• Threatened or pending litigation;

• The timing of expenses incurred for corporate initiatives;

• Employee hiring, utilization, and turnover rates;

• The seasonality of spending in the federal government and for commercial clients;

• Delays in project contracted engagements;

• Unanticipated contract changes impacting profitability;

• Reductions in prices by our competitors;

• The ability to obtain follow-on work;

• Failure to properly manage projects resulting in additional costs;

• The cost of compliance for the Company's laboratories;

• The results of a negative government audit potentially impacting our costs, reputation and ability to work with the federal government;

• Loss of key personnel;

ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
• The ability to compete in a highly competitive environment; and

• Federal funding delays due to wars in Iraq and Afghanistan.

Results of Operations
Versar's gross revenue for fiscal year 2009 totaled $112,196,000, a $3,406,000 (3%) decrease compared to gross revenue of $115,602,000 for fiscal year 2008. Gross revenue for fiscal year 2008 increased by $12,876,000 (13%)

over that reported in fiscal year 2007.

                                                           Years Ended
                                              June 26,      June 27,      June 29,
                                                2009          2008          2007
                                                         (In thousands)
      GROSS REVENUE
      Program Management                      $  71,526     $  68,896     $  58,765
      Compliance and Environmental Programs      19,649        30,429        29,839
      Professional Services                      11,476         8,101         7,318
      National Security                           9,545         8,176         6,804

                                              $ 112,196     $ 115,602     $ 102,726

Gross revenue in the Program Management business segment for fiscal year 2009 was $71,526,000, an increase of $2,630,000 (4%) over that reported in fiscal year 2008. A majority of the increase is attributable to efforts to support both the Air Force and the Army in Iraq as part of the reconstruction efforts as well as new construction management work being performed in the United Arab Emirates. Gross revenue for the Program Management business segment for fiscal year 2008 was $68,896,000, an increase of $10,131,000 (17%) over that reported in fiscal year 2007. The increase is attributable to the Company's continued efforts to support both the Air Force and the Army in Iraq as part of the reconstruction support efforts. Gross revenue for the Compliance and Environmental Programs business segment for fiscal year 2009 were $19,649,000, a decrease of $10,780,000 (35%) over that reported in fiscal year 2008. Approximately 80% of the decrease was due to decreased work for municipal aquatic facilities as a result of the global economic business downturn which has significantly impacted our municipal clients capital expenditure budgets. The balance of the shortfall is also primarily related to reduced spending due to poor economic conditions by other clients of the Compliance and Environmental business segment. Gross revenue for the Compliance and Environmental Programs business segment for fiscal year 2008 was $30,429,000, an increase of $590,000 (2%) over that reported in fiscal year 2007. The increases are primarily attributable to increased work for municipal aquatic facilities. Gross revenue for the Professional Services business segment for fiscal year 2009, were $11,476,000, an increase of $3,375,000 (42%) over that reported in fiscal year 2008. Gross revenue for the Professional Services business segment for fiscal year 2008 was $8,101,000, an increase of $783,000 (11%) over that reported in fiscal year 2007. The increases in both periods are attributable to additional professional service work obtained from the U.S. Army to provide additional personnel in support of their missions. Gross revenues from the National Security business segment for fiscal year 2009 were $9,545,000, an increase of $1,369,000 (17%) over that reported in fiscal year 2009. The increase is attributable to increased personal protective suit sales as well as increased chemical laboratory testing during fiscal year 2009. The business management approach changed to focus on sustainable revenue streams to reduce business fluctuations and have more predictable revenue streams and improving operating margins in this business segment. Gross revenue for the National Security business segment for fiscal year 2008 was $8,176,000, an increase of $1,372,000 (20%) over that reported in fiscal year 2007. The increase in fiscal year 2008 is attributable to higher commercial laboratory testing work coupled with a decline in the level of activity in this segment during fiscal year 2007.

ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Purchased services and materials, primarily subcontractors, in fiscal year 2009 were $60,583,000, a decrease of $7,924,000 (12%) over that reported in fiscal year 2008. The decrease was the result of the decline in acquatic facility work in the Compliance and Environmental business segment in fiscal year 2009 as a result of the economic downturn. In fiscal year 2008, purchased services increased by $5,757,000 (9%) over that reported in fiscal year 2007. The increase was due to higher subcontracted work in the Program Management business segment.
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 $3,826,000 (11%) in fiscal year 2009 compared to that reported in fiscal year 2008. Direct costs of services in fiscal year 2008 increased by $4,153,000 (14%) over that reported in fiscal year 2007. The increase in fiscal year 2009 is attributable to the continuing changes in the Company's business mix among the business segments creating a demand for additional Professional Services personnel as well as increased National Security business volume resulting in increased staffing in those segments. The increase in fiscal year 2008 is attributable to the increase in overall business volume across all business segments in fiscal year 2008 to support the business growth of the Company.
Gross profit for fiscal year 2009 was $14,480,000, an increase of $692,000 (5%) over that reported in fiscal year 2008. Gross profit in fiscal year 2008 increased by $2,966,000 (27%) over that reported in fiscal year 2007.

                                                           Years Ended
                                              June 26,      June 27,      June 29,
                                                2009          2008          2007
                                                         (In thousands)
      GROSS PROFIT
      Program Management                      $  10,467     $   9,398     $   7,037
      Compliance and Environmental Programs         884         2,390         2,313
      Professional Services                       1,734         1,290         1,257
      National Security                           1,395           710           215

                                              $  14,480     $  13,788     $  10,822

Gross profit for fiscal year 2009 in the Program Managements business segment was $10,467,000, an increase of $1,069,000 (11%) over that reported in fiscal year 2008. Gross profit in fiscal year 2008 for the Program Management business segment increased by $2,361,000 (34%) over that reported in fiscal year 2007. The increase in both periods are primarily due to increased gross revenue and improved operating margins. Gross profit for fiscal year 2009 in the Compliance and Environmental business segment was $884,000, a decrease of $1,506,000 (63%) over that reported in fiscal year 2008. Gross profit in fiscal year 2008 for the Compliance and Environmental business segment increased by $77,000 (3%) over that reported in fiscal year 2007. Approximately 40% of the decrease in 2009 is due to the decline in municipal aquatic facility work in fiscal year 2009. The remaining balance of the decrease is due to the poor economic conditions in the United States economy impacting our municipal clients. Gross profit for fiscal year 2009 in the Professional Services business segment was $1,734,000, an increase of $444,000 (34%) over that reported in fiscal year 2008. Gross profit in fiscal year 2008 for the Professional Services business segment increased by $33,000 (3%) over that reported in fiscal year 2007. The 2009 increase was due to the increased gross revenues during fiscal year 2009. Gross profit for fiscal year 2009 in the National Security business segment was $1,395,000, an increase of $685,000 (96%) over that reported in fiscal year 2008. Gross profit in fiscal year 2008 for the National Security business segment increased by $495,000 (230%) over that reported in fiscal year 2007. The increases are primarily due to increased gross revenue in fiscal years 2009 and 2008.

ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Selling, general and administrative expenses for fiscal year 2009 were $8,876,000, an increase by $579,000 (7%) over that reported in fiscal year 2008. Selling, general and administrative expenses in fiscal year 2008 increased by $1,628,000 (24%) over that reported in fiscal year 2007. The increases in fiscal year 2009 are primarily due to increased business development activity for future business growth as well as increased Sarbanes Oxley compliance costs.
Operating income for fiscal year 2009 was $5,604,000, an increase of $113,000 (2%) over that reported in fiscal year 2008. Operating income for fiscal year 2008 increased by $1,338,000 (32%) over that reported in fiscal year 2007. The slight increase in fiscal year 2009 was due to the improved financial performance in three out of four of the Company's business segments, which was in part offset by poor performance in the Compliance and Environmental business segment. The increase in fiscal year 2008 was primarily due to increased gross revenues and improved operating margins during fiscal year 2008.
During fiscal year 2009, the Company recorded a $328,000 loss on marketable securities that the Company was holding in the FISCO Income Plus Fund. The FISCO fund received an immediate demand margin call from its broker, UBS. Rather than allow the fund the customary time to satisfy the margin call at the end of the day, UBS demanded the fund cover all calls and puts at high premiums immediately or indicated it would take control of the fund and start liquidating the fund. The fund has terminated its relationship with UBS and transferred the assets to a new custodian. The fund is currently taking legal action against UBS to cover its losses. The Company has participated in any recovery from such action to date. During the remaining periods of fiscal year 2009, the Company recovered $24,000 of the initial loss before the funds were liquidated from the FISCO fund. The Company has liquidated its remaining assets from marketable securities and now holds them in depository accounts with its primary bank due to the volatile nature of the market.
Interest expense for fiscal year 2009 was $36,000, compared to interest income of $173,000 in fiscal year 2008. The increase in interest expense was due to costs associated with capital leases and the financing of insurance premiums and the lower federal prime rate of interest resulting in no offsetting interest income received on funds held by the Company in its bank depository account due to the lower federal prime rate.
Income tax expense for fiscal year 2009 was $2,071,000, a decrease of $202,000 compared to that reported for fiscal year 2008. Income tax expense for fiscal year 2008 increased by $3,378,000 over that reported in fiscal year 2007 primarily due to the release of the Company's tax valuation allowance during fiscal year 2007 resulting in a tax benefit of $1,105,000 for fiscal year 2007. During fiscal year 2007, the Company was carrying a valuation allowance against its deferred tax assets. In the third quarter of fiscal year 2007, the Company re-evaluated the need for the valuation allowance. Because of the Company's continued improved financial performance over the prior three years, management believes that the Company would be able to utilize the full benefit of the deferred tax asset. The effective tax rates were 39.5% and 40.1% for fiscal years 2009 and 2008, respectively.
In summary, Versar's net income for fiscal year 2009 was $3,169,000 compared to $3,391,000 in fiscal year 2008 and $5,282,000 in fiscal year 2007. The reduction of net income is primarily attributable due to the loss from the FISCO fund in the first quarter of fiscal year 2009 as mentioned above.

ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
REVENUE CLIENT BASE
   Versar provides professional services to various industries, serving
government and commercial clients. A summary of revenue generated from the
Company's client base is as follows:

                                                     For the Years Ended
                                June 26, 2009           June 27, 2008           June 29, 2007
                                                       (In thousands)
     Government
     EPA                     $   1,891         2 %   $   2,399         2 %   $   2,753         3 %
     State & Local               8,589         7 %      16,236        14 %      13,936        14 %
     Department of Defense      92,583        83 %      88,245        76 %      65,997        64 %
     Other                       2,576         2 %       3,657         3 %      16,512        16 %
     Commercial                  6,557         6 %       5,065         5 %       3,528         3 %


     Gross Revenue           $ 112,196       100 %   $ 115,602       100 %   $ 102,726       100 %

Liquidity and Capital Resources
The Company's working capital as of June 26, 2009 was approximately $25,513,000, an increase of 15%. In addition, the Company's current ratio at June 26, 2009 was 3.04, compared to 2.67 reported on June 27, 2008. The Company's financial ratios have continued to improve due to the Company's strong financial performance during fiscal year 2009. Accounts receivables increased by approximately $6 million primarily due to changes in contract vehicles that have caused payment delays.
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 less 1/2%. Borrowing rates at June 26, 2009 and June 27, 2008 were 2.75% and 4.5%, respectively. The Company currently has a stand by letter of credit of $455,147, 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 borrowing base on the line of credit. The line of credit capacity as of June 26, 2009 was approximately $7.0 million. Obligations under the credit facility are guaranteed by the Company and each subsidiary individually and collectively are secured by accounts receivable, equipment and intangibles, plus all insurance policies on property constituting collateral. The line of credit matures in November 2009. The Company is in the process of seeking a renewal of the line of credit facility with United Bank. The Company has obtained a commitment letter from United Bank to extend its line of credit to September 30, 2010. The line of credit is and will continue to be subject to certain covenants related to the maintenance of financial ratios. These covenants require a minimum tangible net worth of $22.5 million; a maximum total liabilities to tangible net worth ratio not to exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to 1. Borrowings under the renewed line of credit will be at prime less 1/2% with a floor interest rate of 3.5%. Failure to meet the covenant requirements gives the Bank the right to demand outstanding amounts due under the line of credit, which may impact the Company's ability to finance its working capital requirements. As of June 26, 2009, the Company had no outstanding borrowings and was in compliance with the financial covenants.
The Company believes that with its current cash balance of over $8 million along with anticipated cash flows from operations, working capital will be sufficient to meet the Company's liquidity needs within the next fiscal year. Expected capital requirements for fiscal year 2010 are approximately $1,000,000, primarily for upgrades to maintain the Company's existing information technology systems. Such capital requirements will be funded through existing working capital.
As part of the Company's diversification and expansion efforts, the Company has provided short term financing to two business partners to help accelerate those business opportunities within fiscal year 2010. See footnotes D, Notes Receivable, and M, Subsequent Events, of the financial statements for further details.

ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Contractual Obligations
   At June 26, 2009, the Company has short-term and long-term obligations of
approximately $13,341,000, including short-term obligations of approximately
$3,146,000 which will become due over the next twelve months in fiscal year
2010. The Company has contractual obligations primarily related to lease
commitments and notes payable. The table below specifies the total contractual
payment obligations as of June 26, 2009.

Contractual                                                  Less than           1-3            4-5          After 5
Obligations                              Total Cost           1 year            Years          Years          Years
(In thousands)

Operating lease obligations             $     11,950        $     2,701        $ 3,939        $ 3,455        $  1,855
Capital lease obligations                        835                 76            126            133             500
Notes payable                                    336                336              -              -               -
Estimated interest obligations                   220                 33             54             49              84

Total contractual cash obligations      $     13,341        $     3,146        $ 4,119        $ 3,637        $  2,439

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-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. The Company records income from major fixed-price contracts, extending over more than one accounting period, using the percentage-of-completion method. During the performance of such contracts, estimated final contract prices and costs are periodically reviewed and revisions are made as required. Fixed price contracts can be significantly impacted by changes in contract performance, contract delays, liquidated damages and penalty provisions, and contract change orders, which may affect the revenue recognition on a project. Revisions to such estimates are made when they become known. Detailed quarterly project reviews are conducted with project managers to review all project progress accruals and revenue recognition.
There is the possibility that there will be future and currently unforeseeable adjustments to our estimated contract revenues, costs and margins for fixed price contracts, particularly in the later stages of these contracts. Such adjustments are common in the construction industry given the nature of the contracts. These adjustments could either positively or negatively impact our estimates due to the circumstances surrounding the negotiations of change orders, the impact of schedule slippage, subcontractor claims and contract disputes which are normally resolved at the end of the contract.
Allowance for doubtful accounts: Disputes arise in the normal course of the Company's business on projects where the Company is contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability and collectibility. Such disputes, whether claims or unapproved change orders in process of negotiation, are recorded at the lesser of their estimated net realizable value or actual costs incurred and only when realization is probable and can be reliably estimated.

ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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.
Net deferred tax asset: The Company has approximately $1.5 million in net deferred tax assets as of June 26, 2009. During the third quarter of fiscal year 2007, the Company released the entire $2.95 million tax valuation allowance that was previously established against such assets due to the improved earnings and likelihood of realizing such deferred tax assets in future periods.
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 1 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 June 26, 2009, the Company has accrued approximately $586,000 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 . . .