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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-K
 
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 000-51579
 
 
 NCI, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    20-3211574(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)11730 Plaza America DriveReston, Virginia
    
    20190-4764(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (703) 707-6900
 
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange On Which RegisteredClass A Common Stock, par value $0.019 per share
    
    Nasdaq Stock Market, LLC
 Securities registered pursuant to Section 12(g) of the Act:
 
 Yes o No þ
 Yes o No þ
 þ o
 o o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



NCI, INC.
 FORM 10-K
 PAGEPART I:
    
    
    1Item 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    17Item 1B. Unresolved Staff Comments
    
    
    29Item 2. Properties
    
    
    29Item 3. Legal Proceedings
    
    
    29Item 4. [Removed and Reserved]
    
    
    29PART II:
    
    
    30Item 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
    
    
    30Item 6. Selected Financial Data
    
    
    32Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    33Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    43Item 8. Financial Statements and Supplementary Data
    
    
    43Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    43Item 9A. Controls and Procedures
    
    
    43Item 9B. Other Information
    
    
    45PART III:
    
    
    46Item 10. Directors, Executive Officers, and Corporate Governance
    
    
    46Item 11. Executive Compensation
    
    
    46Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    46Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    46Item 14. Principal Accountant Fees and Services
    
    
    46PART IV:
    
    
    47Item 15. Exhibits and Financial Statement Schedules
    
    
    47Signatures
    
    
    48EX-21.1EX-23.1EX-31.1EX-32.1




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PART I
 Forward-Looking Statements
     Page 1




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ITEM 1.
    
    BUSINESS
 COMPANY OVERVIEW
     MARKET OPPORTUNITY
   Page 2




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Current Market Challenges
  Economic Pressures Create Demand for Efficient, Effective Solutions
   Page 3




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Transformational Initiatives Driving Investments.
 Cybersecurity Remains Top Priority in Technology Spending.
 Open Government Directive Creates Opportunity with Data Transparency Mandates.The current
administration is committed to creating an unprecedented level of openness in Government.
The Presidents Transparency and Open Government memorandum directs the Chief Technology
Officer, in coordination with the Director of the Office of Management and Budget (OMB) and
the Administrator of General Services, to take specific actions supporting the increased
transparency and collaboration objectives. We believe this mandate will create significant
opportunities for IT and professional service providers in open source software;
building/customizing geospatial tools; creating spatially aware databases and mapping
applications; developing agile applications and reusing code; and supporting better business
intelligence to reduce integration costs, lower licensing fees, improve service delivery,
and improve data transparency.
 Human Capital Issues
  Declining Federal Government Workforce.
  Page 4




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Increased Reliance on Technology and Professional Service Providers.
 Acquisition Reform and Procurement Practices
  Contract Consolidation to Leverage Buying Power.
 Continued Growth of GWACs, MACs, and Agency-Specific IDIQs.
 Increased Emphasis on Transparency and OCI Avoidance.
  Page 5




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COMPETITIVE STRENGTHS
  In-Depth Understanding of Customers Missions
  Cybersecurity Expertise
  Proven Ability to Win Business
  Diverse Base of Key Prime Contract Vehicles
   Page 6




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Highly Skilled Employees and an Experienced Management Team
  Industry-Leading Recognition for Quality Systems and Certifications
  Capability Maturity Model Integration (CMMI)
 ISO 9001:2008
 ISO/IEC 20000-1:2005
 Contractor Purchasing System Review (CPSR)
   Page 7




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STRATEGY
  Focus on Organic Revenue Growth
  Capitalize on Current Contract Base.
 Expand Services Provided to Existing Customers.
 Expand Customer Base.
 Offer New Complementary Services.
 Operating Margins
  Capitalize on Corporate Infrastructure Investments
  Page 8




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Concentrate on High Value-Added Services and Increasing Our Labor Content
 Pursue Strategic Acquisitions
  IT AND PROFESSIONAL SERVICES AND SOLUTIONS
  Enterprise Systems Management
   
    
    Infrastructure and Enterprise Systems Management
    
    Infrastructure Operations and Management
    
    Outsourcing and Managed Services
    
    Infrastructure Consolidation and Modernization
    
    Public/Private Cloud Computing
 
    
    Application and Network Management
    
    Application and Business System Performance
Measures
    
    Network Design, Implementation, and Migration
    
    Network Monitoring and Performance Evaluation
    Page 9




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Network Engineering
   
    
    Architecture Development and Design
    
    Disaster Response Planning and
Recovery
    
    Installation, Test, and Evaluation
    
    Network Configuration
    
    Network Security Evaluation
 
    
    Protocol and Topology Selection
    
    Reliability and Contingency
Assessment
    
    Requirements Analysis
    
    Routing Design
    
    Vulnerability Assessment
   Cybersecurity and Information Assurance
   
    
    Intrusion Detection/Prevention System Development
    
    Certification and Accreditation
    
    Policy and Procedures Development
    
    Products Evaluation and Integration
    
    Cybersecurity Fusion Centers
 
    
    Public Key Infrastructure (PKI)
Implementation
    
    Computer Forensics
    
    Risk and Threat Assessment
    
    Security Awareness and Training
    
    Security Test and Evaluation
   Software Development and Systems Engineering
   
    
    Agile and Open Source Software Development
    
    Database Design and Management
    
    Enterprise Portal Implementation
    
    Integration, Test, and Evaluation
    
    Legacy System Integration
    
    Project Planning and Management
    
    Full Systems Lifecycle Development and
Deployment
 
    
    Software/Systems Development
    
    Analytical Computing Solutions
    
    Data Warehousing/Mining
    
    Advanced Graph Analytics
    
    Information Sharing and
Collaboration
    
    High Performance and Grid Computing
    Page 10




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Program Management, Acquisition, and Lifecycle Support
   
    
    Acquisition Management and Logistics
    
    Program and Portfolio Management
    
    Test and Evaluation
    
    Systems Engineering and Technical
Support
    
    Studies and Capabilities Analysis
 
    
    Financial
Management
    
    Security Management
    
    Training
    
    Risk Management
   Engineering and Logistics
   
    
    Software Development and Systems
Integration
    
    Prototype Design, Development and Testing
    
    Material and Component Sourcing
    
    Modeling and Simulation
    
    Acquisition Planning and Program Management
 
    
    Technology Assessments and Analysis of Alternatives
    
    Sustainment Engineering and Obsolescence Management
    
    Diminishing Manufacturing Sources and Material
Shortages
    
    Supply Chain Management and Business Process
Outsourcing
    
    Multi-Service Weapon Systems Reprogramming Capability
    Page 11




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Health IT/Medical Transformation
   
    
    Strategic Planning/Consulting
    
    Electronic and Personal Health Records
    
    Access-to-Care Program Support
    
    Data/System Consolidation, Migration,
and Modernization
    
    Doctrine/Policy Development
    
    Social Media/Networking
Tools/Solutions
 
    
    Occupational, Environmental, and Population Health
Programs
    
    Collaboration and Telemedicine Solutions
    
    Preparedness and Contingency Planning
    
    Aeromedical Evaluation and Combat Casualty Care
    
    Medical Education and Training
   Training and Simulation
   
    
    Modeling and Simulation
    
    Network Engineering, Operations and
Support
    
    Virtual/Desktop Simulation
    
    Exercise Support
    
    Development and Integration of
Distributed Simulation Systems
 
    
    Information Assurance
    
    Multi-level Security
    
    Distance Learning, Training, and Educational
Products
    
    Learning Management Systems
   CUSTOMERS
    Page 12




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Department of Defense
                                      Page 13




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Federal Civilian
                    CONTRACTS
  Number ofPeriod of
    
    
    
    
    
    pre-qualifiedVehicle
    
    Owning agency
    
    performance
    
    Ceiling value*
    
    
    contractorsGSA Alliant
    
    General Services Administration
    
    05/2009  08/2017
    
    $50.0 billion
    
    
    
    59ITES-2S
    
    U.S. Army
    
    12/2006  04/2015
    
    20.0 billion
    
    
    
    16R2-3G
    
    U.S. Army
    
    07/2010  07/2015
    
    16.4 billion
    
    
    
    17NETCENTS
    
    U.S. Air Force
    
    09/2004  09/2011
    
    9.0 billion
    
    
    
    8DESP II
    
    U.S. Air Force
    
    06/2005  08/2011
    
    1.9 billion
    
    
    
    20HHS FDA ELMS
    
    Health and Human Service
    
    06/2009  06/2019
    
    2.0 billion
    
    
    
    10TEIS
    
    U.S. Army
    
    11/2005  06/2011
    
    0.8 billion
    
    
    
    3PEO Soldier
    
    U.S. Army
    
    05/2007  04/2015
    
    0.4 billion
    
    
    
    1OPM TMA
    
    Office of Personnel Management
    
    04/2007  03/2011
    
    0.3 billion
    
    
    
    25
 *
    
    Ceiling value refers to the overall contract ceiling for all contractors, and not NCIs
individual ceiling value.   Page 14




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CONTRACT BACKLOG
  UnfundedAs of
    
    Funded backlog
    
    
    backlog
    
    
    Total backlog(in millions)December 31, 2010
    
    $
    302
    
    
    $
    999
    
    
    $
    1,301December 31, 2009
    
    $
    250
    
    
    $
    1,251
    
    
    $
    1,501
  BUSINESS DEVELOPMENT
   GOVERNMENT REGULATION
   Page 15




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COMPETITION
  EMPLOYEES
   
    
    Microsoft Certified Professional (MCP)
    
    Microsoft Certified Systems Engineer (MCSE)
    
    Microsoft Certified Systems Administrator
(MCSA)
    
    Cisco Certified Network Associate (CCNA)
    
    Cisco Certified Network Professional (CCNP)
    
    Cisco Certified Design Professional (CCDP)
    
    Cisco Certified Security Professional (CCSP)
    
    Sun Certified Systems Administrator
 
    
    IT Infrastructure Library (ITIL)
    
    Project Management Professional (PMP)
    
    CompTIA Certifications (A+, Network +, Security +)
    
    ISC2 Certifications (CISSP, SCCP, CAP, ISSEP, ISSAP)
    
    Certified INFOSEC Professional
    
    COMSEC Certification
    
    Global Information Assurance Certification (GIAC)  DoD
8570
    
    SANS Institute Certifications (GSEC, GCIA, GCIH, GISF)
    CORPORATE INFORMATION
  WEBSITE ACCESS TO SEC REPORTS
 www.nciinc.com www.sec.gov
  Page 16




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ITEM 1A.
    
    RISK FACTORS
  Risks Related to Our Business
 We depend on contracts with the Federal Government for the majority of our revenue. If our
relationships with Federal Government agencies are harmed, our future revenue and operating profits
would decline.
  We face intense competition from many competitors that have greater resources than we do, which
could result in price reductions, reduced profitability, or loss of market share.
  
    
    divert sales from us by winning very large-scale Government contracts, a risk that is
enhanced by the recent trend in Government procurement practices to bundle services into
larger contracts;
 
    
    force us to charge lower prices; or
 
    
    adversely affect our relationships with current customers, including our ability to
continue to win competitively awarded engagements where we are the incumbent.
   Page 17




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We cannot guarantee that our estimated contract backlog will result in actual revenue.
  Our revenue and operating profits could be adversely affected by significant changes in the
contracting or fiscal policies of the Federal Government.
  
    
    budgetary constraints affecting Federal Government spending generally or specific
departments or agencies in particular, and changes in fiscal policies or available funding;
 
    
    changes in Federal Government programs or requirements, including the increased use of
small business providers;
 
    
    Federal Government agencies are more frequently awarding contracts on a technically
acceptable/lowest cost basis in order to reduce expenditures;
 
    
    Federal Governmental shutdowns (such as that which occurred during the Federal
Governments 1996 fiscal year) and other potential delays in the Federal Government
appropriations process;
 
    
    the use of a Continuing Resolution to fund agencies instead of a budget appropriation,
which may cause our customers within those agencies to defer or reduce work under our
current contracts;
 
    
    a failure of Congress to pass adequate supplemental appropriations to pay for an
international conflict or related reconstruction efforts;
 
    
    a reduction in spending or a shift of expenditures from existing programs;
 
    
    the FAR and certain of our Federal Government contracts contain OCI clauses that may
limit our ability to compete for or perform certain other contracts. OCIs arise when we
engage in activities that may make us unable to render impartial assistance or advice to
the Federal Government, impair our objectivity in performing contract work, or provide us
with an unfair competitive advantage. An OCI issue that precludes our competition for or
performance on a significant program or contract could harm our prospects and negative
publicity about an OCI issue could damage our reputation;
  Page 18




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
    
    curtailment of the Federal Governments use of professional services providers,
realignment of funds with changed Government priorities including insourcing of
previously contracted support services, and the realignment of funds to other non-defense
related programs, which may reduce the amount of funds available to defense-related and
other programs in our core service areas;
 
    
    adoption of new laws or regulations;
 
    
    competition and consolidation in the IT industry;
 
    
    general economic conditions; and
 
    
    these or other factors could cause Federal Governmental agencies, or prime contractors
for which we are acting as a subcontractor, to reduce their purchases under contracts, to
exercise their right to terminate contracts, or elect not to exercise options to renew
contracts, any of which could cause our revenue and operating profits to decline.
 If we fail to attract and retain skilled employees or employees with the necessary security
clearances, we might not be able to perform under our contracts or win new business.
   If our subcontractors fail to perform their contractual obligations, our performance and reputation
as a prime contractor and our ability to obtain future business could suffer.
   Page 19




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We are a subcontractor to other businesses on a portion of our business. If these businesses were
to encounter financial difficulty, they may fail to perform their contractual obligation.
Consequently, our contractual performance and reputation, as well as our financial position could
be affected.
  Failure to maintain strong relationships with other contractors could result in a decline in our
revenue.
  If we experience systems or service failure, our reputation could be harmed and our customers could
assert claims against us for damages or refunds.
  
    
    lose revenue due to adverse customer reaction;
 
    
    be required to provide additional services to a customer at no charge;
 
    
    receive negative publicity, which could damage our reputation and adversely affect our
ability to attract or retain customers; and
 
    
    suffer claims for substantial damages.
     Page 20




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Internal system or service failures could disrupt our business and impair our ability to
effectively provide our products and services to our customers, which could damage our reputation
and adversely affect our revenues and profitability.
  Security breaches in sensitive Federal Government systems could result in the loss of customers and
negative publicity.
  Our business could be negatively impacted by security threats and other disruptions.
  Our employees or subcontractors may engage in misconduct or other improper activities, which could
cause us to lose contracts.
   Page 21




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Our estimates, forward-looking statements, and projections may prove to be inaccurate.
   If we fail to manage acquisitions, divestitures, and other transactions, our financial results,
business, and future prospects could be harmed.
     Page 22




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Current credit market conditions could affect our access to working capital and our ability to make
substantial acquisitions.
  The loss of any member of our senior management could impair our relationships with Federal
Government customers and disrupt the management of our business.
  Our business commitments require our employees to travel to potentially dangerous places, which may
result in injury to our employees.
  If we are unable to manage our growth, our business could be adversely affected.
  We may be harmed by intellectual property infringement claims and our failure to protect our
intellectual property could enable competitors to market products and services with similar
features.
   Page 23




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The Company has substantial investments in recorded goodwill as a result of prior acquisitions, and
changes in future business conditions could cause these investments to become impaired, requiring
substantial write-downs that could reduce the Companys operating income.
  Risks Related to Our Industry
 Our Federal Government contracts may be terminated by the Federal Government at any time, and if we
do not replace them, our revenue and operating profits may be adversely affected.
   Federal Government contracts contain other provisions that may be unfavorable to us.
  
    
    reduce or modify contracts or subcontracts;
 
    
    cancel multi-year contracts and related orders if funds for contract performance for any
subsequent year become unavailable;
 
    
    limit our ability to compete for or perform certain other contracts as a result of OCI
clauses;
    
    claim rights in products and systems produced by us; and
 
    
    suspend or debar us from doing business with the Federal Government.
  Page 24




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Many of our Federal Government customers spend their procurement budgets through MACs under which
we are required to compete for post-award orders or for which we may not be eligible to compete and
could limit our ability to win new contracts and grow revenue.
  Our business could be adversely affected by delays caused by our competitors protesting major
contract awards received by us, resulting in the delay of the initiation of work.
   Each of our contract types involves the risk that we could underestimate our costs and incur
losses.
    Page 25




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Our failure to comply with complex procurement laws and regulations could cause us to lose business
and subject us to a variety of penalties.
  
    
    the FAR and agency regulations supplemental to the FAR, which comprehensively regulate
the formation, administration, and performance of Federal Government contracts;
 
    
    the Truth in Negotiations Act, which requires certification and disclosure of all cost
and pricing data in connection with contract negotiations;
 
    
    the FAR and certain of our Federal Government contracts contain OCI clauses that may
limit our ability to compete for or perform certain other contracts;
 
    
    compliance with the Foreign Corrupt Practices Act or U.S. export control regulations by
us or our subcontractors;
 
    
    the Cost Accounting Standards and Cost Principles, which impose accounting requirements
that govern our right to reimbursement under certain cost-based Federal Government
contracts; and
 
    
    laws, regulations, and executive orders restricting the use and dissemination of
information classified for national security purposes and the export of certain products
and technical data.
  The Federal Government may revise its procurement or other practices in a manner adverse to us.
   Page 26




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A preference for set-aside programs such as minority-owned, small, small-disadvantaged businesses,
or other such programs, could affect our ability to be a prime contractor on certain governmental
procurements.
  We derive significant revenue from contracts awarded through a competitive procurement process,
which may require significant upfront bid and proposal costs that could negatively affect our
operating results.
  Unfavorable Federal Government audit results could subject us to a variety of penalties and
sanctions and could harm our reputation and relationships with our customers and impair our ability
to win new contracts.
   Other Risks Related to Our Stock
 Our stock price is subject to volatility and could decline.
    Page 27




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Our quarterly operating results may fluctuate significantly as a result of factors outside of our
control, which could cause the market price of our common stock to decline.
  
    
    fluctuations in revenue recognized on contracts;
 
    
    variability in demand for our services and solutions;
 
    
    commencement, completion, or termination of contracts during any particular quarter;
 
    
    timing of award or performance incentive-fee notices;
 
    
    timing of significant bid and proposal costs;
 
    
    timing of acquisition activities and the expensing of acquisition-related costs;
 
    
    variable purchasing patterns under the GSA Schedule 70 task orders, GWACs, blanket
purchase agreements, and other agency-specific IDIQ contracts;
 
    
    strategic decisions by us or our competitors, such as acquisitions, divestitures,
spin-offs, and joint ventures;
 
    
    strategic investments or changes in business strategy;
 
    
    changes in the extent to which we use subcontractors;
 
    
    volume of product orders placed under our NETCENTS contract or other material-related
purchases under our contracts;
 
    
    seasonal fluctuations in our staff utilization rates; and
 
    
    Federal Government shutdowns or temporary facility closings.
    Page 28




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Mr. Narang, our founder, Chairman and CEO, controls the Company, and his interests may not be
aligned with yours.
  A substantial number of shares of our common stock are eligible for sale by Mr. Narang, which could
cause our common stock price to decline significantly.
  
 ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 2.
    
    PROPERTIES
  
 ITEM 3.
    
    LEGAL PROCEEDINGS
  
 ITEM 4.
    
    REMOVED AND RESERVED
  Page 29




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  2010
    
    
    2009Quarters
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst
    
    $
    32.57
    
    
    $
    25.34
    
    
    $
    33.08
    
    
    $
    22.33Second
    
    
    29.94
    
    
    
    20.22
    
    
    
    34.23
    
    
    
    23.55Third
    
    
    25.24
    
    
    
    18.15
    
    
    
    32.99
    
    
    
    27.20Fourth
    
    
    24.26
    
    
    
    18.15
    
    
    
    29.82
    
    
    
    24.20
   Share Repurchases
  Dividend Policy
   Recent Sales of Unregistered Securities
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers
   Page 30




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Performance Graph
  COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURNS
 .
 
 December 31, 2010NCI, Inc.
    
    $
    167.48NASDAQ CompositeTotal Returns
    
    
    125.93Russell 2000 Index
    
    
    124.45Federal Government services peer group
    
    
    97.19
  Page 31




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ITEM 6.
    
    SELECTED FINANCIAL DATA
  Year ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007 (a)
    
    
    2006(in thousands except per share data)Statements of Operations Data:Revenue
    
    $
    581,341
    
    
    $
    468,910
    
    
    $
    390,596
    
    
    $
    304,420
    
    
    $
    218,340Operating costs and expenses:Cost of revenue
    
    
    512,779
    
    
    
    407,322
    
    
    
    336,473
    
    
    
    263,679
    
    
    
    188,878General and administrative expenses
    
    
    23,730
    
    
    
    22,047
    
    
    
    20,079
    
    
    
    15,396
    
    
    
    12,852Depreciation and amortization
    
    
    5,054
    
    
    
    4,228
    
    
    
    3,660
    
    
    
    3,012
    
    
    
    2,586Gain on extinguishment of contingent consideration liability
    
    
    
    
    
    
    (2,285
    )
    
    
    
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    541,563
    
    
    
    431,312
    
    
    
    360,212
    
    
    
    282,087
    
    
    
    204,316Operating income
    
    
    39,778
    
    
    
    37,598
    
    
    
    30,384
    
    
    
    22,333
    
    
    
    14,024Interest expense, net
    
    
    598
    
    
    
    657
    
    
    
    2,026
    
    
    
    1,342
    
    
    
    (728
    )Income before income taxes
    
    
    39,180
    
    
    
    36,941
    
    
    
    28,358
    
    
    
    20,991
    
    
    
    14,752Provision for income taxes
    
    
    15,309
    
    
    
    14,784
    
    
    
    11,318
    
    
    
    8,420
    
    
    
    5,493Net income
    
    $
    23,871
    
    
    $
    22,157
    
    
    $
    17,040
    
    
    $
    12,571
    
    
    $
    9,259Earnings per share:Basic
    
    $
    1.75
    
    
    $
    1.65
    
    
    $
    1.28
    
    
    $
    0.94
    
    
    $
    0.69Diluted
    
    $
    1.72
    
    
    $
    1.61
    
    
    $
    1.25
    
    
    $
    0.93
    
    
    $
    0.69Weighted average shares:Basic
    
    
    13,621
    
    
    
    13,452
    
    
    
    13,362
    
    
    
    13,335
    
    
    
    13,328Diluted
    
    
    13,878
    
    
    
    13,775
    
    
    
    13,633
    
    
    
    13,539
    
    
    
    13,483
 As of December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(in thousands)Condensed Balance Sheet Data:Cash and cash equivalents
    
    $
    2,791
    
    
    $
    1,193
    
    
    $
    1,267
    
    
    $
    109
    
    
    $
    13,930Net working capital
    
    
    55,684
    
    
    
    48,073
    
    
    
    41,146
    
    
    
    38,563
    
    
    
    46,320Total assets
    
    
    269,478
    
    
    
    241,651
    
    
    
    200,333
    
    
    
    178,746
    
    
    
    106,799Total debt, including current portion
    
    
    20,023
    
    
    
    42,094
    
    
    
    40,220
    
    
    
    43,318
    
    
    
    381Total stockholders equity
    
    
    153,047
    
    
    
    124,227
    
    
    
    98,859
    
    
    
    80,241
    
    
    
    66,586
 Notes to Five-Year Summary
 (a)
    
    Effective June 27, 2007, the Company acquired Karta
Technologies, Inc. (Karta). Karta added $29 million in
revenue to our 2007 financial results.  Page 32




---



##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis should be read in conjunction with our financial statements
and the related notes included elsewhere in this Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties, and assumptions, such as statements
of our plans, objectives, expectations, and intentions. Our actual results could differ materially
from those anticipated in the forward-looking statements. Factors that could cause or contribute
to our actual results differing materially from those anticipated include, but are not limited to,
those discussed in Item 1A. Risk Factors and elsewhere in this Form 10-K.
 OVERVIEW
  
    
    Enterprise systems management
 
    
    Network engineering
 
    
    Cybersecurity and information assurance
 
    
    Software development and systems engineering
 
    
    Program management, acquisition, and lifecycle support
 
    
    Engineering and logistics
 
    
    Health IT/medical transformation
 
    
    Training and simulation
  Year ended December 31,2010
    
    
    2009
    
    
    2008Defense and Intelligence agencies
    
    
    92.0
    %
    
    
    87.8
    %
    
    
    81.0
    %Federal Civilian agencies
    
    
    8.0
    
    
    
    11.9
    
    
    
    16.3Commercial, state, and local entities
    
    
    
    
    
    
    0.3
    
    
    
    2.7Total revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Page 33




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##### Table of Contents



Revenue
  Contract Types
   Year ended December 31,2010
    
    
    2009
    
    
    2008Time-and-materials
    
    
    55.1
    %
    
    
    50.7
    %
    
    
    45.4
    %Cost-plus
    
    
    13.5
    
    
    
    14.7
    
    
    
    21.9Fixed-price
    
    
    31.4
    
    
    
    34.6
    
    
    
    32.7Total revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Operating Expenses
 Cost of Revenue
   Page 34




---



##### Table of Contents



General and Administrative Expenses
  Depreciation and Amortization
  Interest Expense, net
   Page 35




---



##### Table of Contents



Results of Operations
  2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands)
    
    
    (as a Percentage of Revenue)Revenue
    
    $
    581,341
    
    
    $
    468,910
    
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Cost of revenue
    
    
    512,779
    
    
    
    407,322
    
    
    
    88.2
    
    
    
    86.9General and administrative expenses
    
    
    23,730
    
    
    
    22,047
    
    
    
    4.1
    
    
    
    4.7Depreciation and amortization
    
    
    5,054
    
    
    
    4,228
    
    
    
    0.9
    
    
    
    0.9Gain on extinguishment of
contingent consideration liability
    
    
    
    
    
    
    (2,285
    )
    
    
    
    
    
    
    (0.5
    )Total operating expenses
    
    
    541,563
    
    
    
    431,312
    
    
    
    93.2
    
    
    
    92.0Operating income
    
    
    39,778
    
    
    
    37,598
    
    
    
    6.8
    
    
    
    8.0Interest expense, net
    
    
    598
    
    
    
    657
    
    
    
    0.1
    
    
    
    0.1Income before taxes
    
    
    39,180
    
    
    
    36,941
    
    
    
    6.7
    
    
    
    7.9Provision for income taxes
    
    
    15,309
    
    
    
    14,784
    
    
    
    2.6
    
    
    
    3.2Net income
    
    $
    23,871
    
    
    $
    22,157
    
    
    
    4.1
    %
    
    
    4.7
    %
 Year Ended December 31, 2010, Compared to Year Ended December 31, 2009
 Revenue
   Cost of revenue
   Page 36




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##### Table of Contents



General and administrative expenses
  Depreciation and amortization
  Gain on extinguishment of contingent consideration liability
  Operating income
  Interest expense, net
  Income tax
   Page 37




---



##### Table of Contents



2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands)
    
    
    (as a Percentage of Revenue)Revenue
    
    $
    468,910
    
    
    $
    390,596
    
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Cost of revenue
    
    
    407,322
    
    
    
    336,473
    
    
    
    86.9
    
    
    
    86.1General and administrative expenses
    
    
    22,047
    
    
    
    20,079
    
    
    
    4.7
    
    
    
    5.1Depreciation and amortization
    
    
    4,228
    
    
    
    3,660
    
    
    
    0.9
    
    
    
    1.0Gain on extinguishment of
contingent consideration liability
    
    
    (2,285
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    Total operating expenses
    
    
    431,312
    
    
    
    360,212
    
    
    
    92.0
    
    
    
    92.2Operating income
    
    
    37,598
    
    
    
    30,384
    
    
    
    8.0
    
    
    
    7.8Interest expense, net
    
    
    657
    
    
    
    2,026
    
    
    
    0.1
    
    
    
    0.5Income before taxes
    
    
    36,941
    
    
    
    28,358
    
    
    
    7.9
    
    
    
    7.3Provision for income taxes
    
    
    14,784
    
    
    
    11,318
    
    
    
    3.2
    
    
    
    2.9Net income
    
    $
    22,157
    
    
    $
    17,040
    
    
    
    4.7
    %
    
    
    4.4
    %
 Year Ended December 31, 2009, Compared to Year Ended December 31, 2008
 Revenue
  Cost of revenue
  General and administrative expenses
   Page 38




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##### Table of Contents



Depreciation and amortization
  Gain on extinguishment of contingent consideration liability
  Operating income
  Interest expense, net
  Income tax
  Effects of Inflation
  Liquidity and Capital Resources
   Page 39




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##### Table of Contents



Credit Facility
   Senior Debt to EBITDARatio
    
    SpreadBelow 1.0 to 1
    
    200 basis pointsBetween 2.0 and 1.0 to 1
    
    225 basis pointsBetween 2.0 and 2.5 to 1
    
    250 basis pointsBetween 2.5 and 3.0 to 1
    
    275 basis pointsGreater than 3.0 to 1
    
    300 basis points
     Page 40




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##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments due by periodLess than
    
    
    1-3
    
    
    3-5
    
    
    More thanContractual obligations:
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years(in thousands)Credit Facility
    
    $
    20,000
    
    
    $
    
    
    
    $
    
    
    
    $
    20,000
    
    
    $
    Capital lease obligations
    
    
    23
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    23,922
    
    
    
    7,731
    
    
    
    10,959
    
    
    
    4,137
    
    
    
    1,095Total
    
    $
    43,945
    
    
    $
    7,754
    
    
    $
    10,959
    
    
    $
    24,137
    
    
    $
    1,095
 Critical Accounting Policies
 Revenue Recognition
  Time-and-Materials Contracts:
 Cost-Plus Contracts:
 Fixed-Price Contracts:
   Page 41




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##### Table of Contents



Goodwill and the Amortization of Intangible Assets
       Page 42




---



##### Table of Contents



ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures and Internal Control over Financial Reporting
   
    
    pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the Companys assets;
 
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that the Companys
receipts and expenditures are being made only in accordance with authorizations of
management and the Companys Board of Directors; and
 
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or
disposition of the Companys assets that could have a material adverse effect on the
Companys financial statements.
  Page 43




---



##### Table of Contents



Limitations on the Effectiveness of Controls
  Scope of the Assessments
 Internal ControlIntegrated Framework
  Page 44




---



##### Table of Contents



Evaluation of the Effectiveness of Disclosure Controls and Procedures
  Managements Report on Internal Controls Over Financial Reporting
 Internal ControlIntegrated Framework
 Changes in Internal Control Over Financial Reporting
  
 ITEM 9B.
    
    OTHER INFORMATION
   Page 45




---



##### Table of Contents



PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
       
 ITEM 11.
    
    EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
   Page 46




---



##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  (1)
    
    Report of Independent Registered Public Accounting
Firm On Internal Controls Over Financial
Reporting
       (2)
    
    Exhibits required by Item 601 of Regulation S-K:
 Number
    
    Description3.1
    
    
    Amended and Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference from Exhibit 3.1
to registrants Registration Statement on Form S-1 (File No.
333-127006), as filed with the Commission on October 4, 2005,
as amended).3.2
    
    
    Bylaws of the Registrant (incorporated herein by reference from
Exhibit 3.2 to registrants Registration Statement on Form S-1
(File No. 333-127006), as filed with the Commission on July 29,
2005).4.1
    
    
    Specimen Class A Common Stock Certificate (incorporated herein
by reference from Exhibit 4.1 to registrants Registration
Statement on Form S-1 (File No. 333-127006), as filed with the
Commission on October 20, 2005, as amended).4.2
    *
    
    NCI, Inc. 2005 Performance Incentive Plan (incorporated herein
by reference from Exhibit 4.2 to registrants Registration
Statement on Form S-1 (File No. 333-127006), as filed with the
Commission on July 29, 2005).4.3
    *
    
    Form of 2005 Performance Incentive Plan Notice of Stock Option
Grant and Stock Option Agreement (incorporated herein by
reference from Exhibit 4.4 to registrants Registration
Statement on Form S-1 (File No. 333-127006), as filed with the
Commission on October 20, 2005, as amended).4.4
    *
    
    NCI, Inc. Amended and Restated 2005 Performance Incentive Plan
(incorporated herein by reference from Appendix A to
registrants Proxy Statement on Form DEF 14A, as filed with the
Commission on April 30, 2009).4.5
    *
    
    Form of Amended and Restated 2005 Performance Incentive Plan
Notice of Stock Option Grant and Stock Option Agreement
(incorporated herein by reference from Exhibit 4.2 to
registrants Registration Statement on Form 8-K, as filed with
the Commission on June 12, 2009).10.1
    
    
    Amended and Restated Loan and Security Agreement, dated as of
December 13, 2010, by and among NCI, Inc., NCI Information
Systems Incorporated, Operational Technologies Services, Inc.,
as Borrowers, the several banks and financial institutions
from time to time parties thereto, as Lenders, SunTrust Bank as
the Administrative Agent to the Lenders and SunTrust Robinson
Humphrey, Inc., as Lead Arranger and Book Manager (incorporated
by reference from Exhibit 10.1 to registrants Current Report
on Form 8-K dated December 13, 2010, and filed with the
Commission on December 15, 2010).10.2
    *
    
    Executive Change in Control and Severance Agreement, dated
March 16, 2010, by and among, NCI, Inc., and Terry W. Glasgow
(incorporated herein by reference from Exhibit 10.1 to
registrants Current Report on Form 8-K (File No. 000-51579),
as filed with the Commission March 18, 2010).10.3
    *
    
    Executive Change in Control and Severance Agreement, dated
March 16, 2010, by and among, NCI, Inc., and Michele R.
Cappello (incorporated herein by reference from Exhibit 10.3 to
registrants Current Report on
Form 8-K(File No. 000-51579),
as filed with the Commission March 18, 2010).21.1
    
    
    Subsidiaries of Registrant.23.1
    
    
    Consent of Ernst & Young LLP.31.1
    
    
    Certification of the Chief Executive Officer and Acting
Principal Financial Officer pursuant to rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.32.1
    
    
    Certification of the Chief Executive Officer and Acting
Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 
    
    Included with this filing.*
    
    Management Contract or Compensatory Plan or Arrangement. (b)
    
    Exhibits. The exhibits required by this Item are listed under Item 15(a)(3).
  Page 47




---



##### Table of Contents



SIGNATURES
  NCI, Inc.RegistrantDate: February 28, 2011
    
    By:
    
    /s/ CHARLES K. NARANG

Charles K. NarangChairman of the Board and Chief Executive Officer(Principal Executive Officer and Acting Principal Financial Officer)
  Signature
    
    Title
    
    Date/s/ TERRY W. GLASGOW

Terry W. Glasgow
    
    President and Director
    
    February 28, 2011/s/ JAMES P. ALLEN

James P. Allen
    
    Director
    
    February 28, 2011/s/ JOHN E. LAWLER

John E. Lawler
    
    Director
    
    February 28, 2011/s/ PAUL V. LOMBARDI

Paul V. Lombardi
    
    Director
    
    February 28, 2011/s/ J. PATRICK MCMAHON

J. Patrick McMahon
    
    Director
    
    February 28, 2011/s/ STEPHEN L. WAECHTER

Stephen L. Waechter
    
    Director
    
    February 28, 2011/s/ DANIEL R. YOUNG

Daniel R. Young
    
    Director
    
    February 28, 2011
  Page 48




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 NCI, INC.
 Report of Independent Registered Public Accounting Firm On Internal Controls Over Financial Reporting
    
    
    F-2Report of Independent Registered Public Accounting Firm On The Consolidated Financial Statements
    
    
    F-3Consolidated Balance Sheets 
As of December 31, 2010 and 2009
    
    
    F-4Consolidated Statements of Operations 
For the years ended December 31, 2010, 2009, and 2008
    
    
    F-5Consolidated Statements of Changes in Stockholders Equity 
For the years ended December 31, 2010, 2009, and 2008
    
    
    F-6Consolidated Statements of Cash Flows 
For the years ended December 31, 2010, 2009, and 2008
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 On Internal Controls Over Financial Reporting
      .
  /s/ Ernst & Young LLP
 
  F-2




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 On The Consolidated Financial Statements
      /s/ Ernst & Young LLP
 
  F-3




---



##### Table of Contents



NCI, Inc.
 
 Consolidated Balance Sheets
 (in thousands, except share amounts)
 As of December 31,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,791
    
    
    $
    1,193Accounts receivable, net
    
    
    132,693
    
    
    
    110,027Deferred tax assets, net
    
    
    4,547
    
    
    
    4,525Prepaid expenses and other current assets
    
    
    3,347
    
    
    
    1,677Total current assets
    
    
    143,378
    
    
    
    117,422Property and equipment, net
    
    
    11,751
    
    
    
    8,253Other assets
    
    
    1,590
    
    
    
    827Intangible assets, net
    
    
    6,179
    
    
    
    8,569Goodwill
    
    
    106,580
    
    
    
    106,580Total assets
    
    $
    269,478
    
    
    $
    241,651Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    61,046
    
    
    $
    42,333Accrued salaries and benefits
    
    
    20,229
    
    
    
    21,012Deferred revenue
    
    
    2,951
    
    
    
    1,782Other accrued expenses
    
    
    3,468
    
    
    
    4,222Total current liabilities
    
    
    87,694
    
    
    
    69,349Long-term debt
    
    
    20,000
    
    
    
    42,000Deferred tax liabilities, net
    
    
    7,450
    
    
    
    4,138Deferred rent and other long-term liabilities
    
    
    1,287
    
    
    
    1,937Total liabilities
    
    
    116,431
    
    
    
    117,424Stockholders equity:Class A common stock, $0.019 par
value37,500,000 shares authorized;
8,469,242 shares issued and outstanding as
of December 31, 2010, and 8,288,454 shares
issued and outstanding as of December 31,
2009
    
    
    161
    
    
    
    158Class B common stock, $0.019 par
value12,500,000 shares authorized;
5,200,000 shares issued and outstanding as
of December 31, 2010 and 2009
    
    
    99
    
    
    
    99Additional paid-in capital
    
    
    67,889
    
    
    
    62,943Retained earnings
    
    
    84,898
    
    
    
    61,027Total stockholders equity
    
    
    153,047
    
    
    
    124,227Total liabilities and stockholders equity
    
    $
    269,478
    
    
    $
    241,651
 See Notes to Consolidated Financial Statements.
  F-4




---



##### Table of Contents



NCI, Inc.


Consolidated Statements of Operations
(in thousands, except per share amounts)
 Year ended December 31,2010
    
    
    2009
    
    
    2008Revenue
    
    $
    581,341
    
    
    $
    468,910
    
    
    $
    390,596Operating expenses:Cost of revenue
    
    
    512,779
    
    
    
    407,322
    
    
    
    336,473General and administrative expense
    
    
    23,730
    
    
    
    22,047
    
    
    
    20,079Depreciation and amortization
    
    
    5,054
    
    
    
    4,228
    
    
    
    3,660Gain on extinguishment of contingent consideration liability
    
    
    
    
    
    
    (2,285
    )
    
    
    Total operating expenses
    
    
    541,563
    
    
    
    431,312
    
    
    
    360,212Operating income
    
    
    39,778
    
    
    
    37,598
    
    
    
    30,384Interest expense, net
    
    
    598
    
    
    
    657
    
    
    
    2,026Income before taxes
    
    
    39,180
    
    
    
    36,941
    
    
    
    28,358Income tax expense
    
    
    15,309
    
    
    
    14,784
    
    
    
    11,318Net income
    
    $
    23,871
    
    
    $
    22,157
    
    
    $
    17,040Earnings per common and common equivalent share:Basic:Weighted average shares outstanding
    
    
    13,621
    
    
    
    13,452
    
    
    
    13,362Net income per share
    
    $
    1.75
    
    
    $
    1.65
    
    
    $
    1.28Diluted:Weighted average shares and equivalent shares outstanding
    
    
    13,878
    
    
    
    13,775
    
    
    
    13,633Net income per share
    
    $
    1.72
    
    
    $
    1.61
    
    
    $
    1.25
 See Notes to Consolidated Financial Statements.
  F-5




---



##### Table of Contents



NCI, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity
 (in thousands)
 Class A
    
    
    Class B
    
    
    Additional
    
    
    
    
    
    
    Totalcommon stock
    
    
    common stock
    
    
    Paid-in
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    EquityBalance at December 31, 2007
    
    
    8,153
    
    
    $
    155
    
    
    
    5,200
    
    
    $
    99
    
    
    $
    58,157
    
    
    $
    21,830
    
    
    $
    80,241Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,040
    
    
    
    17,040Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828
    
    
    
    
    
    
    
    828Exercise of stock options
    
    
    53
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    405
    
    
    
    
    
    
    
    406Excess tax benefits of stock option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344
    
    
    
    
    
    
    
    344Balance at December 31, 2008
    
    
    8,206
    
    
    $
    156
    
    
    
    5,200
    
    
    $
    99
    
    
    $
    59,734
    
    
    $
    38,870
    
    
    $
    98,859Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,157
    
    
    
    22,157Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,784
    
    
    
    
    
    
    
    1,784Exercise of stock options
    
    
    82
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    1,017
    
    
    
    
    
    
    
    1,019Excess tax benefits of stock option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    408
    
    
    
    
    
    
    
    408Balance at December 31, 2009
    
    
    8,288
    
    
    $
    158
    
    
    
    5,200
    
    
    $
    99
    
    
    $
    62,943
    
    
    $
    61,027
    
    
    $
    124,227Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,871
    
    
    
    23,871Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,607
    
    
    
    
    
    
    
    1,607Exercise of stock options
    
    
    181
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    2,930
    
    
    
    
    
    
    
    2,933Excess tax benefits of stock option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    409
    
    
    
    
    
    
    
    409Balance at December 31, 2010
    
    
    8,469
    
    
    $
    161
    
    
    
    5,200
    
    
    $
    99
    
    
    $
    67,889
    
    
    $
    84,898
    
    
    $
    153,047
 See Notes to Consolidated Financial Statements.
  F-6




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##### Table of Contents



NCI, Inc.
 
 Consolidated Statements of Cash Flows
 (in thousands)
 Year ended December 31,2010
    
    
    2009
    
    
    2008Cash flows from operating activitiesNet income
    
    $
    23,871
    
    
    $
    22,157
    
    
    $
    17,040Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    5,054
    
    
    
    4,228
    
    
    
    3,660(Gain) loss on sale and disposal of property and equipment
    
    
    (85
    )
    
    
    2
    
    
    
    (8
    )Non-cash stock compensation expense
    
    
    1,607
    
    
    
    1,784
    
    
    
    828Deferred income taxes
    
    
    3,290
    
    
    
    1,038
    
    
    
    485Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (22,666
    )
    
    
    (16,617
    )
    
    
    (3,699
    )Prepaid expenses and other assets
    
    
    (1,765
    )
    
    
    191
    
    
    
    (484
    )Accounts payable
    
    
    18,713
    
    
    
    9,531
    
    
    
    1,945Accrued expenses
    
    
    (380
    )
    
    
    (2,523
    )
    
    
    2,584Deferred rent
    
    
    (567
    )
    
    
    (590
    )
    
    
    (522
    )Net cash provided by operating activities
    
    
    27,072
    
    
    
    19,201
    
    
    
    21,829Cash flows from investing activitiesPurchase of property and equipment
    
    
    (6,218
    )
    
    
    (4,622
    )
    
    
    (2,160
    )Proceeds from sale of property and equipment
    
    
    141
    
    
    
    
    
    
    
    28Cash paid for acquisitions, net of cash acquired
    
    
    
    
    
    
    (17,953
    )
    
    
    (16,190
    )Net cash used in investing activities
    
    
    (6,077
    )
    
    
    (22,575
    )
    
    
    (18,322
    )Cash flows from financing activitiesProceeds from line of credit
    
    
    119,349
    
    
    
    113,719
    
    
    
    100,489Payments on line of credit
    
    
    (141,349
    )
    
    
    (111,719
    )
    
    
    (103,431
    )Financing costs paid
    
    
    (669
    )
    
    
    
    
    
    
    Principal payments under capital lease obligations
    
    
    (70
    )
    
    
    (127
    )
    
    
    (157
    )Proceeds from exercise of stock options
    
    
    2,933
    
    
    
    1,019
    
    
    
    406Excess tax deduction from exercise of stock options
    
    
    409
    
    
    
    408
    
    
    
    344Net cash (used in) provided by financing activities
    
    
    (19,397
    )
    
    
    3,300
    
    
    
    (2,349
    )Net change in cash and cash equivalents
    
    
    1,598
    
    
    
    (74
    )
    
    
    1,158Cash and cash equivalents, beginning of year
    
    
    1,193
    
    
    
    1,267
    
    
    
    109Cash and cash equivalents, end of year
    
    $
    2,791
    
    
    $
    1,193
    
    
    $
    1,267Supplemental disclosure of cash flow informationCash paid during the period for:Interest
    
    $
    646
    
    
    $
    712
    
    
    $
    2,139Income taxes
    
    $
    12,690
    
    
    $
    13,374
    
    
    $
    9,108
 See Notes to Consolidated Financial Statements.
  F-7




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##### Table of Contents



NCI, Inc.
 
 Notes to Consolidated Financial Statements
 December 31, 2010
 1. Business Overview
   2. Summary of Significant Accounting Policies
 Basis of Consolidation
  Basis of Presentation
  Use of Estimates
  Revenue Recognition
    F-8




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F-9




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##### Table of Contents



Cash and Cash Equivalents
  Accounts Receivable and Allowance for Doubtful Accounts
  Property and Equipment
  Long-Lived Assets (Excluding Goodwill)
  Intangible Assets
  Goodwill
  Common Stock
   F-10




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##### Table of Contents



Segment Information
  Income Taxes
  3. Earnings Per Share
  Year ended December 31,2010
    
    
    2009
    
    
    2008(in thousands, except per share data)Net Income
    
    $
    23,871
    
    
    $
    22,157
    
    
    $
    17,040Weighted average number of basic shares outstanding during the period
    
    
    13,621
    
    
    
    13,452
    
    
    
    13,362Dilutive effect of stock options after application of treasury stock method
    
    
    257
    
    
    
    323
    
    
    
    271Weighted average number of diluted shares outstanding during the period
    
    
    13,878
    
    
    
    13,775
    
    
    
    13,633Basic earnings per share
    
    $
    1.75
    
    
    $
    1.65
    
    
    $
    1.28Diluted earnings per share
    
    $
    1.72
    
    
    $
    1.61
    
    
    $
    1.25
  F-11




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##### Table of Contents



4. Major Customers
  Year ended December 31,2010
    
    
    2009
    
    
    2008(dollars in thousands)Defense and Intelligence agencies
    
    $
    534,987
    
    
    
    92.0
    %
    
    $
    411,646
    
    
    
    87.8
    %
    
    $
    316,316
    
    
    
    81.0
    %Federal Civilian agencies
    
    
    46,258
    
    
    
    8.0
    
    
    
    55,760
    
    
    
    11.9
    
    
    
    63,827
    
    
    
    16.3Commercial, state, and local entities
    
    
    96
    
    
    
    
    
    
    
    1,504
    
    
    
    0.3
    
    
    
    10,453
    
    
    
    2.7$
    581,341
    
    
    
    100.0
    %
    
    $
    468,910
    
    
    
    100.0
    %
    
    $
    390,596
    
    
    
    100.0
    %
 5. Accounts Receivable
  As of December 31,2010
    
    
    2009(in thousands)Billed receivables
    
    $
    51,611
    
    
    $
    59,132Unbilled receivables:Billable receivables at end of period
    
    
    61,500
    
    
    
    42,934Other
    
    
    20,280
    
    
    
    9,020Total unbilled receivables
    
    
    81,780
    
    
    
    51,954Total accounts receivable
    
    
    133,391
    
    
    
    111,086Less: allowance for doubtful accounts
    
    
    698
    
    
    
    1,059Total accounts receivable, net
    
    $
    132,693
    
    
    $
    110,027
   Year ended December 31,2010
    
    
    2009
    
    
    2008(in thousands)Balance at beginning of period
    
    $
    1,059
    
    
    $
    1,020
    
    
    $
    585Charged to costs and expense
    
    
    385
    
    
    
    88
    
    
    
    610Deductions
    
    
    (746
    )
    
    
    (49
    )
    
    
    (175
    )Balance at end of period
    
    $
    698
    
    
    $
    1,059
    
    
    $
    1,020
  F-12




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##### Table of Contents



6. Property and Equipment
  As of December 31,2010
    
    
    2009(in thousands)Property and equipmentFurniture and equipment
    
    $
    17,855
    
    
    $
    18,831Leasehold improvements
    
    
    5,287
    
    
    
    4,936Real property
    
    
    549
    
    
    
    54923,691
    
    
    
    24,316Less: Accumulated depreciation and amortization
    
    
    11,940
    
    
    
    16,063Net property and equipment
    
    $
    11,751
    
    
    $
    8,253
  7. Intangible Assets
  As of December 31,2010
    
    
    2009(in thousands)Contract and customer relationships
    
    $
    14,942
    
    
    $
    14,942Less: Accumulated amortization
    
    
    8,994
    
    
    
    6,7405,948
    
    
    
    8,202Non-compete agreements
    
    
    2,038
    
    
    
    2,038Less: Accumulated amortization
    
    
    1,807
    
    
    
    1,671231
    
    
    
    367Total
    
    $
    6,179
    
    
    $
    8,569
  For the year ending December 31,
    
    (in thousands)2011
    
    $
    2,0102012
    
    
    1,4502013
    
    
    1,1632014
    
    
    1,0872015
    
    
    469Thereafter
    
    
    
  F-13




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##### Table of Contents



8. Goodwill
  As of December 31,2010
    
    
    2009(in thousands)Spectrum Systems Services, Inc.
    
    $
    169
    
    
    $
    169Scientific and Engineering Solutions, Inc.
    
    
    17,258
    
    
    
    17,258Operational Technology Services, Inc.
    
    
    5,766
    
    
    
    5,766Karta Technologies, Inc.
    
    
    53,373
    
    
    
    53,373PEO Soldier
    
    
    11,174
    
    
    
    11,174TRS Consulting, Inc.
    
    
    18,840
    
    
    
    18,840Total
    
    $
    106,580
    
    
    $
    106,580
 9. Other Accrued Expenses
  As of December 31,2010
    
    
    2009(in thousands)Accrued health claims
    
    $
    1,525
    
    
    $
    1,612Accrued income tax
    
    
    
    
    
    
    989Deferred rent, current
    
    
    695
    
    
    
    634Other accrued expenses
    
    
    1,248
    
    
    
    987Total other accrued expenses
    
    $
    3,468
    
    
    $
    4,222
 10. Leases
    Operatingleases(in thousands)For the year ending December 31,2011
    
    $
    7,7312012
    
    
    6,5582013
    
    
    4,4012014
    
    
    2,4512015
    
    
    1,686Thereafter
    
    
    1,095Total minimum lease payments
    
    $
    23,922
   F-14




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##### Table of Contents



11. Credit Facility
     12. Acquisitions
 TRS Acquisition
    F-15




---



##### Table of Contents



13. Performance Incentive Plan
  As of December 31,2010(in thousands)Shares reserved under the plan
    
    
    3,700Options exercised
    
    
    1,318Options outstanding
    
    
    1,098Shares available for future grants
    
    
    1,284
 Stock Compensation
  Assumptions Used in Fair Value determination
  Year ended December 31,2010
    
    
    2009
    
    
    2008Expected Volatility
    
    
    46
    %
    
    
    47
    %
    
    
    39
    %Expected Term (in years)
    
    
    5.4
    
    
    
    5.3
    
    
    
    5.4Risk-free Interest Rate
    
    
    2.12
    %
    
    
    2.15
    %
    
    
    2.66
    %Dividend Yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 
    
    Expected Volatility. The expected volatility of the Companys shares was estimated
based upon the historical volatility of the Companys share price.
 
    
    Expected Term. Because the Company does not have significant historical data on
employee exercise behavior, we are using the Simplified Methodas defined under SEC Staff
Accounting Bulletin No. 110 to calculate the expected term. The simplified method is
calculated by averaging the vesting period and contractual term of the option.
 
    
    Risk-free Interest Rate. The Company bases the risk-free interest rate used in the
Black-Scholes-Merton valuation method on the implied yield available on a U.S. Treasury
note with a term equal to the expected term of the underlying grants.
 
    
    Dividend Yield. The Black-Scholes-Merton valuation model calls for a single expected
dividend yield as an input. The Company has not paid dividends in the past nor does it
expect to pay dividends in the future.
  F-16




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##### Table of Contents



Stock Options Activity
  Weighted-AverageExercise Price perOptions
    
    
    Share(in thousands)Outstanding at January 1, 2008
    
    
    834
    
    
    $
    10.96Granted
    
    
    208
    
    
    
    20.89Forfeited/cancelled
    
    
    (11
    )
    
    
    13.08Exercised
    
    
    (53
    )
    
    
    7.76Outstanding at December 31, 2008
    
    
    978
    
    
    $
    13.20Granted
    
    
    213
    
    
    
    28.42Forfeited/cancelled
    
    
    (14
    )
    
    
    15.10Exercised
    
    
    (82
    )
    
    
    12.32Outstanding at December 31, 2009
    
    
    1,095
    
    
    $
    16.21Granted
    
    
    265
    
    
    
    26.98Forfeited/cancelled
    
    
    (81
    )
    
    
    24.69Exercised
    
    
    (181
    )
    
    
    16.23Outstanding at December 31, 2010
    
    
    1,098
    
    
    $
    18.18
  Weighted-Options
    
    
    Average(in thousands)
    
    
    Fair ValueUnvested January 1, 2008
    
    
    405
    
    
    $
    5.45Granted
    
    
    208
    
    
    
    8.39Vested
    
    
    (131
    )
    
    
    4.42Forfeited
    
    
    (11
    )
    
    
    5.48Unvested December 31, 2008
    
    
    471
    
    
    $
    7.04Vested December 31, 2008
    
    
    507
    
    
    $
    3.79Granted
    
    
    213
    
    
    
    12.61Vested
    
    
    (236
    )
    
    
    6.99Forfeited
    
    
    (14
    )
    
    
    6.88Unvested December 31, 2009
    
    
    434
    
    
    $
    9.81Vested December 31, 2009
    
    
    661
    
    
    $
    4.79Granted
    
    
    265
    
    
    
    26.98Vested
    
    
    (161
    )
    
    
    9.01Forfeited
    
    
    (81
    )
    
    
    10.87Unvested December 31, 2010
    
    
    457
    
    
    $
    11.17Vested December 31, 2010
    
    
    642
    
    
    $
    5.16
  F-17




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##### Table of Contents



Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    OptionsRange of exercise prices
    
    Number of Options
    
    
    Exercise Price
    
    
    Life
    
    
    exercisable(in thousands)
    
    
    
    
    
    (in years)
    
    
    (in thousands)$1.00  $7.00
    
    
    207
    
    
    $
    6.53
    
    
    
    2.2
    
    
    
    207$10.00  $12.99
    
    
    163
    
    
    
    10.16
    
    
    
    3.8
    
    
    
    163$13.00  $20.00
    
    
    274
    
    
    
    16.48
    
    
    
    3.7
    
    
    
    186$21.00  $27.00
    
    
    200
    
    
    
    24.76
    
    
    
    5.5
    
    
    
    55$29.00  $32.00
    
    
    254
    
    
    
    29.42
    
    
    
    5.9
    
    
    
    31
  Stock Compensation
  Year Ended December 31,2010
    
    
    2009
    
    
    2008(in thousands)Cost of revenue
    
    $
    552
    
    
    $
    550
    
    
    $
    358General and administrative
    
    
    1,055
    
    
    
    1,234
    
    
    
    470$
    1,607
    
    
    $
    1,784
    
    
    $
    828
  14. Provision for Income Taxes
  Year Ended December 31,2010
    
    
    2009
    
    
    2008(in thousands)CurrentFederal
    
    $
    9,593
    
    
    $
    11,610
    
    
    $
    8,755State and Local
    
    
    2,392
    
    
    
    2,137
    
    
    
    2,078Total Current
    
    
    11,985
    
    
    
    13,747
    
    
    
    10,833DeferredFederal
    
    
    3,301
    
    
    
    701
    
    
    
    498State and Local
    
    
    23
    
    
    
    336
    
    
    
    (13
    )Total Deferred
    
    
    3,324
    
    
    
    1,037
    
    
    
    485Total Income Tax Provision
    
    $
    15,309
    
    
    $
    14,784
    
    
    $
    11,318
  F-18




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##### Table of Contents



Year ended December 31,2010
    
    
    2009
    
    
    2008(in thousands)Federal income tax at statutory rates
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, net of Federal benefit
    
    
    3.8
    
    
    
    4.8
    
    
    
    4.7Other
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.2Total income tax expense
    
    
    39.1
    %
    
    
    40.0
    %
    
    
    39.9
    %
    2010
    
    
    2009(in thousands)Deferred tax assetsAccrued vacation and compensation
    
    $
    3,800
    
    
    $
    3,488Allowance for doubtful accounts
    
    
    512
    
    
    
    410Deferred rent
    
    
    777
    
    
    
    988Intangible assets excluding goodwill
    
    
    2,539
    
    
    
    2,243Self insurance
    
    
    
    
    
    
    381Stock compensation
    
    
    1,661
    
    
    
    1,402Total deferred tax assets
    
    
    9,289
    
    
    
    8,912Deferred tax liabilitiesSelf insurance
    
    
    54
    
    
    
    Property and equipment
    
    
    1,558
    
    
    
    215Goodwill
    
    
    10,580
    
    
    
    8,310Total deferred tax liabilities
    
    
    12,192
    
    
    
    8,525Net deferred tax (liabilities) assets
    
    $
    (2,903
    )
    
    $
    387
     F-19




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##### Table of Contents



15. Profit Sharing
    16. Related Party Transactions
    17. Contingencies
 Government Audits
  Litigation
  18. Subsequent Event
   F-20




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##### Table of Contents



F-21




---



##### Table of Contents



18. Supplemental Quarterly Information (unaudited)
  For the quarter endedDec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    Mar. 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    Mar. 31,2010
    
    
    2010
    
    
    2010
    
    
    2010
    
    
    2009
    
    
    2009
    
    
    2009
    
    
    2009(in thousands)Statement of Operations Data:Revenue
    
    $
    171,021
    
    
    $
    168,769
    
    
    $
    126,558
    
    
    $
    114,993
    
    
    $
    125,177
    
    
    $
    130,198
    
    
    $
    108,519
    
    
    $
    105,017Operating costs and expenses:Cost of revenue
    
    
    151,322
    
    
    
    151,138
    
    
    
    110,927
    
    
    
    99,392
    
    
    
    108,619
    
    
    
    113,403
    
    
    
    93,976
    
    
    
    91,324General and administrative
expenses
    
    
    6,550
    
    
    
    6,194
    
    
    
    5,369
    
    
    
    5,617
    
    
    
    6,121
    
    
    
    6,271
    
    
    
    4,894
    
    
    
    4,762Depreciation and amortization
    
    
    1,330
    
    
    
    1,359
    
    
    
    1,193
    
    
    
    1,172
    
    
    
    1,195
    
    
    
    1,096
    
    
    
    991
    
    
    
    946Gain on extinguishment of
contingent consideration
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,285
    )
    
    
    
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    159,202
    
    
    
    158,691
    
    
    
    117,489
    
    
    
    106,181
    
    
    
    113,650
    
    
    
    120,770
    
    
    
    99,861
    
    
    
    97,032Operating income
    
    
    11,819
    
    
    
    10,078
    
    
    
    9,069
    
    
    
    8,812
    
    
    
    11,527
    
    
    
    9,428
    
    
    
    8,658
    
    
    
    7,985Interest expense, net
    
    
    173
    
    
    
    133
    
    
    
    149
    
    
    
    143
    
    
    
    169
    
    
    
    145
    
    
    
    151
    
    
    
    192Income before income taxes
    
    
    11,646
    
    
    
    9,945
    
    
    
    8,920
    
    
    
    8,669
    
    
    
    11,358
    
    
    
    9,283
    
    
    
    8,507
    
    
    
    7,793Provision for income taxes
    
    
    4,741
    
    
    
    3,841
    
    
    
    3,524
    
    
    
    3,203
    
    
    
    4,622
    
    
    
    3,658
    
    
    
    3,387
    
    
    
    3,118Net income
    
    $
    6,905
    
    
    $
    6,104
    
    
    $
    5,396
    
    
    $
    5,466
    
    
    $
    6,736
    
    
    $
    5,625
    
    
    $
    5,120
    
    
    $
    4,675Earnings per shareBasic
    
    $
    0.51
    
    
    $
    0.45
    
    
    $
    0.40
    
    
    $
    0.40
    
    
    $
    0.50
    
    
    $
    0.42
    
    
    $
    0.38
    
    
    $
    0.35Diluted
    
    $
    0.50
    
    
    $
    0.44
    
    
    $
    0.39
    
    
    $
    0.39
    
    
    $
    0.49
    
    
    $
    0.41
    
    
    $
    0.37
    
    
    $
    0.34
  F-22