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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2008
|- | --------------------------------------------------------------------------------------------------------------------------------



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number

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 Drive Reston, Virginia                     |  | 20190-4764                          
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (703) 707-6900





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes     ̈  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of accelerated filer and large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



| |  |  |  |   |  |                         |  |   |  |                   |  |                                               |  |                       |  |   |  |                           |  | 
| |  |  |  | - |  | ----------------------- |  | - |  | ----------------- |  | --------------------------------------------- |  | --------------------- |  | - |  | ------------------------- |  | 
| |  |  |  |  ̈ |  | Large accelerated
filer |  | x |  | Accelerated filer |  |  ̈                                             |  | Non-accelerated filer |  |  ̈ |  | Smaller Reporting Company |  | 
| |  |  |  |   |  |                         |  |   | 
| |  |  |  |   |  |                         |  |   |  |                   |  | (Do not check if a smaller reporting company) |  |                       |  |   |  |                          

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).     ̈  Yes    x  No

As of October 30, 2008 there were 8,166,238 shares outstanding of the registrants Class A common stock. In addition, there are 5,200,000 shares outstanding of the registrants Class B common stock, which are convertible
on a one-for-one basis into Class A common stock.









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NCI, INC.



|         |  |                                                                                                                   |  |     
|-------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                   |  | PAGE
|PART I:  |  | FINANCIAL INFORMATION                                                                                             |  |     
|Item 1.  |  | Financial Statements                                                                                              |  | 1   
|         |  | Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007                            |  | 1   
|         |  | Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2008 and 2007 |  | 2   
|         |  | Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2008 and 2007           |  | 3   
|         |  | Notes to Consolidated Financial Statements (unaudited)                                                            |  | 4   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 8   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 14  
|Item 4.  |  | Controls and Procedures                                                                                           |  | 15  
|PART II: |  | OTHER INFORMATION                                                                                                 |  |     
|Item 1.  |  | Legal Proceedings                                                                                                 |  | 16  
|Item 1A. |  | Risk Factors                                                                                                      |  | 16  
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                       |  | 16  
|Item 3.  |  | Defaults Upon Senior Securities                                                                                   |  | 16  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                               |  | 16  
|Item 5.  |  | Other Information                                                                                                 |  | 16  
|Item 6.  |  | Exhibits                                                                                                          |  | 16  
|         |  | Signatures                                                                                                        |  | 17  



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##### Table of Contents

PART 1

FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

NCI, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)



|                                                                                                                                                                                                          |  |                        |         |                       |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | --------------------- | - | -------
|                                                                                                                                                                                                          |  | As ofSeptember 30,2008 |         | As ofDecember 31,2007
|                                                                                                                                                                                                          |  | (unaudited)            |         |                      
|Assets                                                                                                                                                                                                    |  |                        |         |                       |   |        
|Current assets:                                                                                                                                                                                           |  |                        |         |                       |   |        
|Cash and cash equivalents                                                                                                                                                                                 |  | $                      | 1,590   |                       | $ | 109    
|Accounts receivable, net                                                                                                                                                                                  |  |                        | 83,024  |                       |   | 88,493 
|Deferred tax assets                                                                                                                                                                                       |  |                        | 2,124   |                       |   | 1,890  
|Prepaid expenses and other current assets                                                                                                                                                                 |  |                        | 1,702   |                       |   | 1,244  
|                                                                                                                                                                                                          |  |                        |         |                       |   |        
|Total current assets                                                                                                                                                                                      |  |                        | 88,440  |                       |   | 91,736 
|                                                                                                                                                                                                          |  |                       
|Property and equipment, net                                                                                                                                                                               |  |                        | 4,865   |                       |   | 5,120  
|Other assets                                                                                                                                                                                              |  |                        | 998     |                       |   | 930    
|Deferred tax assets, net                                                                                                                                                                                  |  |                        |        |                       |   | 20     
|Intangible assets, net                                                                                                                                                                                    |  |                        | 8,464   |                       |   | 5,448  
|Goodwill                                                                                                                                                                                                  |  |                        | 87,740  |                       |   | 75,492 
|                                                                                                                                                                                                          |  |                        |         |                       |   |        
|Total assets                                                                                                                                                                                              |  | $                      | 190,507 |                       | $ | 178,746
|                                                                                                                                                                                                          |  |                        |         |                       |   |        
|                                                                                                                                                                                                          |  |                       
|Liabilities and stockholders equity                                                                                                                                                                      |  |                        |         |                       |   |        
|Current liabilities:                                                                                                                                                                                      |  |                        |         |                       |   |        
|Accounts payable                                                                                                                                                                                          |  | $                      | 31,659  |                       | $ | 30,803 
|Accrued salaries and benefits                                                                                                                                                                             |  |                        | 15,901  |                       |   | 12,572 
|Other accrued expenses/liabilities                                                                                                                                                                        |  |                        | 5,701   |                       |   | 6,641  
|Deferred revenue                                                                                                                                                                                          |  |                        | 3,554   |                       |   | 2,215  
|Current portion of long-term debt                                                                                                                                                                         |  |                        |        |                       |   | 942    
|                                                                                                                                                                                                          |  |                        |         |                       |   |        
|Total current liabilities                                                                                                                                                                                 |  |                        | 56,815  |                       |   | 53,173 
|                                                                                                                                                                                                          |  |                       
|Long-term debt                                                                                                                                                                                            |  |                        | 36,500  |                       |   | 42,000 
|Deferred tax liabilities, net                                                                                                                                                                             |  |                        | 1,300   |                       |   |       
|Other liabilities                                                                                                                                                                                         |  |                        | 125     |                       |   | 217    
|Deferred rent                                                                                                                                                                                             |  |                        | 2,672   |                       |   | 3,115  
|                                                                                                                                                                                                          |  |                        |         |                       |   |        
|Total liabilities                                                                                                                                                                                         |  |                        | 97,412  |                       |   | 98,505 
|                                                                                                                                                                                                          |  |                        |         |                       |   |        
|Stockholders equity:                                                                                                                                                                                     |  |                        |         |                       |   |        
|Class A common stock, $0.019 par value37,500,000 shares authorized; 8,165,238 shares issued and outstanding as of
September 30, 2008 and 8,153,416 shares issued and outstanding as of December 31, 2007 |  |                        | 155     |                       |   | 155    
|Class B common stock, $0.019 par value12,500,000 shares authorized; 5,200,000 shares issued and outstanding as of September 30,
2008 and December 31, 2007                                               |  |                        | 99      |                       |   | 99     
|Additional paid-in capital                                                                                                                                                                                |  |                        | 58,917  |                       |   | 58,157 
|Retained earnings                                                                                                                                                                                         |  |                        | 33,924  |                       |   | 21,830 
|                                                                                                                                                                                                          |  |                        |         |                       |   |        
|Total stockholders equity                                                                                                                                                                                |  |                        | 93,095  |                       |   | 80,241 
|                                                                                                                                                                                                          |  |                        |         |                       |   |        
|Total liabilities and stockholders equity                                                                                                                                                                |  | $                      | 190,507 |                       | $ | 178,746
|                                                                                                                                                                                                          |  |                        |         |                       |   |        

See accompanying notes



1



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NCI, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(amounts in thousands, except per share data)



|                                                                                     |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | -------------------------------- | ------- | - | ------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                     |  | Three months ended September 30, |         |   | Nine months ended September 30, |  
|                                                                                     |  | 2008                             |         |   | 2007                            |   |        | 2008 |  |   | 2007    |  
|Revenue                                                                              |  | $                                | 101,141 |   |                                 | $ | 85,208 |      |  | $ | 288,979 |   |  | $ | 216,203 |  
|                                                                                     |  |                                  |         |  
|Operating costs and expenses:                                                        |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Cost of revenue (exclusive of depreciation and amortization, shown separately below) |  |                                  | 87,632  |   |                                 |   | 73,841 |      |  |   | 249,547 |   |  |   | 187,587 |  
|General and administrative expense                                                   |  |                                  | 4,810   |   |                                 |   | 4,063  |      |  |   | 15,016  |   |  |   | 10,722  |  
|Depreciation and amortization                                                        |  |                                  | 455     |   |                                 |   | 465    |      |  |   | 1,425   |   |  |   | 1,191   |  
|Amortization of intangible assets                                                    |  |                                  | 483     |   |                                 |   | 516    |      |  |   | 1,289   |   |  |   | 916     |  
|                                                                                     |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total operating costs and expenses                                                   |  |                                  | 93,380  |   |                                 |   | 78,885 |      |  |   | 267,277 |   |  |   | 200,416 |  
|                                                                                     |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Operating income                                                                     |  |                                  | 7,761   |   |                                 |   | 6,323  |      |  |   | 21,702  |   |  |   | 15,787  |  
|Interest income                                                                      |  |                                  | 24      |   |                                 |   | 103    |      |  |   | 97      |   |  |   | 458     |  
|Interest expense                                                                     |  |                                  | (498    | ) |                                 |   | (901   | )    |  |   | (1,685  | ) |  |   | (984    | )
|                                                                                     |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Income before income taxes                                                           |  |                                  | 7,287   |   |                                 |   | 5,525  |      |  |   | 20,114  |   |  |   | 15,261  |  
|Income tax expense                                                                   |  |                                  | 2,890   |   |                                 |   | 2,185  |      |  |   | 8,020   |   |  |   | 6,028   |  
|                                                                                     |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                                           |  | $                                | 4,397   |   |                                 | $ | 3,340  |      |  | $ | 12,094  |   |  | $ | 9,233   |  
|                                                                                     |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Earnings per common and common equivalent share:                                     |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Basic:                                                                               |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                                                  |  |                                  | 13,361  |   |                                 |   | 13,331 |      |  |   | 13,356  |   |  |   | 13,329  |  
|                                                                                     |  |                                  |         |  
|Net income per share                                                                 |  | $                                | 0.33    |   |                                 | $ | 0.25   |      |  | $ | 0.91    |   |  | $ | 0.69    |  
|                                                                                     |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Diluted:                                                                             |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|                                                                                     |  |                                  |         |  
|Weighted average shares and equivalent shares outstanding                            |  |                                  | 13,672  |   |                                 |   | 13,547 |      |  |   | 13,616  |   |  |   | 13,526  |  
|                                                                                     |  |                                  |         |  
|Net income per share                                                                 |  | $                                | 0.32    |   |                                 | $ | 0.25   |      |  | $ | 0.89    |   |  | $ | 0.68    |  
|                                                                                     |  |                                  |         |   |                                 |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes



2



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NCI, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(amounts in thousands)



|                                                                                  |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine months ended September 30, |        
|                                                                                  |  | 2008                            |         |   | 2007 |  
|Cash flows from operating activities                                              |  |                                 |         |   |      |   |         |  
|Net income                                                                        |  | $                               | 12,094  |   |      | $ | 9,233   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                 | 2,714   |   |      |   | 2,107   |  
|Gain on sale and disposal of property and equipment                               |  |                                 | (11     | ) |      |   | (4      | )
|Non-cash stock compensation expense                                               |  |                                 | 581     |   |      |   | 281     |  
|Deferred income taxes                                                             |  |                                 | 1,085   |   |      |   | (341    | )
|Changes in operating assets and liabilities:                                      |  |                                 |         |   |      |   |         |  
|Accounts receivable, net                                                          |  |                                 | 5,469   |   |      |   | (2,441  | )
|Prepaid expenses and other assets                                                 |  |                                 | (525    | ) |      |   | 424     |  
|Accounts payable                                                                  |  |                                 | 856     |   |      |   | (1,638  | )
|Accrued expenses/other current liabilities                                        |  |                                 | 3,353   |   |      |   | 2,386   |  
|Deferred rent                                                                     |  |                                 | (407    | ) |      |   | (352    | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                 | 25,209  |   |      |   | 9,655   |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash flows from investing activities                                              |  |                                 |         |   |      |   |         |  
|Purchase of property and equipment                                                |  |                                 | (1,164  | ) |      |   | (684    | )
|Proceeds from sale of property and equipment                                      |  |                                 | 11      |   |      |   | 4       |  
|Cash paid for acquisitions, net of cash received                                  |  |                                 | (16,190 | ) |      |   | (73,500 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                                 | (17,343 | ) |      |   | (74,180 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash flows from financing activities                                              |  |                                 |         |   |      |   |         |  
|(Payments on) proceeds from line of credit, net                                   |  |                                 | (6,442  | ) |      |   | 50,500  |  
|Principal payments under capital lease obligations                                |  |                                 | (120    | ) |      |   | (173    | )
|Proceeds from exercise of stock options                                           |  |                                 | 133     |   |      |   | 202     |  
|Excess tax deductions from stock options                                          |  |                                 | 44      |   |      |   | 81      |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                               |  |                                 | (6,385  | ) |      |   | 50,610  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net change in cash and cash equivalents                                           |  |                                 | 1,481   |   |      |   | (13,915 | )
|Cash and cash equivalents, beginning of year                                      |  |                                 | 109     |   |      |   | 13,930  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                               | 1,590   |   |      | $ | 15      |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Supplemental disclosure of cash flow information                                  |  |                                 |         |   |      |   |         |  
|Cash paid during the period for:                                                  |  |                                 |         |   |      |   |         |  
|Interest                                                                          |  | $                               | 1,685   |   |      | $ | 984     |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Income taxes                                                                      |  | $                               | 7,012   |   |      | $ | 6,607   |  
|                                                                                  |  |                                 |         |   |      |   |         |  

See accompanying notes



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NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of NCI, Inc. and its subsidiaries have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As a result, certain information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all necessary adjustments and reclassifications
(all of which are of a normal, recurring nature) that are necessary to a fair presentation of the results for such periods. The information disclosed in the notes to the financial statements for these periods is unaudited. For further information,
refer to the financial statements and footnotes included in NCIs Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission (SEC). The current periods results of
operations are not necessarily indicative of results that may be achieved for any future period.

2. Business Overview

NCI is a provider of information technology (IT), engineering, and professional services and solutions to federal government agencies. Our offerings focus on designing,
implementing, maintaining and upgrading secure IT systems and networks by leveraging our skills across eight core competencies: enterprise systems management; network engineering; information assurance; systems engineering and integration; program
management, acquisition, and lifecycle support; engineering and logistics; medical transformation/health IT; and distance learning and training. The Company provides these services to defense, intelligence, and federal civilian agencies. The
majority of the Companys revenue was derived from contracts with the federal government, directly as a prime contractor or as a subcontractor. The Company primarily conducts business throughout the United States.

3. Earnings Per Share

Statement of Financial Accounting Standards
(SFAS) No. 128,Earnings Per Share, requires presentation of basic and diluted earnings per share. Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average number of common shares
outstanding for the period. The computation of earnings per share presented is for both Class A and Class B common stock.

Diluted earnings per share
reflect potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per share include the incremental effect of stock options calculated using the
treasury stock method.

The following details the historical computation of basic and diluted earnings per common share (Class A and Class B).



|                                                                            |  |                                       |        |                                       |   |        |  |      |        |  |   |       
|--------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ------------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                            |  | Three months ended September 30,      |        | Nine months ended September 30,      
|                                                                            |  | 2008                                  |        | 2007                                  |   | 2008   |  | 2007
|                                                                            |  | (in thousands, except per share data) |        | (in thousands, except per share data)
|Net Income                                                                  |  | $                                     | 4,397  |                                       | $ | 3,340  |  | $    | 12,094 |  | $ | 9,233 
|                                                                            |  |                                       |        |                                       |   |        |  |      |        |  |   |       
|Weighted average number of basic shares outstanding during the period       |  |                                       | 13,361 |                                       |   | 13,331 |  |      | 13,356 |  |   | 13,329
|Dilutive effect of stock options after application of treasury stock method |  |                                       | 311    |                                       |   | 216    |  |      | 260    |  |   | 197   
|                                                                            |  |                                       |        |                                       |   |        |  |      |        |  |   |       
|Weighted average number of diluted shares outstanding during the period     |  |                                       | 13,672 |                                       |   | 13,547 |  |      | 13,616 |  |   | 13,526
|                                                                            |  |                                       |        |                                       |   |        |  |      |        |  |   |       
|Basic earnings per share                                                    |  | $                                     | 0.33   |                                       | $ | 0.25   |  | $    | 0.91   |  | $ | 0.69  
|                                                                            |  |                                       |        |                                       |   |        |  |      |        |  |   |       
|Diluted earnings per share                                                  |  | $                                     | 0.32   |                                       | $ | 0.25   |  | $    | 0.89   |  | $ | 0.68  
|                                                                            |  |                                       |        |                                       |   |        |  |      |        |  |   |       



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NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



4. Stock Compensation

During 2008, the Company granted approximately 183,000 options and had exercises of approximately 12,000 options. As of September 30, 2008, there were approximately 993,000 options outstanding.

The following table summarizes stock compensation for the three and nine months ended September 30, 2008 and 2007:



|                           |  |                                  |     |                                 |   |      |  |      |     |  |   |    
|-------------------------- |  | -------------------------------- | --- | ------------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                           |  | Three months ended September 30, |     | Nine months ended September 30,
|                           |  | 2008                             |     | 2007                            |   | 2008 |  | 2007
|                           |  | (in thousands)                  
|Cost of Revenue            |  | $                                | 94  |                                 | $ | 51   |  | $    | 300 |  | $ | 133
|General and Administrative |  |                                  | 131 |                                 |   | 76   |  |      | 281 |  |   | 148
|                           |  |                                  |     |                                 |   |      |  |      |     |  |   |    
|                           |  | $                                | 225 |                                 | $ | 127  |  | $    | 581 |  | $ | 281
|                           |  |                                  |     |                                 |   |      |  |      |     |  |   |    

As of September 30, 2008, there was approximately $2.7 million of total unrecognized compensation cost
related to unvested stock compensation agreements accounted for under SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)). This cost is expected to be fully amortized over the next five years, with approximately $239,000,
$950,000, $896,000, $484,000, and $84,000 during the remainder of 2008, 2009, 2010, 2011, and 2012, respectively. SFAS No. 123(R) requires that the cost of the options be included in the Companys Statement of Operations before or in
conjunction with the vesting of options.

5. Acquisitions

PEO Soldier Assets

Effective March 15, 2008, the Company completed the acquisition of certain assets from MTC Technologies, Inc. These
assets are used to conduct business under the Program Executive Office Soldier, Project Manager Soldier Warrior, and Project Manager Soldier Equipment (PEO Soldier) contract. The Company paid approximately $15.0 million in cash at closing, incurred
transaction costs of approximately $0.1 million, and assumed liabilities related to employee vacation balances of approximately $0.4 million. The acquired assets and liabilities were recorded at fair value under the purchase method of accounting.
The acquired identified intangible assets had a fair market value of approximately $4.3 million. As the cost of the acquisition exceeded the fair value of the assets acquired, goodwill was recorded in the amount of $11.2 million.

Operational Technologies Services, Inc.

Effective January 31,
2007, the Company completed the acquisition of Operational Technologies Services, Inc. (OTS). The definitive agreement for the acquisition of OTS provided for various contingent consideration. During the third quarter of 2008, NCI paid approximately
$0.7 million as additional consideration for OTS. Pursuant to the provisions of SFAS No. 141, Business Combinations, the payment has been treated as additional cost of the acquisition and added to goodwill.

6. Loan and Security Agreement

The borrowing capacity under the
credit facility consists of a revolving line of credit with a principal amount of up to $90.0 million, which includes a swingline facility with an original principal amount of up to $5.0 million. The outstanding balance of the facility accrues
interest based on LIBOR plus an applicable margin, ranging from 100 to 175 basis points, based on a ratio of funded debt to earnings. The credit facility expires on March 14, 2011.

The outstanding borrowings are collateralized by a security interest in substantially all of the Companys assets. The lenders also require a direct assignment of all contracts at the lenders discretion.



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NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



6. Loan and Security Agreement (continued)



The credit facility contains various restrictive covenants that, among other things, restrict the Companys
ability to: incur or guarantee additional debt; make certain distributions, investments and other restricted payments, including cash dividends on the Companys outstanding common stock; enter into transactions with certain affiliates; create
or permit certain liens; and consolidate, merge, or sell assets. In addition, the credit facility contains certain financial covenants that require the Company to: maintain a minimum tangible net worth; maintain a minimum fixed charge coverage ratio
and a ratio of funded debt to earnings; and limit capital expenditures below certain thresholds.

As of September 30, 2008, the outstanding balance
was approximately $36.5 million and interest accrued at a rate of LIBOR plus 100 basis points, or 3.486%. As of December 31, 2007, the outstanding balance was approximately $43.0 million. As of September 30, 2008, NCI was in compliance
with all its loan covenants.

7. Related Party Transactions

The Company purchased services from Net Commerce Corporation, which is a government contractor wholly-owned by Rajiv Narang, the son of Charles K. Narang, the Chairman and Chief Executive Officer of the Company. For the three months ended
September 30, 2008 and 2007, the expense incurred under this agreement was approximately $151,000 and $0, respectively. For the nine months ended September 30, 2008 and 2007, the expense incurred under this agreement was approximately
$455,000 and $0, respectively. As of September 30, 2008 and December 31, 2007 there was outstanding accounts payable of approximately $99,000 and $42,000, respectively.

The Company rents office space from Gur Parsaad Properties, Ltd. which is controlled by Dr. Gurvinder Pal Singh, a member of the NCI Board of Directors. For the three months ended September 30, 2008 and
2007, NCI has paid approximately $231,000 and $118,000, respectively, for rent to Gur Parsaad Properties, Ltd. For the nine months ended September 30, 2008 and 2007, NCI has paid approximately $655,000 and $118,000, respectively, for rent to
Gur Parsaad Properties, Ltd. There were no amounts outstanding in accounts payable as of September 30, 2008 and December 31, 2007.

During June
2007, the Company entered into a Stock Purchase Agreement to purchase 100% of the outstanding shares of Karta Technologies, Inc. (Karta). This Agreement included certain indemnifications from the selling shareholders. Dr. Gurvinder Pal Singh, a
member of the NCI Board of Directors, is one of the selling shareholders of Karta. At the time of the purchase, an escrow account was established to pay for indemnification claims. As of September 30, 2008 and December 31, 2007, the
Company had outstanding claims in the amount of approximately $53,000 and $0, respectively.

Management believes that all transactions with related parties
have been conducted based on then current market conditions.

8. Income Taxes

Effective January 1, 2007, the Company adopted the provisions of FIN No. 48. Previously, the Company had accounted for tax contingencies in accordance with SFAS No. 5, Accounting for
Contingencies. The Company does not have any material uncertain tax positions. There have been no changes to the Companys accounting policy to record any interest or penalties incurred in connection with income taxes as interest expense or
general and administrative expenses, respectively, for financial reporting purposes. There are no amounts accrued for interest or penalties.

The Company
is subject to income taxes in the U.S. and various state jurisdictions. Tax statutes and regulations within each jurisdiction are subject to interpretation and require significant judgment to apply. Tax years related to U.S. federal and various
state jurisdictions remain subject to examination for tax periods ended on or after December 31, 2005.



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NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



9. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)), which replaces SFAS No. 141, Business
Combinations(SFAS No. 141). SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but
SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date;
in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS No. 141(R) is effective on a prospective basis for all business combinations for
which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008. Early adoption is not permitted. This standard will become effective for the Company January 1, 2009.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Forward Looking Statements

This Quarterly Report on Form 10-Q, including the section entitled
Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding our business, financial condition, results of operations, and prospects. There are statements made
herein which may not address historical facts and, therefore, could be interpreted to be forward looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to factors that could
cause actual results to differ materially from anticipated results. The factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following:



| |  |  | our dependence on our contracts with federal government agencies, particularly within the U.S. Department of Defense, for substantially all of our revenue;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continued funding of our contracts by the U.S. Government, based on a change in spending patterns, or in the event of a priority need for funds, such as homeland
security, the war on terrorism, or rebuilding Iraq;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | risk of contract performance or termination;
| | - |  | --------------------------------------------



| |  |  | failure to achieve contract awards in connection with recompetes for present business and/or competition for new business;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | government contract procurement (such as bid protest, small business set asides, etc.) and termination risks;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | competitive factors such as pricing pressures and competition to hire and retain employees (particularly those with security clearances);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to identify, execute, and effectively integrate acquisitions appropriate to the achievement of our strategic plans;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | current economic market conditions, specifically the credit and liquidity crisis, (i) has caused the interest rate on our outstanding debt to fluctuate and
could increase significantly in the future; (ii) could cause our non-government business partners, prime or subcontractors, to default on contracts which may impact our ability to perform; and (iii) could impact the cost of future
acquisitions significantly above our current cost of debt;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | economic conditions in the United States, including conditions that result from terrorist activities or war; material changes in laws or regulations applicable to
our businesses, particularly legislation affecting (i) government contracts for services, (ii) outsourcing of activities that have been performed by the government, (iii) delays related to agency specific funding freezes, and
(iv) competition for task orders under Government Wide Acquisition Contracts (GWACs) and/or schedule contracts with the General Services Administration; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our own ability to achieve the objectives of near term or long range business plans.
| | - |  | ------------------------------------------------------------------------------------

Some of these important factors are outlined under Item 1A. Risk Factors and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2007
filed with the SEC, and from time to time, in other filings with the SEC such as our Forms 8-K and 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results,
level of activity, or performance. We undertake no obligation to update publicly or revise any forward-looking statements. You should not place undue reliance on the forward-looking statements.

In this document, unless the context indicates otherwise, the terms Company, NCI, we, us and our refer to
NCI, Inc., a Delaware corporation, and, where appropriate, its subsidiaries.



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OVERVIEW

We are a
provider of information technology (IT), engineering, and professional engineering services and solutions to U.S. Federal Government agencies. Our technology and industry expertise enables us to provide a full spectrum of services and solutions that
assist our clients in achieving their program goals. We deliver a wide range of complex services and solutions by leveraging our skills across eight core competencies:



| |  |  | enterprise systems management;
| | - |  | ------------------------------



| |  |  | network engineering;
| | - |  | --------------------



| |  |  | information assurance;
| | - |  | ----------------------



| |  |  | systems engineering and integration;
| | - |  | ------------------------------------



| |  |  | program management, acquisition, and lifecycle support;
| | - |  | -------------------------------------------------------



| |  |  | engineering and logistics;
| | - |  | --------------------------



| |  |  | medical transformation/health IT; and
| | - |  | -------------------------------------



| |  |  | distance learning and training.
| | - |  | -------------------------------

We generate the
vast majority of our revenue from federal government contracts. We report operating results and financial data as one operating segment. Revenue from our contracts and task orders is generally linked to trends in federal government spending by
defense, intelligence, and federal civilian agencies. The following table shows our revenue from the client groups listed as a percentage of total revenue for the period shown.



|                                                |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|----------------------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                                                |  | Three months ended September 30, |   |  | Nine months ended September 30, |  
|                                                |  | 2008                             |   |  | 2007                            |   |  | 2008 |   |  | 2007 |  
|Department of Defense and intelligence agencies |  | 79.6                             | % |  | 82.2                            | % |  | 79.5 | % |  | 81.4 | %
|Federal civilian agencies                       |  | 16.8                             | % |  | 17.3                            | % |  | 17.3 | % |  | 18.4 | %
|Commercial and state & local entities           |  | 3.6                              | % |  | 0.5                             | % |  | 3.2  | % |  | 0.2  | %

Revenue

The
majority of our revenue is derived from services and solutions provided to the federal government, primarily by our employees and, to a lesser extent, our subcontractors. In some cases, our revenue includes third-party hardware and software that we
purchase on behalf of our clients. The level of hardware and software purchases we make for clients may vary from period to period depending on specific contract and client requirements.

Contract Types

Our services and solutions are
provided under three types of contracts: time-and-materials; cost-plus; and fixed-price. Our contract mix varies from year to year due to numerous factors including our business strategies and federal government procurement objectives.

The following table shows our revenue from each of these types of contracts as a percentage of our total revenue for the periods shown.



|                   |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|------------------ |  | -------------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                   |  | Three months ended September 30, |   |  | Nine months ended September 30, |  
|                   |  | 2008                             |   |  | 2007                            |   |  | 2008 |   |  | 2007 |  
|Time-and-materials |  | 44.1                             | % |  | 36.4                            | % |  | 43.7 | % |  | 38.5 | %
|Cost-plus          |  | 20.0                             | % |  | 28.3                            | % |  | 22.9 | % |  | 29.2 | %
|Fixed-price        |  | 35.9                             | % |  | 35.3                            | % |  | 33.4 | % |  | 32.3 | %

The amount of risk and potential reward varies under each type of contract. Under time-and-materials contracts,
where we are paid a fixed hourly rate by labor category, to the extent that our actual labor costs vary significantly from the negotiated hourly rates, we may generate more or less than the targeted amount of profit. We are typically



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##### Table of Contents

reimbursed for other contract direct costs and expenses at our cost, and typically receive no fee on those costs. Under cost-plus type contracts, there is
limited financial risk, since we are reimbursed all of our allowable costs, and therefore, the profit margins tend to be lower on cost-plus type contracts. Under fixed-price contracts, we perform specific tasks or provide specified goods for a
predetermined price. Compared to time-and-materials and cost-plus contracts, fixed-price services contracts generally offer higher profit margin opportunities but involve greater financial risk because we bear the impact of potential cost overruns
in return for the full benefit of any cost savings. The majority of our services work under fixed-price service contracts is fixed-price level-of-effort work, which has a lower risk than fixed-price completion contracts.

Operating Expenses

Cost of Revenue

Cost of revenue primarily includes direct costs incurred to provide our services and solutions to clients. The most significant portion of these costs is
salaries and wages, plus associated fringe benefits including stock compensation, of our employees directly serving clients, in addition to the related management, facilities, and infrastructure costs. Cost of revenue also includes the costs of
subcontractors and outside consultants, third-party materials, such as hardware or software that we purchase and provide to the client as part of an integrated solution, and any other related direct costs, such as travel expenses. Since we earn
higher profits on our own labor services, we expect the ratio of cost of revenue as a percent of revenue to decline when our labor services mix increases relative to subcontracted labor or third-party material. Conversely, as subcontracted labor or
third-party material purchases for clients increase relative to our own labor services, we expect the ratio of cost of revenue as a percent of revenue to increase. Changes in the mix of services and equipment provided under our contracts can result
in variability in our contract margins. In addition, as we continue to bid and win larger contracts, our own labor services component could decrease. This is because the larger contracts typically are broader in scope and require more diverse
capabilities resulting in more subcontracted labor and the potential for more third-party hardware and software purchases. While these factors could lead to a higher ratio of cost of revenue as a percent of revenue, the economics of these larger
jobs are nonetheless generally favorable because they increase income, broaden our revenue base, and have a favorable return on invested capital.

General and Administrative Expenses

General and administrative expenses include corporate business development, bid and proposal,
contracts administration, finance and accounting, legal, corporate governance, and executive and senior management. The primary items of general and administration expenses are the salaries and wages, plus associated fringe benefits including stock
compensation, and the facilities related costs of our employees performing these functions.

Depreciation and Amortization

Depreciation and amortization includes the depreciation of computers, furniture and other equipment, the amortization of third party software we use
internally, and leasehold improvements.

Amortization of Intangible Assets

Amortization of intangible assets includes the amortization of identifiable intangible assets over their estimated useful lives. Non-compete agreements are generally
amortized straight-line over the term of the agreement, while contracts and related client relationships are amortized proportionately against the acquired backlog.

Interest Income and Expense

Interest income is primarily related to earnings on short-term, highly liquid
investments of our excess cash. Interest expense is primarily related to interest expense incurred or accrued under our outstanding borrowings and interest on capital leases.



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##### Table of Contents

Results of Operations

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

The following table sets forth certain
items from our consolidated statements of operations and expresses each item in dollars and as a percentage of revenue for the periods indicated.



|                                    |  |                                  |                                 |   |                            |   |        |      |  |       |      |  |       |  
|----------------------------------- |  | -------------------------------- | ------------------------------- | - | -------------------------- | - | ------ | ---- |  | ----- | ---- |  | ----- | -
|                                    |  | Three months ended September 30, |                                 |   | As a Percentage of Revenue |  
|                                    |  |                                  | Three months endedSeptember 30, |  
|                                    |  | 2008                             |                                 |   | 2007                       |   |        | 2008 |  |       | 2007 | 
|                                    |  | (unaudited)                      |                                
|Revenue                             |  | $                                | 101,141                         |   |                            | $ | 85,208 |      |  | 100.0 | %    |  | 100.0 | %
|                                    |  |                                  |                                 |  
|Operating costs and expenses:       |  |                                  |                                 |   |                            |   |        |      |  |       |      |  |       |  
|Cost of revenue                     |  |                                  | 87,632                          |   |                            |   | 73,841 |      |  | 86.6  |      |  | 86.7  |  
|General and administrative expenses |  |                                  | 4,810                           |   |                            |   | 4,063  |      |  | 4.8   |      |  | 4.8   |  
|Depreciation and amortization       |  |                                  | 455                             |   |                            |   | 465    |      |  | 0.4   |      |  | 0.5   |  
|Amortization of intangible assets   |  |                                  | 483                             |   |                            |   | 516    |      |  | 0.5   |      |  | 0.6   |  
|                                    |  |                                  |                                 |   |                            |   |        |      |  |       |      |  |       |  
|Total operating costs and expenses  |  |                                  | 93,380                          |   |                            |   | 78,885 |      |  | 92.3  |      |  | 92.6  |  
|                                    |  |                                  |                                 |   |                            |   |        |      |  |       |      |  |       |  
|Operating income                    |  |                                  | 7,761                           |   |                            |   | 6,323  |      |  | 7.7   |      |  | 7.4   |  
|Interest income                     |  |                                  | 24                              |   |                            |   | 103    |      |  |      |      |  | 0.1   |  
|Interest expense                    |  |                                  | (498                            | ) |                            |   | (901   | )    |  | (0.5  | )    |  | (1.0  | )
|                                    |  |                                  |                                 |   |                            |   |        |      |  |       |      |  |       |  
|Income before taxes                 |  |                                  | 7,287                           |   |                            |   | 5,525  |      |  | 7.2   |      |  | 6.5   |  
|Provision for income taxes          |  |                                  | 2,890                           |   |                            |   | 2,185  |      |  | 2.9   |      |  | 2.6   |  
|                                    |  |                                  |                                 |   |                            |   |        |      |  |       |      |  |       |  
|Net income                          |  | $                                | 4,397                           |   |                            | $ | 3,340  |      |  | 4.3   | %    |  | 3.9   | %
|                                    |  |                                  |                                 |   |                            |   |        |      |  |       |      |  |       |  

Revenue

For the three months ended September 30, 2008, total revenue increased by 18.7%, or $15.9 million, over the same period a year ago. This increase was due to new contact awards under our numerous GWAC contract vehicles, as well as
growth on existing programs. Revenue from acquisitions added $9.7 million in the three months ended September 30, 2008. These increases were offset by revenue reductions due to tasks that have been completed.

Cost of revenue

Cost of revenue increased 18.7%, or $13.8
million, for the three months ended September 30, 2008, as compared to the same period a year ago. The increase was attributable to an increase in direct labor and associated indirect costs, and increases in subcontractor costs, hardware and
software purchase for our clients, and other direct costs due to the increase in revenue. As a percentage of revenue, cost of revenue was 86.6% and 86.7% for the quarters ended September 30, 2008 and 2007, respectively.

General and Administrative Expenses

General and
administrative expense increased 18.4%, or $0.7 million, for the three months ended September 30, 2008, as compared to the same period a year ago. The increase was due primarily to higher bid and proposal costs, which were approximately $0.4
million more in third quarter 2008 compared to the same period in 2007, and related business developments and capture costs in the quarter. As a percentage of revenue, general and administrative expenses remained at 4.8% for the quarters ended
September 30, 2008 and 2007.

Depreciation and Amortization

Depreciation and amortization expense was approximately $0.5 million for the quarters ended September 30, 2008 and 2007.

Amortization of Intangible Assets

Amortization of intangible assets was approximately $0.5 million for the quarters ended
September 30, 2008 and 2007.



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Operating income

For the three months ended September 30, 2008, operating income was $7.8 million, or 7.7% of revenue, compared to $6.3 million, or 7.4% of revenue, for the three months ended September 30, 2007. Operating income was higher for the
three months ended September 30, 2008 due to the higher revenue volume as compared to the same period in the prior year. Operating income, as a percent of revenue, was higher for the three months ended September 30, 2008 compared to the
same period in the prior year due to a higher percentage of revenue derived from direct labor, which typically carried a higher margin and resulted in a slightly higher gross margin, and a decrease in depreciation and amortization costs as a
percentage of revenue.

Interest Income/Expense

Net interest expense was approximately $0.5 million for the quarter ended September 30, 2008 as compared to $0.8 million for the same period in the prior year. The change is primarily due to lower interest rates, as well as using
available cash to reduce our outstanding debt.

Income Taxes

The increase in income taxes of $0.7 million is the result of the increase in operating income and a 0.1% rate increase during third quarter 2008 compared to third quarter 2007. The effective income tax rate for the
quarter ended September 30, 2008 is approximately 39.7% as compared to an effective income tax rate of 39.6% for the quarter ended September 30, 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

The following table sets forth certain
items from our consolidated statements of operations and expresses each item in dollars and as a percentage of revenue for the periods indicated.



|                                    |             |                                |         |      |                            |   |         |   |  |       |   |  |       |  
|----------------------------------- | ----------- | ------------------------------ | ------- | ---- | -------------------------- | - | ------- | - |  | ----- | - |  | ----- | -
|                                    |             | Nine months endedSeptember 30, |         |      | As a Percentage of Revenue |  
|                                    |             | Nine months endedSeptember 30, |        
|                                    | 2008        |                                |         | 2007 |                            |   | 2008    |   |  | 2007  |  
|                                    | (unaudited) |                               
|Revenue                             |             | $                              | 288,979 |      |                            | $ | 216,203 |   |  | 100.0 | % |  | 100.0 | %
|                                    |             |                                |         |     
|Operating costs and expenses:       |             |                                |         |      |                            |   |         |   |  |       |   |  |       |  
|Cost of revenue                     |             |                                | 249,547 |      |                            |   | 187,587 |   |  | 86.4  |   |  | 86.8  |  
|General and administrative expenses |             |                                | 15,016  |      |                            |   | 10,722  |   |  | 5.2   |   |  | 5.0   |  
|Depreciation and amortization       |             |                                | 1,425   |      |                            |   | 1,191   |   |  | 0.5   |   |  | 0.5   |  
|Amortization of intangible assets   |             |                                | 1,289   |      |                            |   | 916     |   |  | 0.4   |   |  | 0.4   |  
|                                    |             |                                |         |      |                            |   |         |   |  |       |   |  |       |  
|Total operating costs and expenses  |             |                                | 267,277 |      |                            |   | 200,416 |   |  | 92.5  |   |  | 92.7  |  
|                                    |             |                                |         |      |                            |   |         |   |  |       |   |  |       |  
|Operating income                    |             |                                | 21,702  |      |                            |   | 15,787  |   |  | 7.5   |   |  | 7.3   |  
|Interest income                     |             |                                | 97      |      |                            |   | 458     |   |  |      |   |  | 0.2   |  
|Interest expense                    |             |                                | (1,685  | )    |                            |   | (984    | ) |  | (0.5  | ) |  | (0.4  | )
|                                    |             |                                |         |      |                            |   |         |   |  |       |   |  |       |  
|Income before taxes                 |             |                                | 20,114  |      |                            |   | 15,261  |   |  | 7.0   |   |  | 7.1   |  
|Provision for income taxes          |             |                                | 8,020   |      |                            |   | 6,028   |   |  | 2.8   |   |  | 2.8   |  
|                                    |             |                                |         |      |                            |   |         |   |  |       |   |  |       |  
|Net income                          |             | $                              | 12,094  |      |                            | $ | 9,233   |   |  | 4.2   | % |  | 4.3   | %
|                                    |             |                                |         |      |                            |   |         |   |  |       |   |  |       |  

Revenue

For the nine months ended September 30, 2008, total revenue increased by 33.7% or $72.8 million, over the same period a year ago. Approximately $54.0 million of revenue increase in the nine months ended September 30, 2008 came
from our acquisitions. Additionally, we received many new task orders under our numerous GWAC contract vehicles, as well as growth on existing programs. These increases were offset by revenue reductions due to contracts that have ended.

Cost of revenue

Cost of revenue increased 33.0%, or $62.0
million, for the nine months ended September 30, 2008, as compared to the same period a year ago. The increase was attributable to an increase in direct labor and associated indirect costs, subcontractor costs, and other direct costs due to the
increase in revenue. As a percentage of revenue, cost of revenue was 86.4% and 86.8% for the nine months ended September 30, 2008 and 2007, respectively. The 0.4% decrease in cost of revenue as a percentage of revenue for the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007 is due to the higher percentage of direct labor based revenue, which typically carries higher margins than other costs, and results in a higher gross margin.



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General and Administrative Expenses

General and administrative expense increased 40.0%, or $4.3 million, for the nine months ended September 30, 2008, as compared to the same period a year ago. As a percentage of revenue, general and administrative
expenses increased to 5.2% from 5.0% for the nine months ended September 30, 2008 and 2007, respectively. The increase in general and administrative expenses is due primarily to higher bid and proposal costs, which were approximately $1.4
million higher in the nine months ended September 30, 2008 compared to the same period in 2007, and higher associated business development and capture expenses of approximately $2.5 million for the nine months ended September 30, 2008
compared to the same period in 2007.

Depreciation and Amortization

Depreciation and amortization expense was approximately $1.4 million and $1.2 million for the nine months ended September 30, 2008 and 2007, respectively. The increase in depreciation and amortization is due
primarily to the additional assets from our acquisitions and overall corporate growth.

Amortization of Intangible Assets

Amortization of intangible assets was approximately $1.3 million for the nine months ended September 30, 2008 and $0.9 million for the same period during 2007. The
increase is due to the amortization of intangibles assets over their estimated lives from the Karta and PEO Soldier contract asset acquisitions.

Operating income

For the nine months ended September 30, 2008, operating income was $21.7 million, or 7.5% of revenue, compared
to $15.8 million, or 7.3% of revenue, for the nine months ended September 30, 2007. Operating income was higher for the nine months ended September 30, 2008 due to the higher revenue volume as compared to the same period in the prior year.
Operating income, as a percent of revenue, was higher for the nine months ended September 30, 2008 compared to the same period in the prior year due to the higher portion of labor based revenue, which resulted in a higher gross margin, which
was slightly offset by the higher general and administrative expenses as a percentage of revenue.

Interest Income/Expense

Net interest expense was approximately $1.6 million for the nine months ended September 30, 2008 as compared to $0.5 million for the same period in the prior year.
The change is due to using available cash and the increase in our line of credit balance in relation to the Karta and PEO Soldier contract assets acquisitions.

Income Taxes

The increase in income taxes of approximately $2.0 million is the result of the increase in operating income and a 0.4%
increase in the effective income tax rate. The effective income tax rate for the nine months ended September 30, 2008 is approximately 39.9% as compared to an effective income tax rate of 39.5% for the nine months ended September 30, 2007.

Contract Backlog

At September 30, 2008 and
December 31, 2007, our estimated backlog was $1,096 million and $756 million, respectively, of which $233 million and $189 million, respectively, was funded. We define backlog as our estimate of the remaining future revenue from existing signed
contracts over the remaining base contract performance period and from the option periods of those contracts, assuming the exercise of all related options. We define funded backlog as the portion of backlog for which funding currently is
appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing agency, less the amount of revenue we have previously recognized. Our backlog does not include any estimate of future potential
delivery orders that might be awarded under our GWAC or other multiple award contract vehicles. Additional information on how we determine backlog is included in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the
SEC.

Liquidity and Capital Resources

Our
primary liquidity needs are for financing working capital, investing in capital expenditures, and making selective strategic acquisitions. Historically, we have relied primarily on our cash flow from operations and



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borrowings under our credit facility to provide the capital for our liquidity needs. We expect the combination of our current cash, cash flow from
operations, and the available borrowing capacity on our credit facility to continue to meet our normal working capital and capital expenditure requirements. As part of our growth strategy, we may pursue acquisitions that could require us to obtain
additional debt or issue equity.

During the first quarter of 2008, we borrowed approximately $15.0 million from our credit facility for the acquisition of
the PEO Soldier contract assets from MTC Technologies, Inc. Generally, our most significant use of working capital is for accounts receivables. During the third quarter of 2008, the balance of accounts receivable decreased by $10.5 million to $83.0
million at the end of the quarter. Days sales outstanding of accounts receivable (DSO) decreased to 76 days as of September 30, 2008. This compares to a DSO of 92 days as of December 31, 2007. This is improvement resulted from improved
billing and collections processes and the resolution of some payment office issues. We remain focused on continuing to improve our DSO, but typically expect DSO to increase at the end of the calendar year due to delays in funding paperwork
processing at the start of the government fiscal year. During the third quarter of 2008, cash generated from operations primarily from increased accounts receivable collections was used to reduce our long term debt by $20.5 million.

Funds borrowed under the revolving credit facility will be used to finance possible future acquisitions, to provide for working capital expenditures and for general
corporate uses. As of September 30 2008, there was approximately $36.5 million outstanding under the credit facility.

Credit Agreement:The
borrowing capacity under our Loan and Security Agreement (as amended, the Credit Agreement) consists of a revolving credit facility with a principal amount of up to $90.0 million, which includes a swingline facility with a principal amount of up to
$5.0 million. The outstanding balance of the facility accrues interest based on LIBOR plus an applicable margin, ranging from 100 to 175 basis points, based on a ratio of funded debt to earnings. Interest was accruing at LIBOR plus 100 basis points,
or 3.486%, as of September 30, 2008. The credit facility expires on March 14, 2011. Our interest rate is indexed to the one month LIBOR and resets monthly. We do not currently hedge our interest rate risk. As of October 1, 2008, our
interest rate increased to 4.72%.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

There have been no significant changes to our Critical Accounting Policies during 2008. Refer to our Critical Accounting Policies section in our Annual Report on Form
10-K for the year ended December 31, 2007 filed with the SEC.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Our exposure to market risk relates to changes in interest rates for borrowings under our Credit Agreement. A 1% change in interest rates would have changed our interest expense and cash flow by approximately $127,000 for the quarter ended
September 30, 2008 and approximately $389,000 for the nine months ended September 30, 2008.

Additionally, we are subject to credit risks
associated with our cash, cash equivalents, and accounts receivable. We believe that the concentration of credit risks with respect to cash equivalents and investments are limited due to the high credit quality of these investments. Our investment
policy requires that we invest excess cash in high quality investments which preserve principal, provide liquidity, and minimize investment risk. We also believe that our credit risk associated with accounts receivable is limited as they are
primarily with the federal government or prime contractors working for the federal government.



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|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of the
Effectiveness of Disclosure Controls and Procedures

Management carried out an evaluation as of September 30, 2008 of the effectiveness of the
design and operation of the Companys disclosure controls and procedures. This evaluation was done under the supervision and with the participation of management, including the Companys Chief Executive Officer and Chief Financial Officer.
Based upon the evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2008, the Companys disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

The
Company made no change to its internal control over financial reporting during the three months ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.



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PART II

OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The Company is party to various legal
actions, claims, government inquiries, and audits resulting from the normal course of business. The Company believes that the probability is remote that any resulting liability will have a material effect on the Companys financial position,
results of operations, or liquidity.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no significant changes from
those discussed in Item 1A. Risk Factors included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------

Exhibits

|     |  |                                                         
|---- |  | --------------------------------------------------------
|31.1 |  | Section 302 Certification of the Chief Executive Officer
|31.2 |  | Section 302 Certification of the Chief Financial Officer
|32.1 |  | Section 906 Certification of the Chief Executive Officer
|32.2 |  | Section 906 Certification of the Chief Financial Officer



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



|                       |  |            |  |                                             
|---------------------- |  | ---------- |  | --------------------------------------------
|                       |  | NCI, Inc. 
|                       |  | Registrant
|                       |  |           
|Date: November 7, 2008 |  | By:        |  | /s/ Charles K. Narang                       
|                       |  |            |  | Charles K. Narang                           
|                       |  |            |  | Chairman of the Board,                      
|                       |  |            |  | Chief Executive Officer and Director        
|                       |  |            |  | (Principal Executive Officer)               
|                       |  |           
|Date: November 7, 2008 |  | By:        |  | /s/ Judith L. Bjornaas                      
|                       |  |            |  | Judith L. Bjornaas                          
|                       |  |            |  | Senior Vice President                       
|                       |  |            |  | Chief Financial Officer                     
|                       |  |            |  | (Principal Financial and Accounting Officer)



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