%	$	110,000	80	%	$	78,022	77	%
State & Local		7,236	6	%		7,331	5	%		4,928	5	%
EPA		2,391	2	%		3,662	3	%		1,725	2	%
Other		7,481	6	%		11,043	8	%		6,180	6	%
Commercial		4,302	4	%		5,563	4	%		9,908	10	%
Gross Revenue	$	119,040	100	%	$	137,599	100	%	$	100,763	100	%

Liquidity and Capital Resources

Our working capital as of June 29, 2012 was approximately $22.3 million, an increase of $2.7 million compared to the prior fiscal year. In addition, our current ratio at June 29, 2012 was 2.32 compared to 1.90 from the prior fiscal year.

As discussed in Note M – Debt and Note T – Subsequent Event, of the Notes to the Consolidated Financial Statements included elsewhere in this report on Form 10-K, we have a line of credit facility with United Bank. On September 14, 2012 the line of credit facility was modified to extend its maturity date to September 25, 2014 and to make certain other changes to the terms and conditions governing the line for credit. We cumulatively borrowed and repaid $13.6 million and $27.2 million under the line of credit during fiscal year 2012 and 2011, respectively. Accordingly, we had no outstanding borrowings under the line of credit at June 29, 2012 and July 1, 2011. On October 5, 2011, we terminated our letter of credit of approximately $0.5 million outstanding under the line of credit facility, which served as collateral for surety bond coverage provided by our insurance carrier against project construction work which had been completed.

We financed a portion of our fiscal year 2012 acquisition of Charron through seller notes totaling $1.0 million. At June 29, 2012 the outstanding aggregate principal balance of the notes was $1.0 million. Additionally, in fiscal year 2010 we financed a portion of the acquisitions of PPS and ADVENT through seller notes totaling approximately $2.7 million. At June 29, 2012 no amounts were outstanding under the PPS and ADVENT notes. At July 1, 2011, the outstanding principal balances of the notes payable were approximately $391,000 and $656,000 for PPS and ADVENT, respectively.

We believe that in light of our cash balance of $8.0 million at the end of fiscal year 2012, along with anticipated cash flows from operations and availability under our extended line of credit, our working capital will be sufficient to meet our liquidity needs within the next fiscal year. Expected capital requirements for fiscal year 2013 are approximately $1.1 million, to be used primarily for annual hardware and software purchases to maintain our existing information technology systems, equipment related to our Military Munitions Response Programs, and upgrades to our personal protective equipment manufacturing. These capital requirements will be funded through existing working capital.

Contractual Obligations

At June 29, 2012, we had total contractual obligations of approximately $15.8 million, including short-term obligations of approximately $3.7 million. The short-term obligations will become due over the next twelve months (fiscal year 2013). Our contractual obligations are primarily related to lease commitments. Additionally, we have principal and interest obligations related to the notes payable from our acquisition of Charron. The table below specifies the total contractual payment obligations as of June 29, 2012.

Contractual Obligations	Total		Within 1 year		2-3 Years		4-5 Years		After 5 Years
	(in thousands)

Operating lease obligations	$	14,730	$	3,302	$	3,731	$	2,809	$	4,888
Notes payable to sellers		1,000		333		667		—		—
Estimated interest obligations		83		46		37		—		—
Total contractual obligations	$	15,813	$	3,681	$	4,435	$	2,809	$	4,888

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

Critical Accounting Policies and Estimates

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

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

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

Allowance for doubtful accounts: Disputes arise in the normal course of our business on projects where we are contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability and collectibility. Such disputes, whether claims or unapproved change orders in process of negotiation, are recorded at the lesser of their estimated net realizable value or actual costs incurred and only when realization is probable and can be reliably estimated. Management reviews outstanding receivables on a quarterly basis and assesses the need for reserves, taking into consideration past collection history and other events that bear on the collectibility of such receivables. All receivables over 60 days old are reviewed as part of this process.

Allowance for doubtful financing receivables: The methodology for determining the allowance for doubtful financing receivables is based on the review of specific facts and circumstances of both the receivables and the respective borrowers, including the inherent risk of the borrowers being private closely-held companies. During its analysis of collectability, management assesses factors such as existing economic conditions of the borrower and the borrower’s industries, each borrower’s repayment history related to the notes, and other external factors that may impact the repayment of the notes receivable by the borrower. A reserve against the financing receivable will be recorded when there is a specific risk of collectability. A write-off of a financing receivable will occur when it has been deemed uncollectable, based on management’s judgment.

Share-based compensation: Share-based compensation is measured at the grant date, based on the fair value of the award. The majority of the Company's equity awards granted in fiscal years 2012, 2011, and 2010 were restricted stock unit awards. Share-based compensation cost for restricted stock unit awards is based on the fair market value of the Company’s stock on the date of grant. Stock-based compensation cost for stock options is calculated on the date of grant using the fair value of stock options, as calculated using the black-scholes pricing model.

Net deferred tax asset: We have approximately $2.2 million in net deferred tax assets as of June 29, 2012. These deferred tax assets are comprised of tax benefits associated with accrued expenses, reserves and employee benefits and are offset against deferred tax liabilities related to depreciation and amortization. We expect these net deferred tax assets to be fully utilized except for net operating loss carryforwards from our Philippine branch in the amount of $58,000 for which, consistent with prior years, we continue to maintain a valuation allowance.

Long-lived assets: We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss is recognized if the carrying value exceeds the fair value. We review the cash flows of the operating units to ensure the carrying values do not exceed the cash flows that they support. Any write-downs are treated as permanent reductions. We believe our long-lived assets as of June 29, 2012 are fully realizable.

Goodwill: The carrying value of goodwill at June 29, 2012 and July 1, 2011 was $7.4 million and $5.8 million, respectively. The goodwill balances were principally generated from our fiscal year 2012 acquisition of Charron and our 2010 acquisitions of PPS and ADVENT. In performing the goodwill impairment analysis, management utilized a market-based valuation approach. Management engaged outside professionals and valuation experts to assist in performing this annual review and will test more often if events and circumstances warrant it. We have elected to perform the annual goodwill impairment assessment on the last day of each fiscal year. As part of the impairment assessment, an analysis was performed on public companies and company transactions to prepare a market-based valuation. Based upon the analysis, the estimated fair value of our reporting units exceeded the carrying value of the net assets as of June 29, 2012. Accordingly, the goodwill impairment test for fiscal year 2012 concluded that none of our goodwill was impaired. Should the financial performance of the reporting units not meet estimates, then impairment of goodwill would have to be further assessed to determine whether a write down of goodwill value would be warranted. If such a write down were to occur, it would negatively impact our financial position and results of operations. However, it would not impact our cash flow or financial debt covenants.

Intangible assets: The net carrying value of our intangible assets at June 29, 2012 and July 1, 2011 was $2.3 and $1.5 million, respectively. The intangible assets include customer related assets, marketing related assets, and technology-based assets. These intangible assets are amortized over a 5 - 8 year useful life. We review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset might not be recoverable. An impairment loss is recognized if the carrying value exceeds the fair value. Any impairments of the asset are treated as permanent reductions. We believe that our intangible assets were not impaired during fiscal years 2012 or 2011.

Asset retirement obligation: We have recorded an asset retirement obligation associated with the estimated clean-up costs for our chemical laboratory that resides in our Engineering and Construction Management business segment. This obligation represents the estimated costs to clean-up the laboratory and return it to its original state. If we determine that the estimated clean-up cost is larger than expected any adjustments that are required will be recorded when they become known. At June 29, 2012 and July 1, 2011, we have an asset retirement obligation balance of approximately $0.7 million associated with the estimated clean-up costs for our chemical laboratory.

New Accounting Pronouncements

For information concerning new accounting pronouncements that have recently been adopted by Versar and its subsidiaries, see Note A - Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included elsewhere in this report on Form 10-K.

Impact of Inflation

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

Business Segments

We have the following three business segments: Engineering and Construction Management, Environmental Services, and Professional Services. Additional details regarding these segments are contained in Note B - Business Segments, of the Notes to the Consolidated Financial Statements included elsewhere in this report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and

Stockholders of Versar, Inc.

We have audited the accompanying consolidated balance sheets of Versar, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 29, 2012 and July 1, 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three fiscal years in the period ended June 29, 2012. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(2)(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Versar, Inc. and subsidiaries as of June 29, 2012 and July 1, 2011 and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 29, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ Grant Thornton LLP

McLean, Virginia

September 18, 2012

VERSAR, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	As of
	June 29, 2012			July 1, 2011
ASSETS
Current assets
Cash and cash equivalents	$	8,012		$	6,017
Accounts receivable, net		25,598			29,500
Inventory		1,428			1,386
Notes receivable, current		—			1,040
Prepaid expenses and other current assets		1,938			1,511
Deferred income taxes		2,305			1,554
Income tax receivable, net		—			424
Total current assets		39,281			41,432

Property and equipment, net		3,341			3,828
Deferred income taxes, non-current		193			—
Goodwill		7,418			5,758
Intangible assets, net		2,283			1,539
Other assets		861			819
Total assets	$	53,377		$	53,376

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	5,415		$	10,022
Accrued salaries and vacation		3,124			3,039
Other current liabilities		7,409			7,363
Income tax payable		677			—
Notes payable, current		333			1,417
Total current liabilities		16,958			21,841

Notes payable, non-current		667			—
Deferred income taxes		332			332
Other long-term liabilities		1,037			977
Total liabilities		18,994			23,150

Commitments and contingencies

Stockholders’ equity
Common stock, $.01 par value; 30,000,000 shares authorized; 9,645,149 shares and 9,585,474 shares issued; 9,391,575 shares and 9,340,280 shares outstanding		96			95
Capital in excess of par value		29,047			28,806
Retained earnings		6,963			2,768
Treasury stock, at cost (253,574 and 245,194 shares, respectively)		(1,166	)		(1,142	)
Accumulated other comprehensive loss, foreign currency translation		(557	)		(301	)
Total stockholders’ equity		34,383			30,226
Total liabilities and stockholders’ equity	$	53,377		$	53,376

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

VERSAR, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share amounts)

	Fiscal Years Ended
	June 29, 2012			July 1, 2011			June 25, 2010
GROSS REVENUE	$	119,040		$	137,599		$	100,763
Purchased services and materials, at cost		53,010			71,417			55,378
Direct costs of services and overhead		50,031			51,849			39,374
GROSS PROFIT		15,999			14,333			6,011

Selling, general and administrative expenses		8,083			8,025			8,651
Other expense		199			423			1,012
OPERATING INCOME (LOSS)		7,717			5,885			(3,652	)

OTHER EXPENSE (INCOME)
Write-off of uncollectible financing receivable		694			—			—
Interest income		(70	)		(182	)		(143	)
Interest expense		193			175			104

INCOME (LOSS) BEFORE INCOME TAXES		6,900			5,892			(3,613	)

Income tax expense (benefit)		2,705			2,445			(1,319	)

NET INCOME (LOSS)	$	4,195		$	3,447		$	(2,294	)

NET INCOME (LOSS) PER SHARE – BASIC	$	0.45		$	0.37		$	(0.25	)

NET INCOME (LOSS) PER SHARE – DILUTED	$	0.45		$	0.37		$	(0.25	)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC		9,366			9,261			9,141

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED		9,381			9,283			9,141

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

VERSAR, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

	Fiscal Years Ended
	June 29, 2012			July 1, 2011		June 25, 2010

Net income (loss)	$	4,195		$	3,447	$	(2,294	)
Change in foreign currency adjustment		(256	)		151		(371	)

Comprehensive income (loss)	$	3,939		$	3,598	$	(2,665	)

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

VERSAR, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Fiscal Years Ended June 29, 2012, July 1, 2011, and June 25, 2010

(in thousands)

																	Accumulated
					Capital			(Accumulated									Other			Total
					in Excess			Deficit) /									Comprehensive			Stock-
	Common Stock				of Par			Retained			Treasury						Income /			holders’
	Shares		Amount		Value			Earnings			Shares			Amount			(Loss)			Equity

Balance, June 26, 2009		9,194		92		27,734			1,615			(119	)		(706	)		(81	)		28,654

Exercise of stock options		100		1		237			—			—			—			—			238
Issuance of restricted stock units		95		1		211			—			—			—			—			212
Issuance of stock for acquisition		78		1		239			—			—			—			—			240
Treasury stock		—		—		—			—			(90	)		(315	)		—			(315	)
Share-based compensation		—		—		106			—			—			—			—			106
Tax shortfall in exercise of stock options		—		—		(53	)		—			—			—			—			(53	)
Comprehensive loss:
Net loss		—		—		—			(2,294	)		—			—			—			(2,294	)
Other comprehensive loss:
Foreign currency translation adjustments		—		—		—			—			—			—			(371	)		(371	)
Total comprehensive loss		—		—		—			—			—			—			—-			(2,665	)

Balance, June 25, 2010		9,467	$	95	$	28,474		$	(679	)		(209	)	$	(1,021	)	$	(452	)	$	26,417

Exercise of stock options		65		—		157			—			—			—			—			157
Issuance of restricted stock units		53		—		94			—			—			—			—			94
Treasury stock		—		—		—			—			(36	)		(121	)		—			(121	)
Share-based compensation		—		—		93			—			—			—			—			93
Tax shortfall in exercise of stock options		—		—		(12	)		—			—			—			—			(12	)
Comprehensive income:
Net income		—		—		—			3,447			—			—			—			3,447
Other comprehensive income:
Foreign currency translation adjustments		—		—		—			—			—			—			151			151
Total comprehensive income		—		—		—			—			—			—			—			3,598

Balance, July 1, 2011		9,585	$	95	$	28,806		$	2,768			(245	)	$	(1,142	)	$	(301	)	$	30,226

Issuance of restricted stock units		60		1		38			—			—			—			—			39
Treasury stock		—		—		—			—			(9	)		(24	)		—			(24	)
Share-based compensation		—		—		203			—			—			—			—			203
Comprehensive income:
Net income		—		—		—			4,195			—			—			—			4,195
Other comprehensive income:
Foreign currency translation adjustments		—		—		—			—			—			—			(256	)		(256	)
Total comprehensive income		—		—		—			—			—			—			—			3,939

Balance, June 29, 2012		9,645	$	96	$	29,047		$	6,963			(254	)	$	(1,166	)	$	(557	)	$	34,383

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

VERSAR, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

	Fiscal Years Ended
	June 29, 2012			July 1, 2011			June 25, 2010
Cash Flows From Operating Activities
Net income (loss)	$	4,195		$	3,447		$	(2,294	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,674			1,553			1,303
Loss on sale of property and equipment		47			79			—
Provision for doubtful accounts receivable		1,019			595			107
Write-off of financing receivable		694			—			—
Loss (gain) on life insurance policy cash surrender value		33			(76	)		34
Deferred tax (benefit) expense		(944	)		274			(220	)
Share-based compensation		261			187			318
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		3,621			(4,160	)		1,382
Decrease (increase) in income tax receivables		1,101			1,915			(2,339	)
(Increase) decrease in prepaid expenses and other assets		(427	)		1,264			(3,767	)
Increase in inventory		(42	)		(12	)		(1,160	)
(Decrease) increase in accounts payable		(4,625	)		(1,703	)		4,357
(Decrease) increase in accrued salaries and vacation		(196	)		947			132
Increase in other liabilities		304			2,442			3,762
Net cash provided by operating activities		6,715			6,752			1,615

Cash Flows From Investing Activities
Purchase of property and equipment		(897	)		(1,213	)		(2,356	)
Payment for Charron, net of cash acquired		(1,610	)		—			—
Payment for ADVENT, net of cash acquired		—			—			(498	)
Payment for PPS, net of cash acquired		—			—			(4,330	)
Premiums paid on life insurance policies		(25	)		(35	)		(36	)
Proceeds from (investment in) notes receivable		346			293			(1,070	)
Net cash used in investing activities		(2,186	)		(955	)		(8,290	)

Cash Flows From Financing Activities
Earn-out obligation payments for PPS and ADVENT		(1,261	)		—			—
Borrowings on line of credit		13,586			27,189			10,755
Repayments on line of credit		(13,586	)		(27,189	)		(10,755	)
Repayment of notes payable		(1,417	)		(1,458	)		—
Purchase of treasury stock		(24	)		(20	)		(77	)
Proceeds from exercise of stock options		—			56			—
Net cash used in financing activities		(2,702	)		(1,422	)		(77	)
Effect of exchange rate changes		168			49			(55	)
Net increase (decrease) in cash and cash equivalents		1,995			4,424			(6,807	)
Cash and cash equivalents at the beginning of the year		6,017			1,593			8,400
Cash and cash equivalents at the end of the year	$	8,012		$	6,017		$	1,593
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest	$	53		$	175		$	58
Income taxes	$	2,576		$	2,495		$	1,392
Supplemental disclosures of non-cash financing activities:
Exercise of stock options/vesting of restricted stock units	$	131		$	101		$	238
Acquisition of treasury stock for restricted stock units	$	(131	)	$	(101	)	$	(238	)
Supplemental disclosures of non-cash investing activities:
Issuance of notes payable for acquisitions	$	1,000		$	—		$	2,690
Issuance of stock for PPS acquisition	$	—		$	—		$	240

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

VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

Significant Accounting Policies

Principles of consolidation and business operations: Versar, Inc., a Delaware corporation organized in 1969 (the “Company” or “Versar”), is a global project management firm that provides sustainable value oriented solutions to government and commercial clients. We also provide tailored and secure solutions in extreme environments and offer specialized abilities in staff augmentation, performance based remediation, and hazardous material management. 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 Company operates within three business segments as follows: (1) Engineering and Construction Management, (2) Environmental Services, and (3) Professional Services. Refer to Note B – Business Segments for additional information. Our financial year end is based upon 52 or 53 weeks per year ending on the last Friday of the fiscal period and therefore does not close on a calendar month end. The Company’s fiscal year 2012 included 52 weeks, its fiscal year 2011 included 53 weeks, and its fiscal year 2010 included 52 weeks.

Accounting estimates: The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), 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.

Contract accounting and revenue recognition: 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.

Direct costs of services and overhead: These expenses represent the cost to Versar of direct and overhead staff, including recoverable overhead costs and unallowable costs that are directly attributable to contracts performed by the Company.

Pre-contract costs: Costs incurred by the Company prior to the execution of a contract, including bid and proposal costs, are expensed when incurred regardless of whether the bid is successful.

Depreciation and amortization: Property and equipment are carried at cost net of accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets.

Allowance for doubtful accounts receivable: Disputes arise in the normal course of our business on projects where we are contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability and collectability. 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 collectability of such receivables. All receivables over 60 days old are reviewed as part of this process.

Allowance for doubtful financing receivables: The methodology for determining the allowance for doubtful financing receivables is based on the review of specific facts and circumstances of both the receivables and the respective borrowers, including the inherent risk of the borrowers being private closely-held companies. During its analysis of collectability, management assesses factors such as existing economic conditions of the borrowers and the borrowers’ industries, each borrower’s repayment history related to the notes, and other external factors that may impact the repayment of the notes receivable by the borrower. A reserve against the financing receivable will be recorded when there is a specific risk of collectability. A write-off of a financing receivable will occur when it has been deemed uncollectable, based on management’s judgment.

Share-based compensation : Share-based compensation expense is measured at the grant date, based on the fair value of the award. The majority of the Company's equity awards granted in fiscal years 2012 and 2011 have been restricted stock unit awards. Share-based compensation cost for restricted stock unit awards is based on the fair market value of the Company’s stock on the date of grant. Share-based compensation cost for stock options is calculated on the date of grant using the fair value of stock options. Compensation expense is recognized ratably over the requisite service period of the grants.

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 equivalent shares outstanding during the period, if dilutive. The Company’s common equivalent shares consist of shares to be issued under outstanding stock options and shares to be issued upon vesting of unvested restricted stock units.

The following is a reconciliation of weighted average outstanding shares for purposes of calculating basic net income (loss) per share compared to diluted net income (loss) per share, in thousands:

	Years Ended
	June 29, 2012		July 1, 2011		June 25, 2010
	(in thousands)
Weighted average number of shares outstanding – basic		9,366		9,261		9,141

Effect of assumed exercise of stock options and vesting of restricted stock units		15		22		—

Weighted average number of shares outstanding – diluted		9,381		9,283		9,141

For fiscal years 2012, 2011, and 2010, options to purchase approximately 27,000, 22,000, and 222,000 shares of common stock, respectively, were not included in the computation of diluted net income (loss) per share because the effect would be anti-dilutive.

Cash and cash equivalents: All investments with an original maturity of three months or less when purchased are considered to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. All of the Company’s non-interest bearing cash balances were fully insured at June 29, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning in 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and therefore the Company’s non-interest bearing cash balances may again exceed federally insured limits.

Inventory : The Company’s inventory is valued at the lower of cost or market and is accounted for on a first-in first-out basis.

Notes receivable: Includes short-term loans made to business partners in order to accelerate and advance the Company’s business related opportunities.

Long-lived assets: The Company is required to review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss is recognized if the carrying value exceeds the fair value. Any write-downs are treated as permanent reductions. The Company believes its long-lived assets as of June 29, 2012 are fully recoverable.

Income taxes: The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of certain assets and liabilities. A valuation allowance is established, as necessary, to reduce deferred income tax assets to the amount expected to be realized in future periods.

Goodwill: The carrying value of goodwill at June 29, 2012 and July 1, 2011 was $7.4 million and $5.8 million, respectively. The goodwill balances were generated principally from the Company’s fiscal year 2012 acquisition of Charron Construction Consulting, Inc. (“Charron”) and the 2010 acquisitions of Professional Protection Systems Limited (“PPS”) and ADVENT Environmental, Inc. (“ADVENT”). In performing its goodwill impairment analysis, management utilized a market-based valuation approach to determine the estimated fair value of the Company’s reporting units, which carry goodwill and therefore are subject to the analysis. The Company has elected to perform the annual goodwill impairment assessment on the last day of each fiscal year. Management engaged external valuation experts to assist in performing this analysis, and will test more often if events or circumstances warrant it. As part of the assessment an analysis was performed on public companies and company transactions to prepare a market-based valuation. Based upon the fiscal year 2012 analysis, the estimated fair value of the Company’s reporting units exceeded the carrying value of their net assets and therefore, management concluded that the goodwill was not impaired.

Other intangible assets : The net carrying value of intangible assets at June 29, 2012 and July 1, 2011 was $2.3 and $1.5 million, respectively. The intangible assets include customer related assets, marketing related assets, and technology-based assets. These intangible assets are amortized over a 5 - 8 year useful life. The Company is required to review its amortized intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset might not be recoverable. An impairment loss is recognized if the carrying value exceeds the fair value. Any impairment of the assets would be treated as permanent reductions. We concluded that our intangible assets were not impaired during fiscal years 2012 and 2011.

Asset retirement obligation: The Company has recorded an asset retirement obligation associated with the estimated clean-up costs for its chemical laboratory that resides in its Engineering and Construction Management business segment. This obligation represents the estimated costs to clean-up the laboratory and return it to its original state. If the Company determines that the estimated clean-up cost is larger than expected any adjustments that are required will be recorded when they become known. At June 29, 2012 and July 1, 2011, the Company has an asset retirement obligation balance of approximately $0.7 million associated with the estimated clean-up costs for its chemical laboratory. The asset retirement obligation is included in the Other Current Liabilities line item in the Company’s Consolidated Balance Sheets.

Treasury stock: The Company records treasury stock using the cost basis method. There were approximately 253,600 and 245,200 shares of treasury stock valued at approximately $1.2 million and $1.1 million at June 29, 2012 and July 1, 2011, respectively.

Foreign Currency Translation: The financial position and results of operations of the Company’s foreign affiliates are translated using the local currency as the functional currency. Assets and liabilities of the affiliates are translated at the exchange rate in effect at year-end. Statement of Operations accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in Accumulated Other Comprehensive Income (Loss) within the Company’s Consolidated Statements of Changes in Stockholders’ Equity. Gains and losses resulting from foreign currency transactions are included in operations and are not material for the fiscal years presented. At June 29, 2012 and July 1, 2011, the Company had cash held in foreign banks of approximately $1.4 million and $0.7 million, respectively.

Fair value Measurements: The fair values of our cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their carrying values because of the short-term nature of those instruments. Certain non-financial assets and liabilities are measured at fair value on a recurring and a non-recurring basis. These non-financial assets and liabilities are written down to their fair value when they are determined to be impaired.

Commitments and Contingencies: Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.

Prior Year Rec lassification: Certain prior year business segment amounts have been reclassified in order to conform to the current year realigned segment presentation. See Note B - Business Segments for additional information.

New Accounting Pronouncements

Accounting Guidance Adopted during Fiscal Year 2012

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update with new guidance on annual goodwill impairment testing. The standards update allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If based on its qualitative assessment an entity concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. The standards update was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted this guidance effective with the goodwill impairment test for its fiscal year ended June 29, 2012. The adoption of this guidance did not impact the Company’s consolidated financial position, results of operations or cash flows. Additionally, the adoption of this guidance did not result in changes to the Company’s processes regarding its goodwill impairment testing.

NOTE B - BUSINESS SEGMENTS

In previous years, the Company operated in four business segments: Program Management, Environmental Services, Professional Services, and National Security. During fiscal year 2012 the Company’s management undertook a strategic initiative to assess the Company’s internal processes and organizational structures with the intention of identifying opportunities to streamline and improve these areas. As a result of this strategic initiative the Company modified certain organizational structures in fiscal year 2012 which resulted in the realignment of the Company’s business segments. As part of this realignment, the operations of the National Security business segment were primarily allocated to the previous Program Management Segment, which was renamed Engineering and Construction Management, and the remaining National Security operations were allocated to the Environmental Services business segment. Certain management lines of authority were also revised consistent with these structure changes. These segments were aligned based on the nature of the work, business processes, customer base and the business environment in which each of the segments operates. The Company’s resulting three business segments are as follows:

Engineering and Construction Management

Environmental Services

Professional Services

The new alignment of the business segments is consistent with how the Company’s Chief Operating Decision Maker (“CODM”) assessed our operations after the 2012 initiative and will assess our operations going forward. The business segments have discrete financial information that is used by the Company’s Chief Executive Officer, its CODM, in allocating resources and making financial decisions. The CODM evaluates and measures the performance of its business segments based on gross revenue and gross profit. Accordingly, selling, general and administrative expenses, interest and income taxes have not been allocated to the Company’s business segments.

The Company’s Engineering and Construction Management business segment manages large complex construction projects. The Environmental Services business segment provides full service environmental consulting including regulatory, risk assessments, Unexploded Ordnance clean-up/Military Munitions Response Programs, natural and cultural resources, and remediation support to several federal government and municipal agencies. The Professional Services business segment provides outsourced personnel to various government agencies providing the Company’s clients with cost-effective onsite resources.

Summary financial information for the Company’s business segments is as follows. The presentation of this information for fiscal years 2011 and 2010 has been reclassified to conform to the realigned fiscal year 2012 presentation.

	Years Ended
	June 29, 2012		July 1, 2011		June 25, 2010
	(in thousands)
GROSS REVENUE
Engineering and Construction Management	$	73,224	$	81,633	$	66,540
Environmental Services		30,925		42,036		21,586
Professional Services		14,891		13,930		12,637
	$	119,040	$	137,599	$	100,763

GROSS PROFIT (LOSS) (a)
Engineering and Construction Management	$	10,417	$	3,317	$	4,273
Environmental Services		2,772		8,174		(280	)
Professional Services		2,810		2,842		2,018
	$	15,999	$	14,333	$	6,011

Selling, general and administrative Expenses		8,083		8,025		8,651
Other expenses		199		423		1,012

OPERATING INCOME (LOSS)	$	7,717	$	5,885	$	(3,652	)

(a) Gross Profit (Loss) is defined as gross revenue less purchased services and materials, at cost, less direct costs of services and overhead.

	As of
	June 29, 2012		July 1, 2011
ASSETS	(in thousands)

Engineering and Construction Management	$	36,800	$	34,876
Environmental Services		12,561		14,376
Professional Services		4,016		4,124
Total Assets	$	53,377	$	53,376

NOTE C - ACQUISITIONS

The following table presents select information regarding the Company’s business combinations for the three fiscal years ended June 29, 2012.

Acquired Company	Acquisition Date	Purchase Price

Charron	May 31, 2012	$3.4 million
PPS	January 5, 2010	$6.5 million
ADVENT	March 17, 2010	$3.4 million

These acquisitions were accounted for under the purchase method of accounting. The results of operations for Charron, PPS, and ADVENT since the acquisition dates are included in the Company’s accompanying Consolidated Statements of Operations. The Company primarily utilized its working capital in conjunction with notes to the sellers, earn out provisions, and company stock to fund the acquisitions. The Company recorded the excess of the respective purchase prices for the acquisitions over the estimated fair value of the net tangible and specifically identifiable intangible assets acquired as goodwill. Specifically identifiable intangible assets consist of technology-related, customer-related, and marketing-related intangible assets. Costs associated with each transaction are expensed when incurred.

PPS was purchased under the election provision of Internal Revenue Code 338(h) (10), and therefore, the amortization of goodwill and intangible assets are deductible for tax purposes over a fifteen-year period. Under the terms of the Charron acquisition this provision can be elected before February 15, 2013. The goodwill associated with the ADVENT acquisition will not be tax deductible.

The transaction costs to purchase Charron were approximately $63,000 and primarily related to legal and valuation support. These costs are included in the Other Expense line in the Company’s fiscal year 2012 Consolidated Statement of Operations. The transaction costs in connection with the PPS and ADVENT acquisitions were approximately $330,000 and primarily related to legal and valuation. These costs are included in the Other Expense line in the Company’s fiscal year 2010 Consolidated Statement of Operations.

Additional information about the Charron, PPS, and ADVENT acquisitions is as follows:

Charron Acquisition

On May 31, 2012, the Company acquired all of the outstanding equity of Charron, headquartered in Dulles, Virginia. Charron is a national construction project management firm that since 1992 has provided construction management services for a broad spectrum of projects including office, retail, industrial, civic, and various government facilities. The Company is integrating Charron into its Engineering and Construction Management business segment.

The Company’s purchase price for acquiring 100% of the equity interests in Charon was comprised of the following: (i) cash paid of approximately $2.0 million (including a holdback amount of $0.2 million), (ii) the issuance of seller notes to two selling shareholders with an aggregate principal amount of $1.0 million, payable in full on May 31, 2015 with an interest rate of 5% per annum, and (iii) contingent cash consideration payable to certain of the selling shareholders through an earn-out provision that is based upon Charron meeting certain funded backlog targets measured as of April 1, 2013. The fair value of the earn-out provision was calculated as of May 31, 2012 as approximately $0.4 million. The fair value was determined using the Company’s probability analysis of the outcome of the earn-out provision and a discount rate commensurate with the rate on the Company’s notes payable to sellers.

The preliminary purchase price allocation in the table below reflects the Company’s accounting of the fair value on Charron’s May 31, 2012 acquisition date.

Description	Amount
	(in thousands)

Cash	$	190
Accounts receivable		738
Fixed assets, net and other		11
Goodwill		1,660
Intangibles		1,081
Total assets acquired		3,680
Accounts payable		18
Payroll liabilities		280
Total liabilities assumed		298
Acquisition purchase price	$	3,382

PPS Acquisition

On January 5, 2010, the Company acquired all of the outstanding share capital of PPS, located in Milton Keynes, United Kingdom. PPS manufactures and sells proprietary personal protective equipment to the nuclear industry, including protective suits, decontamination showers and emergency shelters. As part of the acquisition of PPS, certain of the selling shareholders were entitled to contingent cash consideration through an earn-out provision calculated based on earnings before interest, taxes, depreciation and amortization of PPS for the 12-month period ending January 1, 2011. Based on PPS’s achievement of certain of these business goals, the Company’s remaining earn-out liability associated with this transaction was estimated at $161,000 as of July 1, 2011, and was settled for that amount during the 2012 fiscal year. During fiscal year 2011, the Company recorded $55,000 as an Other Expense in its Consolidated Statements of Operations related to this transaction. PPS was integrated into the Company’s Engineering and Construction Management business segment.

ADVENT Acquisition

On March 17, 2010, the Company acquired all of the outstanding equity of ADVENT, headquartered in Charleston, South Carolina. ADVENT is a U.S. Department of Defense (“DoD”), full service environmental contractor with significant capabilities in Military Munitions Response Plans and Unexploded Ordnance clean-up. As part of the acquisition of ADVENT, the selling shareholders were entitled to contingent consideration up to a maximum of $1.75 million through an earn-out provision calculated based on earnings before interest, taxes, depreciation or amortization of ADVENT for the 12-month period ending March 2011. The Company estimated the fair value of the contingent earn-out liability to be $475,000 based on the projections and probabilities of reaching ADVENT’s business goals through March 2011. Based on ADVENT’s achievement of certain of these business goals the Company’s earn-out liability associated with this transaction was estimated at $1.1 million as of July 1, 2011, and was settled for that amount during the 2012 fiscal year. During fiscal year 2011, the Company recorded $483,000 as an Other Expense in its Consolidated Statements of Operations related to this transaction. ADVENT was integrated into the Company’s Environmental Services business segment.

NOTE D - GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company’s goodwill balance was derived from the acquisition of Charron in fiscal year 2012, the acquisitions of PPS and ADVENT in fiscal year 2010, and the acquisition of VGI in fiscal year 1998. A rollforward of the carrying value of the Company’s goodwill balance, by business segment, for fiscal years 2012 and 2011 is as follows (in thousands):

	Goodwill Balances
	Engineering and Construction Management		Environmental Services		Total

Balance, June 25, 2010	$	3,790	$	1,968	$	5,758
Acquisition		-		-		-
Balance, July 1, 2011	$	3,790	$	1,968	$	5,758
Charron acquisition		1,660		-		1,660
Balance, June 29, 2012	$	5,450	$	1,968	$	7,418

The Company performs a goodwill impairment analysis each year on the last day of its fiscal year end or more frequently if an event occurs that may indicate possible impairment (a triggering event). In performing the goodwill impairment analysis management utilizes a market-based valuation approach in addition to a discounted cash flow analysis to determine the estimated fair value of its reporting units. The Company has identified two reporting units that carry goodwill. Management engaged outside professionals’ assistance consisting of valuation experts to assist in performing the annual goodwill impairment analysis.

In the event that goodwill is determined to be impaired it would result in a charge against earnings on the Company’s Consolidated Statements of Operations. However, an impairment charge would not impact the Company’s cash flow. The result of the Company’s fiscal year 2012, 2011, and 2010 goodwill impairment assessments concluded that goodwill was not impaired. Accordingly, the Company did not recognize a goodwill impairment charge in fiscal year 2012.

Intangible Assets

In connection with the acquisitions of Charron, PPS, and ADVENT the Company identified certain intangible assets. These intangible assets were customer-related, marketing-related and technology-related. A summary of the Company’s intangible asset balances as of June 29, 2012 and July 1, 2011, as well as their respective amortization periods, is as follows (in thousands):

	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Amortization Period
As of June 29, 2012

Customer-related	$	1,857	$	(359	)	$	1,498		5-8 Years
Marketing -related		372		(128	)		244		5-7 Years
Technology-related		841		(300	)		541		7 Years
Total	$	3,070	$	(787	)	$	2,283

As of July 1, 2011

Customer-related	$	840	$	(198	)	$	642		5-7 Years
Marketing-related		308		(72	)		236		5-7 Years
Technology-related		841		(180	)		661		7 Years
Total	$	1,989	$	(450	)	$	1,539

Amortization expense for intangible assets was $337,000, $346,000, and $104,000 for fiscal years 2012, 2011, and 2010, respectively. No intangible asset impairment charges were recorded during the 2012, 2011, or 2010 fiscal years.

Expected future amortization expense in the fiscal years subsequent to June 29, 2012 is as follows:

Year		Amounts
		(in thousands)

	2013	$	482
	2014		479
	2015		416
	2016		315
	2017		221
	Thereafter		370
	Total	$	2,283

NOTE E - FAIR VALUE MEASUREMENT

The Company analyzes its financial assets and liabilities that are 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 fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own valuation about the assumptions that market participants would use in pricing the assets or liabilities.

The fair values of the Company’s cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their carrying values because of the short-term nature of these instruments.

Certain non-financial assets and liabilities are measured at fair value on a recurring basis primarily using Level 3 inputs. These include reporting units measured at fair value using market and income approaches in the first step of an annual goodwill impairment test. These non-financial assets and liabilities are written down to their fair value when they are determined to be impaired.

Certain non-financial assets, including goodwill, intangible assets and other non-financial long-lived assets, are measured at fair value using market and income approaches on a non-recurring basis when there is an indication that there may be a triggering event which could result in impairment. These non-financial assets and liabilities are written down to their fair value when they are determined to be impaired.

The Company also used Level 3 inputs related to the valuation of intangible assets and contingent consideration arising from the acquisitions of Charron, PPS, and ADVENT. The valuation techniques used were based on inputs that were unobservable in the active market and are developed based upon the best information available under the circumstances, which might include the reporting entity’s data.

NOTE F - INVENTORY

The Company’s inventory balance includes the following:

	As of
	June 29, 2012		July 1, 2011
	(in thousands)

Raw materials	$	767	$	505
Finished goods		613		791
Work-in-process		48		90
Total	$	1,428	$	1,386

NOTE G - CUSTOMER INFORMATION

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

	Years Ended
	June 29, 2012		July 1, 2011		June 25, 2010
	(in thousands)

DoD	$	97,630	$	110,000	$	78,022
U.S. Environmental Protection Agency		2,391		3,662		1,725
Other U.S. Government Agencies		7,481		11,043		6,180
Total U.S. Government	$	107,502	$	124,705	$	85,927

A majority of the DoD work is to support the reconstruction of Iraq and Afghanistan with the U.S. Air Force and U.S. Army. Revenue was approximately $40 million, $42 million, and $39 million for the fiscal years 2012, 2011, and 2010, respectively, for the Company’s international work for the U.S. Government.

NOTE H - NOTES RECEIVABLE

GPC Note Receivable

In 2009 the Company provided interim debt financing to GPC Green Energy, LLC (“GPC”) to fund certain GPC project startup costs for a landfill gas energy project in southern Virginia. The intent of the project was to construct a 15 megawatt co-generation plant that would burn landfill gas, supplemented with natural gas, in turbine engines equipped with a steam generation unit, selling a portion of the energy to a major manufacturer and the remainder to the grid.

The GPC note and accrued interest owed to the Company were due in full on May 5, 2011, however they were not paid. During the 2012 fiscal year the Company continued to pursue any and all options that would have resulted in receiving payment in full for the $550,000 principal balance of the note and accrued interest of $144,000, for a total of $694,000 outstanding as of the end of the third quarter of the 2012 fiscal year. Based on its assessment of collectability, the Company stopped accruing interest on the note receivable at the beginning of the second quarter of the 2012 fiscal year. The note carried an annual interest rate of 12%

The Company’s efforts to collect the outstanding balance from GPC were unsuccessful and therefore, after consideration of all positive and negative factors regarding GPC’s ability and intent to repay the loan, management concluded during the third quarter of fiscal 2012 that the note receivable was not collectible. Other factors that the Company considered in making this decision included: (a) the length of time that GPC was in default; (b) the fact that no payment of principal or interest had been made by GPC; (c) the uncertain financial condition of GPC; and (d) uncertainty as to the Company’s or GPC’s ability to obtain viable third party financing (and the timing of potential financing) needed to build the project. Accordingly, during the third quarter of fiscal 2012 the Company wrote-off the receivable balance and all accrued interest with a charge against earnings in the amount of $694,000 in the Company’s Consolidated Statements of Operations.

Additionally, in connection with initially providing the note to GPC, the Company received a 20% ownership stake in GPC. No value was recorded associated with this interest as it was deemed to be immaterial. Subsequent to the write-off of the receivable and accrued interest, the Company sold this zero cost basis investment in GPC to an affiliate of GPC for approximately $38,000. The $38,000 was recorded as income in the Company’s Consolidated Statements of Operations.

Lemko Note Receivable

In July 2009, the Company provided a $750,000 loan to Lemko Corporation (“Lemko”) for the purchase of long lead telecommunication equipment for several upcoming projects. During the 2012 fiscal year the Company received payment from Lemko for a $10,500 loan extension fee related to an October 31, 2011 agreement to extend the maturity of the loan and a payment of approximately $187,500 from Lemko, which satisfied the outstanding loan and accrued interest balances in full. Accordingly, as of June 29, 2012, Lemko has no outstanding obligations to the Company.

Additionally, in connection with an extension of the maturity date of the loan agreement on May 28, 2010, the Company received warrants from Lemko to purchase 182,400 shares of Lemko common stock with an exercise price of $4.11 per share. The warrants expire on June 30, 2015. The Company determined the fair value of the warrants was immaterial and therefore did not assign a value to them.

NOTE I - PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets include the following:

	Years Ended
	June 29, 2012		July 1, 2011
	(in thousands)

Prepaid insurance	$	80	$	862
Prepaid rent		217		78
VAT input tax		—		12
Other prepaid expenses		662		441
Project bid bond		700		—
Miscellaneous receivables		279		118
Total	$	1,938	$	1,511

Other prepaid expenses include maintenance agreements, licensing, subscriptions, and miscellaneous receivables from employees and a service provider. The project bid bond was repaid in full subsequent to the June 29, 2012 fiscal year end.

NOTE J - OTHER CURRENT LIABILITIES

Other current liabilities include the following:

	Years Ended
	June 29, 2012		July 1, 2011
	(in thousands)

Earn-out liabilities	$	432	$	1,261
Payroll related		2,684		2,872
Deferred rent		539		393
Severance accrual		90		162
Asset retirement obligation		663		663
Project related reserves		2,116		1,139
Other current liabilities		885		873
Total	$	7,409	$	7,363

Other accrued and miscellaneous liabilities include accrued legal, audit, VAT tax liability, foreign entity obligations, and other miscellaneous items.

NOTE K - ACCOUNTS RECEIVABLE

	Years Ended
	June 29, 2012			July 1, 2011
	(in thousands)
Billed receivables
U.S. Government	$	13,596		$	12,058
Commercial		3,065			7,589
Unbilled receivables
U.S. Government		9,387			10,267
Commercial		1,018			426
Total receivables		27,066			30,340
Allowance for doubtful accounts		(1,468	)		(840	)
Accounts receivable, net	$	25,598		$	29,500

Unbilled receivables represent amounts earned which have not yet been billed and other amounts which can be invoiced upon completion of fixed-price contract milestones, attainment of certain contract objectives, or completion of federal and state governments’ incurred cost audits. Management anticipates that such unbilled receivables will be substantially billed and collected in fiscal year 2013; therefore, they have been presented as current assets in accordance with industry practice.

NOTE L - PROPERTY AND EQUIPMENT

		Years Ended
Description	Useful life	June 29, 2012			July 1, 2011
		(in thousands)

Furniture and fixtures	10	$	1,410		$	802
Equipment	3 to 10		11,163			10,086
Capital leases	Life of lease		233			234
Leasehold improvements	(a)		3,346			3,023
Property and equipment, gross			16,152			14,145
Accumulated depreciation			(12,811	)		(10,317	)
Property and equipment, net		$	3,341		$	3,828

(a)

The useful life is the shorter of lease term or the life of the asset.

Depreciation of property and equipment was approximately $1.3 million, $1.1 million, and $1.2 million for the fiscal years 2012, 2011, and 2010, respectively.

Maintenance and repair expense approximated $140,000, $199,000, and $245,000 for the fiscal years 2012, 2011, and 2010, respectively.

NOTE M - DEBT

Line of Credit

On October 25, 2011, the Company’s line of credit facility with United Bank (the “Bank”) was modified to extend its maturity date to September 25, 2012 and to increase its available borrowing capacity to $15 million and to modify certain covenants, interest rate and fee provisions. On September 14, 2012 the line of credit facility was modified to extend its maturity date to September 25, 2014 and to make certain other changes to the terms and conditions governing the line of credit. The line of credit as amended is subject to certain covenants related to the maintenance of financial ratios. These covenants require a minimum tangible net worth of $18.5 million; a maximum total liabilities to tangible net worth ratio not to exceed 2.0 to 1; and a minimum current ratio of at least 1.25 to 1. The Company was in compliance with all financial ratio covenants under the facility as of June 29, 2012 and July 1, 2011. As amended, borrowings under the line of credit bear interest at prime less 0.5% with a floor interest rate of 3.5% (4.5% prior to the October amendment). Failure to meet the financial ratio 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. The Company cumulatively borrowed and repaid $13.6 million and $27.2 million under the line of credit during fiscal year 2012 and 2011, respectively. Accordingly, the Company had no outstanding borrowings under the line of credit at June 29, 2012 and July 1, 2011.

On October 5, 2011, the Company terminated its letter of credit of approximately $0.5 million outstanding under the line of credit facility. This letter of credit served as collateral for surety bond coverage provided by the Company’s insurance carrier against project construction work, which had been completed. The letter of credit reduced the Company’s availability on the line of credit.

Notes Payable

As part of the acquisition of Charron in May 2012, the Company issued notes payable with principal amounts totaling $1.0 million, which are payable quarterly over a three-year period with interest accruing at a rate of 5% per annum. At June 29, 2012, the outstanding principal balance of the Charron notes payable was $1.0 million.

As part of the acquisition of PPS in January 2010, the Company issued notes payable with principal amounts totaling $0.9 million, which were payable quarterly over a two-year period with interest accruing at a rate of 5% per annum. As of June 29, 2012, the PPS notes payable had been paid in full. At July 1, 2011, the outstanding principal balance of the PPS notes payable was approximately $0.4 million.

As part of the acquisition of ADVENT in March 2010, the Company issued notes payable with principal amounts totaling $1.75 million, which were payable quarterly over a two-year period with interest accruing at a rate of 5% per annum. At June 29, 2012, the ADVENT notes payable had been paid in full. At July 1, 2011, the outstanding principal balance of the ADVENT notes payable was approximately $0.7 million.

The outstanding balances of the note payable obligations at June 29, 2012 and July 1, 2011, were included in the notes payable balance in the Company’s Condensed Consolidated Balance Sheets.

NOTE N – SHARE-BASED COMPENSATION

In November 2010, the Company’s stockholders approved the Versar, Inc. 2010 Stock Incentive Plan (the “2010 Plan”). The Company may grant incentive awards to directors, officers, and employees of the Company and its affiliates and to service providers to the Company and its affiliates under the 2010 Plan. One million shares of the Company’s common stock were reserved for issuance under the 2010 Plan. The 2010 Plan is administered by the Compensation Committee of the Board of Directors. From the approval date of the 2010 Plan through June 29, 2012, a total of 109,500 restricted stock units have been issued under the 2010 Plan, leaving 890,500 shares remaining available for the future issuance of awards under the 2012 Plan.

During the 2012 fiscal year, the Company awarded 89,500 shares of restricted stock units to executive officers, employees and Board members, which generally vest over a period of one to two years following the date of grant. Share-based compensation expense relating to the vesting of stock options and restricted stock unit awards totaled approximately $261,000, $187,000, and $318,000 for fiscal years 2012, 2011, and 2010. This expense was included in the direct costs of services and overhead lines of the Company’s Consolidated Statements of Operations.

Additionally, the Company has outstanding awards from prior plans that as of June 29, 2012 are outstanding and fully vested. Information about these outstanding awards is as follows:

Total incentive stock options granted under the Company’s 2010 Plan and prior stock incentive plans are as follows:

	Option Shares			Weighted- Average Option Price Per Share		Total
	(in thousands, except per share price)

Outstanding at June 26, 2009		421		$	3.05	$	1,283
Exercised		(100	)		2.38		(238	)
Cancelled		(5	)		2.48		(13	)

Outstanding at June 25, 2010		316		$	3.26	$	1,032
Exercised		(65	)		2.42		(157	)
Cancelled		(75	)		3.15		(236	)

Outstanding at July 1, 2011		176		$	3.63	$	639
Exercised		—			—		—
Cancelled		(55	)		3.92		(217	)

Outstanding at June 29, 2012		121		$	3.49	$	422

No stock options were exercised for fiscal year 2012. The intrinsic value for incentive stock options exercised for fiscal years 2011 and 2010 was approximately $57,000 and $132,000, respectively.

Details of total exercisable incentive stock options outstanding at June 29, 2012 are as follows:

Number of Shares Underlying Options		Range of Option Price		Weighted- Average Option Price		Weighted- Average Remaining Life		Number of Shares Underlying Exercisable Options
(in thousands, except as noted)

	37	$	1.81 - $ 2.80	$	2.55		0.9 years		37
	52	$	3.40 - $3.82	$	3.63		1.9 years		52
	32	$	4.00 - $4.45	$	4.35		2.2 years		32
	121			$	3.49		1.7 years		121

Total non-qualified stock options granted under the Company’s 2010 Plan and prior stock incentive plans are as follows:

	Optioned Shares			Weighted- Average Option Price Per Share		Total
	(in thousands, except per share price)

Outstanding at June 26, 2009		121		$	3.31	$	400
Cancelled		(18	)		3.40		(63	)

Outstanding at June 25, 2010		103		$	3.27	$	337
Cancelled		(30	)		5.13		(154	)

Outstanding at July 1, 2011		73		$	2.51	$	183
Cancelled		(8	)		3.65		(27	)

Outstanding at June 29, 2012		65		$	2.38	$	156

No non-qualified stock options were exercised in fiscal years 2012, 2011, and 2010.

Details of total exercisable non-qualified stock options outstanding at June 29, 2012 are as follows:

Number of Shares Underlying Options		Range of Option Price		Weighted- Average Option Price		Weighted- Average Remaining Life		Number of Shares Underlying Exercisable Options
(In thousands, except as noted)

	46	$	1.81 - $ 2.80	$	1.82		0.3 years		46
	12	$	3.10 - $3.65	$	3.10		1.5 years		12
	7	$	4.14 - $4.58	$	4.58		2.4 years		7
	65			$	2.38		0.8 years		65

NOTE O - INCOME TAXES

Pretax income (loss) is comprised of the following:

	Years Ended
	June 29, 2012			July 1, 2011			June 25, 2010
	(in thousands)

U.S. Entities	$	7,866		$	6,630		$	(3,253	)
Foreign Entities		(966	)		(738	)		(360	)
Total pretax income (loss)	$	6,900		$	5,892		$	(3,613	)

Pretax income from the U.S. and foreign entities is currently taxable in the U.S. accordingly; the Company has no unremitted foreign income.

Income tax expense (benefit) is as follows:

	Years Ended
	June 29, 2012			July1, 2011		June 25, 2010
	(in thousands)
Current:
Federal	$	1,516		$	1,437	$	(1,274	)
State		708			284		(102	)
Foreign		1,425			450		277

Deferred:
Federal		(764	)		252		(182	)
State		(180	)		22		(23	)
Foreign		—			—		(15	)
Total expense (benefit)	$	2,705		$	2,445	$	(1,319	)

Deferred tax assets are comprised of the following as of the dates indicated below:

	June 29, 2012			July 1, 2011

Deferred Tax Assets:
Employee benefits	$	499		$	374
Bad debt reserves		555			313
All other reserves		728			559
Net operating losses and tax credit		57			53
Capital loss carryforward		110			107
Accrued expenses		846			540
Other		72			34
Total Deferred Tax Assets		2,867			1,980

Valuation Allowance		(58	)		(55	)

Deferred Tax Liabilities:
Goodwill and intangibles		(549	)		(472	)
Depreciation and amortization		(29	)		(204	)
Other		(65	)		(27	)
Net Deferred Tax Assets	$	2,166		$	1,222

The Company regularly reviews the recoverability of its deferred tax assets and establishes a valuation allowance as deemed appropriate. As of the end of fiscal year 2012, the Company had $58,000 in valuation allowance. As of the end of fiscal year 2011 the Company had a valuation allowance of approximately $55,000 related to deferred tax assets in certain foreign jurisdictions as it is not more likely than not that the deferred tax assets will be realized. The Company has established a valuation allowance on its Philippine branch operations as it is not more likely than not that the deferred tax assets will be realized for these operations in future periods as current projections indicate periods of pre-tax loss. At June 29, 2012, the Company has net operating loss carryforwards in the Philippines branch of approximately $58,000.

In accordance with FASB’s guidance regarding uncertain tax positions, the Company recognizes income tax benefits in its financial statements only when it is more likely than not that the tax positions creating those benefits will be sustained by the taxing authorities based on the technical merits of those tax positions. At June 29, 2012 the Company did not have any uncertain tax positions. The Company’s 2010, 2009, 2008 and 2007 tax years remain open to audit in most jurisdictions.

The Company’s policy is to recognize interest expense and penalties as a component of general and administrative expense.

A reconciliation of the Company’s income tax expense (benefit) to the federal statutory rate is as follows:

	June 29, 2012			July 1, 2011			June 25, 2010

Expected provision at federal statutory rate:	$	2,347		$	2,016		$	(1,230	)
State income tax expense		287			196			(120	)
Permanent items		49			243			25
Change in tax rates		(29	)		(7	)		3
Other		51			(3	)		3
Income tax expense (benefit)	$	2,705		$	2,445		$	(1,319	)

NOTE P - RESTRUCTURING CHARGES

The Company recorded a charge to earnings of approximately $250,000 in the third quarter of fiscal year 2011 related to severance costs for the former Chief Financial Officer. This severance obligation was fully paid as of June 29, 2012. At July 1, 2011, approximately $154,000 in severance obligations remained.

In 2010 due to the poor performance in two of our regional offices and the need to re-align our cost structure with the lower business volume the Company took a charge to earnings of $939,000. This change consisted of severance costs of $789,000 (35 personnel) and office closure and project wind down costs of approximately $150,000. The restructuring plan was substantially completed in June 2010. Final restructuring costs amounted to $592,000 for severance and $90,000 for the closing of two offices and therefore the Company reduced the accrual by $267,000 during the fourth quarter of fiscal year 2010. All restructuring charges discussed above are included within Other Expenses in the Company’s Consolidated Statement of Operations.

NOTE Q - EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN

The Company continues to maintain the Versar, Inc. 401(k) Plan (“401(k) Plan”), which permits voluntary participation upon employment. The 401(k) Plan was adopted in accordance with Section 401(k) of the Internal Revenue Code.

Under the 401(k) Plan, participants may elect to defer up to 50% of their salary through contributions to the plan, which are invested in selected mutual funds or used to buy insurance. The Company matches 100% of the first 3% and 50% of the next 2% of the employee-qualified contributions for a total match of 4%. The employer contribution may be made in the Company’s stock or cash. In fiscal years 2012, 2011, and 2010, the Company made cash contributions of $986,000, $988,000, and $773,000, respectively. All contributions to the 401(k) Plan vest immediately.

In January 2005, the Company established an Employee Stock Purchase Plan (“ESPP”) under Section 423 of the United States Internal Revenue Code. The ESPP allows eligible employees of the Company and its designated affiliates to purchase, through payroll deductions, shares of common stock of the Company from the open market. The Company will not reserve shares of authorized but unissued common stock for issuance under the ESPP. Instead, a designated broker will purchase shares for participants on the open market. Eligible employees may purchase the shares at a discounted rate equal to 95% of the closing price of the Company’s shares on the NYSE MKT on the purchase date.

NOTE R – COMMITMENTS AND CONTINGENCIES

Lease Obligations

The Company leases approximately 152,000 square feet of office space, as well as data processing and other equipment under agreements expiring through 2021. Minimum future obligations under operating leases are as follows:

Fiscal Year Ended	Total Amount
	(in thousands)

2013	$	3,302
2014		2,086
2015		1,645
2016		1,300
2017		1,509
Thereafter		4,888
	$	14,730

Certain of the lease payments are subject to adjustment for increases in utility costs and real estate taxes. Total office rental expense approximated $3.0 million, $2.4 million, and $2.8 million, for fiscal years 2012, 2011, and 2010, respectively. Lease concessions and other tenant allowances are amortized over the life of the lease on a straight line basis. For leases with fixed rent escalations, the total lease costs including the fixed rent escalations are totaled and the total rent cost is recognized on a straight line basis over the life of the lease.

Acquisition Related Earn-Out Obligation

In connection with the acquisition of Charron the Company has contingent cash consideration payable to certain of the selling shareholders through an earn-out provision that is based upon Charron meeting certain funded backlog targets measured as of April 1, 2013. The fair value of the earn-out provision was calculated as of May 31, 2012 as approximately $0.4 million. The fair value was determined using the Company’s probability analysis of the outcome of the earn-out provision and a discount rate commensurate with the rate on the Company’s notes payable to sellers.

Disallowed Costs

Versar has a substantial number of U.S. Government contracts, and certain of these contracts are cost reimbursable. Costs incurred on these contracts are subject to audit by the Defense Contract Audit Agency (“DCAA”). All fiscal years through 2006 have been audited and closed. Management believes that the effect of disallowed costs, if any, for the periods not yet audited and settled with DCAA will not have a material adverse effect on the Company’s Consolidated Balance Sheets or Consolidated Statements of Operations.

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 any currently ongoing legal actions will not have a material adverse effect on its consolidated financial condition and results of operations.

NOTE S - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Unaudited quarterly financial information for fiscal years 2012 and 2011 is as follows (in thousands, except share and per share amounts):

	Fiscal Year 2012 Quarters Ended								Fiscal Year 2011 Quarters Ended
	June 29		March 30		Dec. 30		Sept. 30		July 1		April 1		Dec. 31		Sept. 24

Gross Revenue	$	28,728	$	25,748	$	31,280	$	33,284	$	34,908	$	31,487	$	41,908	$	29,296

Gross Profit		4,528		4,291		3,447		3,733		3,750		4,212		3,486		2,885

Operating Income		2,700		2,169		1,531		1,317		2,150		1,368		1,491		876

Net Income		1,591		963		817		824		1,355		629		924		539
Net income per share – diluted	$	0.17	$	0.10	$	0.09	$	0.09	$	0.14	$	0 .07	$	0.10	$	0.06
Weighted average number of shares outstanding – diluted		9,400		9,406		9,391		9,356		9,343		9,302		9,317		9,276

Note: The sum of the four quarterly earnings per share amounts may not equal the annual total due to fluctuations in common shares outstanding.

NOTE T - SUBSEQUENT EVENTS

As discussed in Note M – Debt on September 14, 2012 the Company’s line of credit facility was modified to extend its maturity date to September 25, 2014 and to make certain other changes to the terms and conditions governing the line of credit.

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

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was carried out as of June 29, 2012, the last day of the fiscal period covered by this report. This evaluation was made by the Company’s Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal controls over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, 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 and includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failure. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of June 29, 2012. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control-Integrated Framework.

Based on our assessment, management has concluded that, as of June 29, 2012, the Company’s internal control over financial reporting was effective based on those criteria.

Attestation Report of the Independent Registered Public Accounting Firm

This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Internal control over financial reporting was not subject to attestation by the Company’s independent registered public accounting firm pursuant to a permanent exemption granted under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act for smaller reporting companies that permits the Company to provide only management’s report in this Annual Report.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the Company’s fourth quarter of fiscal year 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information required by this item with respect to executive officers of the Company is included in Part I of this report and is incorporated herein by reference. Other information required by this item will be contained in the Company’s Proxy Statement for its 2012 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission not later than 120 days after the Company’s 2012 fiscal year end and is incorporated herein by reference.

For the purpose of calculating the aggregate market value of the voting stock of Versar held by non-affiliates as shown on the cover page of this report, it has been assumed that the directors and executive officers of the Company and the Company’s 401(k) Plan are the only affiliates of the Company. However, this is not an admission that all such persons are, in fact, affiliates of the Company.

Item 11. Executive Compensation

Information required by this item is incorporated herein by reference to the Company’s Proxy Statement for its 2012 Annual Meeting of Stockholders, which is expected to be filed with the Commission not later than 120 days after the end of the Company’s 2012 fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

(1) Financial Statements:

The following consolidated financial statements of Versar, Inc. and Subsidiaries are included as part of this report on Form 10-K in Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of June 29, 2012 and July 1, 2011

Consolidated Statements of Operations for the Years Ended June 29, 2012, July 1, 2011, and June 25, 2010

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended June 29, 2012, July 1, 2011, and June 25, 2010

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended June 29, 2012, July 1, 2011, and June 25, 2010

Consolidated Statements of Cash Flows for the Years Ended June 29, 2012, July 1, 2011, and June 25, 2010

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules:

Schedule II - Valuation and Qualifying Accounts for the Years Ended June 29, 2012, July 1, 2011, and June 25, 2010

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

(3) Exhibits:

The exhibits to this Form 10-K are set forth in a separate Exhibit Index which is included on pages 55 through 58 of this report.

Exhibit Index

Item No.	Description	Reference

3.1	Restated Certificate of Incorporation of Versar, Inc. filed on September 25, 1999	(A)

3.2	Certificate of Amendment of Restated Certificate of Incorporation of Versar, Inc. filed on December 24, 1996	(B)

3.3	Certificate of Amendment of Restated Certificate of Incorporation of Versar, Inc. filed on January 26, 1999	(C)

3.4	Second Amended and Restated By-laws of Versar, Inc.	(D)

4	Specimen of Certificate of Common Stock of Versar, Inc.	(A)

10.1	Executive Tax and Investment Counseling Program	(A)

10.2	Line of Credit Commitment Letter, dated September 16, 2003 between the Registrant and United Bank	(E)

10.3	Loan and Security Agreement, dated September 26, 2003 between the Registrant and United Bank	(1)

10.4	Revolving Commercial Note, dated September 26, 2003	(1)

10.5	First Modification Agreement of the Loan and Security Agreement, dated as of May 12, 2004	(F)

10.6	Third Modification Agreement of the Loan and Security Agreement, dated as of November 30, 2005	(G)

10.7	Fourth Modification Agreement of the Loan and Security Agreement, dated as of September 28, 2006	(1)

10.8	Fifth Modification Agreement of the Loan and Security Agreement, dated as of September 24, 2007	(H)

10.9	Sixth Modification Agreement of the Loan and Security Agreement, dated September 30, 2009	(1)

10.10	Seventh Modification Agreement of the Loan and Security Agreement, dated March 17, 2010	(1)

10.11	Eighth Modification Agreement of the Loan and Security Agreement effective as of the 17 ^th day of March 2010	(I)

10.12	Ninth Modification Agreement of the Loan and Security Agreement, dated September 30, 2010	(J)

10.13	Tenth Modification Agreement of the Loan and Security Agreement, dated as of September 25, 2011	(1)

10.14	Eleventh Modification Agreement of the Loan and Security Agreement, dated October 25, 2011	(K)

10.15	2002 Stock Incentive Plan*	(L)

10.16	Form of Stock Option Agreement*	(M)

10.17	2005 Stock Incentive Plan*	(G)

10.18	Amendment to Change in Control Severance Agreement dated March 17, 2008 between Versar, Inc. and each of Michael Abram and Jeffrey A. Wagonhurst, Sr. (In reliance on instruction 2 to Item 601 of Regulation S-K, the Registrant has filed the form of Amendment to Change in Control Severance Agreement entered into with each of the individuals listed above)*	(N)

10.19	Form of Indemnification Agreement*	(O)

10.20	Share Purchase Agreement dated as of January 5, 2010 by and among Versar, Inc., GEOI 1 Ltd., Professional Protection Systems, Ltd., Stephen Nobbs, Mark Whitcher, Stephen Kimbell, Peter Holden, Timothy Clark, Jonathan Hambleton, Richard Brown, Simon Cuthbertson, Oliver Wright, Ingrid Sladden and the executors of the estate of Neil Bruce Cobb	(P)

10.21	Stock Purchase Agreement dated as of March 17, 2010 by and among Versar, Inc., ADVENT Environmental, Inc., Jeffrey C. Smoak, Kenna E. Sellers, the Mark A. Sellers Revocable Life Insurance Trust, through Margaret Mitchum Spicher, Trustee and the Mark A. Sellers Revocable Life Insurance Trust, through Kenna A. Sellers, Trustee	(I)

10.22	Separation and General Release Agreement between Theodore M. Prociv, PhD and Versar, Inc. effective March 29, 2010	(Q)

10.23	Change in Control Severance Agreement between Anthony L. Otten and Versar, Inc. effective as of May 24, 2010*	(J)

10.24	2010 Stock Incentive Plan*	(R)

10.24.1	Form of Restricted Stock Unit Award Agreement*	(R)

10.24.2	Form of Performance Stock Award Agreement*	(R)

10.24.3	Form of Deferral Election Agreement for Deferred Share Units*	(R)

10.24.4	Form of Stock Option Award Agreement*	(R)

10.24.5	Form of Stock Appreciation Right Award Agreement*	(R)

10.24.6	Form of Restricted Stock Unit Award Agreement*	(R)

10.25	Change in Control Severance Agreement between J. Joseph Tyler and Versar, Inc. effective as of September 16, 2010*	(1)

10.26	Separation and General Release Agreement between Lawrence W. Sinnott and Versar, Inc. effective February 24, 2011*	(S)

10.27	Consulting Agreement between Lawrence W. Sinnott and Versar, Inc. effective February 25, 2011	(S)

10.28	Change in Control Severance Agreement between Cynthia A. Downes and Versar, Inc. effective as of September 8, 2011*	(T)

10.29	Amendment to Change in Control Severance Agreement dated February 10, 2012 between Versar, Inc. and each of Michael Abram, Cynthia Downes, J. Joseph Tyler and Jeffrey A. Wagonhurst, Sr. (In reliance on instruction 2 to Item 601 of Regulation S-K, the Registrant has filed the form of Amendment to Change in Control Severance Agreement entered into with each of the individuals listed above)*	(1)

10.30	Amendment to Change in Control Severance Agreement dated March 9, 2012 between Versar, Inc. and Anthony L. Otten*	(1)

10.31	Versar, Inc. 2012 Long-Term Incentive Compensation Program*	(U)

10.32	Change in Control Severance Agreement between Joshua J. Izenberg and Versar, Inc. effective September 7, 2012*	(V)

10.33	Amended and Restated Loan and Security Agreement dated September 14, 2012 between the Registrant, certain of the Registrant’s Subsidiaries and United Bank	(V)

10.34	Amended and Restated Revolving Commercial Note dated September 14, 2012	(V)

21		Subsidiaries of the Registrant

23		Consent of Independent Registered Public Accounting Firm, Grant Thornton LLP

31.1		Certifications by Anthony L. Otten, Chief Executive Officer Pursuant to Securities Exchange Rule 13a-14

31.2		Certifications by Cynthia A. Downes, Exec. Vice President, Chief Financial Officer and Treasurer pursuant to Securities Exchange Rule 13a-14

32.1		Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002, for the period ending June 29, 2012 by Anthony L. Otten, Chief Executive Officer

32.2		Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002, for the period ending June 29, 2012 by Cynthia A. Downes, Exec. Vice President, Chief Financial Officer and Treasurer

101+		The following materials from Versar Inc.’s Annual Report on Form 10-K for the fiscal year ended June 29, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 29, 2012 and July 1, 2011; (ii) Consolidated Statements of Operations for the years ended June 29, 2012, July 1, 2011 and June 25, 2010; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended June 29, 2012, July 1, 2011 and June 25, 2010; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 29, 2012, July 1, 2011 and June 25, 2010; (v) Consolidated Statements of Cash Flows for the years ended June 29, 2012, July 1, 2011 and June 25, 2010; (vi) Schedule II — Valuation and Qualifying Accounts; and (vi) Notes to Consolidated Financial Statements tagged as blocks of text

______________________________________________________

* Indicates management contract or compensatory plan or arrangement.

(1)

Filed with this Form 10-K Annual Report for Fiscal Year Ended June 29, 2012.

(A)

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

(B)

Incorporated by reference to the document included within the Registrant’s Proxy Statement filed with the Commission on October 24, 1996.

(C)

Incorporated by reference to the document included within the Registrant’s Proxy Statement filed with the Commission on October 19, 1998.

(D)

Incorporated by reference to the exhibit to the Registrant’s Form 8-K filed with the Commission on February 17, 2010.

(E)

Incorporated by reference to exhibit 10.107 to the Registrant’s Form 10-K Annual Report for Fiscal Year Ended June 30, 2003 filed with the Commission on September 26, 2003.

(F)

Incorporated by reference to exhibit 10.111 to the Registrant’s Form 10-K Annual Report for Fiscal Year Ended June 30, 2004 filed with the Commission on September 27, 2004.

(G)

Incorporated by reference to exhibits 10.117 and 10.118 to the Registrant’s Form 10-K Annual Report for Fiscal Year Ended June 30, 2006 filed with the Commission on September 19, 2006.

(H)

Incorporated by reference to exhibit 10.123 to the Registrant’s Form 10-K Annual Report for Fiscal Year Ended June 29, 2007 filed with the Commission on September 27, 2007.

(I)

Incorporated by reference to exhibits 10.1 and 10.2 to the Registrant’s Form 8-K filed with the Commission on March 22, 2010.

(J)

Incorporated by reference to exhibits 10.1 and 10.2 to the Registrant’s Form 10-Q filed with the Commission on November 8, 2010.

(K)

Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on October 31, 2011.

(L)

Incorporated by reference to exhibit 4.1 to the Registrant’s Form S-8 Registration Statement filed with the Commission on November 4, 2005 (File No. 333-129489).

(M)

Incorporated by reference to exhibit 10.115 to the Registrant’s Form 10-K Annual Report for Fiscal Year Ended July 1, 2005 filed with the Commission on October 4, 2005.

(N)

Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on April 7, 2008.

(O)

Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on May 11, 2009.

(P)

Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on January 8, 2010.

(Q)

Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on April 1, 2010.

(R)

Incorporated by reference to exhibits 4.1 through 4.7 to the Registrant’s Form S-8 filed with the Commission on February 15, 2011.

(S)

Incorporated by reference to exhibits 10.1 and 10.2 to the Registrant’s Form 8-K/A filed with the Commission on February 28, 2011.

(T)

Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on September 13, 2011.

(U)

Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on May 9, 2012.

(V)

Incorporated by reference to exhibits 10.31 to 10.33 to the Registrant’s Form 8-K filed with the Commission on September 17, 2012.

SIGNATURES

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

	VERSAR, INC.
	(Registrant)

Date: September 18, 2012	/S/ Paul J. Hoeper
	Paul J. Hoeper
	Chairman and Director

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

SIGNATURES	TITLE	DATE

/S/ Paul J. Hoeper
Paul J. Hoeper	Chairman and Director	September 18, 2012

/S/ Anthony L. Otten
Anthony L. Otten	Chief Executive Officer and Director	September 18, 2012

/S/ Cynthia A. Downes
Cynthia A. Downes	Executive Vice President,	September 18, 2012
	Chief Financial Officer, Treasurer, and Principal Accounting Officer

/S/ Ruth I. Dreessen
Ruth I. Dreessen	Director	September 18, 2012

/S/ Robert L. Durfee
Robert L. Durfee	Director	September 18, 2012

/S/ James L. Gallagher
James L. Gallagher	Director	September 18, 2012

/S/ Amoretta M. Hoeber
Amoretta M. Hoeber	Director	September 18, 2012

/S/ Amir A. Metry
Amir A. Metry	Director	September 18, 2012

/S/ Jeffrey A. Wagonhurst, Sr.
Jeffrey A. Wagonhurst, Sr.	Director	September 18, 2012

Schedule II

VERSAR, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts

	BALANCE AT BEGINNING OF YEAR		ADDITIONS CHARGED TO COSTS AND EXPENSES		CHARGE OFFS			BALANCE AT END OF YEAR

Allowance for Doubtful Accounts:

2012	$	840,000	$	1,019,000	$	(391,000	)	$	1,468,000

2011	$	525,000	$	595,000	$	(280,000	)	$	840,000

2010	$	469,000	$	107,000	$	(51,000	)	$	525,000

Deferred Tax Valuation Allowance:

2012	$	55,000	$	3,000	$	—		$	58,000

2011	$	51,000	$	4,000	$	—		$	55,000

2010	$	48,000	$	3,000	$	—		$	51,000

LOAN AND SECURITY AGREEMENT

September 26, 2003

This Loan and Security Agreement (as amended, supplemented or modified from time to time, this "Agreement"), is between VERSAR, INC., GEOMET TECHNOLOGIES, LLC, VERSAR GLOBAL SOLUTIONS, INC. and VERSAR ENVIRONMENTAL COMPANY; and UNITED BANK.

The parties hereto agree as follows:

I. DEFINITIONS .

(A) As used herein, terms defined in the Note shall have their defined meanings when used herein and the following terms shall have the following meanings:

"Account Debtor" means, with respect to any Receivable or Other Intangible, any Person obligated to make payment thereunder, including without limitation any account debtor thereon.

"Advances" has the meaning set forth in Section II(A).

"Affiliate" means (i) any person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any person (other than the Borrower) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

"Available Credit" means that amount (which must be a positive number) obtained by subtracting the outstanding principal balance of the Note from the Commitment.

"Bank" means United Bank, a Virginia banking corporation, its successors and assigns.

"Billed Accounts" means Receivables for which a bill has been rendered to the Account Debtor and which are unpaid for no more than ninety (90) days from the date of the original bill.

"Borrower" means, individually and collectively, Versar, GEOMET Technologies, LLC, a Maryland limited liability company, Versar Global Solutions, Inc., a Virginia corporation, Versar Environmental Company, a Pennsylvania corporation, and each Person which becomes a Borrower pursuant to Section VI(C)(16), and their respective successors.

"Borrowing Base" means, without duplication, the sum of (i) 90% of the Net Unpaid Balance of Eligible Assigned Government Accounts, and (ii) the lesser of (A) $2,000,000.00 and (B) the sum of (1) 75% of the Net Unpaid Balance of Eligible Non-Assigned Government Accounts and (2) 75% of the Net Unpaid Balance of Eligible Commercial Accounts. No item of Collateral will be included in the Borrowing Base unless the Bank has a valid and perfected first priority Lien on it.

"Borrowing Base Certificate" has the meaning set forth in Section II(D).

"Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in Virginia are authorized to close.

"Collateral" has the meaning set forth in Section III(A).

"Commitment" means the lesser of (i) the Principal Sum, or (ii) the Borrowing Base.

"Commitment Period" means the period from and including the Effective Date to but excluding the Date of Maturity.

"Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of Versar in its consolidated financial statements as of such date.

"Debt" of any person means at any date, without duplication, (i) all obligations of such person for borrowed money, (ii) all obligations of such person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such person to pay the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business), (iv) all obligations of such person as lessee under capital leases, (v) all non-contingent obligations of such person to reimburse any bank or other person in respect of amounts paid under a letter of credit or similar instrument, (vi) all obligations of others secured by a Lien on any asset of such person, whether or not such obligation is assumed by such person and (vii) all obligations of others Guaranteed by such person.

"Effective Date" means the date on which the Bank receives a fully completed and executed copy of this Agreement.

"Eligible Accounts" means such Billed Accounts for goods delivered or services rendered owing to the Borrower as the Bank, in its reasonable discretion, shall from time to time elect to consider Eligible Accounts for purposes of this Agreement. Without limiting the discretion of the Bank to consider any such accounts not to be Eligible Accounts, and by way of example only of the types of accounts that the Bank may consider not to be Eligible Accounts, the Bank may consider the following classes of accounts not to be Eligible Accounts:

(i) accounts arising out of sales that are not in the ordinary course of the business of the Borrower;

(ii) accounts on terms other than those normal or customary in the business of the Borrower;

(iii) accounts owing from any person that is an Affiliate of the Borrower unless arising in the ordinary course of business conducted on an arm's-length basis;

(iv) accounts, the liability for which has been disputed by the Account Debtor;

(v) accounts owing from any person that shall file or have filed against it a petition or other pleading under any bankruptcy, reorganization, arrangement, insolvency, liquidation or similar law for the relief of debtors;

(vi) accounts owing from any person that is also a supplier to or creditor of the Borrower;

(vii) accounts arising out of sales to an Account Debtor outside the United States, unless the account is (A) fully backed by an irrevocable letter of credit containing terms acceptable to the Bank issued by a financial institution satisfactory to the Bank or (B) on terms acceptable to the Bank;

(viii) accounts arising out of sales on a bill-and-hold guaranteed sale, sale-and-return, sale on approval or consignment basis or subject to any right of return, set-off or charge-back;

(ix) accounts, the full and timely collection of which the Bank, in its sole judgment, believes to be doubtful;

(x) accounts owing from an Account Debtor that is an agency, department or instrumentality of any state Government in the United States unless the Borrower shall have satisfied the requirements of any state legislation similar to the federal Assignment of Claims Act of 1940 in respect thereof and the Bank is satisfied as to the absence of set-offs, counterclaims and other defenses to payment on the part of such state Government; and

(xi) accounts in respect of which this Agreement does not or has ceased to create a valid and perfected first priority Lien in favor of the Bank.

"Eligible Commercial Accounts" means Eligible Accounts that are Billed Accounts, other than Eligible Government Accounts.

"Eligible Assigned Government Accounts" means Eligible Government Accounts as to which the Borrower shall have satisfied the requirements of the Assignment of Claims Act of 1940, as amended, in respect thereof and the Bank is satisfied as to the absence of set-offs, counterclaims and other defenses to payment on the part of the United States.

"Eligible Government Accounts" means Eligible Accounts that are Billed Accounts owing from the United States or, with respect to Eligible Non-Assigned Government Accounts, a prime contractor with the United States.

"Eligible Non-Assigned Government Accounts" means Eligible Government Accounts owing from the United States, or a prime contractor therewith, other than Eligible Assigned Government Accounts.

"Equipment" means all goods (other than inventory, consumer goods and farm products) now owned or hereafter acquired by the Borrower, including all items of machinery, equipment, furnishings and fixtures of every kind, whether affixed to real property or not, as well as all automobiles, trucks and vehicles of every description, trailers, handling and delivery equipment, all additions to, substitutions for, replacements of or accessions to any of the foregoing, all attachments, components, parts (including spare parts) and accessories whether installed thereon or affixed thereto and all fuel for any thereof.

"GAAP" means generally accepted accounting principles in the United States.

"Government" means any Federal, state or local government, authority, agency, court or other body, officer or entity, and any arbitrator with authority to bind a party at law.

"Guaranty" by any person means any obligation, contingent or otherwise, of such person directly or indirectly guarantying any Debt or other obligation of any other person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guaranty shall not include indorsements for collection or deposit in the ordinary course of business. The term "Guaranty" used as a verb has a corresponding meaning.

"Inventory" means all inventory now owned or hereafter acquired by the Borrower, including (i) all goods and other personal property which are held for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in the Borrower's business, (ii) all inventory, wherever located, evidenced by negotiable and non-negotiable documents of title, warehouse receipts and bills of lading, (iii) all of the Borrower's rights in, to and under all purchase orders now owned or hereafter received or acquired by it for goods or services and (iv) all rights of the Borrower as an unpaid seller, including rescission, replevin, reclamation and stopping in transit.

"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Borrower shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset.

"Net Unpaid Balance" means at any date the unpaid balance of an Eligible Account at such date not including any unearned finance charges, late payment charges or other similar charges, or any extension, service or collection fees in respect thereof.

"Note" means that certain Revolving Commercial Note dated September 26, 2003, from the Borrower to the Bank in the amount of $5,000,000.00, and all extensions and modifications thereto, renewals thereof and replacements therefor.

"Obligations" means (i) all amounts now or hereafter payable by the Borrower to the Bank on the Note, (ii) all other obligations or liabilities now or hereafter payable by the Borrower pursuant to this Agreement, (iii) all obligations and liabilities now or hereafter payable by the Borrower under, arising out of or in connection with any other Loan Documents and any other instrument or agreement executed in connection with the Note or this Agreement, and (iv) all other indebtedness, obligations and liabilities of the Borrower to the Bank, now existing or hereafter arising or incurred, whether or not evidenced by notes or other instruments, and whether such indebtedness, obligations and liabilities are direct or indirect, fixed or contingent, liquidated or unliquidated, due or to become due, secured or unsecured, joint, several or joint and several, related or unrelated to the loan evidenced by the Note, similar or dissimilar to the indebtedness arising out of or in connection with the Note or this Agreement or of the same or a different class of indebtedness as the indebtedness arising out of or in connection with the Note or this Agreement, including, without limitation, any overdrafts in any deposit accounts maintained by the Borrower with the Bank, all obligations of the Borrower with respect to letters of credit, if any, issued by the Bank, for the account of the Borrower, any indebtedness of the Borrower that is purchased by or assigned to the Bank, and any indebtedness of the Borrower to any assignee of all or a portion of the Note or any other obligation referred to in this definition.

"Other Intangibles" means all accounts, accounts receivable, contract rights, documents, instruments, chattel paper (whether tangible or electronic), investment property, money, deposit accounts, software, commercial tort claims, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), payment intangibles and general intangibles now owned or hereafter acquired by the Borrower including, without limitation, all customer lists, permits, federal and state tax refunds, reversionary interests in pension plan assets, trademarks, patents, licenses, copyrights and other rights in intellectual property, other than Receivables; together with all supporting obligations thereto.

"Permitted Liens" means the Liens referred to in subparagraphs (a)-(f), inclusive, of Section VI(C)(8).

"Proceeds" means all proceeds, including (i) whatever is received upon any collection, exchange, sale or other disposition of any of the Collateral and any property into which any of the Collateral is converted, whether cash or non-cash, (ii) any and all payments or other property (in any form whatsoever) made or due and payable on account of any insurance, indemnity, warranty or guaranty payable to the Borrower with respect to any of the Collateral, (iii) any and all payments (in any form whatsoever) made or due and payable in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency (or any person, corporation, agency, authority or other entity acting under color of any Government), (iv) any claim of the Borrower against third parties for past, present or future infringement of any patent or for past, present or future infringement or dilution of any trademark or for injury to the goodwill associated with any trademark or for the breach of any license, and (v) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral.

"Receivables" means all accounts now or hereafter owing to the Borrower, and all accounts receivable, contract rights, documents, instruments or chattel paper (whether tangible or electronic) representing amounts payable or monies due or to become due to the Borrower, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned or otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a policy or policies of insurance issued or to be issued (iv) for a secondary obligation incurred or to be incurred, (v) for energy provided or to be provided, (vi) for the use or hire of a vessel under a charter or other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card, and (viii) rights to health-care-insurance receivables; together with all Inventory returned by or reclaimed from customers wherever such Inventory is located, and all guaranties, securities and liens held for the payment of any such account, account receivable, contract right, document, instrument or chattel paper; together with all other supporting obligations thereto.

"Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower.

"Tax" means any fee (including license, filing and registration fee), tax (including any income, gross receipts, franchise, sales, use or real, personal, tangible or intangible property tax), interest equalization or stamp tax, assessment, levy, impost, duty, charge or withholding of any kind or nature whatsoever, imposed or assessed by any Government, together with any penalty, fine or interest thereon.

"UCC" means at any time the Uniform Commercial Code as the same may from time to time be in effect in the Commonwealth of Virginia, provided that, if, by reason of mandatory provisions of law, the validity or perfection of any security interest granted herein is governed by the Uniform Commercial Code as in effect in a jurisdiction other than Virginia then, as to the validity or perfection of such security interest, "UCC" shall mean the Uniform Commercial Code in effect in such other jurisdiction.

"Versar" means Versar, Inc., a Delaware corporation, and its successors.

(B) UCC Definitions . The uncapitalized terms "account", "account debtor", "chattel paper", "commercial tort claim", "contract right", "document", "warehouse receipt", "bill of lading", "document of title", electronic chattel paper", "equipment", "general intangible", "health-care-insurance receivables", "instrument", "inventory", "investment property", "letter-of-credit rights", "money", "payment intangible", "proceeds", "purchase money security interest", "software" and "supporting obligations", as used in Section I(A) or elsewhere in this Agreement, have the meanings of such terms as defined in the UCC.

(C) Accounting Terms and Determinations . Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with GAAP as in effect from time to time, applied on a basis consistent with the most recent audited financial statements of the Borrower delivered to the Bank.

(D) Other Terms . Terms specifically defined in other sections of this Agreement shall have the meanings given to such terms in such sections.

II. THE CREDIT.

(A) Advances . Notwithstanding anything contained in the Note to the contrary:

(1) The Bank agrees, on the terms and conditions set forth in this Agreement and the Note, to make advances under the Note ("Advances") to the Borrower from time to time during the Commitment Period in an aggregate principal amount not to exceed, at any one time outstanding, the Commitment. Subject to the foregoing, the Borrower may borrow under this paragraph (1), prepay and re-borrow during the Commitment Period.

(2) The aggregate amount of Advances made by the Bank during the period a Borrowing Base Certificate is effective (as provided in subsection (D)(2)) shall not exceed the Available Credit set forth in such Borrowing Base Certificate, notwithstanding the receipt by the Bank, during such period, of payments applied to the principal balance of the Note.

(B) The Advances shall be evidenced by, and repayable with interest in accordance with, the Note.

(C) Advances in Excess of Commitment . To the extent, at any time, the aggregate outstanding principal amount of Advances exceeds the Commitment, such excess amount shall be immediately due and payable by the Borrower without notice or demand.

(D) Borrowing Base Certificates.

(1) The Borrowing Base shall be established by a certificate ("Borrowing Base Certificate") prepared by the Borrower and in form satisfactory to the Bank. Presentation of a Borrowing Base Certificate shall constitute the Borrower's representation to the Bank that, as of the date thereof, the Eligible Accounts included in the Borrowing Base Certificate qualify as such in accordance with the terms of this Agreement, and that all other information contained therein is accurate and complete.

(2) A Borrowing Base Certificate dated as of the last Business Day of each month (the "Certificate Date") shall be presented by the Borrower to the Bank on or before the fifteenth (15th) day of the month next following the Certificate Date, or if such day is not a Business Day, the next following Business Day (the "Delivery Date"). A Borrowing Base Certificate shall be effective from and including the date the Bank receives it on or before the Delivery Date, until the Bank receives the next Borrowing Base Certificate on or before the next following Delivery Date.

(3) If the Borrower fails to present a Borrowing Base Certificate on or before the applicable Delivery Date, the Borrowing Base shall be deemed to be zero, and shall remain zero until the Bank accepts in writing a Borrowing Base Certificate.

(E) Fees . During the Commitment Period, the Borrower shall pay to the Bank an administration fee of $800.00 per month, commencing on the same day of the month following the Effective Date, and on the Date of Maturity.

III. THE SECURITY INTERESTS.

(A) Grant of Security Interests . To secure the due and punctual payment of all Obligations, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing or due or to become due, in accordance with the terms thereof and to secure the due and punctual performance of all of the obligations of the Borrower contained in the Note and this Agreement and in the other Loan Documents to which it is a party and in order to induce the Bank to enter into this Agreement and make the Advances provided for therein and herein in accordance with the terms hereof and thereof, the Borrower hereby grants to the Bank a security interest in all of the Borrower's right, title and interest in, to and under the following, whether now existing or hereafter acquired (all of which are herein collectively called the "Collateral"):

(1) all Receivables;

(2) all Other Intangibles;

(3) all Equipment;

(4) all Inventory;

(5) to the extent not included in the foregoing, all other personal property, whether tangible or intangible, and wherever located, including, but not limited to, the balance of every deposit account now or hereafter existing of the Borrower with any bank and all monies of the Borrower and all rights to payment of money of the Borrower;

(6) to the extent not included in the foregoing, all books, ledgers and records and all computer programs, tapes, discs, punch cards, data processing software, transaction files, master files and related property and rights (including computer and peripheral equipment) necessary or helpful in enforcing, identifying or establishing any item of Collateral; and

(7) to the extent not otherwise included, all Proceeds and products of any or all of the foregoing, whether existing on the date hereof or arising hereafter.

Notwithstanding any provision herein to the contrary, the Bank shall not have a security interest in any of the above property to the extent the granting of a security interest therein violates any provision of applicable law or any contract with an Account Debtor giving rise to a Receivable.

(B) Continuing Liability of the Borrower . Anything herein to the contrary notwithstanding, the Borrower shall remain liable to observe and perform all the terms and conditions to be observed and performed by it under any contract, agreement, warranty or other obligation with respect to the Collateral, and shall do nothing to impair the security interests herein granted. The Bank shall not have any obligation or liability under any such contract, agreement, warranty or obligation by reason of or arising out of this Agreement or the receipt by the Bank of any payment relating to any Collateral, nor shall the Bank be required to perform or fulfill any of the obligations of the Borrower with respect to the Collateral, to make any inquiry as to the nature or sufficiency of any payment received by it or the sufficiency of the performance of any party's obligations with respect to any Collateral. Furthermore, the Bank shall not be required to file any claim or demand to collect any amount due or to enforce the performance of any party's obligations with respect to, the Collateral.

(1) The Borrower is authorized (a) to sell in the ordinary course of its business for fair value and on an arm's-length basis any of its Inventory normally held by it for such purpose and (b) to use and consume, in the ordinary course of its business, any raw materials, supplies and materials normally held by it for such purpose. The Bank may upon the occurrence of any Default, without cause or notice, curtail or terminate such authority at any time.

(2) All Account Debtors shall be notified to make payments under Receivables directly to the Bank, in accordance with the Bank's standard lockbox agreement. The Borrower will use all reasonable efforts to cause each Account Debtor to comply with the foregoing instruction. In furtherance of the foregoing, the Borrower authorizes the Bank (a) to ask for, demand, collect, receive and give acquittances and receipts for any and all amounts due and to become due under any Collateral and, in the name of the Borrower or its own name or otherwise, (b) to take possession of, indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Collateral and (c) to file any claim or take any other action in any court of law or equity or otherwise which it may deem appropriate for the purpose of collecting any amounts due under any Collateral. The Bank shall have no obligation to obtain or record any information relating to the source of such funds or the obligations in respect of which payments have been made.

(D) Segregation of Proceeds.

(1) The Bank shall have the right at any time (regardless of whether or not a Default shall have occurred) to cause to be opened and maintained at the principal office of the Bank a non-interest bearing bank account (the "Cash Collateral Account") which will contain only Proceeds. Any cash proceeds (as such term is defined in Section 8.9A-102(a)(9) of the UCC) received by the Bank from the Borrower pursuant to paragraph (2) of this subsection (D), whether consisting of checks, notes, drafts, bills of exchange, money orders, commercial paper or other Proceeds received on account of any Collateral, shall be promptly deposited in the Cash Collateral Account, and until so deposited shall be held in trust for and as the Bank's property and shall not be commingled with any funds of the Borrower not constituting Proceeds of Collateral. The name in which the Cash Collateral Account is carried shall clearly indicate that the funds deposited therein are the property of the Borrower, subject to the security interest of the Bank hereunder. Such Proceeds, when deposited, shall continue to be security for the Obligations and shall not constitute payment thereof until applied as hereinafter provided. The Bank shall have sole dominion and control over the funds deposited in the Cash Collateral Account, and such funds may be withdrawn therefrom only by the Bank; provided, however , that until a Default shall occur, all collected funds on deposit in the Cash Collateral Account, or so much thereof as is not required to make payment of the Obligations which have become due and payable, shall be withdrawn by the Bank on the Business Day next following the day on which the Bank considers the funds deposited therein to be collected funds and disbursed to the Borrower or its order.

(2) Upon notice by the Bank to the Borrower that the Cash Collateral Account has been opened, the Borrower shall cause all cash Proceeds collected by it pursuant to paragraph (1), above, to be delivered to the Bank forthwith upon receipt, in the original form in which received (with such indorsements or assignments as may be necessary to permit collection thereof by the Bank), and for such purpose the Borrower hereby irrevocably authorizes and empowers the Bank, its officers, employees and authorized agents to indorse and sign the name of the Borrower on all checks, drafts, money orders or other media of payment so delivered, and such indorsements or assignments shall, for all purposes, be deemed to have been made by the Borrower prior to any indorsement or assignment thereof by the Bank. The Bank may use any convenient or customary means for the purpose of collecting such checks, drafts, money orders or other media of payment.

(E) Verification of Receivables . The Bank shall have the right to make test verifications of Receivables in any manner and through any medium that it considers advisable, and the Borrower agrees to furnish all such assistance and information as the Bank may require in connection therewith. The Borrower at its expense will cause either independent certified public accountants or, if agreeable to the Bank in its sole discretion, the Borrower's chief financial officer, to furnish to the Bank at any time and from time to time promptly upon the Bank's request, the following reports: (i) a reconciliation of all Receivables, (ii) an aging of all Receivables, (iii) trial balances and (iv) a test verification of such Receivables as the Bank may request.

(F) Release of Collateral.

(1) The Borrower may sell or realize upon or transfer or otherwise dispose of Collateral as permitted by Section VI(B)(13), and the security interests of the Bank in such Collateral so sold, realized upon or disposed of (but not in the Proceeds arising from such sale, realization or disposition) shall cease immediately upon such sale, realization or disposition, without any further action on the part of the Bank. The Bank, if requested in writing by the Borrower but at the expense of the Borrower, is hereby authorized and instructed to deliver to the Account Debtor or the purchaser or other transferee of any such Collateral a certificate stating that the Bank no longer has a security interest therein, and such Account Debtor or such purchaser or other transferee shall be entitled to rely conclusively on such certificate for any and all purposes.

(2) Upon the payment in full of all of the Obligations and if there is no commitment by the Bank to make further Advances, incur obligations or otherwise give value, the Bank will (as soon as reasonably practicable after receipt of notice from the Borrower requesting the same but at the expense of the Borrower) send the Borrower, for each jurisdiction in which a UCC financing statement is on file to perfect the security interests granted to the Bank hereunder, a termination statement to the effect that the Bank no longer claims a security interest under such financing statement.

IV. CONDITIONS PRECEDENT.

(A) Each Advance . The obligation of the Bank to make each Advance is subject to the satisfaction of the following conditions:

(1) no Default has occurred and is continuing or would result from such Advance;

(2) such Advance is subject to all of the Loan Documents;

(3) the representations and warranties contained in Section V are true on and as of the date of such Advance; and

(4) the presentation to the Bank of a Borrowing Base Certificate, and a current aging of the Borrower's Receivables in support of said Borrowing Base Certificate.

(B) The First Advance . The obligation of the Bank to make the first Advance is subject to the satisfaction of the following conditions:

(1) receipt by the Bank of a duly executed Note and any other Loan Document required by the Bank;

(2) receipt by the Bank of evidence satisfactory to the Bank that each document (including, without limitation, each UCC financing statement) requested by the Bank to be filed, registered or recorded has been so filed, registered or recorded and that all other requirements in order to create in favor of the Bank a perfected first priority security interest in the Collateral have been satisfied;

(3) receipt by the Bank of certified copies of Requests for Information or Copies (Form UCC-11), or equivalent reports from an independent search service satisfactory to the Bank, listing the documents referred to in paragraph (2) of this subsection (B), and all other effective financing statements that name the Borrower (under its present name and any and all previous names) as debtor or seller, together with copies of such other financing statements (none of which shall cover any of the Collateral);

(4) receipt by the Bank of any and all landlord's waivers, and any other consents required by the Bank;

(5) receipt by the Bank of evidence of the insurance required by this Agreement;

(6) receipt by the Bank of a Borrowing Base Certificate;

(7) receipt by the Bank of all documents and all opinions of counsel (all in form and substance satisfactory to the Bank) it may require relating to (a) the existence of the Borrower and its authority to execute, deliver and perform the Note, this Agreement and the other Loan Documents; (b) the validity of the Note, this Agreement and the other Loan Documents; and (c) any other matters relevant hereto.

V. REPRESENTATIONS AND WARRANTIES.

The Borrower represents and warrants that:

(A) Existence and Power.

(1) Each corporate Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and no other jurisdiction. The name of the Borrower, as set forth on the signature pages of this Agreement, is as said name appears in the public records of said jurisdiction. The Borrower has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The Borrower is duly qualified as a foreign entity, licensed and in good standing in each jurisdiction where qualification or licensing is required by the nature of its business or the character and location of its property, business or customers and in which the failure to so qualify or be licensed, as the case may be, in the aggregate, could have a material adverse effect on the business, financial position, results of operations, properties or prospects of the Borrower.

(2) Each limited liability company Borrower is a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and no other jurisdiction. The name of the Borrower, as set forth on the signature pages of this Agreement, is as said name appears in the public records of said jurisdiction. The Borrower has all organizational powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The Borrower is duly qualified as a foreign entity, licensed and in good standing in each jurisdiction where qualification or licensing is required by the nature of its business or the character and location of its property, business or customers and in which the failure to so qualify or be licensed, as the case may be, in the aggregate, could have a material adverse effect on the business, financial position, results of operations, properties or prospects of the Borrower.

(B) Organizational and Governmental Authorization; Contravention . The execution, delivery and performance by the Borrower of this Agreement, the Note and the other Loan Documents to which it is a party are within its organizational power, have been duly authorized by all necessary corporate action, or action of its members, as the case may be, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute (with or without the giving of notice or lapse of time or both) a default under, any provision of applicable law or of the organizational documents of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon or affecting the Borrower or result in the creation or imposition of any Lien (other than the Lien of this Agreement and the other Loan Documents) on any of its assets.

(C) Binding Effect . This Agreement constitutes a valid and binding agreement of the Borrower and the Note, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligation of the Borrower, in each case enforceable against the Borrower in accordance with its terms, except as (1) the enforceability hereof and thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (2) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability.

(D) Title to Collateral . Except for the security interests granted to the Bank pursuant to this Agreement, the Borrower is the sole owner of each item of the Collateral, having good and marketable title thereto, free and clear of any and all Liens, except Permitted Liens.

(E) Validity, Perfection and Priority of Security Interests .

(1) By complying with Section VI(B)(l), the Borrower will have created a valid security interest in favor of the Bank in all existing Collateral and in all identifiable Proceeds of such Collateral, which security interest (except in respect of motor vehicles for which the exclusive manner of perfecting a security interest therein is by noting such security interest on the certificate of title in ·accordance with local law) would be prior to the claims of a trustee in bankruptcy under Section 544(a) of the federal Bankruptcy Code. Continuing compliance by the Borrower with the provisions of Section VI(B)(2) will also (a) create valid security interests in all Collateral acquired after the date hereof and in all identifiable Proceeds of such Collateral and (b) cause such security interests in all Collateral and in all Proceeds which are (i) identifiable cash Proceeds of Collateral covered by financing statements required to be filed hereunder, (ii) identifiable Proceeds in which a security interest may be perfected by such filing under the UCC and (iii) any Proceeds in the Cash Collateral Account to be duly perfected under the UCC, in each case prior to the claims of a trustee in bankruptcy under the federal Bankruptcy Code.

(2) The security interests of the Bank in the Collateral rank first in priority. Other than financing statements or other similar documents perfecting the security interests of the Bank, no financing statements or similar documents covering all or any part of the Collateral are on file or of record in any government office in any jurisdiction in which such filing or recording would be effective to perfect a security interest in such Collateral, nor is any of the Collateral in the possession of any person (other than the Borrower) asserting any claim thereto or security interest therein.

(F) Enforceability of Receivables and Other Intangibles . To the best knowledge of the Borrower, each Receivable and Other Intangible is a valid and binding obligation of the related Account Debtor in respect thereof, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general provisions of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and complies with any applicable legal requirements.

(G) Places of Business; Location of Collateral . Appendix 1 hereto correctly sets forth each Borrower's current chief executive office, any and all chief executive offices of said Borrower within the previous four (4) months, all other places of business of said Borrower and the offices of said Borrower where records concerning Receivables and Other Intangibles are kept. Appendix 2 hereto correctly sets forth the location of all Equipment and Inventory, other than rolling stock, aircraft, goods in transit and Inventory sold in the ordinary course of business as permitted by Section VI(B)(13) of this Agreement. Except as otherwise specified in Appendix 2 hereto , all Inventory and Equipment has been located at the address specified on said Appendix 2 at all times during the four-month period prior to the date hereof while owned by said Borrower. All Inventory has been and will be produced in compliance with the Fair Labor Standards Act, 29 U.S.C. §§ 201-219. No Inventory is evidenced by a negotiable document of title, warehouse receipt or bill of lading. No non-negotiable document of title, warehouse receipt or bill of lading has been issued to any person other than said Borrower, and said Borrower has retained possession of all of such non-negotiable documents, warehouse receipts and bills of lading. No amount payable under or in connection with any of the Collateral is evidenced by promissory notes or other instruments.

(H) Trade Names . Any and all trade names, division names, assumed names or other names under which each Borrower transacts, or within the four-month period prior to the date hereof has transacted, business are specified on Appendix 3 hereto.

(I) Financial Information.

(1) The most recent fiscal year end consolidated balance sheet of Versar and the related consolidated financial statements, reported on by Versar's independent public accountants, copies of which have been delivered to the Bank, fairly present, in conformity with GAAP, the financial position of Versar and its Consolidated Subsidiaries as of the date thereof and its results of operations and cash flows for such fiscal year. As of the date of such financial statements, no Borrower has had any material contingent obligation, contingent liability or liability for Taxes, long-term lease or unusual forward or long-term commitment, which is not reflected in any of such financial statements or notes thereto.

(2) Since the date of the most recent balance sheet, there has been no material adverse change in the business, financial position, results of operations or prospects of the Borrower.

(J) Litigation . There is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower before any Government in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, financial position or results of operations of the Borrower or which in any manner draws into question the validity of this Agreement, the Note, or any other Loan Document and there is no basis known to the Borrower for any such action, suit or proceeding.

(K) Marketable Title . The Borrower has good and marketable title to all its properties and assets subject to no Lien, except Permitted Liens.

(L) Filings . All actions by or in respect of, and all filings with, any governmental body, agency or official required in connection with the execution, delivery and performance of this Agreement, the Note and the other Loan Documents, or necessary for the validity or enforceability thereof or for the protection or perfection of the rights and interests of the Bank thereunder, will, prior to the date of delivery thereof, have been duly taken or made, as the case may be, and will at all times thereafter remain in full force and effect.

(M) Regulation U. The proceeds of the Loans will be used by the Borrower only for the purposes set forth in Section VI(C)(14) hereof. None of the proceeds of any Advance will be used, directly or indirectly, for the purpose of purchasing or carrying any "margin stock" or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry margin stock or for any other purpose which might constitute the loan evidenced by the Note, or any Advance, a "purpose credit" within the meaning of Regulation U or Regulation X of the Board of Governors of the Federal Reserve System.

(N) Taxes . The Borrower has filed all United States Federal income Tax returns and all other material Tax returns which are required to be filed by it and has paid all Taxes due pursuant to such returns or pursuant to any assessment received by the Borrower. The charges, accruals and reserves on the books of the Borrower in respect of Taxes or other governmental charges are adequate.

(0) Subsidiaries . Versar has no Subsidiary which is not a Borrower.

(P) Disclosure . None of this Agreement, any other Loan Document, any schedule or exhibit thereto or document, certificate, report, statement or other information furnished to the Bank in connection herewith or therewith or in connection with the consummation of the transactions contemplated hereby or thereby contains any material misstatement of fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. There is no fact materially adversely affecting the assets, business, financial position, results of operations or prospects of the Borrower which has not been set forth in a footnote included in the financial statements referred to in subsection (1)(1), above, or any exhibit or schedule thereto.

VI. COVENANTS .

(A) Financial Covenants . The Borrower agrees that so long as the Bank is committed to make Advances or any amount payable under the Note or any other Loan Document remains unpaid:

(1) Certain Definitions . As used in this paragraph (1) and hereafter in this Agreement, the following terms have the following meanings:

"Intangible Assets" means at any date the amount of all capitalized organization and development costs, capitalized interest, Debt discount and expense, goodwill, patents, trademarks, copyrights, franchises, licenses, amounts due from partners and affiliates, inter-company accounts and investments, shareholder loans, employee advances and such other assets as are properly classified as "intangible assets" in accordance with GAAP.

"Net Worth" means the excess of Versar's and its Consolidated Subsidiaries' assets over their liabilities.

"Tangible Net Worth" means, as of any date, the excess of Versar's and its Consolidated Subsidiaries' Net Worth over their Intangible Assets, as of said date.

"Total Liabilities" means such Debt and other liabilities as are properly classified as "total liabilities" in accordance with GAAP.

(2) Current Ratio . The consolidated ratio of current assets to current liabilities of Versar and its Consolidated Subsidiaries will not, as of the end of each fiscal quarter, be less than 1.25 to 1.0.

(3) Liabilities to Tangible Net Worth . The ratio of Versar's and its Consolidated Subsidiaries' Total consolidated Liabilities to its Tangible Net Worth will not, as of the end of each fiscal quarter, exceed 2.5 to 1.0.

(4) Minimum Tangible Net Worth. Versar's and its Consolidated Subsidiaries' consolidated Tangible Net Worth will not, as of the end of each fiscal quarter, be less than

$6,500,000.00.

(B) Covenants Relating to the Collateral . The Borrower agrees that so long as the Bank is committed to make Advances or any amount payable under the Note or any other Loan documents remains unpaid:

(1) Perfection of Security Interests . The Borrower will, at its expense, cause all filings and recordings and other actions specified on Appendix 4 hereto to have been completed on or prior to the date of the first Advance.

(2) Further Actions.

(a) At all times after the date of the first Advance, the Borrower will, at its expense, comply with the following:

(i) as to all Receivables, Other Intangibles, Equipment and Inventory, it will cause UCC financing statements and continuation statements to be filed and to be on file in all applicable jurisdictions as required to perfect the security interests granted to the Bank hereunder, to the extent that applicable law permits perfection of a security interest by filing under the UCC;

(ii) it will ensure that the provisions of Section III(D) are complied with;

(iii) as to any amount payable under or in connection with any of the Collateral which shall be or shall become evidenced by any promissory note or other instrument, the Borrower will immediately pledge and deliver such note or other instrument to the Bank as part of the Collateral, duly indorsed in a manner satisfactory to the Bank.

(b) The Borrower will, from time to time and at its expense, execute, deliver, file or record such financing statements pursuant to the UCC, applications for certificates of title and such other statements, assignments, instruments, documents, agreements or other papers and take any other action that may be necessary or desirable, or that the Bank may reasonably request, in order to create, preserve, perfect, confirm or validate the security interests, to enable the Bank to obtain the full benefits of this Agreement or to enable it to exercise and enforce any of its rights, powers and remedies hereunder, including, without limitation, its right to take possession of the Collateral, and will use its best efforts to obtain such waivers from landlords and mortgagees as the Bank may request.

(c) To the fullest extent permitted by law, the Borrower authorizes the Bank to sign and file financing and continuation statements and amendments thereto with respect to the Collateral.

(3) Change of Name, Identity or Structure . The Borrower will not change its name, identity or organizational structure in any manner and, except as set forth on Appendix 3 hereto, will not conduct its business under any trade, assumed or fictitious name unless it shall have given the Bank at least thirty days' prior written notice thereof and shall have taken all action (or made arrangements to take such action substantially simultaneously with such change if it is impossible to take such action in advance) necessary or reasonably requested by the Bank to amend any financing statement or continuation statement relating to the security interests granted hereby in order to preserve such security interests and to effectuate or maintain the priority thereof against all persons.

(4) State of Organization, Place of Business and Collateral . The Borrower will not change the state of its organization, or become organized under the laws of any additional state. The Borrower will not change the location of (i) its places of business, (ii) its chief executive office or (iii) the office or other locations where it keeps or holds any Collateral or any records relating thereto from the applicable location listed on Appendices 1 or 2 hereto unless, prior to such change, it notifies the Bank of such change, makes all UCC filings required by paragraph (2) of this subsection (B) and takes all other action necessary or that the Bank may reasonably request to preserve, perfect, confirm and protect the security interests granted hereby. The Borrower will in no event change the location of any Collateral if such change would cause the security interest granted hereby in such Collateral to lapse or cease to be perfected. The Borrower will at all times maintain its chief executive office within the United States.

(5) Fixtures . The Borrower will not permit any Equipment to become a fixture unless it shall have given the Bank at least ten days' prior written notice thereof and shall have taken all such action and delivered or caused to be delivered to the Bank all instruments and documents, including, without limitation, waivers and subordination agreements by any landlords and mortgagees, and filed all financing statements necessary or reasonably requested by the Bank, to preserve and protect the security interest granted herein and to effectuate or maintain the priority thereof against all persons.

(6) Maintenance of Records . The Borrower will keep and maintain at its own cost and expense complete books and records relating to the Collateral which are satisfactory to the Bank including, without limitation, a record of all payments received and all credits granted with respect to the Collateral and all of its other dealings with the Collateral. The Borrower will mark its books and records pertaining to the Collateral to evidence this Agreement and the security interests granted hereby. For the Bank's further security, the Borrower agrees that, to the extent permitted by applicable law and any applicable contract between the Borrower and an Account Party giving rise to a Receivable, the Bank shall have a special property interest in all of the Borrower's books and records pertaining to the Collateral and the Borrower shall deliver and turn over any such books and records to the Bank or to its representatives at any time on demand of the Bank. The Borrower further agrees that the Bank may conduct an audit of the Collateral pursuant to subsection (B)(l6) within 30 days after the Effective Date.

(7) Compliance with Laws. etc. The Borrower will comply, in all material respects, with all acts, rules, regulations, orders, decrees and directions of any Government applicable to the Collateral or any part thereof or to the operation of the Borrower's business except to the extent that the failure to comply would not have a material adverse effect on the financial or other condition of the Borrower; provided , however, that the Borrower may contest any act, regulation, order, decree or direction in any reasonable manner which shall not in the sole opinion of the Bank adversely affect the Bank's rights or the first priority of its security interest in the Collateral.

(8) Payment of Taxes. etc . The Borrower will pay promptly when due, all Taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom, as well as all claims of any kind (including claims for labor, materials and supplies), except that no such charge need be paid if (a) the validity thereof is being contested in good faith by appropriate proceedings and (b) such charge is adequately reserved against in accordance with

GAAP.

(9) Compliance with Terms of Accounts, Contracts and Licenses . The Borrower will perform, and comply in all material respects with, all of its obligations under all agreements relating to the Collateral to which it is a party or by which it is bound.

(10) Limitation on Liens on Collateral . The Borrower will not create, permit or suffer to exist, and will defend the Collateral and the Borrower's rights with respect thereto against and take such other action as is necessary to remove, any Lien, security interest, encumbrance, or claim in or to the Collateral other than the security interests created hereunder .

(11) Limitations on Modifications of Receivables and Other Intangibles: No Waivers or Extensions. The Borrower will not (a) amend, modify, terminate or waive any provision of any material Receivable or Other Intangible in any manner which might have a materially adverse effect on the value of such Receivable or Other Intangible as Collateral, (b) fail to exercise promptly and diligently each and every material right which it may have under each Receivable and Other Intangible or (c) fail to deliver to the Bank a copy of each material demand, notice or document received by it relating in any way to any Receivable or Other Intangible. The Borrower will not, without the Bank's prior written consent, grant any extension of the time of payment of any Receivable or amounts due under any material Other Intangible, compromise, or settle the same for less than the full amount thereof, release, wholly or partly, any person liable for the payment thereof or allow any credit or discount whatsoever thereon other than trade discounts granted in the normal course of business, except such as in the reasonable judgment of the Borrower are advisable to enhance the collectability thereof.

(12) Maintenance of Insurance . The Borrower will maintain with financially sound insurance companies licensed to do business where the Borrower is located insurance policies (a) insuring the Inventory and Equipment against loss by fire, explosion, theft and such other casualties as are usually insured against by companies engaged in the same or similar business for an amount satisfactory to the Bank and (b) insuring the Borrower and the Bank against liability for personal injury arising from, and property damage relating to, such Inventory and Equipment, such policies to be in such form and to cover such amounts as may be satisfactory to the Bank, with losses payable to the Borrower and the Bank as their respective interests may appear. The Borrower shall, if so requested by the Bank, deliver to the Bank as often as the Bank may reasonably request a report of the Borrower or, if requested by the Bank, of an insurance broker satisfactory to the Bank of the insurance on the Inventory and Equipment. All insurance with respect to the Inventory and the Equipment shall (w) contain a standard mortgagee clause in favor of the Bank, (x) provide that any loss shall be payable in accordance with the terms thereof notwithstanding any act of the Borrower which might otherwise result in forfeiture of such insurance and that the insurer waives all rights of set-off, counterclaim, deduction or subrogation against the Borrower, (y) provide that no cancellation, reduction in amount or change in coverage therefor shall be effective until at least 30 days after receipt by the Bank of written notice thereof and (z) provide that the Bank may, but shall not be obligated to, pay premiums in respect thereof.

(13) Limitations on Dispositions of Collateral . The Borrower will not directly or indirectly (through the sale of stock, merger or otherwise) without the prior written consent of the Bank sell, transfer, lease or otherwise dispose of any of the Collateral, or attempt, offer or contract to do so except for (a) sales of Inventory in the ordinary course of its business for fair value in arm's-length transactions and (b) so long as no Default has occurred and is continuing, dispositions in a commercially reasonable manner of Equipment which has become redundant, worn out or obsolete or which should be replaced so as to improve productivity, so long as the proceeds of any such disposition are (i) used to acquire replacement equipment which has comparable or better utility and equivalent or better value and which is subject to a first priority security interest in favor of the Bank therein, except as permitted by paragraph (10) of this subsection (B), and except for Permitted Liens, or (ii) applied to repay the Obligations. The inclusion of Proceeds of the Collateral under the security interests granted hereby shall not be deemed a consent by the Bank to any sale or disposition of any Collateral other than as permitted by this paragraph (13).

(14) Further Identification of Collateral . The Borrower will furnish to the Bank from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Bank may reasonably request.

(15) Notices . The Borrower will advise the Bank promptly and in reasonable detail (a) of any Lien, security interest, encumbrance or claim made or asserted against any of the Collateral, (b) of any material change in the composition of the Collateral, and (c) of the occurrence of any other event which would have a material effect on the aggregate value of the Collateral or on the security interests granted to the Bank in this Agreement.

(16) Right of Inspection . The Bank shall, within 60 days after the Effective Date, and at all times thereafter have full and free access during normal business hours to all the books, correspondence and records of the Borrower, and the Bank or its representatives may examine the same, take extracts therefrom, make photocopies thereof and have such discussions with officers, employees and public accountants of the Borrower as the Bank may deem necessary, and the Borrower agrees to render to the Bank, at the Borrower's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. The Bank and its representatives shall at all times also have the right to enter into and upon any premises where any of the Inventory or Equipment is located for the purpose of inspecting the same, observing its use or protecting interests of the Bank therein.

(17) Maintenance of Equipment . The Borrower will, at its expense, generally maintain the Equipment in good operating condition, ordinary wear and tear excepted.

(18) Reimbursement Obligation . Should the Borrower fail to comply with the provisions of the Note, this Agreement, any other Loan Document to which it is a party or any other agreement relating to the Collateral such that the value of any Collateral or the validity, perfection, rank or value of any security interest granted to the Bank hereunder or thereunder is thereby diminished or potentially diminished or put at risk (as reasonably determined by the Bank), the Bank on behalf of the Borrower may, but shall not be required to, effect such compliance on behalf of the Borrower, and the Borrower shall reimburse the Bank for the cost thereof on demand, and interest shall accrue on such reimbursement obligation from the date the relevant costs are incurred until reimbursement thereof in full at the interest rate provided in the Note.

(19) Assignment of Claims Act . The Borrower shall satisfy the requirements of the federal Assignment of Claims Act of 1940 (and all applicable regulations), as amended, with respect to each Eligible Government Account in excess of $500,000.00 in contract price, where the Borrower is the prime contractor with the United States.

(C) Other Covenants . The Borrower agrees that so long as the Bank is committed to make Advances or any amount payable under the Note or under any other Loan Document remains unpaid:

(1) Information . The Borrower will deliver or cause to be delivered to the Bank:

(a) as soon as available and in any event within 90 days after the end of each fiscal year of Versar, (i) a consolidated balance sheet of Versar and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated financial statements for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon by Versar's independent public accountants, which opinion shall state that such consolidated financial statements present fairly the consolidated financial position of Versar and its Consolidated Subsidiaries as of the date of such financial statements and the results of their operations for the period covered by such financial statements in conformity with GAAP applied on a consistent basis (except for changes in the application of which such accountants concur) and shall not contain any "going concern" or like qualification or exception or qualifications arising out of the scope of the audit; and (ii) a statement of the projected financial statements and cash flows for the fiscal year immediately following said fiscal year;

(b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of Versar, a consolidated balance sheet of Versar and its Consolidated Subsidiaries and the related consolidated financial statements for such quarter and for the portion of Versar's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of Versar's previous fiscal year, all certified (subject to normal year-end audit adjustments) as complete and correct by the chief financial officer or chief accounting officer of Versar;

(c) simultaneously with the delivery of each set of financial statements referred to in subparagraphs (a) and (b) above, a certificate of the chief financial officer or chief accounting officer of the Borrower, (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of paragraphs (2)-(4), inclusive, of subsection (A), above, on the date of such financial statements, (ii) stating whether there exists on the date of such certificate any Default and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto and (iii) stating whether, since the date of the most recent previous delivery of financial statements pursuant to subparagraph (a) or (b) of this paragraph (1) there has been any material adverse change in the business, financial position, results of operations or prospects of the Borrower, and, if so, the nature of such material adverse change;

(d) forthwith upon the occurrence of any Default, a certificate of the chief financial officer or chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto;

(e) promptly upon the filing thereof, copies of all proxy statements, financial statements, and reports which each corporate Borrower sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements, which each Borrower files with the U.S. Securities and Exchange Commission or any Governmental authority which may be substituted therefor, or with any national securities exchange;

(f) as soon as reasonably practicable after obtaining knowledge of the commencement of, or of a material threat of the commencement of, an action, suit or proceeding against the Borrower which could materially adversely affect the business, properties, financial position, results of operations or prospects of the Borrower or which in any manner questions the validity of this Agreement, the Note, any other Loan Document or any of the transactions contemplated hereby or thereby, the nature of such pending or threatened action, suit or proceeding and such additional information as may be reasonably requested by the Bank;

(g) promptly upon transmission thereof, copies of all press releases and other statements made available generally by the Borrower to the public concerning material developments in the results of operations, financial condition, business or prospects of the Borrower;

(h) promptly upon receipt thereof, copies of each report submitted to the Borrower by independent public accountants in connection with any annual, interim or special audit made by them of the books of the Borrower including, without limitation, each report submitted to the Borrower concerning its accounting practices and systems and any final comment letter submitted by such accountants to management in connection with the annual audit of the Borrower;

(i) on or before the fifteenth (15th) day of each month, a Borrowing Base Certificate of the Borrower and the most recent report of the aging of the Borrower's Receivables;

G) on or before 30 days after the end of each fiscal quarter of the Borrower, a contract backlog report of the Borrower for the three month period then ending; and

(k) from time to time such additional information regarding the financial position, results of operations or business of the Borrower as the Bank may reasonably request.

(2) Payment of Obligations . The Borrower will pay and discharge, as the same shall become due and payable, (a) all its obligations and liabilities, including all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons which, in any such case, if unpaid, might by law give rise to a Lien upon any of its property or assets, and (b) all lawful Taxes, assessments and charges or levies made upon it or its property or assets, by any governmental body, agency or official except where any of the items in subparagraphs (a) or (b) of this paragraph (2) may be diligently contested in good faith by appropriate proceedings, and the Borrower shall have set aside on its books, if required under GAAP, appropriate reserves for the accrual of any such items.

(3) Maintenance of Property: Insurance . In addition to the specific requirements of subsection (B)(12) above, the Borrower generally will keep all property useful and necessary in its business in good working order and condition, subject to ordinary wear and tear; will maintain (either in the name of the Borrower or in the name of the Bank if required by subsection (B)(12) above) with financially sound and reputable insurance companies, insurance on all its properties in at least such amounts and against at least such risks (and with such risk retentions) as are usually insured against by companies engaged in the same or a similar business; and will furnish to the Bank upon request full information as to the insurance carried.

(4) Conduct of Business and Maintenance of Existence . The Borrower will continue to engage in business of the same general type as now conducted by the Borrower, and will preserve, renew and keep in full force and effect its corporate existence and its rights, privileges and franchises necessary or desirable in the normal conduct of business.

(5) Compliance with Laws. The Borrower will comply with all applicable laws, ordinances, rules, regulations, and requirements of Government (including, without limitation, the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by

appropriate proceedings.

(6) Accounting; Inspection of Property, Books and Records. In addition to the specific requirements of subsection (B)(6), above, the Borrower generally will keep proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities, will maintain its fiscal reporting periods on the present basis and will permit representatives of the Bank to visit and inspect any of its properties, to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired.

(7) Debt. The Borrower will not incur or at any time be liable with respect to any Debt except (i) Debt outstanding under this Agreement and the Note and the other Loan Documents, and (ii) Debt secured by a Lien pursuant to paragraph (8) of this subsection (C).

(8) Restriction on Liens. The Borrower will not at any time create, assume or suffer to exist any Lien on any property or asset now owned or hereafter acquired by it or assign or subordinate any present or future right to receive assets except:

(a) any Liens created by the this Agreement and all other Loan Documents;

(b) any purchase money security interest on any capital asset of the Borrower if such purchase money security interest attaches to such capital asset concurrently with the acquisition thereof and if the Debt secured by such purchase money security interest does not exceed the lesser of the cost or fair market value as of the time of acquisition of the asset covered thereby to the Borrower; provided, that no such purchase money security interest shall extend to or cover any property or asset of the Borrower other than the related asset;

(c) Liens securing Taxes, assessments or governmental charges or levies or the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons; provided (i) with respect to Liens securing Taxes, assessments or governmental charges, such Taxes are not yet payable pursuant to subsection (C)(2) above, or are not required to be paid, or (ii) with respect to Liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and the like, such Liens are unfiled and no other action has been taken to enforce the same;

(d) Liens not securing Debt which are incurred in the ordinary course of business in connection with workmen's compensation, unemployment insurance, social security and other like laws;

(e) any Lien arising pursuant to any order of attachment, distrait or similar legal process arising in connection with court proceedings so long as the execution or other enforcement thereof is effectively stayed and the claims secured thereby are being contested in good faith by appropriate proceedings; and

(f) zoning restrictions, easements, licenses, reservations, covenants, conditions, waivers, restrictions on the use of property or other minor encumbrances or irregularities of title which do not materially impair the use of any property in the operation or business of the Borrower or the value of such property for the purpose of such business.

(9) Consolidations, Mergers and Sales of Assets . The Borrower will not (a) consolidate or merge with or into any other person or (b) sell, lease or otherwise transfer all or any substantial part of its assets to any other person.

(10) Transactions with Affiliates . The Borrower will not directly or indirectly, pay any funds to or for the account of, make any investment in, engage in any transaction with or effect any transaction in connection with any joint enterprise or other joint arrangement with, any Affiliate of the Borrower, except that (a) the Borrower may make payment or provide compensation (including without limitation the establishment of customary employee benefit plans) for personal services rendered by employees and other persons on terms fair and reasonable in light of the circumstances under which such services were or are to be rendered, and (b) the Borrower may make Shareholder/Employee Advances, not to exceed, at any time in the aggregate, $100,000.00.

Nothing in this paragraph (10) shall prohibit the Borrower from making sales to or purchases from any Affiliate and, in connection therewith, extending credit or making payments, or from making payments for services rendered by any Affiliate, if such sales or purchases are made or such services are rendered in the ordinary course of business and on terms and conditions at least as favorable to the Borrower as the terms and conditions which would apply in a similar transaction with a person not an Affiliate, or prohibit the Borrower from participating in, or effecting any transaction in connection with, any joint enterprise or other joint arrangement with any Affiliate if the Borrower participates in the ordinary course of its business and on a basis no less advantageous than on the basis on which such Affiliate participates.

(11) Restricted Payments . The Borrower will not (a) declare or pay any dividend or other distribution on any shares of the Borrower's capital stock, (except dividends payable solely in shares of its capital stock), (b) make any payment on account of the purchase, redemption, retirement or acquisition of (i) any shares of the Borrower's capital stock (except shares acquired upon the conversion thereof into other shares of its capital stock) or (ii) any option, warrant or other right to acquire shares of the Borrower's capital stock.

(12) Investments . The Borrower will not make or acquire any investment in any person (whether by share purchase, capital contribution, loan, time deposit or otherwise) other than (a) in direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, (b) in commercial paper rated in the highest grade by a nationally recognized credit rating agency, (c) in time deposits with, including certificates of deposit issued by, any office located in the United States of any bank or trust company which is organized under the laws of the United States or any state thereof and has capital, surplus and undivided profits aggregating at least $200,000,000 (provided in each case that such investment matures within one year from the date of acquisition thereof by the Borrower), and (d) loans and advances to employees for travel in the ordinary course of business and in an amount consistent with past practice and satisfactory to the Bank.

(13) Transactions with Other Persons . The Borrower shall not enter into any agreement with any person whereby any of them shall agree to any restriction on the Borrower's right to amend or waive any of the provisions of this Agreement.

(14) Use of Proceeds . The proceeds of the Advances will be used by the Borrower for general working capital and other corporate purposes of the Borrower. None of the proceeds of the Advances will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System.

(15) Bank of Deposit . The Borrower shall at all times maintain the Bank as its primary bank of deposit.

(16) New Subsidiaries . Each Subsidiary of Versar that is in existence on, formed or acquired on or after, the Effective Date, shall become a Borrower, jointly and severally liable with each other Borrower for the payment in full of the Obligations, and Versar shall cause each such Subsidiary to satisfy each of the following conditions on or before the date on which such Subsidiary is formed or acquired:

(i) Such Subsidiary shall execute and deliver to the Bank a joinder agreement on the Bank's form therefor, and, within 30 days after the acquisition or formation, as appropriate, any other Loan Documents required by the Bank to be executed and delivered by said Subsidiary.

(ii) All legal matters incident to such Subsidiary's becoming a Borrower shall be reasonably satisfactory to counsel for the Bank and the Subsidiary shall execute and deliver to the Bank, within 30 days after its acquisition or formation, such additional documents and certificates relating to the Loan as the Bank reasonably may request.

(iii) The Bank shall have received, within 30 days after said acquisition or formation, an opinion of counsel to such Subsidiary, addressed to the Bank, covering such matters as the Bank may reasonably request, in form and substance reasonably satisfactory to the Bank.

(iv) Financing statements in form and substance reasonably satisfactory to the Bank shall have been properly filed in each office where necessary to perfect the security interest of the Bank in the Collateral of such Subsidiary, and, within 30 days after said acquisition or formation, (A) termination statements shall have been filed with respect to any other financing statements covering all or any portion of such Collateral (except with respect to Liens permitted by this Agreement), (B) all Taxes and fees with respect to such recording and filing shall have been paid by such Subsidiary or the Borrower and (C) the Bank shall have received such Lien searches or reports as it shall require confirming that the foregoing filings and recordings have been completed.

(v) Such Subsidiary shall have delivered the following documents to the Bank, each of which shall be certified as of the date on which such Subsidiary is to become a Borrower, by its secretary or representative performing similar functions: (1) copies of evidence of all actions taken by such Subsidiary to authorize the execution and delivery of the applicable Loan Documents; (2) copies of the articles or certificate of incorporation and bylaws (or the organizational documents for a Borrower that is not a corporation) of such Subsidiary; and (3) a certificate as to the incumbency and signatures of the officers of such Subsidiary executing the Loan Documents.

(vi) The Bank shall have received current certificates of good standing and qualification issued by the appropriate state official of the state of formation of such Subsidiary and in each jurisdiction in which it is qualified to do business.

(vii) The Bank shall have received, within 30 days after said acquisition or formation, such information and documents the Bank may reasonably request with respect to the Collateral of such Subsidiary.

(viii) If required by the Bank, the Bank shall have received, within 30 days after said acquisition or formation, a satisfactory field examination of the Collateral and internal control systems of such Subsidiary performed by a consultant selected by the Bank, and the Borrower shall have reimbursed the Bank for the cost of such consultant.

(ix) If reasonably required by the Bank, it shall have received a landlord waiver from each landlord of such Subsidiary, which shall be in form and substance reasonably acceptable to the Bank.

(D) Independence of Covenants . All covenants contained in this Agreement shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that such action or condition would be permitted by an exception to, or otherwise be within the limitations of another covenant shall not avoid the occurrence of a Default if such action is taken or condition exists.

VII. REMEDIES .

(A) UCC Rights . If any Default shall have occurred, the Bank may in addition to all other rights and remedies granted to it in this Agreement, the Note, any and all other Loan Documents and in any other instrument or agreement securing, evidencing or relating to the Obligations, exercise all rights and remedies of a secured party under the UCC and all other rights available to the Bank at law or in equity.

(B) Payments on Collateral . Without limiting the rights of the Bank under any other provision of this Agreement, if a Default shall occur and be continuing:

(1) all payments received by the Borrower under or in connection with any of the Collateral shall be held by the Borrower in trust for the Bank, shall be segregated from other funds of the Borrower and shall forthwith upon receipt by the Borrower be turned over to the Bank, in the same form as received by the Borrower (duly indorsed by the Borrower to the Bank, if required to permit collection thereof by the Bank); and

(2) all such payments received by the Bank (whether from the Borrower or otherwise) may, in the sole discretion of the Bank, be held by the Bank as collateral security for, and then or at any time thereafter applied in whole or in part by the Bank to the payment of the expenses and Obligations as set forth in subsection (J), below.

(C) Possession of Collateral . In furtherance of the foregoing, the Borrower expressly agrees that, if a Default shall occur and be continuing, the Bank may (i) by judicial powers, or without judicial process if it can be done without breach of the peace, enter any premises where any of such Collateral is or may be located, and without charge or liability to the Bank seize and remove such Collateral from such premises and (ii) have access to and use of the Borrower's books and records relating to such Collateral.

(D) Sale of Collateral .

(1) The Borrower expressly agrees that if a Default shall occur and be continuing, the Bank, without demand of performance or other demand or notice of any kind (except the notice specified below of the time and place of any public or private sale) to the Borrower or any other person (all of which demands and notices are hereby waived by the Borrower), may forthwith collect, receive, appropriate and realize upon the Collateral and forthwith sell, lease, assign, give an option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do so) in one or more parcels at public or private sale, at any exchange, broker's board or at any office of the Bank or elsewhere in such manner as is commercially reasonable and as the Bank may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Bank shall have the right upon any such public sale, and, to the extent permitted by law, upon any such private sale, to purchase the whole or any part of the Collateral so sold. The Borrower further agrees, at the Bank's request, to assemble the Collateral, and to make it available to the Bank at places which the Bank may reasonably select. To the extent permitted by applicable law, the Borrower waives all claims, damages and demands against the Bank arising out of the foreclosure, repossession, retention or sale of the Collateral.

(2) Unless the Collateral threatens to decline speedily in value or is of a type customarily sold in a recognized market, the Bank shall give the Borrower five (5) days' written notice of its intention to make any such public or private sale or sale at a broker's board or on a securities exchange. Such notice shall (a) in the case of a public sale, state the time and place fixed for such sale, (b) in the case of a sale at a broker's board or on a securities exchange, state the board or exchange at which such sale is to be made and the day on which the Collateral, or any portion thereof being sold, will first be offered for sale and (c) in the case of a private sale, state the day after which such sale may be consummated. The Bank shall not be required or obligated to make any such sale pursuant to any such notice. The Bank may adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In the case of any sale of all or any part of the Collateral for credit or for future delivery, the Collateral so sold may be retained by the Bank until the selling price is paid by the purchaser thereof, but the Bank shall not incur any liability in case of failure of such purchaser to pay for the Collateral so sold and, in the case of such failure, such Collateral may again be sold upon like notice.

(E) Rights of Purchasers . Upon any sale of the Collateral (whether public or private), the Bank shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser (including the Bank) at any such sale shall hold the Collateral so sold free from any claim or right of whatever kind, including any equity or right of redemption of the Borrower, and the Borrower, to the extent permitted by law,. hereby specifically waives all rights of redemption and any right to a judicial or other stay or approval which it has or may have under any law now existing or hereafter adopted.

(F) Additional Rights of the Bank .

(1) The Bank shall have the right and power to institute and maintain such suits and proceedings as it may deem appropriate to protect and enforce the rights vested in it by this Agreement and may proceed by suit or suits at law or in equity to enforce such rights and to foreclose upon and sell the Collateral or any part thereof pursuant to the judgment or decree of a court of competent jurisdiction.

(2) The Bank shall, to the extent permitted by law and without regard to the solvency or insolvency at the time of any Person then liable for the payment of any of the Obligations or the then value of the Collateral, and without requiring any bond from any party to such proceedings, be entitled to the appointment of a special receiver or receivers (who may be the Bank) for the Collateral or any part thereof and for the rents, issues, tolls, profits, royalties, revenues and other income therefrom, which receiver shall have such powers as the court making such appointment shall confer, and to the entry of an order directing that the rents, issues, tolls, profits, royalties, revenues and other income of the property constituting the whole or any part of the Collateral be segregated, sequestered and impounded for the benefit of the Bank, and the Borrower irrevocably consents to the appointment of such receiver or receivers and to the entry of such order.

(G) Remedies Not Exclusive .

(1) No remedy conferred upon or reserved to the Bank in this Agreement is intended to be exclusive of any other remedy or remedies, but every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law, in equity or by statute.

(2) If the Bank shall have proceeded to enforce any right, remedy or power under this Agreement and the proceeding for the enforcement thereof shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Bank, the Borrower and the Bank shall, subject to any determination in such proceeding, severally and respectively be restored to their former positions and rights under this Agreement, and thereafter all rights, remedies and powers of the Bank shall continue as though no such proceedings had been taken.

(3) All rights of action under this Agreement may be enforced by the Bank without the possession of any instrument evidencing any Obligation or the production thereof at any trial or other proceeding relative thereto, and any suit or proceeding instituted by the Bank shall be brought in its name and any judgment shall be held as part of the Collateral.

(H) Waiver and Estoppel.

(1) The Borrower, to the extent it may lawfully do so, agrees that it will not at any time in any manner whatsoever claim or take the benefit or advantage of any appraisement, valuation, stay, extension, moratorium, turnover or redemption law, or any law now or hereafter in force permitting it to direct the order in which the Collateral shall be sold which may delay, prevent or otherwise affect the performance or enforcement of this Agreement and the Borrower hereby waives the benefits or advantage of all such laws, and covenants that it will not hinder, delay or impede the execution of any power granted to the Bank in this Agreement but will permit the execution of every such power as though no such law were in force; provided that nothing contained in this subsection (H) shall be construed as a waiver of any rights of the Borrower under any applicable federal bankruptcy law.

(2) The Borrower, to the extent it may lawfully do so, on behalf of itself and all who may claim through or under it, including without limitation any and all subsequent creditors, vendees, assignees and lienors, waives and releases all rights to demand or to have any marshaling of the Collateral upon any sale, whether made under any power of sale granted herein or pursuant to judicial proceedings or upon any foreclosure or any enforcement of this Agreement and consents and agrees that all the Collateral may at any such sale be offered and sold as an entirety.

(3) The Borrower, to the extent it may lawfully do so, waives presentment, demand, protest and any notice of any kind (except notices explicitly required hereunder) in connection with this Agreement and any action taken by the Bank with respect to the Collateral.

(I) Power of Attorney . The Borrower hereby irrevocably constitutes and appoints the Bank, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Borrower and in the name of the Borrower or in its own name, from time to time in the Bank's reasonable discretion for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, hereby gives the Bank the power and right, on behalf of the Borrower, without notice to or assent by the Borrower to do the following:

(1) to pay or discharge Taxes, Liens, security interests or other encumbrances levied or placed on or threatened against the Collateral;

(2) to effect any repairs or any insurance called for by the terms of this Agreement and to pay all or any part of the premiums therefor and the costs thereof; and

(3) upon the occurrence and continuance of any Default and otherwise to the extent provided in this Agreement, (a) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due and to come due thereunder directly to the Bank or as the Bank shall direct; (b) to receive payment of and receipt for any and all moneys, claims and other amounts due and to become due at any time in respect of or arising out of any Collateral; (c) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts and other documents relating to the Collateral; (d) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (e) to defend any suit, action or proceeding brought against the Borrower with respect to any Collateral; (f) to settle, compromise and adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Bank may deem appropriate; (g) to assign any patent or trademark (along with the goodwill of the business to which such trademark pertains), for such term or terms, on such conditions, and in such manner, as the Bank shall in its sole discretion determine; and (h) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Bank were the absolute owner thereof for all purposes, and to do, at the Bank's option and the Borrower's expense, at any time, or from time to time, all acts and things which the Bank deems necessary to protect, preserve or realize upon the Collateral and the Bank's security interest therein, in order to effect the intent of this Agreement, all as fully and effectively as the Borrower might do.

The Borrower hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable.

(J) Application of Proceeds . The Bank shall retain the net proceeds of any collection, recovery, receipt, appropriation, realization or sale of the Collateral and, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care and safekeeping of any or all of the Collateral or in any way relating to the rights of the Bank hereunder, including reasonable attorneys' fees and legal expenses, apply such net proceeds to the payment in whole or in part of the Obligations in such order as the Bank may elect, the Borrower remaining liable for any amount remaining unpaid (and any attorneys' fees paid by the Bank in collecting such deficiency) after such application. Only after applying such net proceeds and after the payment by the Bank of any other amount required by any provision of law, including Section 9-504(l)(c) of the UCC, need the Bank account for the surplus, if any, to the Borrower or to whomsoever may be lawfully entitled to the same.

VIII. MISCELLANEOUS .

(A) Notices . Unless otherwise specified herein, all notices, requests or other communications to any party hereunder shall be in writing and shall be given to such party at its address set forth on the signature page hereof or any other address which such party shall have specified for the purpose of communications hereunder by notice to the other parties hereunder. Each such notice, request or other communication shall be effective (1) if given by mail, three days after such communication is deposited, certified or registered, in the mails with first class postage prepaid, addressed as aforesaid; or (2) if given by other means, when delivered at the address specified in this subsection (A).

(B) No Waivers . No failure on the part of the Bank to exercise, no course of dealing with respect to, and no delay in exercising any right, power or privilege under this Agreement or any document or agreement contemplated hereby shall operate as a waiver thereof nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

(C) Compensation and Expenses of the Bank . The Borrower shall pay to the Bank from time to time upon demand, all of the fees, costs and expenses incurred by the Bank (including, without limitation, the reasonable fees and disbursements of counsel and any amounts payable by the Bank to any of its agents, whether on account of fees, indemnities or otherwise) (1) arising in connection with the preparation, administration, modification, amendment, waiver or termination of this Agreement or any document or agreement contemplated hereby or any consent or waiver hereunder or thereunder or (2) incurred in connection with the administration of this Agreement, or any document or agreement contemplated hereby, or in connection with the administration, sale or other disposition of Collateral hereunder or under any document or agreement contemplated hereby or the preservation, protection or defense of the rights of the Bank in and to the Collateral.

(D) Indemnification . The Borrower shall at all times hereafter indemnify, hold harmless and, on demand, reimburse the Bank, its subsidiaries, affiliates, successors, assigns, officers, directors, employees and agents, and their respective heirs, executors, administrators, successors and assigns (all of the foregoing parties, including, but not limited to, the Bank, being hereinafter collectively referred to as the "Indemnitees" and individually as an "Indemnitee") from, against and for any and all liabilities, obligations, claims, damages, actions, penalties, causes of action, losses, judgments, suits, costs, expenses and disbursements, including, without limitation, attorney's fees (any and all of the foregoing being hereinafter collectively referred to as the "Liabilities" and individually as a "Liability") which the Indemnitees, or any of them, might be or become subjected, by reason of, or arising out of the preparation, execution, delivery, modification, administration or enforcement of, or performance of the Bank's rights under, this Agreement or any other document, instrument or agreement contemplated hereby or executed in connection herewith; provided that the Borrower shall not be liable to any Indemnitee for any Liability caused solely by the gross negligence or willful misconduct of such Indemnitee. In no event shall any Indemnitee, as a condition to enforcing its rights under this subsection (D) or otherwise, be obligated to make a claim against any other person (including, without limitation, the Bank) to enforce its rights under this subsection (D).

(E) Amendments, Supplements and Waivers . The parties hereto may, from time to time, enter into written agreements supplemental hereto for the purpose of adding any provisions to this Agreement, waiving any provisions hereof or changing in any manner the rights of the parties.

(F) Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and shall inure to the benefit of the Bank's successors and assigns. Nothing herein is intended or shall be construed to give any other person any right, remedy or claim under, to or in respect of this Agreement or any Collateral.

(G) Waiver of Jury Trial; Submission to Jurisdiction . THE BORROWER IRREVOCABLY AND UNCONDITIONALLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY SUIT, ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE NOTE OR ANY OTHER LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. Borrower irrevocably (i) submits to the jurisdiction of any Virginia state court or federal court sitting in the state of Virginia with respect to any suit, action, or proceeding relating to this Agreement, the Note, or any other Loan Document, (ii) waives any objection which it may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum, (iii) waives the right to object that any such court does not have jurisdiction over it, and (iv) consents to the service of process in any such suit, action, or proceeding by the mailing of copies of such process to it by certified mail at the addresses indicated on the signature pages of this Agreement or at such other addresses of which the Bank shall have received notice. Nothing in this paragraph shall affect the Bank's right to serve process in any other manner permitted by law or to bring proceedings against the Borrower in any other court having jurisdiction.

(H) Termination; Survival . This Agreement shall terminate when the security interests granted hereunder have terminated and the Collateral has been released as provided in Section III(F);


VERSAR, INC.		[SEAL]

By:	/s/ Theodore M. Prociv
	Name: Thedore M. Prociv
	Title: President

GEOMET TECHNOLOGIES, LLC		[SEAL]

By:	/s/ Theodore M. Prociv
	Name: Thedore M. Prociv
	Title: President

VERSAR GLOBAL SOLUTIONS		[SEAL]

By:	/s/ Theodore M. Prociv
	Name: Theodore Prociv
	Title: President

VERSAR ENVIRONMENTAL COMPANY, INC.		[SEAL]

By:	/s/ Theodore M. Prociv
	Name: Theodore M. Prociv
	Title: President

APPENDIX 1

Borrower's Current Chief Executive Office:

Previous Chief Executive Offices (last 4 months only) :

Locations of Records of Receivables

and Other Intangibles:

All Other Places of Business:

APPENDIX 2

Locations of Equipment and Inventory:

APPENDIX 3

Trade Names, Division Names, Etc.:

APPENDIX 4

Required Filings and Recordings:

Delaware Secretary of State

Maryland Department of Assessments and Taxation

Virginia State Corporation Commission

Pennsylvania Department of State

REVOLVING
COMMERCIAL NOTE

IMPORTANT NOTICE

THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE A S A DEBTOR AND ALLOWS THE CREDITOR TO OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE.

$5,000,000.00

September 26, 2003

FOR VALUE RECEIVED, on or before November 30, 2005 (hereinafter called "Date of Maturity") the undersigned (individually and collectively, the "Borrower") jointly and severally promise to pay to the order of UNITED BANK (the "Bank," which term shall include any holder of this Note) without offset, at the Bank's office located at 2071 Chain Bridge Road, Vienna, Virginia 22182 (or at such other address as the Bank shall designate), the principal sum of Five Million and no/100 Dollars ($5,000,000.00) (hereinafter called "Principal Sum"), or so much of that sum as the Bank may advance, together with interest on the principal balance outstanding from time to time at the rate provided in this Note.

INTEREST RATE. This Note shall bear interest on the principal balance outstanding from time to time, from the date of this Note until paid in full, a variable rate per annum equal, at all times, to the Prime Rate plus the Variance; provided, however, that at no time shall the interest rate on this Note be less than the Floor Rate. The "Prime Rate" shall mean that variable rate of interest published in The Wall Street Journal from time to time as the domestic prime rate under the heading "Money Rates". If The Wall Street Journal shall cease to publish the Prime Rate, the term "Prime Rate" shall thereafter mean the rate announced from time to time by the Bank as its prime rate of interest and evidenced by a certificate signed by any officer of the Bank setting forth said prime rate of interest in effect on any given date, whether or not such rate is otherwise published or announced. The Prime Rate is not necessarily the lowest rate charged by the Bank to borrowers. Each of the "Variance" and the "Floor Rate" means a rate per annum which is to be determined with reference to the number of consecutive fiscal quarters in which the Net Profit Goal has been achieved (each, a "Successful Quarter") as of the time of determination, as follows:

Number of Successful Quarters is ...	...then the Variance is:	...and the Floor Rate is:
2	1.25%	5.25%
3	1.00%	5.00%
4	0.75%	4.75%
5	0.50%	4.50%
0	1.50%	5.50%

Page 1 of 7

As used herein, "Net Profit Goal" means quarterly net profits (as determined in accordance with GAAP), of Versar and its Consolidated Subsidiaries, of $200,000.00 or more. The interest rate on this Note will change, without notice, (i) in accordance with fluctuations in the Prime Rate then in effect, as and when said changes occur, and (ii) in accordance with changes in the Net Profit Goal, within five (5) days after receipt by the Bank of Versar's then most recent Form 10Q received by the Bank in accordance with Section VI(C)(1)(e) of the Loan Agreement, commencing with Versar's 10Q for the first quarter of 2004 (with a look-back to the fourth quarter of 2003).

Until such time as any 10Q to be received by the Bank in accordance with Section VI(C)(1)(e) of the Loan Agreement is in fact received, the Variance and Floor Rate shall be 1.50% and 5.50%, respectively. Each change in the Variance and Floor Rate shall take effect in the fiscal quarter next following the fiscal quarter of determination.

Interest on this Note shall be calculated on the basis of a 360-day year, for the actual number of days elapsed.

PAYMENT TERMS. The Borrower agrees to pay accrued interest beginning October 26, 2003, and on the same day of each consecutive month thereafter until this Note is paid in full. On the Date of Maturity, all outstanding principal, interest and fees under this Note shall be due and payable in full.

PREPAYMENT. The Borrower may pay the whole or any part of the outstanding indebtedness evidenced by this Note at any time without penalty by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment.

ADVANCES. The Borrower may borrow at any time and from time to time from the date hereof to the Date of Maturity, such amounts as the Borrower may request, subject to the provisions hereof and of the Loan Agreement.

DEFAULT. Each of the following events or conditions shall constitute a default ("Default") under this Note:

(a) the failure to make any payment of principal, interest or any other amount due under this Note when such payment is due;

(b) any default under the terms of any of the Loan Documents, or the failure to perform or observe any warranty, covenant, or other condition of any of the Loan Documents;

( ^c ) any default by the Borrower or any indorser or guarantor of the payment of this Note with respect to any Debt to the Bank (other than this Note) or to any other creditor or obligee;

Page 2 of 7

(d) the merger, consolidation, reorganization, dissolution, or termination of existence of any Party; or the pledge, lease or other disposition, without the prior written approval of the Bank, of all or substantially all of the assets of any Party;

(e) any change, or any transaction which results or could result in a change, in the Control of any Party;

(f) the determination by the Bank that any warranty, representation, certificate, statement or information provided by any Party or any Person on behalf of a Party to the Bank in connection with any of the Loan Documents, or to induce the Bank to make or extend or modify the terms of the loan evidenced by this Note, was false or misleading, or that any Party or any Person on behalf of a Party failed to provide or disclose any facts or information, which failure rendered such warranty, representation, certificate, statement or information misleading;

(g) the inability of any Party to pay its debts as they mature, the insolvency of any Party, the filing of a petition by or against any Party under the provisions of any bankruptcy, reorganization, arrangement, insolvency, liquidation or similar law for relief of debtors, the appointment or application for appointment of any receiver for any Party or the property of any Party, the issuance or service of any attachment, levy, garnishment, tax lien or similar process against any Party or the property of any Party, the entry of a judgment against any Party, or an assignment for the benefit of creditors by any Party;

(h) any agreement or other document granting the Bank security for the payment of this Note shall cease for any reason to be in full force and effect as such security with the priority stated to be created thereby, or the grantor of such security shall contest the validity or enforceability of the security or deny that it has any further liability or obligation under such agreement or other document;

(i) any indorsement or guaranty of the payment of this Note shall cease for any reason to be in full force and effect, or any indorser or guarantor shall contest the validity or enforceability of the indorsement or guaranty or deny that it has any further liability or obligation under the indorsement or guaranty; or

( ^j ) the determination by the Bank that (i) there has occurred an adverse change in the financial condition of any Party, (ii) the value of any property securing this Note has been impaired, or (iii) there has occurred or developed an event or condition which impairs the prospect of payment or performance of any of the obligations of any Party under the Loan Documents.

ACCELERATION. At the option of the Bank, upon the occurrence of a Default as defined above, the full amount remaining unpaid on this Note shall become immediately due and payable without presentment, demand or notice of any kind; no additional advances shall be made to the Borrower under this Note; and the Bank may exercise any or all remedies available to it under applicable law and the Loan Documents.

Page 3 of 7

ACCOUNT RECORD. The Bank shall maintain records of the dates and amounts of advances of principal and payments of principal and interest, the date to which interest has been paid, accrued interest, the unpaid principal balance, and any other account information. Such records shall be maintained unilaterally by the Bank without notice to the Borrower and shall be presumed to be correct, provided, however, any failure of the Bank to maintain such records or any error therein or in any notice hereunder shall not in any manner affect the obligation of the Borrower to pay this Note in accordance with the terms hereof.

IMMEDIATELY AVAILABLE FUNDS. The principal of and interest on this Note shall be payable in immediately available funds in lawful money of the United States which shall be legal tender for public and private debts at the time of payment. The making of any payment in other than immediately available funds which the Bank, at its option, elects to accept shall be subject to collection, and interest shall continue to accrue until the funds by which payment is made are available to the Bank for its use.

ADJUSTMENT TO BILLING NOTICE. If, because a variable interest rate or the outstanding principal balance of this Note changes between the date of a billing notice and the end of a billing period or the Date of Maturity, the actual amount due and payable is different from the amount billed, then the amount billed must be paid. The next following billing notice shall be adjusted by the amount of the difference, or a supplemental billing notice or rebate, as the case may be, shall be sent to the Borrower following the Date of Maturity. A supplemental billing notice following the Date of Maturity shall be immediately due and payable in full.

APPLICATION OF PAYMENTS. Payments will be applied to interest, principal, and late charges and other charges due at the time such payments are received, in that order. All payments shall be applied to satisfaction of scheduled payments in the order in which they become due.

CONFESSION OF JUDGMENT. The Borrower appoints Richard E. Hagerty, Esquire, and Mary C. Zinsner, Esquire, either of whom may act, as its duly constituted attorney-in-fact with authority, in the name, place, and stead of the Borrower, to confess judgment in the office of the clerk of the Circuit Court of Fairfax County, Virginia against it, in the full amount due under this Note, upon the occurrence of a Default under this Note.

WAIVER. The Borrower and any indorser of this Note (i) waive presentment, demand, protest and notice of dishonor and protest, (ii) waive the benefit of their homestead exemptions as to this debt, (iii) waive any right which they may have to require the Bank to proceed against any other Party or any collateral given to secure the payment of this Note, and (iv) agree that, without notice to the Borrower or any indorser and without affecting the liability of the Borrower or any indorser, the Bank, at any time or times, may grant extensions of the time for any payment due on this Note or any other indulgence or forbearance, release any Party from the obligation to make payments on this Note, permit the renewal of this Note, or permit the substitution, exchange or release of any security for this Note.

Page 4 of 7

LATE CHARGE; ATTORNEYS' FEES. If the Borrower fails to pay any amount due under this Note within 7 days of the date due, the Borrower shall pay to the Bank on demand a late charge equal to five percent (5%) of the amount due. The Borrower shall pay to the Bank on demand all costs incurred by the Bank, and reasonable attorneys' fees, in the collection or enforcement of this Note in the event of Default, whether or not suit is brought.

SET-OFF. The Bank will have the right, in addition to all other remedies permitted by law (including, without limitation, other rights of set-off), to set off the amount now or hereafter due under this Note or due under any other obligation of the Borrower to the Bank against any and all accounts, credits, money, securities, or other property now or hereafter on deposit with, held by, or in the possession of the Bank to the credit or for the account of the Borrower, without notice to or consent by the Borrower. In addition to the right of set-off, to secure the payment of this Note the Borrower assigns and grants to the Bank a security interest in all accounts, credits, money, securities, or other property now or hereafter on deposit with, held by, or in the possession of the Bank to the credit or for the account of the Borrower.

DEFINITIONS. The following terms, as used in this Note, have the following meanings:

"Consolidated Subsidiary" has the meaning set forth in the Loan Agreement.

"Control" of any Person means (i) ownership, control, or power to vote 20% or more of any class of voting securities of such Person, directly or indirectly or acting through one or more other Persons; (ii) control in any manner over the election or appointment of a majority of the directors, trustees, managers or general partners (or individuals exercising similar functions) of such Person; (iii) the direct or indirect power to exercise a controlling influence over the management or policies of such Person, whether through the ownership of voting securities, by contract, or otherwise; or (iv) conditioning in any manner the transfer of 20% or more of any class of voting securities of such Person upon the transfer of 20% or more of any class of voting securities of another Person.

"GAAP" has the meaning set forth in the Loan Agreement.

"Loan Agreement" means that certain Loan and Security Agreement dated as of September 26, 2003, between the Borrower and the Bank, and all modifications of, replacements for, and supplements to, said agreement. This Note is the "Note" referenced in the Loan Agreement.

"Loan Documents" means this Note, the Loan Agreement and any other instrument or agreement which now or hereafter evidences, governs, secures or guaranties the indebtedness evidenced by this Note, including any loan agreement, deed of trust, subordination agreement, security agreement or guaranty, and all renewals, extensions and modifications thereof and substitutions therefor.

"Party" means the Borrower, any indorser or guarantor of this Note, any grantor or debtor giving security for this Note, and any other obligor on any of the Loan Documents.

Page 5 of 7

"Person" means an individual, a corporation, a partnership, an association, a limited liability company, a trust or any other entity or organization.

"Versar" has the meaning set forth in the Loan Agreement.

ADDITIONAL TERMS.

THE BORROWER IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN ANY SUIT, ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS NOTE, WHETHER SUCH SUIT, ACTION, PROCEEDING, OR COUNTERCLAIM IS INSTITUTED BY THE BANK, THE BORROWER OR ANY OTHER PARTY.

The Borrower and any indorser of this Note irrevocably (i) submit to the jurisdiction of any Virginia state court or federal court sitting in the Commonwealth of Virginia with respect to any suit, action, or proceeding relating to this Note, (ii) waive any objection which they may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum, (iii) waive the right to object that any such court does not have jurisdiction over them, and (iv) consent to the service of process in any such suit, action, or proceeding by the mailing of copies of such process to them by certified mail at the addresses indicated in this Note or at such other addresses of which the Bank shall have received notice. Nothing in this paragraph shall affect the Bank's right to serve process in any other manner permitted by law or to bring proceedings against the Borrower and indorsers in any other court having jurisdiction.

The proceeds of this Note shall be used to acquire or carry on a business, professional, investment, or commercial enterprise or activity.

The rights and remedies of the Bank under this Note, the other Loan Documents, and applicable law shall be cumulative and concurrent, and the exercise of any one or more of them shall not preclude the simultaneous or later exercise by the Bank of any or all such other rights or remedies. In the event any provision of this Note is held to be invalid, illegal, or unenforceable for any reason, then such provision only shall be deemed null and void and shall not affect any other provisions of this Note, which shall remain effective. No modification or waiver of any provision of this Note shall be effective unless it is in writing and signed by the Bank, and any such waiver shall be effective only in the specific instance and for the specific purpose for which it is given. The failure of the Bank to exercise its option to accelerate this Note as provided above, or to exercise any other option, right or remedy, in any one or more instances, or the acceptance by the Bank of partial payments or partial performance, shall not constitute a waiver of any Default, or the right to exercise any option, right or remedy at any time. The nouns, pronouns, and verbs used in this Note shall be construed as being of such number and gender as the context may require.

Page 6 of 7

This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia.

WITNESS the following signatures and seals:


	VERSAR, INC.		[SEAL]

	By:	/s/ Theodore M. Prociv
		Name: Thedore M. Prociv
		Title: President

	GEOMET TECHNOLOGIES, LLC		[SEAL]

	By:	/s/ Theodore M. Prociv
		Name: Thedore M. Prociv
		Title: President

	VERSAR GLOBAL SOLUTIONS		[SEAL]

	By:	/s/ Theodore M. Prociv
		Name: Theodore Prociv
		Title: President

	VERSAR ENVIRONMENTAL COMPANY, INC.		[SEAL]
6850 Versar Center
Springfield , Virginia
22151
	By:	/s/ Theodore M. Prociv
		Name: Theodore M. Prociv
		Title: President

Page 7 of 7

FOURTH MODIFICATION AGREEMENT

THIS FOURTH MODIFICATION AGREEMENT (this "Agreement"), effective as of the 2S` ^h day of September 2006, 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, and VEC, INC., a Pennsylvania corporation and successor to Versar Environmental Company, Inc. (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 amount of $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 (the 'Note"); and

WHEREAS, as of the effective date hereof, the principal balance of the Note is $0.00 and the parties hereto desire to modify the Loan Agreement.

NOW, THEREFORE, for Ten 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. The Loan Agreement is hereby modified as follows:

(a) In Section I(A), by:

(i) Deleting the definitions of "Bank Guaranty" and "Standby Letter of Credit".

(ii) Replacing the definitions of "Application", "Letter of Credit" an "Obligations" with the following:

"Application" means any Standby Letter of Credit Agreement, on the Bank's form therefor and appropriately completed, between the Borrower and the Bank, requesting the issuance by the Bank of a Letter of Credit, and all extensions, supplements and modifications thereto, and renewals and replacements thereof, and "Applications" means all of said agreements.

"Letter of Credit" means any Standby Letter of Credit issued by the Bank pursuant to an Application, for the account of any Borrower, and "Letters of Credit" means all of said documents.

"Obligations" means (i) all amounts now or hereafter payable by the Borrower to the Bank on the Note and the Applications, (ii) all other obligations or liabilities now or hereafter payable by the Borrower pursuant to this Agreement, (iii) all obligations and liabilities now or hereafter payable by the Borrower under, arising out of or in connection with any other Loan Documents and any other instrument or agreement executed in connection with the Note, any Application, or this Agreement, and (iv) all other indebtedness, obligations and liabilities of the Borrower to the Bank, now existing or hereafter arising or incurred, whether or not evidenced by notes or other instruments, and whether such indebtedness, obligations and liabilities are direct or indirect, fixed or contingent, liquidated or unliquidated, due or to become due, secured or unsecured, joint, several or joint and several, related or unrelated to the loan evidenced by the Note or any Application, similar or dissimilar to the indebtedness arising out of or in connection with the Note, any Application, or this Agreement or of the same or a different class of indebtedness as the indebtedness arising out of or in connection with the Note, any Application, or this Agreement, including, without limitation, any overdrafts in any deposit accounts maintained by the Borrower with the Bank, any indebtedness of the Borrower that is purchased by or assigned to the Bank, and any indebtedness of the Borrower to any assignee of all or a portion of the Note, any Application, or any other obligation referred to in this definition.

(b) In Section II, by replacing subsection (F) with the following:

(F) Letter of Credit Subfeature.

(1) As a subfeature under the Commitment, the Bank agrees, on the terms and conditions set forth in this Agreement and in the applicable Applications, to make loans to the Borrower by issuing Letters of Credit for the account of any Borrower ("Letter of Credit Loans"); provided, that the amount allocated to the Letter of Credit Loans is a permissive use of such amount, and not a mandatory allocation of the proceeds of the Commitment. At no time shall the Outstanding Letter of Credit Balance exceed the Commitment minus the outstanding principal balance of Advances at such time (the "Letter of Credit Commitment"). Each Letter of Credit shall be issued for a term not to exceed one (1) year, although any Letter of Credit may be automatically renewed in accordance with the terms and conditions of said Letter of Credit and the related Application. A Letter of Credit may be denominated only in U.S. Dollars. Each draft paid by the Bank under a Letter of Credit shall, if such amount is available under the Letter of Credit Commitment, be deemed an Advance and shall accrue interest at the rate then applicable under the Note. To the extent the amount of a draft paid by the Bank as aforesaid is unavailable under the Letter of Credit Commitment, said amount shall be payable by the Borrower ON DEMAND and until paid in full shall accrue interest at the rate then applicable under the Note. Subject to the foregoing, the Borrower may borrow under this Section II(F)(1), prepay and re-borrow.

(2) Upon the termination of the Commitment for any reason whatsoever, or upon the occurrence of a Default, the Bank may, at its option, demand that the Borrower, within ten (10) days of such demand, arrange for the cancellation of any or all of the Letters of Credit such that the Bank has no further liability under said Letters of Credit, or in the event the Borrower fails to procure the cancellation of either Letter of Credit within such ten (10) day period, demand that the Borrower pay to the Bank, as cash collateral, the remaining amount available to be drawn, if any, under said Letter of Credit and such amount shall thereupon become immediately due and payable. In the event the Borrower pays to the Bank or the Bank collects from the Borrower sums representing the remaining amount available to be drawn under said Letter of Credit, the Bank shall hold such sums in a non-interest-bearing account as security for the Borrower's obligation to reimburse the Bank for amounts paid by the Bank under said Letter of Credit or otherwise due hereunder. Upon the expiration of said Letter of Credit and the Bank's reasonable determination that it has no further liability thereunder, the Bank shall repay such sums to the Borrower to the extent they exceed the remaining amounts actually paid by the Bank under said Letter of Credit. The Bank's rights under this Section II(F) are in addition to other rights and remedies which the Bank may have.

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

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

4. 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.

5. 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.

6. 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.

WITNESS the following signatures and seals.

UNITED BANK		[SEAL]

By:	/S/ E. Allen Shirmer
	Name: E. Allen Shirmer
	Title: Vice President

VERSAR, INC.		[SEAL]

By:	/S/ Lawrence W. Sinnott
	Name: Lawrence W. Sinnott
	Title: Exec, VP, COO, CFO and Treasurer

GEOMET TECHNOLOGIES, LLC		[SEAL]

By:	/S/ Lawrence W. Sinnott
	Name: Lawrence W. Sinnott
	Title: VP and Treasurer

VERSAR GLOBAL SOLUTIONS		[SEAL]

By:	/S/ Lawrence W. Sinnott
	Name: Lawrence W. Sinnott
	Title: VP and Treasurer

VEC, INC.		[SEAL]

By:	/S/ Lawrence W. Sinnott
	Name: Lawrence W. Sinnott
	Title: VP and Treasurer

SIXTH MODIFICATION AGREEMENT

(Extension)

THIS SIXTH MODIFICATION AGREEMENT (this "Agreement"), effective as of the 30th day of September 2009, 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, and VEC CORP., a Pennsylvania corporation and successor to Versar Environmental Company, Inc. (individually and collectively, the "Borrower").

WITNESSETH THAT:

WHEREAS, as of the effective date hereof, the principal balance of the Note is $0.00 and the parties hereto desire to extend the maturity date of the Note and modify the terms thereof and of the Loan Agreement.

NOW, THEREFORE, for Ten 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. The maturity date of the Note is hereby extended to September 30, 2010. The definition of "Date of Maturity" in the Note and the Loan Agreement is hereby changed to "September 30, 2010".

2. From and after the effective date hereof, interest on the unpaid 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, that at no time shall the interest rate on the Note be less than three and one-hal f percent (3.5'X,) per annum.

3. The Loan Agreement is hereby further modified as follows:

- 1 -

(a)

In Section I(A), by replacing the definition of "Borrowing Base" with the following:

"Borrowing Base" means, without duplication, the sum of (i) 90% of the Net Unpaid Balance of Eligible Assigned Government Accounts, (ii) 80% of the Net Unpaid Balance of Eligible Non-Assigned Government Accounts, and (iii) 75% of the Net Unpaid Balance of Eligible Commercial Accounts, not to exceed $2,000,000.00. No item of Collateral will be included in the Borrowing Base unless the Bank has a valid and perfected first priority Lien on it.

(b) In Section VI(A)(4), by replacing "$15,000,000.00" with "$22,500,000.00".

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

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

6. 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.

7. 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.

8. 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.

WITNESS the following signatures and seals.

	UNITED BANK
	[SEAL]

	By:	/s/ E. Allen Schirmer
		E. Allen Schirmer
		Sr. Vice President

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	VERSAR, INC.

	By:	/s/ Lawrence W. Sinnott
		Lawrence W. Sinnott
		Exec. VP, COO and CFO

	GEOMET TECHNOLOGIES, LLC

	By:	/s/ Lawrence W. Sinnott
		Lawrence W. Sinnott
		Vice President

	VERSAR GLOBAL SOLUTIONS, INC.

	By:	/s/ Lawrence W. Sinnott
		Lawrence W. Sinnott
		Vice President

	VEC CORP.

	By:	/s/ Lawrence W. Sinnott
		Lawrence W. Sinnott
		Vice President

- 3 -

SEVENTH MODIFICATION AGREEMENT

THIS SEVENTH MODIFICATION AGREEMENT (this "Agreement"), effective as of the 5"' day of January 2010, is by and between UNITED BANK, a Virginia banking corporation (the "Bank"); and VERSAR, INC. a Delaware corporation ("Versar"), GEOMET TECHNOLOGIES, LLC, a Maryland limited liability company ("Geomet"), VERSAR GLOBAL SOLUTIONS, INC., a Virginia corporation ("VGS"), and VEC CORP., a Pennsylvania corporation and successor to Versar Environmental Company, Inc. ("VEC" and, together with Versar, Geomet and VGS, 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 amount of$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 (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), a certain Fourth Modification Agreement dated as of September 28, 2006; as increased to $7,500,000.00 pursuant to a certain Fifth Modification Agreement dated as of September 24, 2007, and a certain Sixth Modification Agreement dated September 30,2009, and as otherwise amended, extended, increased, replaced and supplemented from time to time, the "Loan Agreement"); and

WHEREAS, on or about December 31, 2009, Versar established GEOI 1 Ltd, a private limited company registered in England and Wales under company number 7114583 whose registered office is at Protection House, Sherbourne Drive, Tilbrook, Milton Keynes, Buckinghamshire MIG 8HX, UK (“GEOI"), as a wholly-owned subsidiary of Versar. On or about the effective date hereof, GEOI shall have entered into that certain Share Purchase Agreement with Versar, Professional Protection Systems Limited, a company registered in England and Wales under company number 4494024 whose registered office is at Protection House, Sherbourne Drive, Tilbrooc, Milton Keynes, Buckinghamshire MK7 8HX, UK (“PPS"), Stephen Nobbs ("Nobbs"), Mark Whitcher ("Whitcher"), Stephen Kimbell ("Kimbell"), Peter Holden ("Holden"), Timothy Clark ("Clark"), Jonathan Hambleton ("Hambleton"), Richard Brown ("Brown"), Simon Cuthbertson ("Cuthbertson"), Oliver Wright ("Wright”) and' Ingrid Sladden ("Sladden"; together with Nobbs, Whitcher, Kimbell, Holden, Clark, Hambleton, Brown, Cuthbertson and Wright, each a "Seller" and together the "Sellers") and Richard Martin Frimston, Stuart Leaman and Richard Benson in their capacity as executors of the estate of Neil Bruce Copp, being a deceased shareholder (the "Neil Bruce Copp Shareholder"; together with the Sellers, individually and collectively, the "Seller Note Holder"), each of whom is an existing shareholder of PPS (the "Purchase Agreement"), in which GEOI, on the Closing Date (as defined in the Purchase Agreement), will purchase all or substantially all of the share capital and voting ownership interests of PPS, free and clear of all Versar (7th Mod.) 411039.5 EHARLLEE Liens, for the Purchase Price (as said terms are defined in the Purchase Agreement) (the "Acquisition"). Upon the Closing Date, PPS will become a wholly-owned subsidiary of GEOI. As part of the Purchase Price of PPS, GEOI will issue Seller Notes (as defined in the Purchase Agreement) to the Seller Note Holder in the aggregate principal amount of $940,000, subject to adjustment pursuant to the Purchase Agreement Unless consented to by the Bank, the Acquisition would violate the provisions of Sections VI(C)(7), (12) and (16) of the Loan Agreement.

WHEREAS, Borrower has requested that Bank (i) consent to the Acquisition and (ii) make certain other modifications to the Loan Agreement as more fully set forth herein, and the Bank has consented to such requests subject to the execution of this Agreement and the satisfaction of the conditions specified herein.

NOW, THEREFORE, for Ten 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. Consent and Waiver . Subject to satisfaction of the terms and conditions of Section 3 and 9 below, the Bank hereby consents to the Acquisition, the Purchase Agreement and transactions contemplated thereby and agrees that neither the Acquisition, nor the Purchase Agreement, nor the transactions contemplated thereby, shall constitute a Default under Sections VI(C)(7), (12) and (16) of the Loan Agreement. Additionally, notwithstanding anything to the contrary in the Loan Agreement, Bank hereby agrees that GEOI and PPS are not subject to the requirements of Section VI(C)(I6) of the Loan Agreement, which among other things, requires that any Subsidiary of Versar be added as a Borrower and become jointly and severally liable with each other Borrower for the payment in full of the Obligations. The 90nsent and waiver set forth above shall not be deemed or otherwise construed to constitute a waiver of any provisions of the Loan Agreement in connection with any other transaction, and the waivers contained herein are otherwise subject to Sections VIII(,B) and (E) of the Loan Agreement.

3. Authorized Payments under Seller Notes . As long as no default has occurred under any instrument or agreement evidencing or securing the Obligations, the scheduled payments of principal and interest due pursuant to the terms of the Seller Notes made by GEOI (and guaranteed by Versar, as parent to GEOI) to the order of each Seller Note Holder, and no other payments, may be made, directly or indirectly, to any Seller Note Holder by GEOI or Versar; provided, however, in no eventwi1! GEOI or Versar make any prepayment under the Seller Notes, directly or indirectly (such prepayment being called the "Seller Note Prepayment") prior to the scheduled due date. In furtherance of the foregoing, Borrower hereby agrees that it shall be an immediate Default under the Loan Documents if (i) GEOI and/or Versar (as a guarantor under the Seller Notes) or any other Borrower makes a Seller Note Prepayment without the prior written consent of Bank, in its sale discretion; provided, further, however, that the foregoing shall not limit the payment by GEOI or Versar of (i) amounts due to (a) Nobbs under that certain Consultancy Deed between GEOl and Nobbs dated January 5, 2010 (the "Consultancy Deed") and (b) Whitcher under that certain Contract of Employment between GEOI and Whitcher dated January 5, 2010 ("Whitcher Employment Contract") or (ii) amounts due to the Seller Note Holder pursuant to the Post- -2- Post-Closing Purchase Price Adjustment provisions of the Purchase Agreement; (ii) the occurrence of a default or event of default under the Purchase Agreement or any of the Seller Notes; (iii) there is a Sale or Quotation (as said terms are defined in the Seller Notes); or (iv) the failure to perform or observe any warranty, covenant, or other condition of this Agreement. Neither the Consultancy Deed nor the Whitcher Employment Contract have been modified, changed, supplemented, canceled, amended or otherwise altered or affected; and neither the Consultancy Deed nor the Whitcher Employment Contract will be modified, changed, supplemented, cancelled, amended or otherwise altered, waived or affected without the Bank's prior written consent.

4. Restriction on Liens on Subsidiaries . The Borrower hereby agrees that the Seller Notes will not at any time be secured by a Lien on any property or asset now owned or hereafter acquired by Borrower or any Subsidiary of Borrower, including, but not limited to, GEOI and PPS.

5. Purchase Agreement . Attached hereto as Schedule I is a true, correct and complete copy of the Purchase Agreement, which will be executed in connection with the Acquisition. The Purchase Agreement has not been modified, changed, supplemented, canceled, amended or otherwise altered or affected; and neither the Purchase Agreement nor any of the Seller Notes will be modified, changed, supplemented, canceled, amended or otherwise altered, waived or affected without the Bank's prior written consent. The Acquisition will be effected, closed and consummated pursuant to, and in accordance with, the terms and conditions of the Purchase Agreement and with all applicable laws. Versar will cause GEOI to promptly notify the Bank when the Purchase Agreement has been executed and is effective.

6. Limitation of Consent Waiver and Amendments . The consent, waiver and amendments set forth in Section 2 and Section 3, above, are effective for the purposes set forth herein and shall be limited precisely as written and shall not be deemed to (a) be a waiver of any existing or future Default or a consent to amend or modify any other term or condition of any Loan Documents, other than as necessary to the consummation of the transactions contemplated by the Purchase Agreement, or (b) otherwise prejudice any right or remedy which the Bank may now have or may have in the future under or in connection with any Loan Documents. The Bank's agreement to consent to the Acquisition and the consent, waiver and amendments set forth herein shall in no way obligate the Bank to make any other modifications to the Loan Agreement or to waive the Borrower's continued compliance with any other terms of the Loan Documents, and shall not limit or impair the Bank's right to demand strict performance of all other terms and covenants as of any date.

7. 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 institute 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) enforceable obligations; The Borrower's obligations under the Loan Documents remain valid and

(e) As of the date hereof, the Borrower bas 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, other than to the extent the failure to add VIAP, Inc. as a borrower pursuant to Section VI(C)(l6) constitutes a Default.

8. 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.

9. Conditions of Effectiveness . This Agreement shall become effective when, and only when, the Bank shall have received: (i) this Agreement, executed by each Borrower and acknowledged and agreed by GEOI; (ii) true and complete copies of the organizational documents and governing documents and all recorded amendments thereto of GEOI and PPS for its respective jurisdiction of organization; and (iii) payment of Bank's attorneys' fees and expenses regarding this Agreement.

10. Loan Documents . The other "Loan Documents", as defined in the Note, are hereby modified to the extent necessary to carry ant the purposes of this Agreement.

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

12. No Impairment . Tins 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.

13. 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.

14. 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.

15. 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.

16. 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/ Robert H. Hawthorne
		Robert H. Hawthorne
		Market President

	VERSAR, INC.

	By:	/s/ Lawrence W. Sinnott
		Lawrence W. Sinnott
		Exec. VP, COO and CFO

	GEOMET TECHNOLOGIES, LLC

	By:	/s/ Lawrence W. Sinnott
		Lawrence W. Sinnott
		Vice President

	VERSAR GLOBAL SOLUTIONS, INC.

	By:	/s/ Lawrence W. Sinnott
		Lawrence W. Sinnott
		Vice President

	VEC CORP.

	By:	/s/ Lawrence W. Sinnott
		Lawrence W. Sinnott
		Vice President

The undersigned approves of the terms of this Agreement.

Executed as a deed by

GEOI I LTD

/s/ Lawrence W. Sinnott
Name: Lawrence W. Sinnott
Title: Director

Witness:	/s/ Brenda A. Chube
	Name: Brenda A. Chube
	Title: Assistant Corporate Secretary, Versar, Inc.

Witness Address: 6850 Versar Center

Springfield, Virginia 22151

Schedule 1

Purchase Agreement

[See Attached]

TENTH MODIFICATION AGREEMENT
(Extension)

THIS TENTH MODIFICATION AGREEMENT (this "Agreement"), effective as of the 25 ⁶⁶ day of September 2011, 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, 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 that certain Ninth Modification Agreement dated as of September 30, 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. Amendment to Note and Loan Agreement. The maturity date of the Note is hereby extended to October 25, 2011. The definition of "Date of Maturity" in the Note and the Loan Agreement is hereby changed to "October 25, 2011".

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

(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;

(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/Cynthia A. Downes
	Name: Cynthia A. Downes
	Title: EVP, CFO & Treasurer

GEOMET TECHNOLOGIES, LLC		[SEAL]

By:	/S/ Cynthia A. Downes
	Name: Cynthia A. Downes
	Title: VP & Treasurer

VERSAR GLOBAL SOLUTIONS		[SEAL]

By:	/S/ Cynthia A. Downes
	Name: Cynthia A. Downes
	Title: EVP & Treasurer

VEC CORP		[SEAL]

By:	/S/ Cynthia A. Downes
	Name: Cynthia A. Downes
	VP & Treasurer

VERSAR INTERNATIONAL, INC.		[SEAL]

By:	/S/ Cynthia A. Downes
	Name: Cynthia A. Downes
	VP & Treasurer

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	2
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	3
d.	Group Insurance Benefit Continuation	3
e.	Group Benefit Continuation	3
f.	Officer Benefits	3
g.	Medical Benefits	3
7.	Time for Payment	4
8.	Payment Explanation	4
9.	Potential Limitations	4
a.	Golden Parachute Limitation	4
b.	Section 162(m) Limitation	4
10.	Disability	5
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	6
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	8
a.	To the Company	8
b.	To You	8
20.	Definitions	8
a.	Agreement	8

- i -

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	9
(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	10
i.	Exchange Act	10
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	11
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 J. Joseph Tyler ("you") and VERSAR, INC. ("Company") has been entered into as of September 16, 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.

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 Senior Vice President for Corporate Initiatives and Integration. 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.

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.

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.

- 1 -

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).

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.

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.

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).

- 2 -

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.

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 .

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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.

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.

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).

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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.

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.

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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.

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.

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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.

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.

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(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”.

(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 vor 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.

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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.

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.

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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.

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:

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March 16, 2012; or

Your ceasing to serve in the position of Senior Vice President for Corporate Initiatives and Integration prior to the occurrence of a Potential Change in Control or Change in Control; or

(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 September 16, 2010_______________	By: Versar, Inc.
	/s/ Anthony L. Otten
	Anthony L. Otten, Chief Executive Officer

Date September 16, 2010_______________	/s/ J. Joseph Tyler
	J. Joseph Tyler

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

	7411 Shady Palm Drive

	Springfield, VA 22152

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February 10, 2012

_______________

Re: Amendment to Change in Control Severance Agreement

Dear _____________,

Pursuant to the Letter Agreement executed _________________, the Change in Control Severance Agreement (“Agreement) between yourself and Versar, Inc., (“Company”) dated ________________ was amended so that the term of the agreement in Section 20 q(l)(a) thereof was extended from ______________ to _____________.

The Board of Directors in their February 7, 2012 meeting decided that all Change in Control Severance Agreements should expire at the same date.

This Letter Agreement amends Section 20 q(l)(a) of your Agreement to further extend the term from _______________ to March 15, 2014.

All other terms and conditions of the Agreement remain unchanged.

If you agree, please sign below.

Sincerely,

_______________________________
Anthony L. Otten
Chief Executive Officer

ACCEPTED AND AGREED

_______________________________
_________________
_________________________________________

Date: ___________________

February 23, 2012

Anthony L. Otten

4821 Woodway Lane NW

Washington DC

20016

Re: Amendment to Change in Control Severance Agreement

Dear Mr. Otten,

The Change in Control Severance Agreement (“Agreement) between yourself and Versar, Inc., (“Company”) executed on July 2, 2010 shall expire on May 23, 2012.

The Board of Directors in their February 7, 2012 meeting decided that all Change in Control Agreements Severance Agreements should expire at the same date.

This Letter Agreement amends Section 20 q(l)(a) of your Agreement to extend the term from May 23, 2012 to March 15, 2014.

All other terms and conditions of the Agreement remain unchanged.

If you agree, please sign below.

Sincerely,

/s/ Paul J. Hoeper
Paul J. Hoeper
Chairman of the Board

ACCEPTED AND AGREED

/s/ Anthony L. Otten
Anthony L. Otten
Chief Executive Officer
Date:	March 9, 2012

Exhibit 21

Subsidiaries of the Registrant

Subsidiary		State of Incorporation

Charron Construction Consulting, Inc.		Virginia

GEOMET Technologies, LLC		Maryland

VEC Corp.		Pennsylvania

Versar Global Solutions, Inc.		Virginia

Versar International, Inc.		Delaware

GEOI 1 Limited		United Kingdom

Professional Protection Systems, Limited		United Kingdom

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated September 18, 2012, with respect to the consolidated financial statements and schedule included in the Annual Report of Versar, Inc. on Form 10-K for the year ended June 29, 2012. We hereby consent to the incorporation by reference of said report in the Registration Statements of Versar, Inc. on Forms S-8 (File No. 333-172297, effective February 15, 2011, File No. 333-129893, effective November 22, 2005, File No. 333-129489, effective November 4, 2005, File No. 333-121619, effective December 23, 2004, File No. 333-106111, effective June 13, 2003 and File No. 333-21469, effective February 10, 1997).

/s/ Grant Thornton LLP

McLean, Virginia

September 18, 2012

Exhibit 31.1

CERTIFICATION BY ANTHONY L. OTTEN PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14

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

I have reviewed this annual report on Form 10-K of Versar, Inc. (the “registrant”);

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;

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;

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(f) and 15d-15(f)) for the registrant and we have:

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;

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;

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):

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

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: September 18, 2012

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

Exhibit 31.2

CERTIFICATION BY CYNTHIA A. DOWNES PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14

I, Cynthia A. Downes, Executive Vice President, Chief Financial Officer, and Treasurer of Versar, Inc., certify that:

I have reviewed this annual report on Form 10-K of Versar, Inc. (the “registrant”);

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: September 18, 2012	/S/ Cynthia A. Downes
	Cynthia A. Downes
	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 Annual Report of Versar, Inc. (the “Company”) on Form 10-K for the period ending June 29, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony L. Otten, Chief Executive Officer of the Company, 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

September 18, 2012

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 Annual Report of Versar, Inc. (the “Company”) on Form 10-K for the period ending June 29, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cynthia A. Downes, Executive Vice President, Chief Financial Officer, and Treasurer of the Company, 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/ Cynthia A. Downes
	Cynthia A. Downes
	Executive Vice President, Chief Financial Officer, and
	Treasurer

September 18, 2012