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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 JUNE 30, 2009
|- | ---------------------------------------------------------------------------------------------------------------------------



| ̈ | 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 has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).     ̈  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, large
accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | 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 July 31, 2009, there were 8,273,954 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 |  | 1                                                                                                           
|Item 1.                       |  | Financial Statements                                                                                         |  | 1   
|                              |  | Consolidated Balance Sheets as of June 30, 2009, (unaudited) and December 31, 2008                           |  | 1   
|                              |  | Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2009, and 2008 |  | 2   
|                              |  | Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2009, and 2008           |  | 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                                                                                      |  | 14  
|                              | 
|PART II: OTHER INFORMATION    |  | 15                                                                                                          
|Item 1.                       |  | Legal Proceedings                                                                                            |  | 15  
|Item 1A.                      |  | Risk Factors                                                                                                 |  | 15  
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                  |  | 15  
|Item 3.                       |  | Defaults Upon Senior Securities                                                                              |  | 15  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                          |  | 15  
|Item 5.                       |  | Other Information                                                                                            |  | 15  
|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 ofJune 30,2009 |         | As ofDecember 31,2008
|                                                                                                                                                                                                      |  | (unaudited)       |         |                      
|Assets                                                                                                                                                                                                |  |                   |         |                       |   |        
|Current assets:                                                                                                                                                                                       |  |                   |         |                       |   |        
|Cash and cash equivalents                                                                                                                                                                             |  | $                 | 1,467   |                       | $ | 1,267  
|Accounts receivable, net                                                                                                                                                                              |  |                   | 80,419  |                       |   | 92,192 
|Deferred tax assets                                                                                                                                                                                   |  |                   | 3,369   |                       |   | 3,116  
|Prepaid expenses and other current assets                                                                                                                                                             |  |                   | 3,514   |                       |   | 1,733  
|                                                                                                                                                                                                      |  |                   |         |                       |   |        
|Total current assets                                                                                                                                                                                  |  |                   | 88,769  |                       |   | 98,308 
|                                                                                                                                                                                                      |  |                  
|Property and equipment, net                                                                                                                                                                           |  |                   | 6,562   |                       |   | 5,378  
|Other assets                                                                                                                                                                                          |  |                   | 824     |                       |   | 926    
|Intangible assets, net                                                                                                                                                                                |  |                   | 7,085   |                       |   | 7,981  
|Goodwill                                                                                                                                                                                              |  |                   | 87,740  |                       |   | 87,740 
|                                                                                                                                                                                                      |  |                   |         |                       |   |        
|Total assets                                                                                                                                                                                          |  | $                 | 190,980 |                       | $ | 200,333
|                                                                                                                                                                                                      |  |                   |         |                       |   |        
|                                                                                                                                                                                                      |  |                  
|Liabilities and stockholders equity                                                                                                                                                                  |  |                   |         |                       |   |        
|Current liabilities:                                                                                                                                                                                  |  |                   |         |                       |   |        
|Accounts payable                                                                                                                                                                                      |  | $                 | 25,632  |                       | $ | 32,747 
|Accrued salaries and benefits                                                                                                                                                                         |  |                   | 16,672  |                       |   | 16,436 
|Other accrued expenses/liabilities                                                                                                                                                                    |  |                   | 4,975   |                       |   | 5,353  
|Deferred revenue                                                                                                                                                                                      |  |                   | 2,852   |                       |   | 2,626  
|                                                                                                                                                                                                      |  |                   |         |                       |   |        
|Total current liabilities                                                                                                                                                                             |  |                   | 50,131  |                       |   | 57,162 
|                                                                                                                                                                                                      |  |                  
|Long-term debt                                                                                                                                                                                        |  |                   | 26,000  |                       |   | 40,000 
|Other liabilities                                                                                                                                                                                     |  |                   | 58      |                       |   | 98     
|Deferred rent                                                                                                                                                                                         |  |                   | 2,230   |                       |   | 2,523  
|Deferred tax liabilities, net                                                                                                                                                                         |  |                   | 2,355   |                       |   | 1,691  
|                                                                                                                                                                                                      |  |                   |         |                       |   |        
|Total liabilities                                                                                                                                                                                     |  |                   | 80,774  |                       |   | 101,474
|                                                                                                                                                                                                      |  |                   |         |                       |   |        
|                                                                                                                                                                                                      |  |                  
|Stockholders equity:                                                                                                                                                                                 |  |                   |         |                       |   |        
|                                                                                                                                                                                                      |  |                  
|Class A common stock, $0.019 par value37,500,000 shares authorized; 8,273,954 shares issued and outstanding as of June 30,
2009, and 8,205,711 shares issued and outstanding as of December 31, 2008 |  |                   | 157     |                       |   | 156    
|                                                                                                                                                                                                      |  |                  
|Class B common stock, $0.019 par value12,500,000 shares authorized; 5,200,000 shares issued and outstanding as of June 30, 2009,
and December 31, 2008                                               |  |                   | 99      |                       |   | 99     
|Additional paid-in capital                                                                                                                                                                            |  |                   | 61,285  |                       |   | 59,734 
|Retained earnings                                                                                                                                                                                     |  |                   | 48,665  |                       |   | 38,870 
|                                                                                                                                                                                                      |  |                   |         |                       |   |        
|Total stockholders equity                                                                                                                                                                            |  |                   | 110,206 |                       |   | 98,859 
|                                                                                                                                                                                                      |  |                   |         |                       |   |        
|                                                                                                                                                                                                      |  |                  
|Total liabilities and stockholders equity                                                                                                                                                            |  | $                 | 190,980 |                       | $ | 200,333
|                                                                                                                                                                                                      |  |                   |         |                       |   |        

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 June 30, |         |   | Six months ended June 30, |  
|                                                          |  | 2009                        |         |   | 2008                      |   |        | 2009 |  |   | 2008    |  
|                                                          |  |                             |         |  
|Revenue                                                   |  | $                           | 108,519 |   |                           | $ | 96,337 |      |  | $ | 213,536 |   |  | $ | 187,838 |  
|                                                          |  |                             |         |  
|Operating costs and expenses:                             |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Cost of revenue                                           |  |                             | 93,976  |   |                           |   | 82,571 |      |  |   | 185,300 |   |  |   | 161,915 |  
|General and administrative expense                        |  |                             | 4,894   |   |                           |   | 5,461  |      |  |   | 9,655   |   |  |   | 10,207  |  
|Depreciation and amortization                             |  |                             | 543     |   |                           |   | 489    |      |  |   | 1,041   |   |  |   | 970     |  
|Amortization of intangible assets                         |  |                             | 448     |   |                           |   | 483    |      |  |   | 896     |   |  |   | 806     |  
|                                                          |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total operating costs and expenses                        |  |                             | 99,861  |   |                           |   | 89,004 |      |  |   | 196,892 |   |  |   | 173,898 |  
|                                                          |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|                                                          |  |                             |         |  
|Operating income                                          |  |                             | 8,658   |   |                           |   | 7,333  |      |  |   | 16,644  |   |  |   | 13,940  |  
|Interest income                                           |  |                             | 10      |   |                           |   | 20     |      |  |   | 30      |   |  |   | 74      |  
|Interest expense                                          |  |                             | (161    | ) |                           |   | (603   | )    |  |   | (374    | ) |  |   | (1,186  | )
|                                                          |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|                                                          |  |                             |         |  
|Income before income taxes                                |  |                             | 8,507   |   |                           |   | 6,750  |      |  |   | 16,300  |   |  |   | 12,828  |  
|Income tax expense                                        |  |                             | 3,387   |   |                           |   | 2,684  |      |  |   | 6,505   |   |  |   | 5,131   |  
|                                                          |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                |  | $                           | 5,120   |   |                           | $ | 4,066  |      |  | $ | 9,795   |   |  | $ | 7,697   |  
|                                                          |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|                                                          |  |                             |         |  
|Earnings per common and common equivalent share:          |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic:                                                    |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                       |  |                             | 13,438  |   |                           |   | 13,353 |      |  |   | 13,424  |   |  |   | 13,353  |  
|                                                          |  |                             |         |  
|Net income per share                                      |  | $                           | 0.38    |   |                           | $ | 0.30   |      |  | $ | 0.73    |   |  | $ | 0.58    |  
|                                                          |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|                                                          |  |                             |         |  
|Diluted:                                                  |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|                                                          |  |                             |         |  
|Weighted average shares and equivalent shares outstanding |  |                             | 13,755  |   |                           |   | 13,616 |      |  |   | 13,748  |   |  |   | 13,588  |  
|                                                          |  |                             |         |  
|Net income per share                                      |  | $                           | 0.37    |   |                           | $ | 0.30   |      |  | $ | 0.71    |   |  | $ | 0.57    |  
|                                                          |  |                             |         |   |                           |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes



2



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NCI, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(amounts in thousands)



|                                                                                  |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Six months ended June 30, |        
|                                                                                  |  | 2009                      |         |   | 2008 |  
|Cash flows from operating activities                                              |  |                           |         |   |      |   |         |  
|Net income                                                                        |  | $                         | 9,795   |   |      | $ | 7,697   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                           | 1,937   |   |      |   | 1,776   |  
|Gain on sale and disposal of property and equipment                               |  |                           |         |   |      |   | (11     | )
|Non-cash stock compensation expense                                               |  |                           | 609     |   |      |   | 356     |  
|Deferred income taxes                                                             |  |                           | 410     |   |      |   | 552     |  
|Changes in operating assets and liabilities:                                      |  |                           |         |   |      |   |         |  
|Accounts receivable, net                                                          |  |                           | 11,773  |   |      |   | (4,987  | )
|Prepaid expenses and other assets                                                 |  |                           | (1,679  | ) |      |   | (1,798  | )
|Accounts payable                                                                  |  |                           | (7,115  | ) |      |   | (1,426  | )
|Accrued expenses/other current liabilities                                        |  |                           | 97      |   |      |   | 2,105   |  
|Deferred rent                                                                     |  |                           | (282    | ) |      |   | (262    | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                           | 15,545  |   |      |   | 4,002   |  
|                                                                                  |  |                           |         |   |      |   |         |  
|                                                                                  |  |                          
|Cash flows from investing activities                                              |  |                           |         |   |      |   |         |  
|Purchase of property and equipment                                                |  |                           | (2,225  | ) |      |   | (847    | )
|Proceeds from sale of property and equipment                                      |  |                           |        |   |      |   | 11      |  
|Cash paid for acquisitions, net of cash received                                  |  |                           |        |   |      |   | (16,191 | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                           | (2,225  | ) |      |   | (17,027 | )
|                                                                                  |  |                           |         |   |      |   |         |  
|                                                                                  |  |                          
|Cash flows from financing activities                                              |  |                           |         |   |      |   |         |  
|Proceeds from exercise of stock options                                           |  |                           | 765     |   |      |   |        |  
|Excess tax deduction from exercise of stock options                               |  |                           | 178     |   |      |   |        |  
|(Repayment) proceeds of line of credit, net                                       |  |                           | (14,000 | ) |      |   | 14,058  |  
|Principal payments under capital lease obligations                                |  |                           | (63     | ) |      |   | (81     | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                               |  |                           | (13,120 | ) |      |   | 13,977  |  
|                                                                                  |  |                           |         |   |      |   |         |  
|                                                                                  |  |                          
|Net change in cash and cash equivalents                                           |  |                           | 200     |   |      |   | 952     |  
|Cash and cash equivalents, beginning of period                                    |  |                           | 1,267   |   |      |   | 109     |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                         | 1,467   |   |      | $ | 1,061   |  
|                                                                                  |  |                           |         |   |      |   |         |  
|                                                                                  |  |                          
|Supplemental disclosure of cash flow information                                  |  |                           |         |   |      |   |         |  
|Cash paid during the period for:                                                  |  |                           |         |   |      |   |         |  
|Interest                                                                          |  | $                         | 374     |   |      | $ | 1,186   |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Income taxes                                                                      |  | $                         | 8,274   |   |      | $ | 5,186   |  
|                                                                                  |  |                           |         |   |      |   |         |  

See accompanying notes



3



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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 (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, 2008, 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.

The Company evaluated events subsequent to June 30, 2009, through publication of these financial statements on August 6, 2009.

2. Business Overview

NCI is a provider of information technology (IT), engineering, and professional services and
solutions to Federal Government agencies. NCIs capabilities are centered on overcoming our customers challenges to help them meet their critical mission and objectives. Through our comprehensive offerings, we are a full lifecycle
capabilities company. We provide full lifecycle IT specialties, complemented by our professional services. We have the agility, position, and determination to focus on expanding market segments within the Federal IT and professional services
markets. We are extending our core capabilities in line with key market drivers and investing in a robust set of business solutions and offerings. Our core capabilities include: enterprise systems management; network engineering; information
assurance and cybersecurity; 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).



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NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

3. Earnings Per Share (continued)



|                                                                            |  |                                        |        |                           |   |        |  |      |        |  |   |       
|--------------------------------------------------------------------------- |  | -------------------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                            |  | Three months ended June 30,            |        | Six months ended June 30,
|                                                                            |  | 2009                                   |        | 2008                      |   | 2009   |  | 2008
|                                                                            |  | (in thousands, except per share data))
|Net Income                                                                  |  | $                                      | 5,120  |                           | $ | 4,066  |  | $    | 9,795  |  | $ | 7,697 
|                                                                            |  |                                        |        |                           |   |        |  |      |        |  |   |       
|                                                                            |  |                                        |        |                          
|Weighted average number of basic shares outstanding during the period       |  |                                        | 13,438 |                           |   | 13,353 |  |      | 13,424 |  |   | 13,353
|Dilutive effect of stock options after application of treasury stock method |  |                                        | 317    |                           |   | 263    |  |      | 324    |  |   | 235   
|                                                                            |  |                                        |        |                           |   |        |  |      |        |  |   |       
|Weighted average number of diluted shares outstanding during the period     |  |                                        | 13,755 |                           |   | 13,616 |  |      | 13,748 |  |   | 13,588
|                                                                            |  |                                        |        |                           |   |        |  |      |        |  |   |       
|                                                                            |  |                                        |        |                          
|Basic earnings per share                                                    |  | $                                      | 0.38   |                           | $ | 0.30   |  | $    | 0.73   |  | $ | 0.58  
|                                                                            |  |                                        |        |                           |   |        |  |      |        |  |   |       
|                                                                            |  |                                        |        |                          
|Diluted earnings per share                                                  |  | $                                      | 0.37   |                           | $ | 0.30   |  | $    | 0.71   |  | $ | 0.57  
|                                                                            |  |                                        |        |                           |   |        |  |      |        |  |   |       

4. Stock Compensation

During 2009, the Company granted approximately 138,000 options and had exercises of approximately 68,000 options. As of June 30, 2009, there were approximately 1,034,000 options outstanding.

The following table summarizes stock compensation for the three and six months ended June 30, 2009, and 2008:



|                           |  |                             |     |                           |   |      |  |      |     |  |   |    
|-------------------------- |  | --------------------------- | --- | ------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                           |  | Three months ended June 30, |     | Six months ended June 30,
|                           |  | 2009                        |     | 2008                      |   | 2009 |  | 2008
|                           |  | (in thousands)             
|Cost of Revenue            |  | $                           | 124 |                           | $ | 114  |  | $    | 232 |  | $ | 206
|General and Administrative |  |                             | 204 |                           |   | 83   |  |      | 377 |  |   | 150
|                           |  |                             |     |                           |   |      |  |      |     |  |   |    
|                           |  | $                           | 328 |                           | $ | 197  |  | $    | 609 |  | $ | 356
|                           |  |                             |     |                           |   |      |  |      |     |  |   |    

As of June 30, 2009, there was approximately $3.5 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 $704,000, $1,362,000,
$950,000, $471,000, and $41,000 during the remainder of 2009, 2010, 2011, 2012, and 2013, 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. 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 the Companys assets. The lenders also require a direct assignment of all
contracts at the lenders discretion.

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.



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##### Table of Contents

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5. Loan and Security Agreement (continued)

As of June 30, 2009,
the outstanding balance was $26.0 million and interest accrued at a rate of LIBOR plus 100 basis points, or 1.32%. As of December 31, 2008, the outstanding balance was approximately $40.0 million. As of June 30, 2009, NCI was in compliance
with all its loan covenants.

6. Related Party Transactions

The Company purchased services from Net Commerce Corporation, which is a Government contractor wholly owned by Mr. Rajiv Narang, the son of Mr. Charles K. Narang, the Chairman and Chief Executive Officer of the Company, under
a subcontract. For the three months ended June 30, 2009, and 2008, the expense incurred under this agreement was approximately $183,000 and $252,000, respectively. For the six months ended June 30, 2009, and 2008, the expense incurred
under this agreement was approximately $278,000 and $304,000, respectively. As of June 30, 2009, and December 31, 2008, there were outstanding accounts payable of approximately $0 and $44,000, 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. The lease
is for approximately 41,000 square feet at $14.00 per square foot with annual escalation and shared common area operating expenses. The lease expires on June 30, 2012. For the three months ended June 30, 2009, and 2008, NCI has paid
approximately $294,000 and $220,000, respectively, for rent to Gur Parsaad Properties, Ltd. For the six months ended June 30, 2009, and 2008, NCI paid approximately $522,000 and $424,000, respectively, for rent to Gur Parsaad Properties, Ltd.
As of June 30, 2009, and December 31, 2008, there were no outstanding accounts payable.

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,
was 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 June 30, 2009, and December 31, 2008, the Company had outstanding claims in the amount of
approximately $40,000 and $0, respectively.

7. New Accounting Pronouncements

We adopted SFAS No. 141(R), Business Combinationseffective January 1, 2009. The new standard replaces existing guidance and significantly changes accounting and reporting relative to business
combinations in consolidated financial statements, including requirements to recognize acquisition-related transaction and post acquisition restructuring costs in the results of operations as incurred. There was no material impact to the
Companys financial statements upon adoption of this standard.

We adopted SFAS No. 165, Subsequent Events effective June 30, 2009.
The new standard establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued. There was no material impact to the Companys financial
statements upon adoption of this standard.



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##### Table of Contents

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

7. New Accounting Pronouncements (continued)

During June 2009, the
FASB (Financial Accounting Standards Board) issued SFAS No. 168, The FASB Accounting Standards Codification (Codification) and the Hierarchy of Generally Accepted Accounting Principles (GAAP),a replacement
of FASB Statement No. 162 (SFAS 168). SFAS 168 establishes the Codification as the single source of authoritative GAAP in the United States, other than rules and interpretive releases issued by the SEC. The Codification is a
reorganization of current GAAP into a topical format that eliminates the current GAAP hierarchy and establishes instead two levels of guidance  authoritative and nonauthoritative. All non-grandfathered, non-SEC accounting literature that is
not included in the Codification will become nonauthoritative. The FASBs primary goal in developing the Codification is to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular
accounting topic in one place. The Codification will be effective for interim and annual periods ending after September 15, 2009. As the Codification is not intended to change or alter existing GAAP, it is not anticipated to impact the
Companys financial statements.

8. Subsequent Event

TRS Acquisition

Effective July 31, 2009, the Company completed the acquisition of 100% of the equity interests of TRS Consulting, Inc.
(TRS). TRS is a provider of high-end IT and software development services to the intelligence community. NCI acquired TRS to expand our presence in Intelligence Community. The Company paid approximately $18.0 million in cash at closing. In addition,
the purchase agreement for the acquisition of TRS provides for various contingent consideration. NCI could pay up to an additional $6.0 million over the next 30 months following closing if certain performance milestones are achieved.



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##### Table of Contents

|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 titled 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 our revenue; a change in
funding of our contracts due to bid protests, changes in spending patterns or changes in priorities due to the change in administration
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | Failure to integrate TRS Consulting, Inc. or to identify and successfully integrate future acquired companies or businesses into our operations or to realize any
accretive or synergistic effects from such acquisitions
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, 2008,
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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##### Table of Contents

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 and cybersecurity
| | - |  | ---------------------------------------



| |  |  | Systems engineering and integration
| | - |  | -----------------------------------



| |  |  | Program management, acquisition, and lifecycle support
| | - |  | ------------------------------------------------------



| |  |  | Engineering and logistics
| | - |  | -------------------------



| |  |  | Medical transformation/health IT
| | - |  | --------------------------------



| |  |  | 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 June 30, |   |  | Six months ended June 30, |  
|                                                |  | 2009                        |   |  | 2008                      |   |  | 2009 |   |  | 2008 |  
|Department of Defense and intelligence agencies |  | 87.3                        | % |  | 79.2                      | % |  | 86.4 | % |  | 79.5 | %
|Federal civilian agencies                       |  | 12.7                        | % |  | 16.9                      | % |  | 12.9 | % |  | 17.6 | %
|Commercial and state & local entities           |  |                            | % |  | 3.9                       | % |  | 0.7  | % |  | 2.9  | %

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 June 30, |   |  | Six months ended June 30, |  
|                   |  | 2009                        |   |  | 2008                      |   |  | 2009 |   |  | 2008 |  
|Time-and-materials |  | 53.6                        | % |  | 46.8                      | % |  | 52.8 | % |  | 43.4 | %
|Cost-plus          |  | 16.1                        | % |  | 23.2                      | % |  | 16.0 | % |  | 24.5 | %
|Fixed-price        |  | 30.3                        | % |  | 30.0                      | % |  | 31.2 | % |  | 32.1 | %

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 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, because we are reimbursed all 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.



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##### Table of Contents

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.



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##### Table of Contents

Results of Operations

Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008

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 June 30, |         |   | Three months ended June 30,  |  
|                                    |  | 2009                        |         |   | 2008                         |   |        | 2009 |  |       | 2008 | 
|                                    |  | (in thousands)              |         |   | (as a percentage of revenue) |  
|Revenue                             |  | $                           | 108,519 |   |                              | $ | 96,337 |      |  | 100.0 | %    |  | 100.0 | %
|                                    |  |                             |         |  
|Operating costs and expenses:       |  |                             |         |   |                              |   |        |      |  |       |      |  |       |  
|Cost of revenue                     |  |                             | 93,976  |   |                              |   | 82,571 |      |  | 86.6  |      |  | 85.7  |  
|General and administrative expenses |  |                             | 4,894   |   |                              |   | 5,461  |      |  | 4.5   |      |  | 5.7   |  
|Depreciation and amortization       |  |                             | 543     |   |                              |   | 489    |      |  | 0.5   |      |  | 0.5   |  
|Amortization of intangible assets   |  |                             | 448     |   |                              |   | 483    |      |  | 0.4   |      |  | 0.5   |  
|                                    |  |                             |         |   |                              |   |        |      |  |       |      |  |       |  
|Total operating costs and expenses  |  |                             | 99,861  |   |                              |   | 89,004 |      |  | 92.0  |      |  | 92.4  |  
|                                    |  |                             |         |   |                              |   |        |      |  |       |      |  |       |  
|                                    |  |                             |         |  
|Operating income                    |  |                             | 8,658   |   |                              |   | 7,333  |      |  | 8.0   |      |  | 7.6   |  
|Interest income                     |  |                             | 10      |   |                              |   | 20     |      |  |      |      |  |      |  
|Interest expense                    |  |                             | (161    | ) |                              |   | (603   | )    |  | (0.2  | )    |  | (0.6  | )
|                                    |  |                             |         |   |                              |   |        |      |  |       |      |  |       |  
|                                    |  |                             |         |  
|Income before taxes                 |  |                             | 8,507   |   |                              |   | 6,750  |      |  | 7.8   |      |  | 7.0   |  
|Provision for income taxes          |  |                             | 3,387   |   |                              |   | 2,684  |      |  | 3.1   |      |  | 2.8   |  
|                                    |  |                             |         |   |                              |   |        |      |  |       |      |  |       |  
|Net income                          |  | $                           | 5,120   |   |                              | $ | 4,066  |      |  | 4.7   | %    |  | 4.2   | %
|                                    |  |                             |         |   |                              |   |        |      |  |       |      |  |       |  

Revenue

For the three months ended June 30, 2009, total revenue increased by 12.6% or $12.2 million, over the same period a year ago. This increase is due to significant growth on some of our IDIQ contracts, particularly the NETCOM EMS and PEO
Soldier contracts, as well as a number of new task awards under our GWAC contract vehicles, primarily NETCENTS, TEIS, and ITES-2S, and new contract awards. This growth was partially offset by revenue reductions from programs that have been
completed.

Cost of revenue

Cost of revenue
increased 13.8%, or $11.4 million, for the three months ended June 30, 2009, 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, hardware
and product related expenses, and other direct costs such as travel, driven by the increase in revenue. As a percentage of revenue, cost of revenue was 86.6% and 85.7% for the quarters ended June 30, 2009, and 2008, respectively. The 0.9%
increase in cost of revenue as a percentage of revenue resulted from approximately $660,000 less in award fees received and slightly lower margins on the start of new contracts for the quarter ended June 30, 2009, compared to the quarter ended
June 30, 2008.

General and Administrative Expenses

General and administrative expense decreased 10.4%, or $0.6 million, for the three months ended June 30, 2009, as compared to the same period a year ago. As a percentage of revenue, general and administrative expenses decreased to 4.5%
from 5.7% for the quarters ended June 30, 2009, and 2008, respectively. The decrease was primarily due to significantly lower bid and proposal costs incurred during the quarter ended June 30, 2009, compared to the same quarter of 2008.

Depreciation and Amortization

Depreciation and
amortization expense was approximately $0.5 million for the quarters ended June 30, 2009, and 2008.

Amortization of Intangible Assets

Amortization of intangible assets was approximately $0.4 million for the quarter ended June 30, 2009, as compared to $0.5 million for the period ended
June 30, 2008.

Operating income

For the
three months ended June 30, 2009, operating income was $8.7 million, or 8.0% of revenue, compared to $7.3 million, or 7.6% of revenue, for the three months ended June 30, 2008. Operating income was higher for the



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three months ended June 30, 2009, due to the higher revenue volume and lower general and administrative expenses as compared to the same period in the
prior year. Operating income, as a percent of revenue, was higher for the three months ended June 30, 2009, compared to the same period in the prior year due to lower general and administrative expenses as a percentage of revenue due primarily
to lower bid and proposal expenses for the quarter. This was partially offset by the lower award fees received in the quarter as compared to the same quarter in the prior year and the higher cost of revenue as a percentage of revenue. We expect bid
and proposal costs to increase in the future which may reduce operating margins.

Interest Income/Expense

Net interest expense was approximately $0.2 million for the quarter ended June 30, 2009, as compared to net interest expense of $0.6 million for the corresponding
quarter during 2008. The decrease is due to the reduction of debt as well as a reduced interest rate on our debt when compared to 2008.

Income Taxes

The increase in income taxes of $0.7 million is the result of the increase in operating income. The effective income tax rate was approximately
39.8% for the quarters ended June 30, 2009, and 2008.

Six Months Ended June 30, 2009, Compared to Six Months Ended June 30, 2008

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.



|                                    |  |                           |         |   |                              |   |         |      |  |       |      |  |       |  
|----------------------------------- |  | ------------------------- | ------- | - | ---------------------------- | - | ------- | ---- |  | ----- | ---- |  | ----- | -
|                                    |  | Six months ended June 30, |         |   | Six months ended June 30,    |  
|                                    |  | 2009                      |         |   | 2008                         |   |         | 2009 |  |       | 2008 | 
|                                    |  | (in thousands)            |         |   | (as a percentage of revenue) |  
|Revenue                             |  | $                         | 213,536 |   |                              | $ | 187,838 |      |  | 100.0 | %    |  | 100.0 | %
|                                    |  |                           |         |  
|Operating costs and expenses:       |  |                           |         |   |                              |   |         |      |  |       |      |  |       |  
|Cost of revenue                     |  |                           | 185,300 |   |                              |   | 161,915 |      |  | 86.8  |      |  | 86.2  |  
|General and administrative expenses |  |                           | 9,655   |   |                              |   | 10,207  |      |  | 4.5   |      |  | 5.4   |  
|Depreciation and amortization       |  |                           | 1,041   |   |                              |   | 970     |      |  | 0.5   |      |  | 0.5   |  
|Amortization of intangible assets   |  |                           | 896     |   |                              |   | 806     |      |  | 0.4   |      |  | 0.5   |  
|                                    |  |                           |         |   |                              |   |         |      |  |       |      |  |       |  
|Total operating costs and expenses  |  |                           | 196,892 |   |                              |   | 173,898 |      |  | 92.2  |      |  | 92.6  |  
|                                    |  |                           |         |   |                              |   |         |      |  |       |      |  |       |  
|                                    |  |                           |         |  
|Operating income                    |  |                           | 16,644  |   |                              |   | 13,940  |      |  | 7.8   |      |  | 7.4   |  
|Interest income                     |  |                           | 30      |   |                              |   | 74      |      |  |      |      |  |      |  
|Interest expense                    |  |                           | (374    | ) |                              |   | (1,186  | )    |  | (0.2  | )    |  | (0.6  | )
|                                    |  |                           |         |   |                              |   |         |      |  |       |      |  |       |  
|                                    |  |                           |         |  
|Income before taxes                 |  |                           | 16,300  |   |                              |   | 12,828  |      |  | 7.6   |      |  | 6.8   |  
|Provision for income taxes          |  |                           | 6,505   |   |                              |   | 5,131   |      |  | 3.0   |      |  | 2.7   |  
|                                    |  |                           |         |   |                              |   |         |      |  |       |      |  |       |  
|Net income                          |  | $                         | 9,795   |   |                              | $ | 7,697   |      |  | 4.6   | %    |  | 4.1   | %
|                                    |  |                           |         |   |                              |   |         |      |  |       |      |  |       |  

Revenue

For the six months ended June 30, 2009, total revenue increased by 13.7% or $25.7 million, over the same period a year ago. The increase is due to significant growth on some of our IDIQ contracts, particularly the NETCOM EMS contract
and the PEO Soldier contract, which was acquired during the first quarter 2008, as well as a number of new task awards under our GWAC contract vehicles, primarily NETCENTS, TEIS, and ITES-2S, along with other new contract awards. This growth was
partially offset by revenue reductions from programs that have ended, lower product and other direct cost purchases on some contracts, and some scope reductions on certain projects.

Cost of revenue

Cost of revenue increased 14.4%, or $23.4 million for the six months ended June 30,
2009, as compared to the same period a year ago. The increase was attributable to an increase in direct labor and associated indirect costs, higher subcontractor costs, and other direct costs due to the increase in revenue. As a percentage of
revenue, cost of revenue was 86.8% and 86.2% for the six months ended June 30, 2009, and 2008, respectively. The 0.6% increase in cost of revenue as a percentage of revenue is due to lower award fees received and slightly lower margins on the
start of new contracts for the six months ended June 30, 2009, compared to the six months ended June 30, 2008.

General and Administrative
Expenses

General and administrative expense decreased 5.4%, or $0.6 million for the six months ended June 30, 2009, as compared to the same
period a year ago. As a percentage of revenue, general and administrative expenses decreased to 4.5% from 5.4% for the six months ended June 30, 2009, and 2008, respectively. The decrease is due primarily to lower bid and proposal costs.



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Depreciation and Amortization

Depreciation and amortization expense was approximately $1.0 million for the six months ended June 30, 2009, and 2008.

Amortization of Intangible Assets

Amortization of intangible assets was approximately $0.9 million for the six months ended
June 30, 2009, and $0.8 million for the same period during 2008. The increase is due primarily to the intangible assets associated with our acquisitions.

Operating income

For the six months ended June 30, 2009, operating income was $16.6 million, or 7.8% of revenue, compared to
$13.9 million, or 7.4% of revenue, for the six months ended June 30, 2008. Operating income was higher for the six months ended June 30, 2009, 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 six months ended June 30, 2009, compared to the same period in the prior year due to the lower percentage general and administrative expenses as a percent of revenue. We expect bid and
proposal costs to increase in the future which may reduce operating margins.

Interest Income/Expense

Net interest expense was approximately $0.3 million for the six months ended June 30, 2009, as compared to $1.1 million for the same period during 2008. The decrease
is due to our reduction of debt as well as a lower interest rate as compared to the same period during the prior year.

Income Taxes

The increase in income taxes of $1.4 million is the result of the increase in operating income, slightly offset by a 0.1% rate decrease. The
effective income tax rate for the six months ended June 30, 2009, is approximately 39.9% as compared to an effective income tax rate of 40.0% for the six months ended June 30, 2008.

Contract Backlog

At June 30, 2009, and December 31, 2008,
our estimated backlog was $1,120 million and $1,189 million, respectively, of which $205 million and $234 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 fiscal ended December 31, 2008, filed with the SEC.

Liquidity and Capital Resources

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

Generally, our most significant use of working
capital is for financing accounts receivables, investing in capital expenditures, and making select strategic acquisitions. During the second quarter of 2009, the balance of accounts receivable decreased by $4.9 million to $80.4 million at the end
of the quarter. Days sales outstanding of accounts receivable (DSO) stood at 67 days as of June 30, 2009. This compares to a DSO of 83 days as of December 31, 2008. Historically, we have experienced DSOs at a much higher level and we
are focused on keeping DSOs in the range of the high 60s to mid 70s. An increase in our DSOs will impact our cash flow and working capital requirements.



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Credit Agreement: The borrowing capacity under our Loan and Security Agreement (the Agreement) consists of a
revolving credit facility with an original 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. Interest is accruing at LIBOR plus 100 basis points or 1.32% as of June 30, 2009. The credit facility expires on March 14, 2011.

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 June 30, 2009, there was $26.0 million outstanding under the credit facility.

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 2009. Refer to our Critical
Accounting Policies section in our Annual Report on Form 10-K for the year ended December 31, 2008, 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 facility. A 1% change in interest rates would have changed our interest expense and cash flow by approximately $0.1 million for the quarter
ended June 30, 2009, and approximately $0.2 million for the six months ended June 30, 2009.

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.



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

Evaluation of the
Effectiveness of Disclosure Controls and Procedures

Management carried out an evaluation as of June 30, 2009, 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 June 30, 2009, 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 June 30, 2009, that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.



14



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##### Table of Contents

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, 2008, 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
|------- | ---------------------------------------------------

Our
Annual Meeting of Shareholders was held on June 10, 2009, (the Annual Meeting). The following proposals were voted upon at the Annual Meeting:



|            |  |                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Proposal 1: |  | The election of nine directors to serve a one year term or until their respective successors have been duly elected and qualified.         
|            | 
|Proposal 2: |  | The approval of The Amended and Restated 2005 Performance Incentive Plan.                                                                  
|            | 
|Proposal 3: |  | To ratify the appointment of Ernst & Young, LLP as the Companys independent registered public accounting firm for the current fiscal year.

A summary of the voting for proposals voted upon at the Annual Meeting is as follows:



|           |  |                                                                                  |  |                    |  |          
|---------- |  | -------------------------------------------------------------------------------- |  | ------------------ |  | ---------
|Proposal   |  | For                                                                              |  | Against orWithheld
|           |  |                                                                                  | 
|Proposal 1 |  | Election of Directors                                                            |  |                    |  |          
|           |  | Charles K. Narang                                                                |  | 59,536,112         |  | 52,224   
|           |  | Terry W. Glasgow                                                                 |  | 59,571,589         |  | 16,747   
|           |  | James P. Allen                                                                   |  | 59,307,883         |  | 280,453  
|           |  | John E. Lawler                                                                   |  | 59,571,589         |  | 16,747   
|           |  | Paul V. Lombardi                                                                 |  | 59,307,543         |  | 280,793  
|           |  | J. Patrick McMahon                                                               |  | 59,571,907         |  | 16,429   
|           |  | Gurvinder P. Singh                                                               |  | 59,506,706         |  | 81,630   
|           |  | Stephen L. Waechter                                                              |  | 59,571,907         |  | 16,429   
|           |  | Daniel R. Young                                                                  |  | 59.307,543         |  | 280,793  
|           |  |                                                                                  | 
|Proposal 2 |  | The approval of The Amended and Restated 2005 Performance Incentive Plan         |  | 55,350,100         |  | 3,708,928
|           |  |                                                                                  | 
|Proposal 3 |  | Retain Ernst & Young, LLP as NCIs Independent Registered Public Accounting Firm |  | 59,545,498         |  | 42,349   



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

None.



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##### Table of Contents

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



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3.1    |  | Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference from Exhibit 3.1 to registrants Registration Statement on Form S-1 (File No.
333-127006), as filed with the Commission on October 4, 2005, as amended).                                                                                                                                                                                                                                                                                             
|       | 
|3.2    |  | Bylaws of the Registrant (incorporated herein by reference from Exhibit 3.2 to registrants Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on July
29, 2005).                                                                                                                                                                                                                                                                                                                                                      
|       | 
|4.1    |  | Specimen Class A Common Stock Certificate (incorporated herein by reference from Exhibit 4.1 to registrants Registration Statement on Form S-1 (File No. 333-127006), as filed with the
Commission on October 20, 2005, as amended).                                                                                                                                                                                                                                                                                                                      
|       | 
|4.2*   |  | NCI, Inc. Amended and Restated 2005 Performance Incentive Plan (incorporated herein by reference from Appendix A to registrants Proxy Statement on Form DEF 14A, as filed with the
Commission on April 30, 2009).                                                                                                                                                                                                                                                                                                                                         
|       | 
|4.3*   |  | Form of Amended and Restated 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement (incorporated herein by reference from Exhibit 4.2 to registrants
Registration Statement on Form 8-K, as filed with the Commission on June 12, 2009).                                                                                                                                                                                                                                                                                
|       | 
|10.1*  |  | 401(k) Profit Sharing Plan (incorporated herein by reference from Exhibit 10.4 to registrants Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on July
29, 2005).                                                                                                                                                                                                                                                                                                                                                   
|       | 
|10.2   |  | Loan and Security Agreement, dated March 14, 2006, by and among NCI, Inc., as the Parent Borrower, each of the Subsidiary Borrowers identified on the signature pages thereto, the several banks
and financial institutions from time to time parties to the agreement, and SunTrust Bank as the Administrative Agent. (incorporated by reference from Exhibit 10.1 to registrants Current Report on Form 8-K dated March 14, 2006, and filed with
the Commission on March 17, 2006).                                                                     
|       | 
|10.3   |  | First Amendment to Loan and Security Agreement, dated August 1, 2006, by and among, NCI, Inc., as the Parent Borrower, each of the Subsidiary Borrowers identified on the signature pages thereto,
the several banks and financial institutions from time to time parties to the agreement, and SunTrust Bank as the Administrative Agent (incorporated herein by reference from Exhibit 10.1 to registrants Quarterly Report on Form 10-Q for the
period ended September 30, 2006 (File No. 000-51579), as filed with the Commission on November 7, 2006)
|       | 
|10.4   |  | Second Amendment to Loan and Security Agreement, dated June 27, 2007, by and among, NCI, Inc., as the Parent Borrower, each of the Subsidiary Borrowers identified on the signature pages thereto,
the several banks and financial institutions from time to time parties to the agreement, and SunTrust Bank as the Administrative Agent (incorporated herein by reference from Exhibit 10.1 to registrants Current Report on Form 8-K (File No.
000-51579), as filed with the Commission on June 27, 2007).                                             
|       | 
|10.5   |  | Third Amendment to Loan and Security Agreement, dated March 20,2008, by and among, NCI, Inc., as the Parent Borrower, each of the Subsidiary Borrowers identified on the signature pages thereto,
the several banks and financial institutions from time to time parties to the agreement, and SunTrust Bank as the Administrative Agent (incorporated herein by reference from Exhibit 10.1 to registrants Quarterly Report on Form 10-Q (File No.
000-51579), as filed with the Commission on August 1, 2008).                                          
|       | 
|31.1  |  | Certification of the Chief Executive Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 
|31.2  |  | Certification of the Chief Financial Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 
|32.1  |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 
|32.2  |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                     



| | Included with this filing.
|- | --------------------------

|* | Management Contract or Compensatory Plan or Arrangement.
|- | --------------------------------------------------------



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##### Table of Contents

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: August 6, 2009 |  | By:        |  | /s/ Charles K. Narang                       
|                     |  |            |  | Charles K. Narang                           
|                     |  |            |  | Chairman of the Board,                      
|                     |  |            |  | Chief Executive Officer and Director        
|                     |  |            |  | (Principal Executive Officer)               
|                     |  |           
|Date: August 6, 2009 |  | By:        |  | /s/ Judith L. Bjornaas                      
|                     |  |            |  | Judith L. Bjornaas                          
|                     |  |            |  | Executive Vice President                    
|                     |  |            |  | Chief Financial Officer                     
|                     |  |            |  | (Principal Financial and Accounting Officer)



17