UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [ x ] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ x ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a -12 VSE CORPORATION (Name of Registrant as Specified In Its Charter) Payment of Filing Fee (Check the appropriate box): [ x ] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1. Title of each Class of securities to which transaction applies: N/A 2. Aggregate number of securities to which transaction applies: N/A 3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): N/A 4. Proposed maximum aggregate value of transaction: N/A 5. Total fee paid: N/A [ ] Fee paid previously with preliminary materials: [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1. Amount previously paid: N/A 2. Form, Schedule or Registration Statement No.: N/A 3. Filing Party: N/A 4. Date Filed: N/A VSE CORPORATON 2550 Huntington Avenue, Alexandria, Virginia 22303-1499 Notice of 2006 Annual Meeting of Stockholders and Proxy Statement Fellow Stockholders: You are cordially invited to attend the annual meeting of stockholders of VSE Corporation to be held on Tuesday, May 2, 2006, commencing at 10:00 a.m., Washington, D.C. time, at the VSE Building, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499. The matters expected to be considered at the annual meeting are described in the accompanying notice of meeting and proxy statement. At the meeting we will also review the activities of the company during the past year and its current activities. Stockholders will have an opportunity to ask questions. I hope you will be able to join us. To ensure that your VSE common stock is voted at the meeting, please promptly sign and date the enclosed proxy card and return it to VSE in the enclosed envelope. Your vote is important. Even if you return your proxy, you may attend the meeting and vote in person. Please note the location for this meeting. The VSE Building is located at 2550 Huntington Avenue, Alexandria, Virginia 22303-1499, just off I-95/I-495 at Exit 176 (Telegraph Road - South). The building is also within walking distance of the Huntington Avenue Metro Station (Yellow Line), using the Lower Level exit to Huntington Avenue. Very truly yours, VSE CORPORATION D. M. Ervine Chairman, President, CEO and COO March 31, 2006 VSE CORPORATION 2550 Huntington Avenue, Alexandria, Virginia 22303-1499 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 2, 2006 To the Stockholders of VSE Corporation: Notice is hereby given that the annual meeting of stockholders of VSE Corporation, a Delaware corporation ("VSE"), will be held on Tuesday, May 2, 2006, commencing at 10:00 a.m., Washington, D.C. time, at the VSE Building, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499, for the following purposes: 1. To elect seven directors to serve until the next annual meeting of stockholders and until their successors are duly elected and qualified; 2. To approve an amendment to VSE's Restated Certificate of Incorporation to increase the authorized number of shares of VSE Common Stock, par value $.05 per share, from 5,000,000 shares to 15,000,000 shares; 3. To approve the adoption of the VSE Corporation 2006 Restricted Stock Plan; 4. To ratify the appointment of Ernst & Young LLP as VSE's independent certified public accountants for the fiscal year ending December 31, 2006; and 5. To transact such other business as may properly come before the meeting or any adjournment thereof. Only record holders of VSE common stock as of the close of business on March 20, 2006, will be entitled to notice of, and to vote at, the meeting or any adjournments thereof. The list of stockholders entitled to vote at the meeting or any adjournments thereof will be open to the examination of any stockholder during the 10 days prior to the meeting at VSE's offices located at 2550 Huntington Avenue, Alexandria, Virginia 22303-1499, during ordinary business hours. The VSE Corporation 2005 Annual Report to Stockholders, which contains consolidated financial statements and other information of interest to stockholders, accompanies this proxy material. EVEN IF YOU EXPECT TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY. TO RETURN YOUR PROXY YOU MAY USE THE SELF- ADDRESSED STAMPED ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY, IF YOU WISH, WITHDRAW YOUR PROXY AND VOTE YOUR SHARES PERSONALLY. By Order of the Board of Directors C. S. Weber, Secretary March 31, 2006 VSE CORPORATION __________________________________ PROXY STATEMENT Annual Meeting of Stockholders to be held on May 2, 2006 __________________________________ INTRODUCTION General This proxy statement is being furnished to the stockholders of VSE Corporation, a Delaware corporation ("VSE" or the "Company"), in connection with the solicitation of proxies by VSE's board of directors (the "Board") for use at VSE's annual meeting of stockholders to be held on Tuesday, May 2, 2006, commencing at 10:00 a.m., Washington, D.C. time, at the VSE Building, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499, and at any adjournments thereof for the purposes specified in the accompanying notice of meeting (the "Meeting"). The mailing address of VSE's principal executive office is 2550 Huntington Avenue, Alexandria, Virginia 22303-1499. VSE's telephone number is (703) 960-4600. This proxy statement and the accompanying notice and form of proxy are first being sent or given to the holders of VSE common stock, par value $.05 per share, (the "stockholders") on or about March 31, 2006. The close of business on March 20, 2006, is the record date for the determination of stockholders entitled to notice of, and to vote at, the Meeting. Holders of a majority of VSE's outstanding common stock, par value $.05 per share (the "Stock" or "VSE Stock"), as of March 20, 2006, must be present at the Meeting, either in person or represented by proxy, to constitute a quorum for the transaction of business at the Meeting. As of the close of business on March 20, 2006, there were 2,364,111 shares of Stock outstanding and approximately 250 stockholders of record. Each stockholder is entitled to one vote for each share of Stock held of record as of the close of business on March 20, 2006, on all matters which may be submitted to the stockholders at the Meeting. Voting and Revocation of Proxies All Stock represented by valid proxies will be voted at the Meeting in accordance with the directions on the proxies. If no direction is indicated on a proxy, the Stock represented thereby will be voted as recommended by the Board, including for (a) the election as VSE directors of the seven nominees listed below under Proposal No. 1, (b) the approval of the amendment to VSE's Restated Certificate of Incorporation to increase VSE authorized Stock from 5,000,000 to 15,000,000 shares, as discussed below under Proposal No. 2, (c) the approval of VSE's 2006 Restricted Stock Plan, as discussed below under Proposal No. 3, and (d) the ratification of the appointment of Ernst & Young LLP as VSE's independent certified public accountants for the fiscal year ending December 31, 2006, as discussed below under Proposal No. 4. Votes cast by proxy or in person at the Meeting will be tabulated by the inspectors of election appointed for the Meeting. The inspectors of election will treat abstentions as Stock that is present and entitled to vote for purposes of determining the presence of a quorum, but as unvoted for purposes of determining the approval of any matter submitted to stockholders for a vote. If a broker indicates on a proxy that such broker does not have discretionary authority as to certain Stock to vote on a particular matter, such shares will be included in determining the presence of a quorum, but will not be entitled to be voted with respect to such matter. As of the date of this proxy statement, the Board does not intend to present, and has not been informed that any other person intends to present, any matter for action at the Meeting other than those matters specifically referred to herein. If, however, any other matters are properly presented to the Meeting for action, the proxy holders will vote the proxies, which confer authority on such holders to vote on such matters, in accordance with their best judgment. The persons named as attorneys-in-fact in the proxies are VSE officers. A stockholder returning a proxy to VSE may revoke it at any time before it is exercised by granting a later proxy with respect to the same Stock or by communicating such revocation in writing to VSE's secretary. In addition, any stockholder who has executed a proxy but attends the Meeting may cancel a previously given proxy by voting in person whether or not the proxy has been revoked in writing. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of Stock as of March 20, 2006, based on VSE records, information filed with the Securities and Exchange Commission (the "SEC"), and information provided to VSE. The voting and investment powers of the Stock listed below are held solely by the reported owner unless otherwise indicated. ________________________________________________________________________________ Shares beneficially Percent of Name of Beneficial Owner owned class (a) ________________________________________________________________________________ Certain Beneficial Owners - ------------------------- VSE Corporation Employee ESOP/401(k) Plan (b) 259,262 11.0% Oberweis Asset Management, Inc. 119,864 5.1% 3333 Warrenville Road, Suite 500 Lisle, IL 60532 (c) Non-Employee Directors - ---------------------- Clifford M. Kendall (d) 27,596 1.2% Calvin S. Koonce (d) (e) 530,851 22.4% James F. Lafond (d) 2,253 * David M. Osnos (d) 6,813 * Jimmy D. Ross (d) 9,647 * Bonnie K. Wachtel (d) 28,581 1.2% Executive Officers and Other Director - ------------------------------------- Thomas G. Dacus (d) 13,345 * Donald M. Ervine (d) 93,452 3.9% James M. Knowlton (d) 47,429 2.0% Thomas R. Loftus (d) 27,726 1.2% James E. Reed (d) 0 - Craig S. Weber (d) 59,851 2.5% - 2- ________________________________________________________________________________ Shares beneficially Percent of Name of Beneficial Owner owned class (a) ________________________________________________________________________________ Group - ----- Directors, Nominees, and Executive Officers as a group (12 persons) (d) (f) 847,544 34.2% * Represents less than one percent. (a) Based on 2,364,111 shares of VSE Stock outstanding as of the March 20, 2006, record date. (b) These shares are held in trust for the benefit of the ESOP/401(k) Plan participants. Three VSE officers serve as Plan trustees. The Plan participants have voting power over 204,552 shares allocated to their respective ESOP accounts, while the Plan trustees share voting and investment power over the remaining 54,810 shares. The mailing address for the ESOP/401(k) Plan is 2550 Huntington Avenue, Alexandria, Virginia 22303-1499. (c) The number of shares beneficially held by Oberweis Asset Management, Inc., ("OAM") is based solely on information contained in a Schedule 13G filed with the SEC on February 14, 2006, by OAM, James D. Oberweis, and James W. Oberweis. The report states that James D. Oberweis and James W. Oberweis have shared voting power over the 119,864 shares. The report also states that James D. Oberweis and James W. Oberweis are U.S. citizens and are the principal stockholders of OAM, an Illinois corporation, and that OAM serves as an investment advisor to The Oberweis Funds. (d) Includes the following number of shares of Stock which the non-employee directors, executive officers, other directors, and all directors, nominees, and executive officers as a group (12 persons) have the right to purchase pursuant to the exercise of stock options which are exercisable within the next 60 days: Clifford M. Kendall-969, Calvin S. Koonce-2,563, James F. Lafond-1,063, David M. Osnos-2,563, Jimmy D. Ross-1,813, and Bonnie K. Wachtel-2,063, Thomas G. Dacus-13,250, Donald M. Ervine-38,500, James M. Knowlton-17,750, Thomas R. Loftus-15,750, James E. Reed-0, Craig S. Weber-20,250, and all directors, nominees, and executive officers as a group (12 persons)-116,534. (e) Mr. Koonce's mailing address is 6550 Rock Spring Drive, Suite 600, Bethesda, Maryland 20817. Includes 1,500 shares owned by Mr. Koonce's spouse and 61,907 shares held in brokerage accounts for which Mr. Koonce has discretionary authority. (f) The group consists of 12 persons. The 847,544 shares beneficially owned do not include the 54,810 shares beneficially owned or controlled by the trustees of the ESOP/401(k) Plan. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), requires VSE officers and directors and persons who own more than 10% of VSE's Stock to file reports of ownership and changes in ownership with the SEC. Such officers, directors and stockholders are required by SEC regulations to furnish VSE with copies of all such reports that they file. Based solely on a review of copies of reports filed with the SEC and written representations by certain officers and directors, VSE believes that all VSE officers, directors and stockholders subject to the reporting requirements of Section 16(a) filed their reports on a timely basis in fiscal year 2005. - 3 - Proposal No. 1 -------------- ELECTION OF DIRECTORS Nominees At the Meeting, stockholders will elect, by a plurality of the votes cast, seven VSE directors, who will constitute the entire Board. Each nominee listed below is currently serving as a VSE director and was elected by the stockholders at the last annual meeting of stockholders. Each nominee elected as a director will serve until the next annual meeting of stockholders and until his or her successor is elected and qualified. If any nominee should become unable to serve for any reason, the proxies will be voted for such substitute nominee as shall be designated by the Board. The seven nominees for election as VSE directors and certain information regarding them are as follows: Name and Principal Occupation Age Director since _____________________________ ___ ______________ Donald M. Ervine 69 1987 VSE Chairman of the Board and Chief Executive Officer since 1992. Also serving as President and Chief Operating Officer since 2002. James F. Lafond 63 2003 Retired executive and certified public accountant. From 1998 to 2002, Mr. Lafond was Washington Area Managing Partner, Pricewaterhouse-Coopers LLP. He previously served in various leadership positions at Coopers & Lybrand (1964 to 1998). He is also a director of WGL Holdings, Inc. Clifford M. Kendall 74 2001 Private Investor. Mr. Kendall is a member and former Chairman of the Board of Regents of the University System of Maryland. Mr. Kendall was one of the founders of Computer Data Systems, Inc., in 1968, and he served as its Chairman and Chief Executive Officer from 1970 to 1991 and as Chairman until December 1997. Calvin S. Koonce 68 1992 Chairman, Koonce Securities, Inc., a securities broker/dealer firm (for more than the past five years). David M. Osnos 74 1968 Of counsel (previously senior partner) at Arent Fox PLLC, attorneys-at-law (for more than the past five years). He is also a director of EastGroup Properties, Inc. and Washington Real Estate Investment Trust. Jimmy D. Ross 69 1994 General, U.S. Army (Ret.), formerly Commanding General, U.S. Army Materiel Command. General Ross is a senior logistics consultant for, and from 2000 to 2003 was an executive officer of, Cypress International, Inc., a defense business development consulting firm. - 4 - Name and Principal Occupation Age Director since _____________________________ ___ ______________ Bonnie K. Wachtel 50 1991 Vice President and General Counsel, Wachtel & Co., Inc., brokers and underwriters (for more than the past five years). Ms. Wachtel is also a director of Information Analysis Incorporated and Integral Systems, Inc. Board of Directors, Committees and Corporate Governance There are currently seven members of our Board. Except for Mr. Ervine, who serves as VSE's Chairman, Chief Executive Officer, President and Chief Operating Officer, all of our current directors are "independent" as defined by the applicable rules of The NASDAQ Stock Market, Inc. ("NASDAQ"). The independent directors regularly have the opportunity to meet without Mr. Ervine in attendance. During 2005, there were seven regular Board meetings and one special Board meeting, and no director attended (during the period which he or she was a director) less than 75% of the aggregate of (a) the total number of Board meetings (in person or by telephone) and (b) meetings of Board committees on which he or she served (during the period that he or she served). VSE does not have a specific policy regarding attendance at the annual stockholders meeting. All directors, however, are encouraged to attend if available, and VSE tries to ensure that at least one independent director is present at the annual stockholder meetings and available to answer any stockholder questions. At last year's annual stockholders meeting five directors, including four independent directors, were present. The Board has an Audit Committee, a Nominating and Corporate Governance Committee, a Compensation Committee, a Finance Committee, and a Planning Committee. The current charters of the Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee are available on VSE's Internet site, www.vsecorp.com. Audit Committee. The primary purpose of the Audit Committee is to oversee VSE's accounting and financial reporting processes and the audits of its financial statements. The Audit Committee is directly responsible for, among other things, the appointment, compensation, retention and oversight of the Company's independent auditors. During the past fiscal year, the Audit Committee was composed of Mr. Lafond (Chairman), Mr. Kendall and Ms. Wachtel. All of the Audit Committee members during the past fiscal year are independent in accordance with applicable rules of the SEC and NASDAQ. Each member is able to read and understand fundamental financial statements, including the Company's balance sheet, income statement and cash flow statement. The Board has determined that Mr. Lafond is an "audit committee financial expert" as defined in Exchange Act Regulation S-K Item 401(h). During 2005, the Audit Committee met five times. Compensation Committee. The primary purpose of the Compensation Committee is to recommend to the Board the compensation to be paid to the Company's Chief Executive Officer and review the salaries and bonuses of VSE's other officers. The committee also administers the Company's stock option plans and meets either independently or in conjunction with the full Board to grant options to eligible individuals in accordance with the respective plans. Awards, however, of discretionary stock option grants approved by the Compensation Committee are subject to ratification by the Board. During the past fiscal year, the Compensation Committee was composed of General Ross (Chairman), Mr. Kendall and Mr. Koonce. Each of the committee members is independent in accordance with applicable NASDAQ rules. During 2005, the Compensation Committee met five times. - 5 - Nominating and Corporate Governance Committee. The primary purpose of the Nominating and Corporate Governance Committee is to make recommendations to the Board with respect to nominees to be proposed for election as directors and with corporate policies regarding, among other things, business conduct, securities trading, indemnification of VSE officers and directors, and conflicts of interest involving VSE officers, directors, and employees. During the past fiscal year the Committee was composed of Mr. Kendall (Chairman), Mr. Lafond, Mr. Osnos, Mr. Koonce, General Ross and Ms. Wachtel, all of whom are independent in accordance with applicable NASDAQ rules. During 2005, the Nominating and Corporate Governance Committee met two times. Finance Committee. The Finance Committee is primarily concerned with making recommendations to the Board with respect to VSE's capitalization and long-term funding requirements. During the past fiscal year the Committee was composed of Mr. Osnos (Chairman), Mr. Koonce and Ms. Wachtel. During 2005, the Finance Committee met two times. Planning Committee. The Planning Committee is primarily concerned with making recommendations to the Board with respect to business development opportunities, including acquisitions. The Committee is composed of Mr. Ervine (Chairman), Mr. Lafond, Mr. Koonce, General Ross and Ms. Wachtel. During 2005, the Planning Committee met one time. Director Nominations and Qualifications. Stockholders may recommend persons to be nominated for election as directors of VSE at the annual meeting of stockholders. To be considered, such recommendation must be submitted in accordance with VSE's by-laws and must be received in writing by the secretary of VSE no later than 90 days before the date in the current year which corresponds to the date on which the annual meeting was held during the immediate prior year. (Nominations for the year 2007-2008 should be received by the secretary no later than February 3, 2007.) Such recommendation shall be accompanied by the proposing stockholder's name, evidence that such stockholder is a beneficial owner of VSE Stock, and the candidate's name, biographical data and qualifications. The policy of the Nominating and Corporate Governance Committee is to consider properly submitted stockholder nominations for candidates for Board membership as described below. In evaluating such nominations, the Nominating and Corporate Governance Committee seeks to achieve a balance of knowledge, experience, and capability on the Board and to address the membership criteria discussed below. Under these criteria for Board nominations, Board members should have the highest professional and personal ethics and values, consistent with longstanding VSE values and standards. They should have broad experience at the policy-making level in business, government, education, technology or public interest. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties. Each director must represent the interests of all stockholders. The Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. Such Committee periodically assesses the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. If vacancies are anticipated, or otherwise arise, the Nominating and Corporate Governance Committee will consider various potential candidates for director. Candidates may come to the attention of the Nominating and Corporate Governance Committee through current Board members, professional search firms, stockholders or other persons. These candidates are evaluated at regular or special meetings of the Nominating and Corporate Governance Committee and may be considered at any point during the year. As described above, the Nominating and Corporate Governance - 6 - Committee will consider properly submitted stockholder nominations for candidates for the Board. Following verification of the stockholder status of persons proposing candidates, recommendations will be aggregated and considered by the Nominating and Corporate Governance Committee at a regularly scheduled meeting. If any materials are provided by a stockholder in connection with the nomination of a director candidate, such materials will be forwarded to the Nominating and Corporate Governance Committee. Such Committee also will review materials provided by professional search firms or other parties in connection with a nominee who is not proposed by a stockholder. In evaluating such nominations, the Nominating and Corporate Governance Committee seeks to achieve a balance of knowledge, experience, and capability on the Board. The Committee has not in the past retained any third party to assist in identifying nominees for Board membership. Lead Independent Director The Board has established the position of Lead Independent Director. The Lead Independent Director will assist the Chairman and the other Board members in assuring effective corporate governance. Mr. Kendall, who serves as Chairman of the Nominating and Corporate Governance Committee, was appointed to serve as the Lead Independent Director. Communications with the Board Individuals may communicate with the Board by submitting an e-mail to the VSE Board at board@vsecorp.com. All directors have access to this e-mail address. Communications that are intended specifically for non-employee directors should be sent to the e-mail address above to the attention of the Chairman of the Nominating and Corporate Governance Committee. Communications to the Board by mail can be addressed to The Board of Directors or a particular Board member c/o VSE Corporation, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499. Code of Business Conduct and Ethics The Board has adopted a Code of Business Conduct and Ethics that applies to all of its directors, officers, including principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and employees. The Code is posted on VSE's Internet website www.vsecorp.com. VSE intends to satisfy the disclosure requirements under Item 5.05 of Exchange Act Form 8-K regarding any waiver or amendment of the Code with respect to VSE's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such required information on VSE's Internet website. Compensation of Directors During the first seven months of 2005 (January 1 to August 1), each non- employee director was compensated at an annual rate of $20,000, and the Chairman of the Audit Committee was compensated in addition at an annual rate of $5,000. Effective August 2, 2005, each non-employee director was compensated at an annual rate of $24,000, and the Chairman of the Audit Committee was compensated in addition at an annual rate of $5,000. In addition, effective August 2, 2005, each non-employee director was compensated at a rate of $1,000 for each Board meeting attended, and Committee members were compensated at a rate of $1,000 for each Committee meeting attended. Directors who are VSE employees receive no additional compensation for service as a director. In addition, no compensation is paid to a director for personal services rendered to VSE pursuant to a consulting services agreement between the director and VSE, or any of VSE's subsidiaries, unless - 7 - authorized as a special assignment by the Board. No such authorization was requested for or on behalf of any director in 2005. The foregoing procedures do not restrict reimbursement for expenses incurred by a director for attending meetings of the Board or its authorized committees. Pursuant to the VSE Corporation 2004 Stock Option Plan, each non-employee director (currently Messrs. Kendall, Koonce, Lafond, Osnos, General Ross, and Ms. Wachtel), was granted, as of January 1 each year commencing with January 1, 2005, a nondiscretionary five-year option to purchase up to 1,000 shares of VSE Stock (1,000 shares represents the maximum number of shares which may be covered by options issued annually to each non-employee director pursuant to either or both of the VSE Corporation 1998 and 2004 Stock Option Plans). Each option vests 25% on the date of the grant and on each of the first three successive anniversary dates of the date of grant (100% vested after three years). The option price per share for each nondiscretionary grant is not less than the fair market value of VSE Stock as of the date the option is granted. See "Security Ownership of Certain Beneficial Owners and Management" above for further information on the stock options held by each VSE director. On December 30, 2005, the Board directed VSE to discontinue, until and unless the Board determined otherwise, awarding options, both discretionary and nondiscretionary, to purchase VSE Stock under VSE's 2004 Stock Option Plan. For a proposal regarding the adoption of a new incentive compensation plan (the VSE Corporation 2006 Restricted Stock Plan) to replace the 2004 Stock Option Plan, see "Proposal No. 3" below. Pursuant to the VSE Corporation 2004 Non-Employee Directors Stock Plan (the "Directors Stock Plan"), each non-employee director has the ability to elect that all or a portion of his or her annual cash compensation for service as a VSE director be paid in VSE Stock at fair market value determined in accordance with the Directors Stock Plan. For 2005 Messrs. Kendall, Koonce and Lafond elected to have all of their annual cash compensation paid in VSE Stock, Ms. Wachtel elected to have 60% of her annual cash compensation paid in VSE Stock, and General Ross elected to have 50% of his annual cash compensation paid in VSE Stock. Certain Relationships and Related Transactions Pursuant to an agreement dated as of October 21, 1998, Donald M. Ervine serves as the Chief Executive Officer of VSE at a base salary of $325,000 per annum. Mr. Ervine is employed for a term ending on January 1, 2007, subject to automatic extensions for successive one-year periods unless notice to terminate is given by Mr. Ervine at least 90 days prior to the expiration of the term or any such one-year extension of the term. Mr. Ervine's base salary is subject to review in January of each year, provided that the base salary shall not be less than $254,000 per annum. Mr. Ervine is also eligible to receive an annual performance bonus each year as determined by the Board or its Compensation Committee. Mr. Ervine's employment may be terminated by the Board for willful and gross misconduct and in the case of death or disability which prevents Mr. Ervine from substantially fulfilling his duties for a period in excess of six months. If Mr. Ervine's employment is terminated because of death or illness or disability, he or his beneficiary, as the case may be, will be paid his annual base salary then in effect for one full year from the date of death or disability. Mr. Ervine's employment may also be terminated without cause on 60 days prior notice and on payment of a lump sum severance compensation payment equal to two times his annual base salary then in effect. The agreement includes a covenant by Mr. Ervine not to be involved, directly or indirectly, in a business enterprise that competes with VSE during the term of his employment and for two years thereafter. The agreement also provides that Mr. Ervine will be nominated as a director and elected Chairman of the Board during his employment term. If a change of control of VSE, as defined, occurs, Mr. Ervine may terminate the agreement and will be entitled to a lump sum severance compensation payment equal to three times his annual base salary then in effect. - 8 - Pursuant to separate agreements entered into in 1997 and expiring on January 1, 2007, Mr. Knowlton and Mr. Weber each serve in his executive officer's capacity, subject to automatic extensions for successive one-year periods unless notice to terminate is given by the officer at least 90 days prior to the expiration of the then current term. The terms and conditions in the executive officer agreements are similar to those of Mr. Ervine's 1998 agreement except that (a) each of the executive officers is employed at a minimum base salary equal to the executive officer's annual base salary in effect on the date the agreement was signed, subject to annual and special reviews, (b) each of the executive officers will be reappointed to serve in the executive officer's current or comparable capacity, (c) in the event of termination without cause, each executive officer's lump sum severance compensation payment shall equal his annual base salary then in effect, and (d) in the event of a change of control of VSE, as defined, each executive officer may terminate the agreement and will be entitled to a lump sum severance compensation payment equal to two times his annual base salary then in effect. Pursuant to separate agreements entered into in 2004 and expiring on December 31, 2007, Mr. Dacus and Mr. Loftus each serve in his executive officer's capacity, subject to automatic extensions for successive one-year periods unless notice to terminate is given by either VSE or the officer at least 90 days prior to the expiration of the then current term. The terms and conditions in the executive officer agreements are similar to those of Mr. Ervine's 1998 agreement except that (a) each of the executiveofficers is employed at a minimum base salary equal to the executive officer's annual base salary in effect on the date the agreement was signed, subject to annual and special reviews, (b) each of the executive officers will be reappointed to serve in the executive officer's current or comparable capacity, (c) in the event of termination without cause, each executive officer's lump sum severance compensation payment shall equal his annual base salary then in effect, and (d) in the event of a change of control of VSE, as defined, each executive officer may terminate the agreement and will be entitled to a lump sum severance compensation payment equal to one times his annual base salary then in effect. Pursuant to an agreement dated as of February 10, 2005, James E. Reed serves as the President of VSE's wholly owned subsidiary Energetics Incorporated ("Energetics") at a base salary of $175,000 per annum. Mr. Reed is employed for a term ending on January 31, 2007, subject to automatic extensions for successive one-year periods unless notice to terminate is given by either Energetics or Mr. Reed at least 60 days prior to the expiration of the term or any such one-year extension of the term. Mr. Reed's base salary is subject to review in July of each year, provided that the base salary shall not be less than $175,000 per annum. Mr. Reed is also eligible to receive an annual performance bonus each year as determined by the Energetics' Board of Directors in consultation with the Board and Compensation Committee. The terms and conditions of Mr. Reed's agreement are similar to those of Mr. Ervine's 1998 agreement except that (a) Mr. Reed will be reappointed to serve in his current or comparable capacity, (b) in the event of termination without cause, Mr. Reed's lump sum severance compensation payment shall equal his annual base salary then in effect, and (c) in the event of a change of control of VSE, as defined, Mr. Reed may terminate the agreement for good reason, as defined, and will be entitled to a lump sum severance compensation payment equal to his annual base salary then in effect. There is no family relationship between any director or executive officer of VSE and any other director or executive officer of VSE. The law firm of Arent Fox PLLC, of which Mr. Osnos is of counsel, has represented and is expected to continue to represent VSE on various legal matters. VSE and the trustees of its employee benefit plans have in the past effected certain of their transactions in VSE Stock through Wachtel & Co., Inc., of which Ms. Wachtel is a director, officer, and shareholder, and through Koonce Securities, Inc., which is wholly owned by Mr. Koonce. No transactions in VSE Stock occurred with Wachtel & Co., Inc. or Koonce Securities, Inc. in 2005. - 9 - The Board unanimously recommends that stockholders vote "for" the election of each of the seven persons nominated to serve as a director of VSE for the ensuing year. Proposal No. 2 ______________ AMENDMENT OF CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED COMMON STOCK On February 9, 2006, the Board adopted a resolution declaring it advisable and in the best interests of VSE and its stockholders to amend VSE's Restated Certificate of Incorporation (the "Certificate") to increase the authorized number of shares of VSE's common stock, par value $.05 per share ("VSE Stock" or "Stock"), from 5,000,000 to 15,000,000 shares (the "Amendment"). As of March 20, 2006, 2,364,111 shares of VSE's 5,000,000 authorized shares of Stock were issued and outstanding, 473,063 shares were reserved for issuance upon the exercise of options granted or available for grant under VSE's 1998 Stock Option Plan and 2004 Stock Option Plan, and 46,389 shares were reserved for issuance under VSE's 2004 Directors Stock Plan. Consequently, VSE is currently limited to 2,116,437 authorized but unissued shares if VSE desires to issue Stock for additional equity compensation, including, if approved by stockholders, under VSE's 2006 Restricted Stock Plan (see "Proposal No. 3" below) or for stock splits, stock dividends, or acquisitions or to obtain funds through a private or public offering, or any other purpose. The Board believes that it is in VSE's best interests to have additional authorized but unissued Stock available for issuance to meet business needs as they may arise from time to time, without the expense and delay of seeking stockholders approval for additional authorized shares at that time. Thus, the Board believes that it is in the Company's best interest to increase the authorized Stock beyond the currently available shares for such business needs. Such business needs may include future stock splits or stock dividends, equity financings, acquisitions, adoption of new or modifying current employee benefit plans, and other proper corporate purposes identified by the Board in the future. However, any future issuance of such Stock would remain subject to separate stockholder approval if required by applicable law or NASDAQ rules. Other than issuances of Stock pursuant (a) to the exercise of outstanding stock options and future option grants under the 1998 Stock Option Plan and 2004 Stock Option Plan, (b) to elections under the 2004 Directors Stock Plan, and, (c) if approved by stockholders, to the proposed 2006 Restricted Stock Plan, VSE has no current plans, arrangements or understandings regarding the issuance of any additional Stock for which authorization is sought, and there are no negotiations pending with respect to the issuance of Stock for any purpose. Additional Stock authorized pursuant to the proposed Amendment would be identical in all respects to the VSE Stock currently authorized. While authorization of the additional shares will not currently dilute the proportionate voting power or other rights of existing stockholders, future issuances of Stock could reduce the proportionate ownership of existing holders of VSE Stock, and, depending on the price at which such shares are issued, may be dilutive to the existing stockholders. Stock (including the additional VSE Stock authorized pursuant to this proposal) may be issued from time to time upon authorization of the Board, without further approval by the stockholders, unless otherwise required by applicable law or NASDAQ rules, and for the consideration that the Board may determine is appropriate and as may be permitted by applicable law. - 10 - As provided for by the Delaware General Corporation Law, the Board has directed that the proposed Amendment to increase the authorized Stock from 5,000,000 to 15,000,000 shares be submitted to a vote of the stockholders at the Meeting. Approval of the proposed Amendment requires the affirmative vote of the holders of a majority of the VSE Stock entitled to vote thereon. Although an increase in our authorized Stock could, under certain circumstances, also be construed as having an anti-takeover effect (for example, by permitting easier dilution of the Stock ownership of a person or group seeking to effect a change in the composition of the Board or contemplating a tender offer or other transaction resulting in our acquisition by another company), the proposed increase is not in response to any effort by any person or group to accumulate our Stock or to obtain control of VSE by any means. In addition, the proposal is not part of any current plan by the Board to recommend or implement a series of anti-takeover measures or any other corporate transactions. The proposed Amendment would amend Article Fourth of the Certificate by striking out the entire text of Article FOURTH, as it currently exists and inserting in lieu and instead thereof the following: "FOURTH: The total number of shares of capital stock that the Corporation shall have authority to issue is Fifteen Million (15,000,000) shares of Common Stock, par value $0.05 per share." If approved by the requisite number of shares, the amendment to our Certificate will become effective upon filing the Certificate of Amendment with the Secretary of State of the State of Delaware, which is expected to occur promptly following the Meeting. The Board unanimously recommends that stockholders vote "for" approval of the proposal to amend our Certificate. Proposal No. 3 ______________ APPROVAL OF OUR 2006 RESTRICTED STOCK PLAN Our 2006 Restricted Stock Plan was approved by the Board on February 9, 2006, subject to the approval of our stockholders at the Meeting (the "2006 Plan"). As described in this proxy statement, our employees and non-employee directors have received, in addition to cash, equity-based compensation for their services to VSE. Currently, the equity compensation is provided in the form of options to purchase VSE Stock granted under VSE's 2004 Stock Option Plan (the "2004 Option Plan") and for directors electing to receive Stock under the 2004 Directors Stock Plan, as such plans were approved by stockholders on May 3, 2004. On December 30, 2005, however, the Board directed VSE to discontinue, until and unless the Board determined otherwise, awarding stock options to our employees and non-employee directors under the 2004 Option Plan. The Board believes that compensating our employees and non-employee directors with restricted VSE Stock and restricted VSE Stock units, rather than stock options, is a more appropriate and effective form of equity-based compensation. As with the former use of stock options, the use of restricted stock or restricted stock units is intended to foster a long-term focus on our performance and to provide our employees and non-employee directors with a means to have an equity stake in VSE which will, in turn, align their interests with those of our stockholders. The primary reason for the Board's suspension of option awards under the 2004 Option Plan was the potential impact on VSE's results of operations from the application of recent accounting pronouncements to share-based payments to employees, including stock option awards. The Board believes that the potential - 11 - impact on VSE's results of operations due to the issuance of restricted stock and restricted stock units under the 2006 Plan should be less than the potential impact of issuing options under the 2004 Option Plan. While the Board has no current intent to do so, the Board may in the future authorize the issuances of additional options under the 2004 Option Plan. The Board did not discontinue the issuance of VSE Stock to non-employee directors under the 2004 Directors Stock Plan, which as of March 20, 2006, had 46,389 shares available for issuance thereunder. As required by applicable NASDAQ rules, the Board is asking stockholders to approve the 2006 Plan. If the 2006 Plan is not approved, employees and non- employee directors will not be eligible to receive awards of restricted stock or restricted stock units under the 2006 Plan. In this case, the Board would reconsider its discontinuation of awarding options to VSE's employees and non- employee directors under our 2004 Option Plan. As of March 20, 2006, outstanding options granted under the 2004 Option Plan covered 66,750 shares of VSE Stock, and 256,000 shares of VSE Stock and 24,000 shares of VSE Stock, respectively, were available under the 2004 Option Plan for discretionary option awards to executive officers and key employees and nondiscretionary option awards to non-employee directors. The options outstanding, as of March 20, 2006, to purchase up to 66,750 shares of VSE Stock under the 2004 Option Plan are not affected by the above-referenced Board action. Prior to the Board's suspension of option awards under the 2004 Option Plan, each non-employee director of VSE would receive as of January 1 of each year a nondiscretionary option under the 2004 Option Plan covering 1,000 shares of VSE Stock. In addition, the options outstanding, as of March 20, 2006, to purchase up to 126,313 shares of VSE Stock under VSE's 1998 Stock Option Plan approved by VSE's stockholders on May 7, 1998, are not affected by the above- referenced Board action. No other options are available for issuance under VSE's 1998 Stock Option Plan. Description of 2006 Plan The following is a summary of the material features of the 2006 Plan. The following summary does not purport to be complete and is qualified in its entirety by reference to the terms and conditions of the 2006 Plan, which is attached to this proxy statement as Appendix A. Types of Awards; Eligibility. Awards of restricted stock and restricted stock units may be granted under the 2006 Plan. Awards of restricted stock are shares of VSE Stock which are awarded subject to such restrictions on transfer as the Compensation Committee or Board may establish. Awards of restricted stock units are units valued by reference to shares of VSE Stock that entitle a participant to receive, upon the settlement of the unit, one share of VSE Stock for each unit. If the 2006 Plan is approved by stockholders, VSE employees, including employees of VSE subsidiaries, and non-employee directors will be eligible to receive awards under the 2006 Plan. As of March 20, 2006, potentially eligible 2006 Plan participants included approximately 700 employees, of whom approximately 30 employees are expected to participate, and six non-employee directors. Shares Subject to the 2006 Plan. The aggregate maximum number of shares that may be issued pursuant to awards under the 2006 Plan is 125,000 shares of VSE Stock (subject to adjustments for recapitalization and certain other corporate transactions). Shares issued under the 2006 Plan may be either treasury shares or shares originally issued for this purpose. Rights to receive shares forfeited pursuant to the terms of an Award will be available again for grant under the 2006 Plan. As of March 20, 2006, the fair market value of VSE Stock was $41.00 per share. - 12 - Term of the 2006 Plan. No awards may be granted under the 2006 Plan after the fifth anniversary of the date on which the 2006 Plan is approved by stockholders. Administration. The 2006 Plan will be administered by the Compensation Committee. The Board, however, will be responsible for administering any awards granted to non-employee directors. Terms of Awards. The terms and conditions of each award of restricted stock or restricted stock units granted to an employee or non-employee director ("Award") will be determined under the 2006 Plan. The Compensation Committee will determine the terms and conditions of each Award to an employee, including the period which generally will extend for at least six months from the date of grant, during which the recipient of an Award (the "Grantee") cannot sell, transfer, pledge or assign Awards (the "Restriction") under the Plan. The Compensation Committee will determine the rights which Grantees have with respect to Awards. When all Restrictions applicable to an Award lapse, the Company will deliver to the Grantee a certificate for the number of shares of VSE Stock without any legend or restriction (except as necessary to comply with applicable federal and state securities laws). Currently, the Board has not made any determination regarding the granting of Awards to non-employee directors except if the 2006 Plan is approved by the stockholders, the Board intends each non-employee director elected at the Meeting to receive an Award of 300 shares of restricted stock. Each Award to a non-employee director of restricted stock will be fully vested on the grant date. Awards of restricted stock to a non-employee director will also contain other terms and conditions as determined by the Board. Termination of Employment. Upon termination of employment, all Awards to employees which are still subject to Restriction will be forfeited by the Grantee. With respect to any Award, the Compensation Committee may, in its sole discretion, waive Restrictions in whole or in part. Withholding. Tax liabilities incurred in connection with the grant of an Award or its vesting or lapse of restrictions or settlement will be satisfied by our withholding a portion of the shares subject to the Award that have a fair market value approximately equal to the minimum amount of taxes required to be withheld by VSE under applicable law. Subject to certain conditions specified in the 2006 Plan, a recipient of an Award may elect to have taxes withheld in excess of the minimum amount required to be withheld or may satisfy his or her tax withholding in cash. Adjustments. The aggregate number of shares of VSE Stock available for issuance under the 2006 Plan, the class of shares as to which awards may be granted and the number of shares covered by each outstanding Award are subject to adjustment in the event of a stock dividend, recapitalization or certain other corporate transactions. Terminating Events. In the event of our liquidation or a transaction or series of transactions in which an unaffiliated third party acquires VSE Stock ownership such that this person has the ability to direct the Company's management, as determined by the Board in its sole discretion, the Compensation Committee may provide that upon consummation of such an event, any outstanding Awards will vest in full or in part or that all restricted stock or restricted stock units which have been previously deferred be transferred to the recipient. Amendment or Termination. The 2006 Plan may be amended by the Board or the Compensation Committee and may be terminated by the Board at any time. No award will be materially and adversely affected by any amendment or termination without the written consent of the recipient of the Award. - 13 - Section 16(b). Approval of the 2006 Plan by the stockholders will exempt the acquisition of VSE Stock pursuant to the 2006 Plan by a VSE director or officer from the provisions of Section 16(b) of the Exchange Act. Section 16(b) provides, among other things, that a director or officer who, within a six-month period, purchases and sells (or sells and purchases) the stock of a corporation which employees him or her is liable to the corporation for the difference between the purchase price and the sale price. Exchange Act Rule 16b-3 provides that the acquisition of stock by a director or officer of a corporation pursuant to an employee stock plan, including a plan such as the 2006 Plan, which meets certain requirements (one of which is stockholder approval of the plan) is not subject to Section 16(b). Restrictions on Resale. The Company intends to register the VSE Stock issuable under the 2006 Plan under the Securities Act of 1933, as amended, as soon as practicable after receiving stockholders approval. Certain officers may be deemed to be "affiliates" of VSE as that term is defined under the Securities Act. Stock acquired under the 2006 Plan by an affiliate may be reoffered or resold only pursuant to an effective registration statement or pursuant to Rule 144 promulgated under the Securities Act or another exemption from the registration requirements of the Securities Act. Code Section 162(m). Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), generally limits the allowable deduction for compensation paid to an offer of a publicly held corporation who is the chief executive officer or one of the four most highly compensated officers (other than the chief executive officer) to $1 million for each taxable year. Certain types of compensation are exempted from the deduction limit imposed by Code Section 162(m), including payments contingent on the attainment of one or more performance goals if the performance goals are established by a compensation committee of the board of directors that is comprised solely of two or more outside directors and the material terms of the compensation and performance goals are disclosed to and approved by the stockholders of the corporation before payment. In the case of an award of restricted stock or restricted stock units, a payment will satisfy the requirement that compensation be paid on the basis of a pre-established performance goal if the award is made by the compensation committee comprised solely of outside directors, and the plan is approved by the corporation's stockholders. The 2006 Plan was designed to allow awards thereunder to quality for the exemption from the $1 million limit on tax-deductible payments under Code Section 162(m). Awards may, but need not, include performance criteria that satisfy Code Section 162(m). Any Award intended to qualify as "performance-based compensation" under Code Section 162(m), either will be conditioned on or granted based upon the achievement of one or more of the following performance measures, which shall be set by the Committee no later than 90 days following the commencement of each performance period (or such other time as may be required or permitted by Code Section 162(m): (a) total stockholder return, (b) stock price, (c) operating earnings, (d) net earnings, (e) return on equity or capital, (f) income, (g) level of expenses or (h) growth in revenue. Performance goals may be established on a Company-wide basis or with respect to one or more business units or divisions or subdivisions or subsidiaries. The targeted level or levels of performance (which may include minimum, maximum and target levels of performance) with respect to such performance measures may be established at such levels and in such terms as the Committee may determine, in its discretion. Each Award intended to qualify as "performance-based compensation" will be subject to a $1 million per Award cap. Following the completion of each performance period, the Committee will certify in writing whether the applicable performance targets have been achieved and the number of units or shares, if any, earned, or for which options become exercisable, by a participant for such performance period. In determining the number of units or shares earned by a participant, or for which options become exercisable, for a given performance period, subject to any applicable Award agreement, the Committee shall have the right to reduce (but not increase) the - 14 - amount earned at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the performance period. New Plan Benefits. Grants of Awards to eligible employees will be subject to the Compensation Committee's discretion and, therefore, are not determinable at this time. If the 2006 Plan is approved by stockholders and non-employee directors are eligible to participate in the Plan, each non-employee director (currently six directors) will receive an award of 300 shares of restricted stock on or about the date of the Meeting. Except for such awards of 300 shares of restricted stock, VSE has not made any determination for the granting of awards to non-employee directors. Federal Income Taxation The federal and state income tax consequences of restricted stock and restricted stock units are complex and subject to change. The following discussion is only a brief summary of the general U.S. federal income tax consequences of restricted stock and restricted stock units granted under the 2006 Plan and does not cover all specific transactions that may arise. A taxpayer's particular situation may be such that the general federal income tax rules described below may not apply. Also, this summary does not cover the state, local or foreign tax consequences of either the award of restricted stock or restricted stock units or the subsequent sale or other transfer of the underlying VSE Stock, or federal or state estate tax, inheritance or death taxes. Therefore, each participant in the 2006 Plan is urged to consult with his or her own tax advisor regarding federal, state, local and foreign tax consequences relating to participation in the 2006 Plan. Restricted Stock. Generally, the grant of an award of restricted stock that is subject to restrictions on transfer and a substantial risk of forfeiture is not a taxable event. The recipient of the award will recognize ordinary compensation income in each year in which restrictions on the award lapse and the award vests, in an amount equal to the fair market value of the common stock received. An award of restricted stock that is fully vested on the grant date generally will be taxable to the recipient on such date. A recipient's basis for determining gain or loss on a subsequent disposition of common stock will be the amount the recipient must include in income when the restrictions lapse or when the award was granted, if not subject to restrictions. Any gain or loss recognized on a disposition of the common stock generally will be short-term or long-term capital gain or loss depending on the length of time the recipient holds the shares. Restricted Stock Units. Generally, the grant of an award of restricted stock units is not a taxable event. The recipient of the award will recognize ordinary compensation income in each year in which the units are settled, in an amount equal to the fair market value of the common stock received. A recipient's basis for determining gain or loss on a subsequent disposition of common stock will be the amount the recipient must include in income when the units vest and are settled. Any gain or loss recognized on a disposition of the common stock generally will be short-term or long-term capital gain or loss depending on the length of time the recipient holds the shares. Section 83(b) Election. If a recipient of an award of restricted stock properly makes an election pursuant to Code Section 83(b), he or she will recognize ordinary compensation income equal to the fair market value of the shares of common stock at the time the shares are awarded, without taking into account the effect of the restrictions on the award. The recipient's basis for determining gain or loss on a subsequent disposition of shares will be the amount the recipient so included in income. Any gain or loss recognized on a disposition of shares of common stock which were subject to the Section 83(b) election will be short-term or long-term capital gain or loss, depending on the length of time since the date of the award. If, however, the recipient forfeits an award upon a termination of employment prior to the time the restrictions - 15 - lapse, he or she will generally not be entitled to deduct any loss upon such forfeiture even though the recipient may have been required to include an amount in income by virtue of the Section 83(b) election. Approval of the 2006 Plan requires the affirmative vote of the holders of a majority of the VSE Stock present or represented and entitled to be cast at the Meeting. The Board unanimously recommends that stockholders vote "for" approval of our 2006 Restricted Stock Plan. Proposal No. 4 ______________ APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Based on the recommendation of its Audit Committee, the Board has appointed the firm of Ernst & Young LLP to be VSE's independent certified public accountants for the year ending December 31, 2006, and recommends to stockholders that they vote for ratification of that appointment. Although not required to do so, the Board has determined that it would be desirable to request stockholders' approval of this appointment. The ratification of the appointment of VSE's independent certified public accountants will require the affirmative vote by the holders of a majority of the outstanding Stock present in person or represented by proxy at the Meeting. If such approval is not received, the Board will reconsider the appointment. In 2005 and 2004 Ernst & Young LLP services included an examination of VSE's consolidated financial statements, the financial statements of certain benefit plans, and reviews of the consolidated financial statements included in VSE Form 10-Qs filed with the SEC for each of the quarters ended March 31, June 30, and September 30. Ernst & Young LLP billed VSE for professional services rendered for the years ended December 31, 2005, and December 31, 2004, as follows: 2005 2004 ---- ---- Audit fees (1) $235,900 $168,028 Audit-related fees (2) 20,000 27,500 Tax fees (3) 13,835 - All other fees - - _______________ (1) Includes fees and expenses related to the fiscal year audit and to interim reviews and related accounting consultation. (2) Includes fees and expenses for audits of the employee benefit plan and, in 2004, consultation regarding internal control reporting. (3) Includes fees and expenses for tax advisory service. The Audit Committee approves in advance all audit and non-audit services provided by the independent auditors prior to their engagement with respect to such services. The Audit Committee has delegated to the Chairman of the Audit Committee the authority to pre-approve additional audit-related and non-audit services not prohibited by law to be performed by VSE's independent auditors and associated fees up to a maximum for any one non-audit service equal to the lesser of $30,000 or 25% of the audit fees for VSE's most recent completed fiscal year, provided that the Chair shall report any decisions to pre-approve such audit-related or non-audit services and fees to the full Audit Committee at - 16 - its next regular meeting. The Audit Committee approved in advance all of the audit and non-audit services provided by the independent auditors in fiscal 2005 and 2004. A representative of Ernst & Young LLP is expected to attend the Meeting, will have an opportunity to make a statement, if he or she desires to do so, and will be available to respond to appropriate questions. The Board unanimously recommends that stockholders vote "for" the proposal to ratify the appointment of Ernst & Young LLP to serve as VSE's independent certified public accountants for the fiscal year ending December 31, 2006. AUDIT COMMITTEE REPORT The Audit Committee (the "Committee") is composed of three non-employee directors (Messrs. Lafond and Kendall and Ms. Wachtel), each of whom is considered an "independent" director for the purposes of the applicable rules of NASDAQ and the SEC. The Committee's responsibilities are set forth in its charter, a copy of which is available on VSE's Internet site, www.vsecorp.com. The Board and the Committee believe that the Committee members are and were at the time of the actions described in this report "independent" directors as independence is defined by NASDAQ Rule 4200(a)(15). The Committee has reviewed and discussed with management VSE's audited consolidated financial statements as of and for the year ended December 31, 2005, and has discussed with VSE's independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, issued by the Auditing Standards Board of the American Institute of Certified Public Accountants. The Committee has received and reviewed the written disclosures and the letter from the independent auditors required by Independence Standard No. 1, Independence Discussions with Audit Committees, as amended, issued by the Independence Standards Board, and has discussed with the auditors the auditors' independence and considered whether the provision of non-audit services by the auditors is compatible with maintaining their independence. Based on the foregoing reviews and discussions, the Committee recommended to the Board that the above referenced consolidated financial statements be included in VSE's Annual Report on Form 10-K for the year ended December 31, 2005, for filing with the SEC. Audit Committee: James F. Lafond (Chairman), Clifford M. Kendall, and Bonnie K. Wachtel COMPENSATION COMMITTEE REPORT The Board has established a Compensation Committee (the "Committee") to (a) review corporate compensation policies, including incentive compensation, (b) recommend to the Board for its determination the compensation of the Chief Executive Officer (the "CEO"), and (c) review the compensation of other VSE executive officers and employees. The Committee is composed entirely of non- employee directors (see "Board of Directors, Committees and Corporate Governance" above). Compensation Philosophy VSE's overall compensation philosophy is based on aligning executive compensation with industry standards and with financial performance objectives established by the Board. Under the Committee's supervision, VSE has established - 17 - compensation policies designed to attract and retain qualified executives and to link total compensation to corporate goals. The key elements of VSE executive compensation are base salary, a performance bonus incentive plan, and a long- term incentive plan. Base Salary The base salaries for executive officers and other corporate officers are established primarily on the basis of comparability to the range of compensation paid by companies of similar size and industry, as determined by commercially available wage and salary surveys. Size is determined primarily by reference to annual revenues and number of employees. VSE's industry group is engineering and technical services (formerly SIC Code 8711). National and geographic differences in compensation are considered based on the executive's primary area of operations and responsibility. VSE targets a competitive salary for executive officers with performance incentives as indicated by such surveys. Performance Bonus During 2004 the Committee approved a performance bonus plan based on achieving financial results in excess of certain financial thresholds or goals specified at the beginning of the year. Such goals consist principally of revenue and pretax income goals for operating units and group executive officers, and return on equity for corporate staff, corporate officers, and corporate executive officers. Annual bonus amounts are paid in February after establishing the financial results for the prior calendar year. For 2005 aggregate performance bonuses of about $3,700,000 were earned and paid to VSE officers and other employees under the performance bonus plan, including about $1,079,000 paid to executive officers under the plan. VSE's wholly owned subsidiary Energetics Incorporated ("Energetics") maintains a performance bonus plan for its employees, including Mr. Reed. Amounts contributed to the plan are determined by Energetics based on its ability to utilize direct labor, contain costs, maintain competitive burden rates, and achieve pretax profitability. Bonus amounts accrued are distributed on the basis of individual and group contribution to meeting corporate goals for revenue, profit, marketing, and new and repeat business. Annual bonus amounts are paid in February after establishing the financial results for the prior calendar year. Mr. Reed's bonus under the plan is approved by the Energetics and VSE Board of Directors. Long-term Compensation During 2004 the Board recommended and the stockholders approved the adoption of the VSE Corporation 2004 Stock Option Plan (the "2004 Plan"), which replaced a substantially similar 1998 Plan. Under the 2004 Plan, an aggregate of 350,000 shares of VSE Stock may be purchased pursuant to the grant of options. The purpose of the 2004 Plan is to provide non-employee directors, executive officers, and key personnel with long-term performance incentives and an identity of interests with the stockholders. VSE operates in a highly specialized field in which success is substantially dependent on the expertise of qualified and highly motivated key personnel. Management believes that the plans have been of material assistance in recruiting, motivating, and retaining key personnel. Discretionary stock options granted under the 2004 Plan are approved by the Committee after considering recommendations submitted by management based on the perceived long-term contribution of key personnel. The Committee independently determines the number of stock options to be awarded to the - 18 - Chairman and CEO and President and COO. Awards of discretionary stock option grants approved by the Committee are subject to ratification by the Board. On December 30, 2005, the Board directed VSE to discontinue, until and unless the Board determined otherwise, awarding options, both discretionary and nondiscretionary, to purchase VSE Stock under the 2004 Plan. As of March 20, 2006, outstanding options issued under the 2004 Plan covered 66,750 shares of VSE Stock, and 256,000 shares and 24,000 shares, respectively, were available under the 2004 Plan for discretionary option awards to executive officers and key employees of VSE and nondiscretionary option awards to non-employee directors of VSE. The options outstanding, as of March 20, 2006, to purchase up to 66,750 shares of VSE Stock under the 2004 Plan are not affected by the above- referenced Board action. Prior to the Board's action, each non-employee director of VSE would receive as of January 1 of each year a nondiscretionary option under the 2004 Plan covering 1,000 shares of VSE Stock at a purchase price not less than the fair market value of VSE Stock as of the award date. In addition, the options outstanding, as of March 20, 2006, to purchase up to 126,313 shares of VSE Stock under VSE's 1998 Stock Option Plan are not affected by the above-referenced Board action. The primary reason for the Board's suspension of option awards under the 2004 Plan was the potential adverse affect on VSE's results of operations from the application of recent accounting pronouncements to share-based payments to employees, including stock option awards. While the Board has no current intent to do so, the Board may in the future authorize the issuances of additional options under the 2004 Plan. For a proposal regarding the adoption of a new incentive compensation plan (VSE's 2006 Restricted Stock Plan) see "Proposal No. 3" above. All Other Compensation All VSE officers are entitled to participate in company fringe benefit programs, including the VSE Employee ESOP/401(k) Plan, which is an IRS qualified plan available to all eligible employees. Effective April 1, 1999, employer contributions to the ESOP portion of the plan were discontinued and replaced by employer contributions to the 401(k) portion of the plan based on employee 401(k) deferrals. The employer 401(k) contribution is equal to 50% of the first 6% of employee pay deferred into the employee's 401(k) account. Amounts contributed to the VSE ESOP/401(k) plan on behalf of the named executive officers are included in the "Summary Compensation Table." VSE has a non-qualified Deferred Supplemental Compensation Plan (the "DSC Plan") for all VSE officers. The DSC Plan provides, at the Board's discretion, for an annual contribution not to exceed 12% of VSE's consolidated net income for the year. Each officer's allocation from the annual contribution bears the same percentage to the annual contribution as that officer's salary bears to total annual officer salaries. Pursuant to the DSC Plan, an annual contribution of approximately $420,000 was authorized for 2005. Benefits under the DSC Plan are payable to the participant on retirement or resignation, subject to a vesting schedule, non-competition agreement, and other plan provisions, or in the event of a change of control of VSE. Amounts contributed to the DSC Plan on behalf of the named executive officers are included in the Summary Compensation Table. Energetics maintains a profit sharing plan (the Energetics Incorporated Profit Sharing Plan and Trust) for its employees, including Mr. Reed. All Energetics employees who have completed two years of service are members of the profit sharing plan. At the discretion of its Board of Directors, Energetics - 19 - makes contributions to the plan approximately equal to 10% of eligible employee compensation. Eligible employee compensation under the plan is capped at $200,000 per year. Chief Executive Officer Compensation During 2005, 2004, and 2003, VSE Chairman, Chief Executive Officer ("CEO"), President and Chief Operating Officer (Mr. Ervine) was compensated in accordance with an employment agreement negotiated and approved by the Committee in 1998. The agreement with Mr. Ervine presently extends through January 1, 2007, and is subject thereafter to automatic extensions for successive one-year periods unless notice to terminate is given by Mr. Ervine at least 90 days prior to the expiration of the term or any such one-year extension of the term. The agreement provides for a minimum base salary, with other terms and conditions substantially similar to a predecessor January 1, 1996, employment agreement (see "Certain Relationships and Related Transactions" above for a description of the current employment agreement). During 2005, Mr. Ervine was paid a base salary of $300,000 and served as VSE Chairman, CEO, President, and Chief Operating Officer. Effective January 1, 2006, the Committee approved an increase in Mr. Ervine's base salary to $325,000. The Committee based the salary increase primarily on the performance of the Corporation in 2005, including significant increases in revenues, backlog, net income, return on equity, number of employees, and the public market value of VSE Stock. The Committee also considered compensation survey data for executive officers at similarly situated companies, Mr. Ervine's leadership role in VSE, and his performance as both Chairman and Chief Executive Officer and President and Chief Operating Officer of the Corporation. The CEO's performance bonus for each of the years ended December 31, 2005, 2004, and 2003 was determined on the basis of the performance bonus plan described above. VSE's return on equity for the years ended December 31, 2005, 2004, and 2003, used in determining the CEO's performance bonus was approximately 26.6%, 18.1%, and 11.8%, respectively. On December 30, 2005, the Board directed VSE to discontinue, until and unless the Board determined otherwise, awarding options, both discretionary and nondiscretionary, to purchase VSE Stock under the 2004 Plan, and accordingly, the CEO received no long-term compensation award for the year ended December 31, 2005. For a proposal regarding the adoption of a new incentive compensation plan (the VSE Corporation 2006 Restricted Stock Plan) to replace the 2004 Plan, please see "Proposal No. 3" above. Compensation Committee: Jimmy D. Ross (Chairman), Clifford M. Kendall, and Calvin S. Koonce Compensation Committee Interlocks and Insider Participation No executive officer of VSE serves or has served as a member of the Compensation Committee of another entity which has an executive officer who serves on VSE's Compensation Committee. No executive officer of VSE serves or has served as a director of another entity which has an executive officer who serves on VSE's Compensation Committee. Mr. Koonce is a major stockholder of VSE. See "Security Ownership of Certain Beneficial Owners and Management." VSE and the trustees of its employee benefit plans have in the past effected certain of their transactions in VSE Stock through Wachtel & Co., Inc., of which Ms. Wachtel is a director, officer and shareholder, and through Koonce - 20 - Securities, Inc., which is wholly owned by Mr. Koonce. No transactions in VSE Stock occurred with Wachtel & Co., Inc. or Koonce Securities, Inc. in 2005. Mr. Osnos is of counsel at the law firm of Arent Fox PLLC, which has represented and is expected to continue to represent VSE on various legal matters. See "Certain Relationships and Related Transactions." Summary Compensation Table