Human activity recognition research relies heavily on extensive datasets to verify and validate performance of activity recognition algorithms. However, obtaining real datasets are expensive and highly time consuming. A physics-based virtual simulation can accelerate the development of context based human activity recognition algorithms and techniques by generating relevant training and testing videos simulating diverse operational scenarios. In this paper, we discuss in detail the requisite capabilities of a virtual environment to aid as a test bed for evaluating and enhancing activity recognition algorithms. To demonstrate the numerous advantages of virtual environment development, a newly developed virtual environment simulation modeling (VESM) environment is presented here to generate calibrated multisource imagery datasets suitable for development and testing of recognition algorithms for context-based human activities. The VESM environment serves as a versatile test bed to generate a vast amount of realistic data for training and testing of sensor processing algorithms. To demonstrate the effectiveness of VESM environment, we present various simulated scenarios and processed results to infer proper semantic annotations from the high fidelity imagery data for human-vehicle activity recognition under different operational contexts.