VTF is a texture file format for Valve Software's Source engine, it stands for Valve Texture Format.
VTF is a versatile container format that can contain compressed or uncompressed images, in a variety of bit depths, optionally with mip maps, and using 2D or 3D or Cube map layouts. VTF is very similar to DDS excpet it uses different headers and can contain a variety of image flags.
The DXT compression format can be used inside a VTF file. This form of compression is widely supported on current graphics hardware, meaning it will stay compressed in video memory, allowing the artist to use more or larger textures.
See the Valve Texture Format page on the Valve Developer Community wiki for more information.