Executive Overview

Organization

Our business is focused on providing sustainment services for U.S. Department of Defense ("DoD") legacy systems and equipment and professional services to DoD and Federal Civilian agencies. Operations consist primarily of diversified program management, logistics, engineering, equipment refurbishment, IT, construction management and consulting services performed on a contract basis. Substantially all of our contracts are with United States Government ("Government") agencies and other Government prime contractors.

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

Customers and Services

We provide program management, logistics, engineering, legacy equipment sustainment, 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 civilian Government 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, SED and MSD. MSD became inactive in 2009.

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 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 the Middle East and Asia. 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. We performed work on this program for a full year in 2008, but only two months in 2009 because the 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"). In January 2009, we were awarded a $389 million follow-on task order on this program for work that will run through January 2011.

RCV Modernization Program - We received 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 $235 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 - Past activities of MSD focused on services for product and process improvement, supporting a variety of Government and commercial clients. These service offerings have been transferred to our G&B operations and MSD does not currently conduct operating activities.

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 GLOBAL, FMD and VCG. VCG became inactive in 2009.

GLOBAL - Through GLOBAL, 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 historically caused quarterly and annual revenue fluctuations.

FMD - FMD provides 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.

Treasury Seized Asset Program - FMD also provides management, maintenance, storage and disposal support for the U.S. Department of Treasury's seized and forfeited general property program. Our contract with the Department of Treasury to support this program is a cost plus incentive fee contract that contains certain conditions under which the incentive fee revenue is earned. The amount of incentive fee earned depends on our costs incurred on the contract compared to certain target cost levels specified in the contract. Per the contract, an assessment of actual costs compared to target costs is made once annually. The target cost levels in this contract may be subject to negotiation and change if the customer's work requirements vary from the scope of work originally contained in the contract. We recognize incentive fee when the amount is fixed or determinable and collectability is reasonably assured. Due to the conditions under which the incentive fee for this contract is awarded, and to the potential for changes in the cost targets as work requirements vary, the full amount of incentive fee for the work we perform in any one period may not be fixed or determinable and the collectability may not be reasonably assured until a subsequent period. See our Management Outlook section for further discussion of recent events relating to financial performance on this program.

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 with certainty, 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 made 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, policy, business, and management support in areas of clean and efficient energy, climate change mitigation, infrastructure protection, measurement technology, and global health. Energetics' expertise lies in managing collaborative processes to bring together diverse stakeholders in decision making, R&D program planning and evaluation metrics, state-of-the-art technology assessments, technical and economic feasibility analysis, and technical communications. Customers include the U.S. Department of Energy, the U.S. Department of Homeland Security, U.S. Department of Commerce, 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, and Defense; 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, systems design and integration, and quality assurance services.

Infrastructure Group - This group consists of our ICRC subsidiary. ICRC is engaged principally in providing engineering and transportation infrastructure services.

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. The PIEP contract has an estimated ceiling amount of $704 million, a three-year base period of performance, and four one-year option periods. 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. In addition, revenues and profits are down significantly on this project during the nine months ended September 30, 2009 due to temporary delays in the work schedule caused by certain environmental and technical issues near the site on which ICRC conducts its PIEP work. We expect revenue levels on this job to recover because most of the work that we are unable to perform in 2009 will be performed in future years.

                          Concentration of Revenues
                                (in thousands)
                   For the nine months ended September 30,
                   ---------------------------------------
                                     2009                2008
Source of Revenue                  Revenues     %      Revenues     %
-----------------                  --------     -      --------     -
CED Army Equipment Support         $ 54,099      7     $244,896     33
CED Assured Mobility Systems        102,844     14       61,231      8
RCV Modernization                    62,751      8            -      -
CED Other                           123,409     16      112,747     15
                                   --------    ---     --------    ---
  Total CED                         343,103     45      418,874     56

GLOBAL Egypt                         42,313      5       36,879      5
GLOBAL Romania                       15,648      2        6,637      1
GLOBAL Other                         14,082      2       15,239      2
                                   --------    ---      -------    ---
  Total GLOBAL                       72,043      9       58,755      8

Treasury Seized Asset Program        34,988      5       40,760      5

PIEP Contract                        26,607      4       67,700      9

Other                               281,891     37      161,133     22
                                   --------    ---     --------    ---

  Total revenues                   $758,632    100     $747,222    100
                                   ========    ===     ========    ===

Revenues on the "Other" line in the table above include: 1) revenues in our Federal Group from legacy sustainment equipment refurbishment services performed by our ELD division and from work performed by our FSS and SED divisions on programs other than the RCV Modernization Program; 2) revenues in our FMD division from services provided on engineering and technical services task orders and from work performed on the CFT Program; and 3) revenues from various contracts performed in our IT, Energy and Management Consulting Group.

Management Outlook

We have made a strategic commitment to increase our direct labor revenue and diversify our service offerings and customer base to improve our profit margins. These efforts are showing results in 2009 and we anticipate further advances in future years. Concurrently, we will continue to pursue large DoD management contracts for which we have demonstrated proven expertise as those opportunities arise.


Our employee count increased significantly in 2008 and this trend has continued in 2009. As of September 30, 2009, we had 2,501 employees, which represents an increase of 581 employees, or approximately 30% since December 31, 2008. The majority of our new employees are engaged in work on DoD legacy systems sustainment services, an area on which we believe DoD will be sharply focused in the near future. Concurrently, requirements for work performed by our subcontractors that generated much of our revenue growth in years prior to 2009 have tapered off. As a result, an increasing amount of our work is performed by our employees and we are relying less on subcontractors. Revenue from work performed by our employees, or direct labor revenue, typically has a higher profit margin than subcontractor generated revenue, which generally has little or no associated profit. While the decline in subcontractor work is expected to result in flatter overall revenue growth in the near term, we will benefit from improved profit margins associated with our strong employee growth, enhanced control of our client relationships, and reduced dependence upon subcontractor priorities.

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 recent contract awards that will be performed during the next three to five years; 2) the growth of G&B employee count and revenues in 2009; and 3) our continued commitment to grow through strategic acquisitions of companies that perform work outside the DoD market. We expect these efforts directed toward the growth of our work in the Federal Civilian marketplace to contribute to overall future revenue growth and financial performance.

We also know there are risks and uncertainties related to our business. We recognize that 2009 is a Government transition year and Government spending priorities may change significantly. There are indications of a shift in Government spending to more energy, IT-related infrastructure, health care IT, and DoD legacy systems sustainment services. We believe that our current capabilities have us well prepared to pursue these opportunities.

The Government transition can also affect the timing of contract awards and the funding process. The federal technical services industry is experiencing an extraordinary delay in contract awards while the new administration ensures these transactions are consistent with its priorities. Additionally, the Government workforce has experienced a loss of qualified contracting personnel in recent years. While the Government is seeking to replace this personnel loss, we believe that this transition in the Government workforce may impact proposal decisions and delay funding of new and ongoing contract efforts. A summary of our funding activity is presented below.

Funded Backlog

Revenues in our industry 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, 2009
and 2008, and funded contract backlog as of September 30, 2009 and 2008 is as
follows:
                                                       (in millions)
                                                      2009        2008
                                                      ----        ----
        Bookings                                      $789      $1,033
        Revenue                                       $759        $747
        Funded backlog                                $597        $706

Rapid Response Program

The U.S. Army informed us in January 2009 that it would not consider our proposal for a new contract, known as Rapid Response - Third Generation ("R2- 3G") to succeed our current R2 Program contract. We protested this decision with the General Accounting Office ("GAO") in June 2009. As a result of the protest efforts by us and other offerors, the Army has agreed to take corrective action and may amend the solicitation to allow additional prime contract awards. If additional prime contract awards are solicited, VSE and


other offerors that originally were not considered for contract awards may be eligible for such additional awards. There is also a possibility that new awards will not be granted and that the entire R2-3G program will be cancelled by the Army.

Concurrent with the initial notification that we would not be considered for an R2-3G award, we began moving work that had previously been performed through our R2 contract to our other omnibus contracts. We are continuing this effort by seeking new task order awards on our other omnibus contracts for this work as the R2 task orders expire. The award of a prime contract under the R2-3G program would provide us with an additional contract on which to place this work and potential new work. We expect to continue our work on existing task orders under our current R2 contract through the scheduled contract expiration in January 2011, including work on our CED Assured Mobility Systems and RCV Modernization Programs that we expect will continue generating significant revenues, despite CED revenues tapering off while the R2 contract nears completion. As anticipated and communicated in our previous SEC filings, the CED division had program work set to expire in February 2009, but we were also awarded new work in January 2009. As shown in the "Concentration of Revenues" table above, the total CED revenue under the R2 contract for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, has declined from 56% to 45% of our revenues. It is difficult to assess the financial impact regarding the final outcome of the R2-3G program and our level of participation, given uncertain DoD work requirements and the potential to perform work under other multiple award omnibus contracts.

A substantial portion of our revenues on the R2 contract are from low profit margin subcontract work. We believe our efforts in replacing subcontract work with direct labor are resulting in expected increases in our profit margins.

Treasury Seized Asset Program

Contract terms on this program allow changes to the target costs on which our incentive fee is calculated on an annual basis when work requirements vary from the original scope. We recently concluded negotiations with our customer that finalized target cost levels for the customer's fiscal year ending September 30, 2009 to reflect more closely the customer's work requirements for the year and amended certain other terms. With the conclusion of these negotiations, our incentive fee for this fiscal year became fixed and determinable and collectability was reasonably assured. This allowed us to recognize incentive fees in the third quarter of 2009 on all of our work performed during the Government's fiscal year ended September 30, 2009. We recognized revenue and pretax income on this program in the third quarter of 2009 of approximately $3.3 million, primarily due to this incentive fee recognition. The customer also exercised the next option year, allowing us to continue work through September 30, 2010. A similar process to determine incentive fees related to work performed during the September 30, 2010 fiscal year will be made and associated incentive fees will likely be recognized in the third quarter of 2010. We also agreed with the customer that future award periods in the contract would be terminated.

As a result of these negotiations, we have come to a mutual agreement with our customer that the current cost plus incentive fee contract type is inappropriate for the volatility of the workload. Accordingly, this contract will be re-competed under a more appropriate contract type for work to be performed after September 30, 2010.

Other Programs and Contracts

Our work has increased significantly in recent years and we believe that several new and ongoing efforts will help us sustain this level of work.

In addition to a significant new source of work in 2009 and 2010, the RCV Maintenance Program gives us a key presence in Kuwait and is expected to provide us with significant potential for additional work in the future. Our FSS division is performing the work on the RCV Maintenance Program and currently has bids pending on additional work in Kuwait and in Afghanistan. If


we are awarded these contracts, we believe they would significantly increase our workforce and revenues in these locations.

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 nine months of 2009. ELD revenues are primarily generated from direct labor. Our investment in facilities and personnel to support this work enhances our ability to serve DoD's growing need for our equipment refurbishment and sustainment services.

Our ELD division currently has several bids pending for additional new work. If we are awarded these task orders, we believe they would significantly increase the number of our employees and revenues.

Our SED division was recently awarded a subcontract to provide Vehicle Integration Kits ("VIKs"), spare VIK components, and engineering and installation support on tactical wheeled vehicles and combat vehicles for the U.S. Army and U.S. Marine Corps through a multiple award indefinite delivery/indefinite quantity contract under the Driver's Vision Enhancer- Family of Systems ("DVE-FOS") program. The subcontract has an anticipated ceiling value of approximately $190 million over a five-year period. We have pursued this work for several years and we believe that this award will rekindle the growth of revenues and profits in our SED division after its successful completion in November 2008 of 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.

Our GLOBAL division revenues have increased in 2009 compared to the prior year and based on indications from new requests for FMS assets, congressional approval of certain ship transfers, and our receipt of an award of a $249 million contract option modification from the U. S. Navy to provide one additional year of continued support, we expect further increases in our ship transfer revenues in the near term. This may include some of our current client countries and some new client countries.

The CFT Program contract gives us the opportunity to increase our sustainment and legacy services performed for the Air Force. This program is contributing to direct labor revenue increases in our FMD division. Our FMD division also recently entered into a software license and services agreement that will enable us to expand our logistics support services for air, sea and land military assets. Our investment in this asset gives us the opportunity for further increases in our FMD division revenues.

Our G&B subsidiary has received two major awards in 2009. One award is a subcontract to provide Systems Operations Support Services to the Social Security Administration. While future revenues from this award cannot be determined with certainty, the engagement has a ceiling value of $100 million over five years. G&B also received a $26 million prime contract award with a base period of one year and four one-year option periods from the Army Armament Research, Development and Engineering Center to provide Enterprise Excellence services. This award is an indicator of the success we anticipated in our transition of product and process improvement service offerings from our MSD division to G&B. We expect both awards to provide solid growth prospects for our G&B subsidiary in the years ahead.

Our Energetics subsidiary was awarded one of the largest contracts in its history in 2009 by the U.S. Department of Energy's Office of Electricity Delivery and Energy Reliability. Energetics expects to receive up to $11.3 million to provide services under a three-year subcontract.

Our ICRC subsidiary's work on the PIEP in Anchorage, Alaska has been a challenge in 2009. Revenues and profits are down significantly on this project in 2009 due to temporary delays in the work schedule caused by certain environmental and technical issues near the site on which ICRC conducts its PIEP work. We expect revenue levels on this job to recover because most of the . . .