Executive Overview

Organization

Our business operations consist primarily of diversified engineering, logistics, management, and technical services performed on a contract basis. Substantially all of our contracts are with agencies of the United States Government (the "Government") and other Government prime contractors.

Our unincorporated divisions include BAV Division ("BAV"), Communications and Engineering Division ("CED"), Coast Guard Division ("VCG"), Engineering and Logistics Division ("ELD"), Field Support Services Division ("FSS") beginning in June 2007, Fleet Maintenance Division ("FMD"), Management Sciences Division ("MSD"), and Systems Engineering Division ("SED"). Energetics Incorporated ("Energetics"), Integrated Concepts and Research Corporation ("ICRC"), acquired in June 2007, and G&B Solutions, Inc. ("G&B"), acquired in April 2008, are our currently active subsidiaries.

Customers and Services

We provide engineering, design, logistics, management and technical services to the Government, other Government prime contractors, and commercial entities. Our largest customer is the U.S. Department of Defense ("DoD"), including agencies of the U.S. Navy, Army and Air Force.

Operating Segments

We manage our business operations under four reportable operating segments:
the Federal Group, the International Group, the IT, Energy and Management Consulting Group (formerly the Energy and Environmental Group, renamed in April 2008), and the Infrastructure Group (formerly the Infrastructure and Information Technology Group, renamed in April 2008).

Federal Group - The Federal Group provides engineering, technical, management, integrated logistics support and information technology services to all U.S. military branches and other Government agencies. This Group includes CED, ELD, FSS, MSD and SED.

CED - CED is dedicated to supporting the Army's Communications and Electronics Command ("CECOM") in the management and execution of the Rapid Response ("R2") Program, which supports clients across DoD and the Government. CED manages execution of tasks involving research and development, technology insertion, systems integration and engineering, hardware/software fabrication and installation, testing and evaluation, studies and analysis, technical data management, logistics support, training and acquisition support. A large portion of our current work on this program is related to the U.S. military involvement in Iraq and Afghanistan, including the Army Equipment Support Program and the Assured Mobility Systems Program.

CED Army Equipment Support Program - Our CED division has a program on its Rapid Response support contract to provide maintenance and logistics services in support of U.S. Army equipment in Iraq and Afghanistan. In February 2008 a new task order with a ceiling value of approximately $282 million was awarded to continue this program work through February 2009. This program had revenues of approximately $219 million for the year ended December 31, 2007 and approximately $245 million for the first three quarters of 2008.

CED Assured Mobility Systems Program - Our CED division has a program on its Rapid Response support contract to provide technical support services in support of U.S. Army PM Assured Mobility Systems and U.S. Army Tank-automotive and Armaments Command ("TACOM"). This program has a current ceiling value of approximately $271 million and a period of performance that ends in March 2009. This program had revenues of approximately $28 million for the year

ELD - ELD provides full life cycle engineering, logistics, maintenance and refurbishment services to extend and enhance the life of existing equipment. ELD principally supports the U.S. Army, Army Reserve and Army National Guard with core competencies in combat and combat service support system conversions, technical research, sustainment and re-engineering, system integration and configuration management.

FSS - We formed FSS in June 2007 to provide worldwide field maintenance and logistics support services for a wide variety of military vehicles and equipment, including performance of organizational, intermediate and specialized depot-level maintenance. FSS principally supports the U.S. Army and Marine Corps by providing specialized Field Service Representatives ("FSR") and Field Support Teams ("FST") in areas of combat operations and austere environments. FSS work includes some field service support on the CED Army Equipment Support program.

MSD - MSD provides services for product and process improvement, supporting a variety of Government and commercial clients. MSD provides training, consulting, and implementation support in the areas of: Enterprise Excellence, Lean Six Sigma, process and product optimization, project management, leadership quality engineering, Integrated Product and Process Development ("IPPD"), and reliability engineering. MSD's services range from individual improvement projects to global organizational change programs.

SED - SED provides comprehensive systems and software engineering, logistics, and prototyping services to DoD. Our services offered through SED principally support U.S. Army, Air Force, and Marine Corps combat and combat support systems. SED's core competencies include: systems technical support, configuration management and life cycle support for wheeled and tracked vehicles and ground support equipment; obsolescence management, service life extension, and technology insertion programs; and technical documentation and data packages. A large portion of our current SED work is related to the U.S. military involvement in southwest Asia.

TBPS Program - Our SED Division performs work on a program providing a protection system, the Tanker Ballistic Protection System, for vehicles deployed by the U.S. Army in Iraq. This program is nearing completion. The total contract ceiling value on this program as of September 30, 2008 was approximately $96 million, and the remaining available contract ceiling was approximately $2.7 million.

RCV Maintenance Program - SED was awarded contract coverage on a program to provide maintenance work on U.S. Army Route Clearance Vehicles in Kuwait (the "RCV Maintenance Program") in September 2008. We expect the initial phase of this program to run for two years under contractual coverage of approximately $194 million.

International Group - The International Group provides engineering, industrial, logistics, and foreign military sales services to the U.S. military and other Government agencies. This Group includes BAV, FMD and VCG.

BAV - Through BAV, we provide assistance to the U.S. Navy in executing its Foreign Military Sales ("FMS") Program for surface ships sold, leased or granted to foreign countries by providing program management, engineering, technical support, logistics services for ship reactivations and transfers and follow-on support. BAV's expertise includes: ship reactivation/transfer, overhaul and maintenance, follow-on technical support, FMS integrated logistics support, engineering and industrial services, training and spare and repair parts support.

FMD - FMD provides global field engineering, logistics, maintenance and information technology services to the U.S. Navy and Air Force, including fleet-wide ship and aircraft support programs. FMD's expertise includes ship repair and modernization, ship systems installations, ordnance engineering and

VCG - VCG provides the U.S. Coast Guard with FMS support and life cycle support for vessels transferred to foreign governments. VCG's core competencies include pre-transfer joint vessel inspections, reactivations, crew training, transit assistance, heavy-lift contracting, logistics support, technical support and overseas husbandry.

IT, Energy and Management Consulting Group - The IT, Energy and Management Consulting Group provides technical and consulting services primarily to various civilian Government agencies. This group includes Energetics and, as of April 2008, G&B.

Energetics - Energetics provides technical and management support in areas of nuclear energy, technology research, development, demonstration, and consulting services in the field of energy and environmental management. Energetics' expertise lies in state-of-the-art and advanced technology assessment, technical and economic feasibility analysis, technology transfer, R&D program planning, engineering studies, market assessment, strategic resource management, regulatory analysis, environmental compliance and risk management. Customers include the U.S. Department of Energy, including the Office of Nuclear Energy, Science and Technology; the U.S. Department of Homeland Security, through new contract work won in 2007; and other Government agencies and commercial clients.

G&B - G&B is an established information technology provider to many Government agencies, including the Departments of Homeland Security, Interior, Labor, Agriculture, and Housing and Urban Development, the Pension Benefit Guaranty Corporation, and the National Institutes of Health. G&B's core expertise lies in enterprise architecture development, information assurance/business continuity, program and portfolio management, network IT services and systems design and integration.

We acquired G&B in April 2008. Cash paid at closing for G&B was approximately $19.5 million, which includes approximately $650 thousand of prepaid retention bonuses that will be expensed in the post-acquisition period as the affected employees provide services, less approximately $600 thousand for certain closing adjustments. We also incurred approximately $200 thousand of direct acquisition costs consisting of legal, accounting and other fees. Under the terms of the acquisition, we will be required to make additional payments of up to $4.2 million over the next three years if G&B achieves certain financial performance targets.

Infrastructure Group - We formed our Infrastructure Group in the second quarter of 2007, upon acquiring ICRC. We purchased ICRC in June 2007 for an initial cash purchase price of approximately $11.8 million plus potential additional payments in future years if specified financial targets are achieved. ICRC is engaged principally in providing engineering and transportation infrastructure services.

Port of Anchorage Project - A significant amount of ICRC's revenue and income comes from services performed for the Port of Anchorage in Alaska (the "POA Project"). This intermodal expansion program to provide infrastructure services to the port will significantly expand the size of the port's facilities and allow for larger ships, more dock space, improved cargo flow, improved traffic flow next to the port, more environmentally friendly port operations and other modernization enhancements. Some of the infrastructure services on this project typically cannot be performed during the winter months. The seasonal nature of this work will cause fluctuations in our revenues on this project, with higher revenue levels in summer months and lower revenue levels in winter months. In July 2008, ICRC was awarded a new unrestricted contract to continue work on this program. The contract has an estimated ceiling amount of $704 million, a three-year base period of

                           Concentration of Revenues
                                (in thousands)
                    For the nine months ended September 30,
                    ---------------------------------------

        Source of Revenue                  2008     %        2007     %
        -----------------                  ----     -        ----     -
        CED Army Equipment Support      $244,896    33    $149,356    33
        CED Assured Mobility Systems      61,231     8      14,515     3
        CED Other                        112,747    15      31,929     7
                                        --------   ---    --------   ---
          Total CED                      418,874    56     195,800    43

        BAV Egypt                         36,879     5      39,380     9
        BAV India                             55     -      36,765     8
        BAV Other                         21,821     3      17,869     4
                                        --------   ---    --------   ---
          Total BAV                       58,755     8      94,014    21

        Treasury Seized Asset Program     40,760     5      37,675     8

        Port of Anchorage Contract        67,700     9      12,708     3

        VSE Other                        161,133    22     114,828    25
                                        --------   ---    --------   ---
          Total Revenues                $747,222   100    $455,025   100
                                        ========   ===    ========   ===

Management Outlook

The growth in our revenues and profits during 2007 and 2008 presents us with both challenges and opportunities. Certain work efforts that have supported our growth in recent years have expired or are due to expire. Large task order awards under the Rapid Response support contract, including the CED Army Equipment Support Program, are due to expire in early 2009. A large majority of the originally proposed work on the TBPS Program has been delivered and this program is due to expire in the near future.

We believe that we are prepared to meet the challenge of replacing the expiring work. Our work in the DoD market remains strong. ELD has expanded its workforce, facilities, capacity to provide services, contractual coverage and funding since its inception, resulting in increases in revenues from these services in 2006, 2007 and the first nine months of 2008. We expect further increases in the remainder of 2008 and in future years. The recent award of the RCV Maintenance program gives us a major new source of work. We continue to seek new task order awards under the Rapid Response support contract. We have also submitted a proposal for a follow-on contract to the current Rapid Response contract. If awarded, the Government could begin issuing new task orders on this follow-on contract beginning in early 2009.

We are augmenting our core base of DoD work by emphasizing growth in our non- DoD services. These efforts have included: 1) a renewed emphasis on marketing our Energetics services that is beginning to show results in 2008, 2) work on the Treasury Seized Property Management program, and, 3) the acquisitions of ICRC in 2007 and G&B in 2008. We expect these efforts that are directed toward the growth of our work in the Federal Civil marketplace to contribute to overall future revenue growth and financial performance.

Although our current prospects for continued growth in 2009 appear to be favorable, we recognize that 2009 is a federal government transition year and government spending priorities may change in ways that we cannot predict at this time.

Funded Backlog

Revenues in government contracting businesses depend on contract funding
("Bookings") and funded contract backlog is an indicator of potential future
revenues. A summary of our bookings and revenues for the nine month periods
ended September 30, 2008 and 2007, and funded contract backlog as of September
30, 2008 and 2007 is as follows:

                                                       (in millions)
                                                      2008        2007
                                                      ----        ----
        Bookings                                    $1,033        $603
        Revenue                                       $747        $455
        Funded backlog                                $706        $478

Approximately $364 million of the bookings for 2008 were on the CED Army Equipment Support Program and CED Assured Mobility Systems Program. These two programs accounted for approximately $229 million of the bookings for 2007.

VSE Stock in Employee 401(k) Plan and ESOP Accounts

We decided that employees should have an opportunity to diversify their VSE stock in their 401(k) accounts held in the VSE Corporation Employee ESOP/401(k) Plan (the "Plan") beginning with our 2008 Plan year. In January 2008, employees were notified that they may elect to transfer any portion of their 401(k) accounts that is invested in VSE stock from that investment into another investment alternative under the Plan. This right extends to all of VSE stock held under the 401(k) portion of the Plan. In addition, we have decided to terminate and liquidate the ESOP portion of the VSE Corporation Employee ESOP/401(k) Plan and, as elected by the employees, either distribute VSE stock held in the ESOP accounts to the employees or rollover such VSE Stock into an Individual Retirement Account or employee plan selected by the employee. ESOP shares were distributed to employees in the third quarter of 2008.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141(R), "Business Combinations; a replacement of FASB Statement No. 141," which will become effective for us on January 1, 2009. The new standard will replace existing guidance and significantly change accounting and reporting relative to business combinations in consolidated financial statements, including requirements to recognize acquisition-related transaction and post acquisition restructuring costs in results of operations as incurred. SFAS No. 141(R) will be effective for businesses acquired after the effective date.

On January 1, 2008, we adopted SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a market-based hierarchy for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value, but does not require any new fair value measurements. The SFAS No. 157 requirements for certain non- financial assets and liabilities have been deferred until the first quarter of 2009 in accordance with Financial Accounting Standards Board Staff Position ("FSP") 157-2. The adoption of SFAS 157 did not have a material impact on our results of operations, financial position or cash flows.

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC on March 7, 2008 for a full discussion of our accounting policies.

Revenue by Contract Type

Our revenues by contract type for the nine months ended September 30, 2008 and
2007 were as follows (in thousands):


                                   2008             2007
          Contract Type          Revenues    %    Revenues    %
          -------------          --------    -    --------    -
          Cost-type . . . . .    $182,689    25   $159,932    35
          Time and materials.     533,345    71    261,889    58
          Fixed-price . . . .      31,188     4     33,204     7
                                 --------   ---   --------   ---
                                 $747,222   100   $455,025   100
                                 ========   ===   ========   ===

A significant portion of the time and materials revenues are attributable to revenues from the CED Rapid Response contract. The majority of the revenues on this contract have resulted from the pass through of subcontractor support services that have lower profit margins than the margins on our other contracts.

Results of Operations

We show certain items in the table below, including our consolidated revenues,
pre-tax income, and net income, and the changes in these items for the three
and nine month periods ended September 30, 2008 and 2007 (in thousands).

                         Three Months         Nine Months        Change
                     Ended September 30, Ended September 30, Three     Nine
Description            2008       2007       2008      2007   Months    Months
                       ----       ----       ----      ----   ------    ------
Revenues             $306,811  $174,692   $747,222  $455,025 $132,119  $292,197
Contract costs        297,330   168,747    723,097   438,899  128,583   284,198
                     --------  --------   --------  -------- --------  --------
Gross Profit            9,481     5,945     24,125    16,126    3,536     7,999
Selling, general and
  Administrative
  Expenses                758       576      1,829       970      182       859
Interest expense
(income), net              (5)     (161)      (118)     (532)     156       414
                     --------   -------   --------  --------  -------  --------
Income before income
  taxes                 8,728     5,530     22,414    15,688    3,198     6,726
Provision for income
  taxes                 3,419     2,171      8,738     6,053    1,248     2,685
                     --------   -------   --------  --------  -------  --------
Net Income           $  5,309   $ 3,359   $ 13,676  $  9,635  $ 1,950  $  4,041
                     ========   =======   ========  ========  =======  ========

Our revenues and contract costs increased by approximatley 76% for the three months ended September 30, 2008, as compared to the same period of 2007. Revenues increased by approximately 64% and contract costs increased by approximately 65% for the nine months ended September 30, 2008 as compared to the same period of 2007. The primary reasons for the increases are 1) increased revenues from the Army Equipment Support program and other CED task orders, including the U.S. Army PM Assured Mobility Systems and TACOM support;
2) ICRC is included in our financial results for the full three and nine month periods in 2008 compared to a shorter period in 2007 as a result of the June 2007 acquisition; 3) revenues of G&B from the April 14, 2008 date of acquisition through September 30, 2008; and 4) increases in FMD, ELD, FSS, and Energetics services.

Selling, general and administrative expenses consist primarily of costs and expenses that are not chargeable or reimbursable on our operating unit

Income before income taxes increased by approximately 58% and 43% for the three and nine month periods ended September 30, 2008 as compared to the same periods of 2007. The increases are primarily due to 1) profits from the growth of revenues on the CED Army Equipment Support program and other CED task orders; 2) the inclusion of ICRC, G&B and FSS in our operating results for the full three and nine month periods of 2008; 3) increased profitability of SED services performed on the TBPS Program; and 4) revenue increases from Energetics services.

Federal Group Results

We show consolidated revenues and income before income taxes and the changes
in these items for our Federal Group for the three and nine month periods
ended September 30, 2008 and 2007 in the following table (in thousands).

                         Three Months         Nine Months         Change
                     Ended September 30, Ended September 30, Three      Nine
Description             2008     2007       2008      2007   Months     Months
-----------             ----     ----       ----      ----   ------     ------
Revenues             $188,934  $91,619   $475,400  $245,414  $97,315  $229,986
                     ========  =======   ========  ========  =======  ========
Income before income
  taxes              $  4,830  $ 2,815   $ 13,149  $  8,579  $ 2,015  $  4,570
                     ========  =======   ========  ========  =======  ========
Profit percentage        2.6%     3.1%       2.8%      3.5%

Revenues for our Federal Group increased by approximately 106% and 94% for the three and nine month periods ended September 30, 2008, as compared to the same periods for the prior year. The increases in revenues for 2008 primarily resulted from 1) revenues from the CED Army Equipment Support Program work; 2) additional work on other CED task orders, including CED's U.S. Army PM Assured Mobility Systems and TACOM support; 3) increased revenues from ELD's equipment refurbishment services; and 4) revenues from the inclusion of FSS in 2008. The increases in revenues of this segment were offset partially by a decrease in TBPS Program revenues.

Income before income taxes for our Federal Group increased by approximately 72% and 53% for the three and nine month periods ended September 30, 2008, as compared to the same periods for the prior year. The increases are primarily due to 1) the increase in revenues on the CED Army Equipment Support Program work and other CED task orders; 2) increased profitability of SED services performed on the TBPS Program; and, 3) profits from the inclusion of FSS services in our operating results in 2008. These increases in profits were partially offset by a decline in ELD profits resulting from losses on work performed in a new location in the third quarter. These losses are expected to be eliminated as the work performed at this new location becomes more fully developed. Also, a significant amount of the increase in our Federal Group revenues resulted from the CED Army Equipment Support Program work and from other CED task orders that have lower profit margins than our other work, which caused profits as a percentage of revenues to decline as compared to prior year percentages.

International Group Results

We show consolidated revenues and income before income taxes and the changes
in these items for our International Group for the three and nine month
periods ended September 30, 2008 and 2007 in the following table (in
thousands).

                         Three Months         Nine Months          Change
                     Ended September 30, Ended September 30,  Three      Nine
Description             2008      2007      2008      2007    Months     Months
-----------             ----      ----      ----      ----    ------     ------
Revenues               $55,577  $58,795  $156,462  $174,810  $ (3,218) $(18,348)
                       =======  =======  ========  ========  ========  ========
Income before income
  taxes                $ 1,005  $ 1,259  $  4,080  $  5,002  $   (254) $   (922)
                       =======  =======  ========  ========  ========  ========
Profit percentage         1.8%     2.1%      2.6%      2.9%

Revenues for our International Group decreased by approximately 5% and 10% for the three and nine month periods ended September 30, 2008, as compared to the same periods for the prior year. Our BAV division had approximately $36.8 mllion of 2007 revenue from a ship transfer to India that was completed in 2007, and there was no similar ship transfer in 2008. This resulted in lower . . .