This report contains certain forward-looking statements which are based on current expectations. Actual results may differ materially. The forward-looking statements include without limitation, those regarding the continued award of future work or task orders from government and private clients, cost controls and reductions, the expected resolution of delays in billing of certain projects, and the possible impact of current and future claims against the Company based upon negligence and other theories of liability. Forward-looking statements involve numerous risks and uncertainties that could cause actual results to differ materially, including, but not limited to, the possibility that the demand for the Company's services may decline as a result of possible changes in general and industry specific economic conditions and the effects of competitive services and pricing; the possibility that the Company will not be able to perform work within budget or contractual limitations; one or more current or future claims made against the Company may result in substantial liabilities; the possibility that the Company will not be able to attract and retain key professional employees; changes to or failure of the Federal government to fund certain programs in which the Company participates; delays in project funding; and such other risks and uncertainties, described in our Form 10-K for fiscal year ended June 27, 2008 and in other reports and other documents filed by the Company from time to time with the Securities and Exchange Commission.

Financial Trends

In fiscal year 2006, the Company's gross revenues declined primarily due to the continuation of federal government delays in funding, which in certain instances, spanned as much as nine months and the continued diversion of funding to the war in Iraq. The Company adapted to the funding shifts by expanding its services in Iraq work under existing contracts and seeking new contract work in Iraq. By the end of fiscal year 2006, the project funding began to return to normal levels and increased the Company's funded backlog by 55% to $48 million. By the end of fiscal year 2007, as a result of continued efforts to grow the business and with new contracts, funded backlog had increased by an additional 19% to $57 million. During fiscal year 2008, backlog continued to grow, increasing by 12% to $64 million at June 27, 2008.

In the first quarter of fiscal year 2009, the Company was awarded an additional $71 million in additional work, which increased funded backlog up to $110 million as of September 26, 2008. Although the Company has continued to exhibit success with the award of additional work, resulting in increased backlog, during the first quarter of fiscal year 2009, the Company experienced a 13% decline in gross revenues. This decline was primarily attributable to a decrease in the award of construction projects in the U.S. in the Project Management segment during fiscal year 2008 resulting in lower construction work and a decline in aquatic facility work in the Compliance and Environmental Programs segment. Several awards of new, larger projects for the Project Management segment were received late in the first quarter of fiscal year 2009 and the Company anticipates that these new awards will result in additional construction work during the second half of fiscal year 2009. There continues to be a decline in the award of additional aquatic facility work and the Company expects this segment to continue to face a decline in revenues during the 2009 fiscal year.

Approximately 53% of the Company's business volume related to the reconstruction efforts in Iraq in fiscal year 2008. However, the Company is taking steps to further diversify its business if opportunities in Iraq are reduced or are eliminated. The Company's primary focus is on BRAC efforts and requirements which have been delayed as a result of the war in Iraq. Gross revenues and gross profit increased among all business segments in fiscal year 2008. We see the Compliance and Environmental business segment being impacted by the funding of work into fiscal year 2009. We continue to follow the funding shifts in Iraq and Afghanistan to maintain and expand our business basis. The funding of BRAC work world-wide represents our greatest opportunity for growth in the second half of fiscal year 2009.

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

* General economic or political conditions;
* Threatened or pending litigation;
* The timing of expenses incurred for corporate initiatives;
* Employee hiring, utilization, and turnover rates;
* The seasonality of spending in the federal government and for commercial clients;
* Delays in project contracted engagements;
* Unanticipated contract changes impacting profitability;
* Reductions in prices by our competitors;

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

* The ability to obtain follow-on project work;
* Failure to properly manage projects resulting in additional costs;
* The cost of compliance for the Company's laboratories;
* The results of a negative government audit potentially impacting our costs, reputation and ability to work with the federal government;
* Loss of key personnel;
* The ability to compete in a highly competitive environment; and
* Federal funding delays due to the war in Iraq.

Results of Operations
---------------------

First Quarter Comparison of Fiscal Year 2009 and 2008
-----------------------------------------------------

                                               For the Three-Months Ended
                                              ----------------------------
                                              September 26,  September 28,
                                                  2008           2007
                                              -------------  -------------

GROSS REVENUE
-------------
Program Management                            $     15,650   $     17,263
Compliance and Environmental Programs                4,760          8,226
Professional Services                                2,178          1,455
National Security                                    2,410          1,938
                                              -------------  -------------
                                              $     24,998   $     28,882
                                              =============  =============

Gross revenue for the first quarter of fiscal year 2009 was $24,998,000, a decrease of $3,884,000 (13%) from the first quarter of fiscal year 2008. Gross revenues in the Program Management business segment for the first quarter of fiscal year 2009 was $15,650,000, a decrease of $1,613,000 (9%) from that reported in the first quarter of fiscal year 2008. The decrease is due to lower construction related work in the United States as several large projects in the pipeline were not awarded until late in the first quarter of fiscal year 2009. Gross revenues for the Compliance and Environmental Programs business segment for the first quarter of fiscal year 2009 was $4,760,000, a decrease of $3,466,000 (42%) from the first quarter of fiscal year 2008. The decrease is due the completion of several large municipal aquatic facility projects at the end of fiscal year 2008, and state and municipal budget constraints due to the poor economy for additional aquatic facility work. Gross revenues for the Professional Services business segment for the first quarter of 2009 was $2,178,000, an increase of $723,000 (50%) from the first quarter of fiscal year 2008. The increase is attributable to additional larger professional services outsourcing awards awarded in fiscal year 2008. Gross revenues for the National Security business segment for the first quarter of fiscal year 2009 was $2,410,000, an increase of $472,000 (24%) from the first quarter of fiscal year 2008. The increase is primarily due to additional chemical laboratory work during the first quarter of fiscal year 2009.

Purchased services and materials decreased by $4,622,000 (25%) in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008. The decrease is attributable to the decrease in construction work and municipal aquatic facility work in the Program Management and the Compliance and Environmental Programs business segments as mentioned above.

Direct costs of services and overhead include the cost to Versar of direct and overhead staff, including recoverable and unallowable costs that are directly attributable to contracts. Direct costs of services and overhead increased by $1,059,000 (15%) in the first quarter of fiscal year 2009 compared to that reported in the first quarter of fiscal year 2008. Approximately 47% of the increase is due to the business growth in the Professional Services business segment. The balance of the increase is due to additional costs required to support business growth efforts in the Program Management business segment.

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

        Gross profit for the first quarter of fiscal year 2009 was
$3,178,000, a decrease of $321,000 (9%) from that reported in the
first quarter of fiscal year 2008.  The decrease is primarily due
to the decreased gross revenues in the Compliance and Environmental
business segment as mentioned above.


                                                         For the Three-Months Ended
                                          ----------------------------
                                          September 26,  September 28,
                                              2008           2007
                                          -------------  -------------
GROSS PROFIT
------------
Program Management                        $      2,313   $      2,282
Compliance and Environmental Programs              226            680
Professional Services                              421            248
National Security                                  218            289
                                          -------------  -------------
                                          $      3,178   $      3,499
                                          =============  =============

Gross profit for the Program Management business segment for the first quarter of fiscal year 2009 was $2,313,000, an increase of $31,000 (1%) over that reported in the first quarter of fiscal year 2008. Gross profit for the Compliance and Environmental business segment for the first quarter of fiscal year 2009 was $226,000, a decrease of $454,000 (67%) lower than that reported in the first quarter of fiscal year 2008. Thirty-five percent of the decrease is due to the lower aquatic facility work. The balance of the decrease is due to funding delays and poor economic conditions. Gross profit for the Professional Services business segment for the first quarter of fiscal year 2009 was $421,000, an increase of $173,000 (70%) over that reported in the first quarter of fiscal year 2008. The increase is attributable to the increased gross revenues as mentioned above. Gross profit for the National Security business segment was $218,000, a decrease of $71,000 (25%) lower than that reported in the first quarter of fiscal year 2008. The decrease was due to delayed product shipments of personal protective equipment during the first quarter of fiscal year 2009.

Selling, general and administrative expenses increased by $260,000 (15%) during the first quarter of fiscal year 2009 compared to that reported in the first quarter of fiscal year 2008. The increase is primarily due to increased business development activities and compliance costs associated with Sarbanes Oxley.

Operating income for the first quarter of fiscal year 2009 was $1,142,000, a decrease of $581,000 (34%) lower than that reported for the first quarter of fiscal year 2008. The decrease is attributable to the decreased revenues, project funding delays, and higher selling, general and administrative costs as mentioned above.

During the first quarter of fiscal year 2009, the Company recorded a $352,000 loss on marketable securities the Company was holding in the FISCO Income Plus Funds. The FISCO fund received an immediate demand margin call from its broker, UBS, yet rather than allow the fund the customary time to satisfy the margin call to the end of the day, UBS demanded the fund cover all calls and puts at high premiums or they would take control of the fund and start liquidating the fund itself. The fund has terminated its relationship with UBS and transferred the assets to a new custodian. The fund is pursuing legal action against UBS to cover its losses. The Company will participate in any such settlement. The Company has taken steps to redeem all of its assets from marketable securities and reinvesting in its primary bank due to the volatile nature of the market.

Interest income for the first quarter of fiscal year 2009 was $55,000, a decrease of $9,000 lower than that reported in the first quarter of fiscal year 2008. The decrease is due to lower interest rates in the first quarter of fiscal year 2009.

Income tax expense for the first quarter of fiscal year 2009 was $320,000, a $450,000 decrease from that reported in the first quarter of fiscal year 2008. The effective tax rates were 38% and 43% for the first quarter of fiscal year 2009 and 2008, respectively.

Versar's net income for the first quarter of fiscal year 2009 was $525,000 compared to $1,017,000 in the first quarter of fiscal year 2008. The decreased revenue, project funding delays, higher selling, general and administrative costs, and the marketable security loss accounted for the reduced net income for the first quarter of fiscal year 2009.

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

Liquidity and Capital Resources

The Company's working capital as of September 26, 2008 approximated $22,682,000, an increase of $411,000 (2%) from June 29, 2007. In addition, at September 26, 2008, the Company's current ratio was 3.46, an improvement over the 2.67 current ratio reported on June 27, 2007. The increase was due to the reduction of current liabilities during the quarter.

The Company has a line of credit facility with United Bank (the Bank) that provides for advances up to $7.5 million based upon qualifying receivables. Interest on borrowings is based upon the prime rate of interest minus 0.5% (4.5% as of September 26, 2008). In October 2006, the Company obtained a letter of credit of approximately $1.6 million which serves as collateral for surety bond coverage provided by the Company's insurance carrier against project construction work. The letter of credit reduces the Company's availability on the line of credit. The line of credit capacity at September 26, 2008 was $5.9 million. Obligations under the credit facility are guaranteed by Versar and each subsidiary individually and are secured by accounts receivable, equipment and intangibles, plus all insurance policies on property constituting collateral of Versar and its subsidiaries. The line of credit matures in November 2009 and is subject to certain covenants related to the maintenance of financial ratios. These covenants require a minimum tangible net worth of $15 million; a maximum total liabilities to tangible net worth ratio not to exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to 1. The Company was in compliance with such covenants as of September 26, 2008.

Management believes that the current cash balance and marketable securities of over $12 million along with anticipated cash from operations and existing capacity on the line of credit, there is sufficient capital to meet its liquidity needs within the next year. Expected capital requirements for the remainder of fiscal year 2009 are approximately $750,000 primarily to maintain our existing information technology systems and software applications. Such capital requirements will be funded through existing working capital.

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

Below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding the Company's consolidated financial position and results of operations, which require management judgments and estimates, or involve uncertainties. Information regarding our other accounting policies is included in the notes to our consolidated financial statements included elsewhere in this report on Form 10-Q and in our annual report on Form 10-K filed for 2008 fiscal year.

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

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

Allowance for doubtful accounts: Disputes arise in the normal course of the Company's business on projects where the Company is contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability and collectibility. Such disputes, whether claims or unapproved change orders in process of negotiation, are recorded at the lesser of their estimated net realizable value or actual costs incurred and only when realization is probable and can be reliably estimated. Management reviews outstanding receivables on a regular

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

basis and assesses the need for reserves, taking into consideration past collection history and other events that bear on the collectibility of such receivables.

Asset retirement obligation: During fiscal year 2007, the Company recorded an asset retirement obligation associated with the estimated clean-up costs for its chemical laboratory in its National Security business segment. In accordance with SFAS 143, the Company estimated the costs to clean up the laboratory and return it to its original state at a present value of approximately $497,000. The Company currently estimates the amortization and accreation expense to be approximately $180,000 to $190,000 per year over the next 2 1/2 years. The Company is rigorously pursuing reimbursement for such costs and other costs from the U.S. Army as a significant portion of the chemical agent that was used in the chemical laboratory was government owned. If the Company determines that the estimated clean up cost is larger than expected or the likelihood of recovery from the U.S. Army is remote, such adjustments will be reflected when they become known in accordance with SFAS 143. At September 26, 2008 the Company has accrued approximately $551,000 long-term liability to clean up the chemical laboratory.

Goodwill and other intangible assets: The carrying value of goodwill is approximately $776,000 relating to the acquisition of Versar Global Solutions, Inc., which is now part of the Program Management business segment. The Program Management business segment was broken out separately in fiscal year 2007, primarily due to the increase in business volume in Iraq and in the United States construction related work. In performing its goodwill impairment analysis, management has utilized a market-based valuation approach to determine the estimated fair value of the Program Management business segment. Management engages outside professionals and valuation experts, as necessary, to assist in performing this analysis. 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 the Program Management business segment exceeds the carrying value of the net assets of $6.5 million on an enterprise value basis by a substantial margin. Should the Program Management business segments financial performance not meet estimates, then impairment of goodwill would have to be further assessed to determine whether a write down of goodwill value would be warranted. If such a write down were to occur, it would negatively impact the Company's financial position and results of operations. However, it would not impact the Company's cash flow or financial debt covenants.

New accounting pronouncements: In December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R),Business Combinations ("SFAS 141(R)"). SFAS 141(R) changes the requirements for an acquiring entity's recognition and measurement of the assets acquired and liabilities assumed in a business combination. This statement is effective for fiscal years beginning after December 15, 2008. The Company is in the process of determining what effect, if any, the application of the provisions of SFAS 141(R) will have on its financial position and results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,Noncontrolling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51 ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not believe the adoption of SFAS 160 will have a material impact on its consolidated financial statements.

Impact of Inflation

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

Contingencies

Versar and its subsidiaries are parties to various legal actions arising in the normal course of business. The Company believes that the ultimate resolution of these legal actions will not have a material adverse effect on its consolidated financial position and results of operations. (See Part II, Item 1 - Legal Proceedings).

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

Business Segments

Versar currently has four business segments: Program Management, Compliance and Environmental Programs, Professional Services, and National Security. See Note J of the Notes to the Consolidated Financial Statements for details regarding these segments.