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corresp

December 15, 2004

United States Securities and Exchange Commission

Division of Corporation Finance

Attn: Rufus Decker, Accounting Branch Chief

Washington, D.C. 20549-0510

Dear Mr. Decker:

     We have reviewed your letter dated November 16, 2004 regarding our Form 10-K for the fiscal
year ended June 30, 2004 and Form 10-Q for the period ended October 1, 2004. We appreciate your
comments and below address each point raised by your letter. As noted below, we will make the
changes discussed in future filings, commencing with our Form 10-Q for the fiscal period ended
December 31, 2004.

     FORM 10-K FOR THE YEAR ENDED JUNE 30, 2004

General

    1.

    Where a comment below requests additional disclosures or other revisions to be
made, please show us in your supplemental response what the revisions will look like.
These revisions should be included in your future filings.

     RESPONSE:

    As previously mentioned, Versar will make changes as presented in this letter in future
filings commencing with our Form 10-Q for the fiscal period ended December 31, 2004.

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

    2.

    Please expand all of your critical accounting policies to address the following
areas:

    •

    Types of assumptions underlying the most significant and subjective
estimates;

    •

    Any known trends, demands, commitments, events or uncertainties that are
reasonably likely to occur and materially affect the methodology or the
assumptions described;

    •

    If applicable, why different estimates that would have had a material impact
on your financial presentation could have been used in the current period;

    •

    If applicable, why the accounting estimate is reasonably likely to change
from period to period with a material impact on the financial presentation;

    •

    A quantitative discussion of changes in overall financial performance and,
to the extent material, line items in the financial statements if you were to
assume that the accounting estimate were changed, either by using reasonably
possible near-term changes in the most material assumption(s) underlying the
accounting estimate or by using the reasonably possible range of the accounting
estimate. If those changes could have a material effect on your liquidity or
capital resources, then you also would have to explain that effect;

    •

    A quantitative and qualitative discussion of any material changes made to
the accounting estimate in the past three years, the reasons for the changes,
and the effect on line items in the financial statements and overall financial
performance.

    Refer to SEC Releases 33-8098 and 33-8040. See also Section V of the Commission
Guidance Regarding Management’s Discussion and Analysis of Financial Condition and
Results of Operations dated December 29, 2003.

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RESPONSE:

     Since this item is an all encompassing request, Versar considers it appropriate to
provide below the entire revised Critical Accounting Policies discussion we intend to use in
the MD&A for future filings, which also address the above requests for additional
information by the SEC where applicable.

     In reviewing our proposed revised disclosure, please note the following responses to
the latter four sub-bullets above in question number 2.

     There were no different estimates that would have had a material impact on Versar’s
financial presentation that could have been used in the current period. If such a situation
arises in the future, Versar will make the required disclosure.

     Changes in accounting estimates from period to period have not had a material impact on
the financial presentation of the Company. The most significant area where estimates may
have the potential to change is revenue recognition, where project performance, contract
delays, and change orders may impact the revenue recognition on a particular project.
Project reviews are conducted on a monthly basis and adjustments where appropriate are made
in the current period. To date these adjustments have not had a material impact to the
Company’s financial statements.

     In addition to the proposed revised critical accounting policies (MD&A) disclosure
below, we will provide additional discussion of changes in the Company’s overall financial
performance. Such performance changes were not due to changes in accounting estimates,
therefore, the discussion will be included under a separate heading. The changes to
financial performance were due to adjustments to the Company’s cost structure to balance
with the Company’s business volume.

     The Company had a material change in accounting estimate to the Company’s provision for
doubtful accounts in fiscal year 2002. Such change was due to a pending lawsuit and a
disputed contract in the Company’s Architecture and Engineering (now Engineering and
Construction) business segment, which required the Company to set reserves for those
projects in the fourth quarter of fiscal year 2002. This change was disclosed in the
Company’s 10K for the fiscal year 2002.

     In fiscal year 2003, Versar made a material change of $1 million by increasing the tax
valuation allowance account due to a non-recurring charge of $800,000 to reduce the
Company’s overall cost structure and reduce costs in non-performing divisions which resulted
in lower taxable income. The estimate in the Company’s tax valuation account is being
reviewed quarterly taking into consideration actual operating results along with estimated
near term performance. When there is evidence of poor performance, management will set
aside additional tax valuation allowance to compensate for the reduced ability to utilize
the tax assets. When the operating results improve, the valuation allowance account is
adjusted downward accordingly.

     Below is the revised Critical Accounting Policies disclosure:

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 our consolidated financial statements, financial
condition, 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.

     Revenue recognition: Contracts in process are stated at the lower of actual
costs incurred plus accrued profits or net estimated realizable value of 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

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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 potentially impact the revenue recognition on a project. Losses on contracts are
recognized in the period when they become known.

     From time to time we may proceed with work based on customer direction pending
finalization and signing of contractual funding documents. We have an internal process for
approving any such work. All revenue recognition is deferred during periods in which
funding is not received. Costs incurred during such periods are deferred if the receipt of
funding is assessed as probable. In evaluating the probability of funding being received,
we consider our previous experiences with the customer, communications with the customer
regarding funding status, and our knowledge of available funding for the contract or
program. If funding is not assessed as probable, costs are expensed as they are incurred.

     There is the possibility that there will be future and currently unforeseeable
significant adjustments to our estimated contract revenues, costs and margins for fixed
price contracts, particularly in the later stages of these contracts. It is most likely
that such adjustments could occur in our growing Engineering and Construction business
segment. 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. Adjustments to the financial statement are made when they are known.

     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 or 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. Claims against the Company are recognized where loss is considered
probable and reasonably determinable in amount. Management reviews outstanding receivables
on a regular basis and assesses the need for reserves, taking into consideration past
collection history and other events that bear on the collectibility of such receivables.

     Deferred tax valuation allowance: The Company has approximately $4.5 million
in deferred tax assets of which a $3.8 million valuation allowance has been established
against such assets. Management provides for a valuation allowance until such time it can
conclude more likely than not that the Company will derive a benefit from such assets. The
valuation allowance is adjusted as necessary based upon the Company’s ability to generate
taxable income, including management’s ability to implement tax strategies that will enable
the Company to benefit from such deferred tax assets.

     In the first quarter of fiscal year 2003, management implemented a cost restructure
plan to improve the operating performance of the Company. The cost reductions, along with
stronger revenue, resulted in $1.3 million operating income, a $1 million improvement from
the prior year operating income of $262,000. As the likelihood of utilizing deferred tax
assets increased, management reduced the tax valuation allowance from $4.1 million to $3.8
million in fiscal year 2004.

     Goodwill and other intangible assets: On January 30, 1998, Versar completed
the acquisition of The Greenwood Partnership, P.C. subsequently renamed (Versar Global
Solutions, Inc. or VGSI). The transaction was accounted for as a purchase. Goodwill
resulting from this transaction was approximately $1.1 million. In fiscal year 2003, the
Company adopted the Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill
and Other Intangible Assets” which eliminated the amortization of goodwill, but does require
the Company to test such goodwill for impairment annually. Currently, the carrying value of
goodwill is approximately $776,000 relating to the acquisition of VGSI, which is now part of
the Architecture and Engineering (A&E) reporting unit. In performing its goodwill
impairment analysis,

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management has utilized a discounted cash flow model to determine the estimated fair
value of the (A&E) reporting unit. This model requires management, among other things, to
estimate future revenue and expenses of the A&E reporting unit based upon current contract
backlog and projected growth resulting from new business. Management engages outside
professionals and valuation experts, as necessary, to assist in performing this analysis.
Should the A&E reporting unit financial performance not meet estimates, then the impairment
of the goodwill would have to be further assessed to determine whether the asset should be
reduced. If such a reduction were to occur, it would impact the Consolidated Statement of
Operations and Balance Sheet, yet would not impact the Company’s cash flow or bank
covenants.

     For fiscal years 2004 and 2003, management concluded, based upon its impairment
analysis, that goodwill relating to the A&E reporting unit was not impaired.

     The MD&A will also include the following sections discussing trends and risks inherent
in the Company’s business.

     Financial trends: From fiscal year 2002 to 2004, the net service revenue of
the Company continued to decline as the Company wound down a major contract in fiscal years
2003 and 2004 in support of the Army STEPO suit production contract in the Defense business
segment. With increased funded contract backlog in the fourth quarter of fiscal year 2004
and the first quarter of fiscal year 2005, the Company began to reverse that trend.
Multi-million dollar contracts were awarded to the Engineering and Construction segment.
These included roofing projects in San Diego in support of Defense Logistic Agency and
hurricane emergency response in various locations in Florida. Recently, the Company was
awarded $3 million construction oversight work in Iraq. The Company anticipates that both
gross and net revenues will continue to increase in fiscal year 2005. Such continued growth
is dependent upon winning additional follow-on projects and additional new contracts in
order to keep the funded contract backlog at levels that would support such continued
growth. Management continues to pursue many business opportunities to continue such growth,
but can give no assurances that this will be achieved.

     Other risk factors or uncertainties that could significantly impact our financial performance:

    •

    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 commercial clients;

    •

    Delays in project contracted engagements;

    •

    Unanticipated contract changes impacting profitability;

    •

    Reductions in prices by our competitors;

    •

    The ability to obtain follow on project work;

    •

    Our failure to properly to manage projects resulting in additional costs;

    •

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

    •

    Loss of key personnel;

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    •

    The ability to compete in a highly competitive environment; and

    •

    Diversion of federal funding to Iraq.

Results of Operations, page 16

    3.

    During the year ended June 30, 2003, you recorded a non-recurring charge of
$800,000 to reduce overall cost structure and reduce costs in non-performing divisions.
Please disclose your restructuring in the notes to the financial statements for the
period in which the exit or disposal activity is initiated and any subsequent period
until the activity is completed. Please include a reconciliation, of the beginning and
ending liability balances showing separately the changes during the period. In
addition, include the disclosures discussed in paragraph 20 of SFAS 146 and SAB Topic
5:P in your footnotes to your financial statements and in your MD&A below:

     RESPONSE:

          During the first quarter of fiscal