Executive Overview

Organization

Our business operations consist primarily of diversified program management, logistics, engineering, IT, construction program and consulting services performed on a contract basis. Substantially all of our contracts are with Government agencies and other Government prime contractors.

Our business operations are managed under groups that consist of one or more divisions or wholly owned VSE subsidiaries that perform our work. Our Federal Group consists of our Communications and Engineering Division ("CED"), Engineering and Logistics Division ("ELD"), Field Support Services Division ("FSS"), Management Sciences Division ("MSD"), and Systems Engineering Division ("SED"). Our International Group consists of our BAV Division ("BAV"), Coast Guard Division ("VCG"), and Fleet Maintenance Division ("FMD"). Our IT, Energy and Management Consulting Group consists of our wholly owned subsidiaries Energetics Incorporated ("Energetics") and G&B Solutions, Inc. ("G&B"). Our Infrastructure Group consists of our wholly owned subsidiary Integrated Concepts and Research Corporation ("ICRC").

Customers and Services

We provide program management, logistics, engineering, IT, construction program, and consulting 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. We also provide services to various Federal Civil customers.

Segments

Our operations are conducted within four reportable segments aligned with our management groups: 1) Federal; 2) International; 3) IT, Energy and Management Consulting; and 4) Infrastructure.

Federal Group - Our Federal Group provides engineering, technical, management and integrated logistics support services to U.S. military branches and other government agencies. The divisions in this group include 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 United States Government ("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. The contract supporting the R2 Program is scheduled to expire in January 2011.

CED Army Equipment Support Program - Our CED division had a program on its R2 support contract to provide maintenance and logistics services in support of U.S. Army equipment in Iraq and Afghanistan. Our revenues on this program were approximately $34 million and approximately $66 million for the first quarter of 2009 and 2008, respectively. Work on this program expired in February 2009.

CED Assured Mobility Systems Program - Our CED division has a program on its R2 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"). Our revenues on this program were approximately $28 million and approximately $15 million for the first quarter of 2009 and

RCV Modernization Program - We were awarded a task order on our R2 support contract for a program to provide maintenance work on U.S. Army Route Clearance Vehicles in Kuwait (the "RCV Modernization Program") in September 2008. We expect the initial phase of this program to run for two years under contractual coverage of approximately $194 million. Revenues on this program for the first quarter of 2009 were approximately $19 million.

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 - FSS provides 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.

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 the DoD. SED principally supports the 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.

International Group - Our International Group provides engineering, industrial, logistics and foreign military sales services to the U.S. military and other government agencies. The divisions in this Group include 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. Our 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. The level of revenues and associated profits resulting from fee income generated by this program varies depending on a number of factors, including the timing of ship transfers and associated support services ordered by foreign governments and economic conditions of potential customers worldwide. Changes in the level of activity associated with the Navy's ship transfer program have caused quarterly and annual revenue fluctuations.

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 logistics, facility operations, war reserve materials management, aircraft sustainment and maintenance automation and IT systems integration.

Contract Field Teams Program - In July 2008, our FMD division was awarded one of several prime contracts to support the United States Air Force Contract Field Teams ("CFT") Program. The CFT Program awards have a maximum ceiling of approximately $10.12 billion. Under the program, we are providing rapid deployment and long-term support services for a variety of Air Force requirements to maintain, repair and modernize equipment and systems. While our revenues under the contract cannot be predicted, the award provides us with the opportunity to compete for and expand our work performed for the Air Force.

VCG - VCG has provided the U. S. Coast Guard with FMS support and life cycle support for vessels transferred to foreign governments. The work performed by VCG for the U.S. Coast Guard has decreased and we have decided to make this division inactive beginning in 2009.

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, Housing and Urban Development, the Social Security Administration, 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 for an initial cash purchase price of approximately $19.5 million plus potential additional payments in future years if specified financial targets are achieved.

Port of Anchorage Intermodal Expansion Project ("PIEP") - A significant amount of ICRC's revenues and income comes from services performed on the Port of Anchorage Intermodal Expansion Project in Alaska (the "PIEP") under a contract with the U.S. Department of Transportation Maritime Administration. This contract requires ICRC to provide program management services, including project management, procurement, permitting, design, and construction to the Government to expand the size of the port's facilities to accommodate larger ships, more dock space, improved cargo flow, improved traffic flow at the port, more environmentally friendly port operations and other modernization enhancements. Some of the infrastructure improvements under the PIEP typically cannot be performed during the winter months due to subarctic conditions. The seasonal nature of this work will cause fluctuations in our revenues on this contract, with revenue levels typically higher in summer months and lower in winter months. The PIEP contract has an estimated ceiling amount of $704 million, a three-year base period of performance, and four one-year option periods.

                           Concentration of Revenues
                                (in thousands)
                     For the three months ended March 31,
                     ---------------------------------------
                                           2009              2008
        Source of Revenue                Revenues    %      Revenues    %
        -----------------                --------    -      --------    -
        CED Army Equipment Support       $ 34,140    14     $ 65,542    35
        CED Assured Mobility Systems       28,320    12       15,108     8
        RCV Modernization                  18,598     8            -     -
        CED Other                          41,693    17       23,613    12
                                         --------   ---     --------   ---
          Total CED                       122,751    51      104,263    55

        BAV Egypt                          13,598     6       11,908     6
        BAV Other                           7,046     3        4,012     2
                                         --------   ---     --------   ---
          Total BAV                        20,644     9       15,920     8

        Treasury Seized Asset Program       9,343     4       15,280     8

        PIEP Contract                       4,951     2        7,402     4

        Other                              82,766    34       45,858    25
                                         --------   ---     --------   ---
          Total Revenues                 $240,455   100     $188,723   100
                                         ========   ===     ========   ===

Management Outlook

The growth in our revenues and profits in recent years presents us with both challenges and opportunities. Our work in the DoD market increased significantly in 2008 and several efforts within that market remain strong. Our ELD division has expanded its workforce, facilities, capacity to provide services, contractual coverage and funding since its inception, resulting in further increases in revenues from these services in the first quarter of 2009. Our investment in facilities and personnel to support this work leaves us well positioned to serve DoD's growing need for our equipment refurbishment and sustainment services. We expect further increases in this division's work going forward. Based on indications from new requests for FMS assets and on congressional approval of certain ship transfers, we expect to show increases in our BAV division ship transfer revenues in 2009 and 2010. Our CED Assured Mobility Systems Program is expected to continue to contribute significant revenues through its scheduled expiration in January 2011.

In addition to the growth in some of our current DoD programs, we expect recent new awards to contribute to our revenues and profits going forward. The award of the RCV Maintenance Program gives us a significant new source of work

We also have three other multiyear, multiple award, indefinite delivery, indefinite quantity ("omnibus") contracts that have large nominal ceiling amounts with no funding committed at the time of award. These are the SeaPort Enhanced contract with the U.S. Navy, the Field and Installation Readiness Support Team ("FIRST") contract with the U.S. Army, and the U.S. Army PEO CS & CSS Omnibus III contract. We are one of several awardees on each contract. While our future revenues from these contracts cannot be predicted with certainty, these contracts provide us with the opportunity to compete for work that could contribute to revenues.

The expansion of current work in our ELD and BAV divisions and the new work arising from the RCV Maintenance and CFT Programs will help us to replace certain work efforts that have supported our growth in recent years and have either expired or are due to expire. In November 2008, we successfully completed a four-year, $96 million program to provide a protection system, the Tanker Ballistic Protection System ("TBPS"), for vehicles deployed by the U.S. Army in Iraq. The CED Army Equipment Support Program expired in February 2009, as scheduled. Additionally, the U.S. Army informed us in January 2009 that they would not consider our proposal for a new contract to succeed our current R2 Program contract. The Army Office of Command Counsel encouraged the U.S. Army to provide us a comprehensive post-award debriefing in accordance with applicable regulations after the award of the successor contract is eventually made. We are evaluating our options regarding this matter, including the filing of a protest after the award of the successor contract. Should we be unsuccessful in our efforts in challenging our exclusion from this award, we will need to replace the R2 Program revenues with other new revenues or to move the work performed through the R2 contract to one of our other omnibus contracts. Our other omnibus contracts can be used to accommodate work performed by our employees and subcontractors. We expect to continue our work on existing task orders on our current R2 contract through the scheduled contract expiration in January 2011.

We are augmenting our core base of DoD work by emphasizing growth in our non- DoD services. These efforts have included: 1) an emphasis on marketing our Energetics services that has shown favorable results, including some major contract awards in 2008 that will be worked over the next three to five years,
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.

Our growth prospects are further evidenced by a continuing increase in our workforce. As of March 31, 2009, our employee count was 2,244, which represents an increase of 324 employees, or approximately 17% since December 31, 2008.

We also know there are other risks and uncertainties related to our business. We recognize that 2009 is a Government transition year and Government spending priorities may change in ways that we cannot fully predict at this time. There are indications of a shift in Government spending to more energy, IT related infrastructure, health care IT, and DoD legacy systems services. We feel that our current capabilities have us well prepared to pursue these opportunities.

To summarize our outlook, we believe our business prospects are both bright and challenging. We are confident that the expansion of our equipment refurbishment and sustainment services performed by ELD and the ship transfer services performed by BAV; our new work on the RCV Maintenance and CFT

Funded Backlog

Revenues in our industry depends on contract funding ("Bookings") and funded
contract backlog is an indicator of potential future revenues. A summary of
our bookings and revenues for the three month periods ended March 31, 2009 and
2008, and funded contract backlog as of March 31, 2009 and 2008 is as follows:

                                                       (in millions)
                                                      2009        2008
                                                      ----        ----
        Bookings                                      $232        $350
        Revenue                                       $240        $189
        Funded backlog                                $555        $570

Recent Accounting Pronouncements

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.

In the first quarter of 2009, we adopted SFAS No. 157 as it relates to non- financial assets and liabilities that are recorded at fair value on a non- recurring basis. The impact of its adoption was not material.

Critical Accounting Policies

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 year ended December 31, 2008 filed with the SEC on March 3, 2009 for a full discussion of our critical accounting policies.

Revenue by Contract Type

Our revenues by contract type were as follows (in thousands):

                                              Three Months
                                             Ended March 31,
Contract Type                             2009    %       2008    %
-------------                             ----    -       ----    -
Cost-type . . . . . . . . . . . . . .  $ 41,108   17   $ 44,018   23
Time and materials  . . . . . . . . .   190,449   79    135,704   72
Fixed price . . . . . . . . . . . . .     8,898    4      9,001    5
                                       --------  ---   --------  ---
                                       $240,455  100   $188,723  100
                                       ========  ===   ========  ===

A significant portion of our time and materials revenues are primarily from the CED Army Equipment Support Program, the CED Assured Mobility Systems Program and other CED R2 Program task orders. Substantially all of the revenues on these programs result from the pass through of subcontractor support services that have a low profit margin for us.

Results of Operations

The results of operations are as follows (in thousands):

                                               Three Months
                                              Ended March 31,
Description                                   2009      2008    Change    %
-----------                                   ----      ----    ------    -
Revenues . . . . . . . . . . . . . . . . . $240,455  $188,723   $51,732   27
Contract costs . . . . . . . . . . . . . .  232,809   182,816    49,993   27
                                           --------  --------   -------  ---
Gross Profit . . . . . . . . . . . . . . .    7,646     5,907     1,739   29
Selling, general and
  administrative expenses  . . . . . . . .      202       163        39   24
Interest income, net . . . . . . . . . . .      (59)     (147)       88  (60)
                                           --------  --------   -------  ---
Income before income taxes . . . . . . . .    7,503     5,891     1,612   27
Provision for income taxes . . . . . . . .    2,863     2,293       570   25
                                           --------  --------   -------  ---
Net income   . . . . . . . . . . . . . . . $  4,640  $  3,598   $ 1,042   29
                                           ========  ========   =======  ===

Our revenues increased approximately $51.7 million, or approximately 27% for the three months ended March 31, 2009, as compared to the same period of 2008. The primary reasons for the increase are 1) an increase in CED revenues from work on R2 contract task orders, including the RCV Modernization program of approximately $18.5 million; 2) increases in our International Group revenues of approximately $15.3 million; 3) G&B revenues of approximately $11.7 million are included in our financial results in 2009 as compared to 2008 when G&B had not yet been acquired; and 4) growth in the equipment refurbishment services provided by our ELD division of approximately $8.6 million.

Our gross profits increased approximately $1.7 million, or approximately 29% for the three months ended March 31, 2009, as compared to the same period of 2008. The primary reasons for the increase are 1) an increase in gross profits provided by ELD equipment refurbishment services of approximately $1.5 million, and an increase in gross profits of approximately $1 million attributable to the inclusion of G&B in our operating results. These increases helped to replace a decrease in gross profits of approximately $1.4 million due to completion of the TBPS program in 2008 and resulting absence of this program from our operating results in 2009. The remaining difference in gross profits is due to smaller increases and decreases in our other operating divisions and subsidiaries.

Selling, general and administrative expenses consist primarily of costs and expenses that are not chargeable or reimbursable on our operating unit contracts. The increase in these expenses for the three months ended March 31, 2009 as compared to the same period of 2008 is in line with the increase in our business activity.

Federal Group Results

The results of operations for our Federal Group are as follows (in thousands):

                                    Three Months
                                   Ended March 31,
Description                        2009       2008      Change      %
-----------                        ----       ----      ------      -
Revenues                        $152,957   $122,321    $ 30,636     25
                                ========   ========    ========     ==
Income before income taxes      $  4,558   $  3,472    $  1,086     31
                                ========   ========    ========     ==
Profit percentage                   3.0%       2.8%

Revenues for our Federal Group increased approximately $30.6 million or approximately 25% for the three month period ended March 31, 2009, as compared to the same period for the prior year. The increase in revenues for 2009 resulted primarily from 1) increased CED revenues from work on R2 contract task orders, including the RCV Modernization program, of approximately $18.5 million; 2) growth in the equipment refurbishment services provided by our ELD

. . .