##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 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 October 30, 2009, there were 8,280,204 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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##### Table of Contents

NCI, INC.



|         |  |                                                                                                                     |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                     |  | PAGE
|         |  |                                                                                                                    
|PART I:  |  | FINANCIAL INFORMATION                                                                                               |  | 1   
|         |  |                                                                                                                    
|Item 1.  |  | Financial Statements                                                                                                |  | 1   
|         |  |                                                                                                                    
|         |  | Consolidated Balance Sheets as of September 30, 2009, (unaudited) and December 31, 2008                             |  | 1   
|         |  | Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2009, and
 2008 |  | 2   
|         |  | Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 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                               |  | 7   
|         |  |                                                                                                                    
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 12  
|         |  |                                                                                                                    
|Item 4.  |  | Controls and Procedures                                                                                             |  | 12  
|         |  |                                                                                                                    
|PART II: |  | OTHER INFORMATION                                                                                                   |  | 14  
|         |  |                                                                                                                    
|Item 1.  |  | Legal Proceedings                                                                                                   |  | 14  
|         |  |                                                                                                                    
|Item 1A. |  | Risk Factors                                                                                                        |  | 14  
|         |  |                                                                                                                    
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                         |  | 14  
|         |  |                                                                                                                    
|Item 3.  |  | Defaults Upon Senior Securities                                                                                     |  | 14  
|         |  |                                                                                                                    
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                 |  | 14  
|         |  |                                                                                                                    
|Item 5.  |  | Other Information                                                                                                   |  | 14  
|         |  |                                                                                                                    
|Item 6.  |  | Exhibits                                                                                                            |  | 14  
|         |  |                                                                                                                    
|         |  | Signatures                                                                                                          |  | 15  



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##### Table of Contents

PART 1

FINANCIAL INFORMATION



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

NCI, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)



|                                                                                                                                                                                                           |  |                        |         |                       |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | --------------------- | - | -------
|                                                                                                                                                                                                           |  | As ofSeptember 30,2009 |         | As ofDecember 31,2008
|                                                                                                                                                                                                           |  | (unaudited)            |         |                      
|Assets                                                                                                                                                                                                     |  |                        |         |                       |   |        
|Current assets:                                                                                                                                                                                            |  |                        |         |                       |   |        
|Cash and cash equivalents                                                                                                                                                                                  |  | $                      | 2,958   |                       | $ | 1,267  
|Accounts receivable, net                                                                                                                                                                                   |  |                        | 93,989  |                       |   | 92,192 
|Deferred tax assets                                                                                                                                                                                        |  |                        | 3,385   |                       |   | 3,116  
|Prepaid expenses and other current assets                                                                                                                                                                  |  |                        | 2,455   |                       |   | 1,733  
|                                                                                                                                                                                                           |  |                        |         |                       |   |        
|Total current assets                                                                                                                                                                                       |  |                        | 102,787 |                       |   | 98,308 
|                                                                                                                                                                                                           |  |                       
|Property and equipment, net                                                                                                                                                                                |  |                        | 7,147   |                       |   | 5,378  
|Other assets                                                                                                                                                                                               |  |                        | 837     |                       |   | 926    
|Intangible assets, net                                                                                                                                                                                     |  |                        | 9,212   |                       |   | 7,981  
|Goodwill                                                                                                                                                                                                   |  |                        | 106,580 |                       |   | 87,740 
|                                                                                                                                                                                                           |  |                        |         |                       |   |        
|Total assets                                                                                                                                                                                               |  | $                      | 226,563 |                       | $ | 200,333
|                                                                                                                                                                                                           |  |                        |         |                       |   |        
|                                                                                                                                                                                                           |  |                       
|Liabilities and stockholders equity                                                                                                                                                                       |  |                        |         |                       |   |        
|Current liabilities:                                                                                                                                                                                       |  |                        |         |                       |   |        
|Accounts payable                                                                                                                                                                                           |  | $                      | 40,835  |                       | $ | 32,747 
|Accrued salaries and benefits                                                                                                                                                                              |  |                        | 19,061  |                       |   | 16,436 
|Other accrued expenses/liabilities                                                                                                                                                                         |  |                        | 7,379   |                       |   | 5,353  
|Deferred revenue                                                                                                                                                                                           |  |                        | 2,372   |                       |   | 2,626  
|                                                                                                                                                                                                           |  |                        |         |                       |   |        
|Total current liabilities                                                                                                                                                                                  |  |                        | 69,647  |                       |   | 57,162 
|                                                                                                                                                                                                           |  |                       
|Long-term debt                                                                                                                                                                                             |  |                        | 32,000  |                       |   | 40,000 
|Other liabilities                                                                                                                                                                                          |  |                        | 3,580   |                       |   | 98     
|Deferred rent                                                                                                                                                                                              |  |                        | 2,071   |                       |   | 2,523  
|Deferred tax liabilities, net                                                                                                                                                                              |  |                        | 2,846   |                       |   | 1,691  
|                                                                                                                                                                                                           |  |                        |         |                       |   |        
|Total liabilities                                                                                                                                                                                          |  |                        | 110,144 |                       |   | 101,474
|                                                                                                                                                                                                           |  |                        |         |                       |   |        
|                                                                                                                                                                                                           |  |                       
|Stockholders equity:                                                                                                                                                                                      |  |                        |         |                       |   |        
|Class A common stock, $0.019 par value37,500,000 shares authorized; 8,280,204 shares issued and outstanding as of
September 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
September 30, 2009, and December 31, 2008                                               |  |                        | 99      |                       |   | 99     
|Additional paid-in capital                                                                                                                                                                                 |  |                        | 61,873  |                       |   | 59,734 
|Retained earnings                                                                                                                                                                                          |  |                        | 54,290  |                       |   | 38,870 
|                                                                                                                                                                                                           |  |                        |         |                       |   |        
|Total stockholders equity                                                                                                                                                                                 |  |                        | 116,419 |                       |   | 98,859 
|                                                                                                                                                                                                           |  |                        |         |                       |   |        
|                                                                                                                                                                                                           |  |                       
|Total liabilities and stockholders equity                                                                                                                                                                 |  | $                      | 226,563 |                       | $ | 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 September 30, |         |   | Nine months ended September 30, |  
|                                                          |  | 2009                             |         |   | 2008                            |   |         | 2009 |  |   | 2008    |  
|                                                          |  |                                  |         |  
|Revenue                                                   |  | $                                | 130,198 |   |                                 | $ | 101,141 |      |  | $ | 343,733 |   |  | $ | 288,979 |  
|                                                          |  |                                  |         |  
|Operating costs and expenses:                             |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Cost of revenue                                           |  |                                  | 113,403 |   |                                 |   | 87,632  |      |  |   | 298,703 |   |  |   | 249,547 |  
|General and administrative expense                        |  |                                  | 6,271   |   |                                 |   | 4,810   |      |  |   | 15,926  |   |  |   | 15,016  |  
|Depreciation and amortization                             |  |                                  | 518     |   |                                 |   | 455     |      |  |   | 1,559   |   |  |   | 1,425   |  
|Amortization of intangible assets                         |  |                                  | 578     |   |                                 |   | 483     |      |  |   | 1,474   |   |  |   | 1,289   |  
|                                                          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Total operating costs and expenses                        |  |                                  | 120,770 |   |                                 |   | 93,380  |      |  |   | 317,662 |   |  |   | 267,277 |  
|                                                          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|                                                          |  |                                  |         |  
|Operating income                                          |  |                                  | 9,428   |   |                                 |   | 7,761   |      |  |   | 26,071  |   |  |   | 21,702  |  
|Interest income                                           |  |                                  | 15      |   |                                 |   | 24      |      |  |   | 45      |   |  |   | 97      |  
|Interest expense                                          |  |                                  | (160    | ) |                                 |   | (498    | )    |  |   | (533    | ) |  |   | (1,685  | )
|                                                          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|                                                          |  |                                  |         |  
|Income before income taxes                                |  |                                  | 9,283   |   |                                 |   | 7,287   |      |  |   | 25,583  |   |  |   | 20,114  |  
|Income tax expense                                        |  |                                  | 3,658   |   |                                 |   | 2,890   |      |  |   | 10,163  |   |  |   | 8,020   |  
|                                                          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                |  | $                                | 5,625   |   |                                 | $ | 4,397   |      |  | $ | 15,420  |   |  | $ | 12,094  |  
|                                                          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|                                                          |  |                                  |         |  
|Earnings per common and common equivalent share:          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Basic:                                                    |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                       |  |                                  | 13,477  |   |                                 |   | 13,361  |      |  |   | 13,442  |   |  |   | 13,356  |  
|                                                          |  |                                  |         |  
|Net income per share                                      |  | $                                | 0.42    |   |                                 | $ | 0.33    |      |  | $ | 1.15    |   |  | $ | 0.91    |  
|                                                          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|                                                          |  |                                  |         |  
|Diluted:                                                  |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|                                                          |  |                                  |         |  
|Weighted average shares and equivalent shares outstanding |  |                                  | 13,801  |   |                                 |   | 13,672  |      |  |   | 13,766  |   |  |   | 13,616  |  
|                                                          |  |                                  |         |  
|Net income per share                                      |  | $                                | 0.41    |   |                                 | $ | 0.32    |      |  | $ | 1.12    |   |  | $ | 0.89    |  
|                                                          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  

See accompanying notes



2



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NCI, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(amounts in thousands)



|                                                                                  |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine months ended September 30, |        
|                                                                                  |  | 2009                            |         |   | 2008 |  
|Cash flows from operating activities                                              |  |                                 |         |   |      |   |         |  
|Net income                                                                        |  | $                               | 15,420  |   |      | $ | 12,094  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                 | 3,033   |   |      |   | 2,714   |  
|Gain on sale and disposal of property and equipment                               |  |                                 | 2       |   |      |   | (11     | )
|Non-cash stock compensation expense                                               |  |                                 | 980     |   |      |   | 581     |  
|Deferred income taxes                                                             |  |                                 | 888     |   |      |   | 1,085   |  
|Changes in operating assets and liabilities:                                      |  |                                 |         |   |      |   |         |  
|Accounts receivable, net                                                          |  |                                 | (578    | ) |      |   | 5,469   |  
|Prepaid expenses and other assets                                                 |  |                                 | (600    | ) |      |   | (525    | )
|Accounts payable                                                                  |  |                                 | 8,032   |   |      |   | 856     |  
|Accrued expenses/other current liabilities                                        |  |                                 | (197    | ) |      |   | 3,353   |  
|Deferred rent                                                                     |  |                                 | (437    | ) |      |   | (407    | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                 | 26,543  |   |      |   | 25,209  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|                                                                                  |  |                                
|Cash flows from investing activities                                              |  |                                 |         |   |      |   |         |  
|Purchase of property and equipment                                                |  |                                 | (2,966  | ) |      |   | (1,164  | )
|Proceeds from sale of property and equipment                                      |  |                                 |        |   |      |   | 11      |  
|Cash paid for acquisitions, net of cash received                                  |  |                                 | (14,953 | ) |      |   | (16,190 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                                 | (17,919 | ) |      |   | (17,343 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|                                                                                  |  |                                
|Cash flows from financing activities                                              |  |                                 |         |   |      |   |         |  
|Payments on from line of credit, net                                              |  |                                 | (8,000  | ) |      |   | (6,442  | )
|Principal payments under capital lease obligations                                |  |                                 | (94     | ) |      |   | (120    | )
|Proceeds from exercise of stock options                                           |  |                                 | 865     |   |      |   | 133     |  
|Excess tax deductions from stock options                                          |  |                                 | 296     |   |      |   | 44      |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash used in financing activities                                             |  |                                 | (6,933  | ) |      |   | (6,385  | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|                                                                                  |  |                                
|Net change in cash and cash equivalents                                           |  |                                 | 1,691   |   |      |   | 1,481   |  
|Cash and cash equivalents, beginning of period                                    |  |                                 | 1,267   |   |      |   | 109     |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                               | 2,958   |   |      | $ | 1,590   |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|                                                                                  |  |                                
|Supplemental disclosure of cash flow information                                  |  |                                 |         |   |      |   |         |  
|Cash paid during the period for:                                                  |  |                                 |         |   |      |   |         |  
|Interest                                                                          |  | $                               | 533     |   |      | $ | 1,685   |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Income taxes                                                                      |  | $                               | 10,397  |   |      | $ | 7,012   |  
|                                                                                  |  |                                 |         |   |      |   |         |  

See accompanying notes



3



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##### Table of Contents

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 September 30,
2009, through publication of these financial statements on November 5, 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 customers challenges to help them meet their critical mission and objectives. NCI provides full lifecycle IT specialties, complemented by professional services. NCI has the agility, position, and
determination to focus on expanding market segments within the Federal IT and professional services markets. The Company is extending its core capabilities in line with key market drivers and investing in a robust set of business solutions and
offerings. NCIs 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

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. Diluted earnings per share reflect potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted
into common stock. Diluted earnings per share include the incremental effect of stock options calculated using the treasury stock method. The following details the historical computation of basic and diluted earnings per common share (Class A and
Class B).



|                                                                            |  |                                       |        |                                 |   |        |  |      |        |  |   |       
|--------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                            |  | Three months ended September 30,      |        | Nine months ended September 30,
|                                                                            |  | 2009                                  |        | 2008                            |   | 2009   |  | 2008
|                                                                            |  | (in thousands, except per share data)
|                                                                            |  |                                       |        |                                
|Net Income                                                                  |  | $                                     | 5,625  |                                 | $ | 4,397  |  | $    | 15,420 |  | $ | 12,094
|                                                                            |  |                                       |        |                                 |   |        |  |      |        |  |   |       
|                                                                            |  |                                       |        |                                
|Weighted average number of basic shares outstanding during the period       |  |                                       | 13,477 |                                 |   | 13,361 |  |      | 13,442 |  |   | 13,356
|Dilutive effect of stock options after application of treasury stock method |  |                                       | 324    |                                 |   | 311    |  |      | 324    |  |   | 260   
|                                                                            |  |                                       |        |                                 |   |        |  |      |        |  |   |       
|Weighted average number of diluted shares outstanding during the period     |  |                                       | 13,801 |                                 |   | 13,672 |  |      | 13,766 |  |   | 13,616
|                                                                            |  |                                       |        |                                 |   |        |  |      |        |  |   |       
|                                                                            |  |                                       |        |                                
|Basic earnings per share                                                    |  | $                                     | 0.42   |                                 | $ | 0.33   |  | $    | 1.15   |  | $ | 0.91  
|                                                                            |  |                                       |        |                                 |   |        |  |      |        |  |   |       
|                                                                            |  |                                       |        |                                
|Diluted earnings per share                                                  |  | $                                     | 0.41   |                                 | $ | 0.32   |  | $    | 1.12   |  | $ | 0.89  
|                                                                            |  |                                       |        |                                 |   |        |  |      |        |  |   |       



4



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NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)

4. Stock Compensation

During 2009, the Company granted approximately 213,000 options and had exercises of approximately 74,000 options. As of September 30, 2009, there were approximately 1.1 million options
outstanding.

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



|                           |  |                                  |     |                                 |   |      |  |      |     |  |   |    
|-------------------------- |  | -------------------------------- | --- | ------------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                           |  | Three months ended September 30, |     | Nine months ended September 30,
|                           |  | 2009                             |     | 2008                            |   | 2009 |  | 2008
|                           |  | (in thousands)                  
|Cost of Revenue            |  | $                                | 141 |                                 | $ | 94   |  | $    | 373 |  | $ | 300
|General and Administrative |  |                                  | 229 |                                 |   | 131  |  |      | 607 |  |   | 281
|                           |  |                                  |     |                                 |   |      |  |      |     |  |   |    
|                           |  | $                                | 370 |                                 | $ | 225  |  | $    | 980 |  | $ | 581
|                           |  |                                  |     |                                 |   |      |  |      |     |  |   |    

As of September 30, 2009, there was approximately $4.0 million of total unrecognized
compensation cost related to unvested stock compensation agreements. This cost is expected to be fully amortized over the next five years, with approximately $406,000, $1,576,000, $1,164,000, $685,000, and $184,000 during the remainder of 2009,
2010, 2011, 2012, and 2013, respectively. The cost of the options are included in the Companys Statement of Operations before or in conjunction with the vesting of options.

5. Acquisition

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 NCIs presence in the Intelligence Community. The Company paid approximately $17.2 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. As of the day of closing,
the contingent consideration was valued at approximately $5.3 million.

6. Loan and Security Agreement

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

The outstanding borrowings are collateralized by a security interest in
substantially all 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.

As of
September 30, 2009, the outstanding balance was approximately $32.0 million and interest accrued at a rate of LIBOR plus 100 basis points, or 1.26%. As of December 31, 2008, the outstanding balance was approximately $40.0 million. As of
September 30, 2009, NCI was in compliance with all its loan covenants.



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##### Table of Contents

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)

7. 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. For the three months ended September 30, 2009, and 2008, the expense incurred under this agreement was approximately $132,000 and $151,000 respectively. For the nine months ended September 30, 2009, and
2008, the expense incurred under this agreement was approximately $478,000 and $455,000, respectively. As of September 30, 2009, and December 31, 2008, there were outstanding accounts payable of approximately $64,000 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. For the three months ended September 30, 2009, and 2008, NCI paid approximately $240,000 and $231,000, respectively, for rent to Gur Parsaad Properties, Ltd. For the nine months ended September 30, 2009, and
2008, NCI paid approximately $762,000 and $655,000, respectively, for rent to Gur Parsaad Properties, Ltd.

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 September 30, 2009, and December 31, 2008, the Company had
outstanding claims in the amount of approximately $36,000 and $0, respectively.

8. New Accounting Pronouncements

During June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards CodificationTM(ASC) as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles. The Codification reorganizes thousands of pronouncements into roughly 90 accounting topics and displays the topics using a consistent structure. All existing accounting standard
documents are superseded, and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification became effective for interim and annual periods ending after September 15, 2009. The Codification
did not have a material impact on the Companys results of operations or financial position.

During December 2007, the FASB issued new
accounting guidance related to the accounting for business combinations and related disclosures that the Company adopted effective January 1, 2009. This guidance replaced existing guidance and significantly changed accounting and reporting
relative to business combinations in consolidated financial statements, including requirements to recognize acquisition-related transaction costs 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.

During June 2009, the FASB issued new accounting
guidance related to the accounting and disclosures of subsequent events that the Company adopted effective June 30, 2009. This guidance 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.

During October 2009, the FASB updated, Revenue Recognition, Multiple-Deliverable Revenue Arrangements. This guidance is effective for fiscal years beginning on or after June 30, 2010. Early
adoption is permitted. Presently, the Company must use fair value when separating multiple-deliverables contained within the same agreement or defer all revenue from the agreement until all elements have been delivered. This update will allow the
Company to use estimated selling price to separate multiple-deliverables when fair value is not available. The Company has not made a decision regarding early adoption. The Company is currently assessing the impact this standard will have on the
financial statements.



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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; changes in contract type, particularly changes from cost-plus or time-and-material type contracts to fixed-price type contracts; or changes in
priorities due to the change in administration
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in Federal Government programs or requirements, including the increased use of small business providers or curtailment of Federal
Governments use of professional service providers (insourcing)
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 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 September 30, |   |  | Nine months ended September 30, |  
|                                                |  | 2009                             |   |  | 2008                            |   |  | 2009 |   |  | 2008 |  
|Department of Defense and intelligence agencies |  | 89.0                             | % |  | 79.6                            | % |  | 87.4 | % |  | 79.5 | %
|Federal civilian agencies                       |  | 11.0                             | % |  | 16.8                            | % |  | 12.2 | % |  | 17.3 | %
|Commercial and state & local entities           |  |                                 | % |  | 3.6                             | % |  | 0.4  | % |  | 3.2  | %

Contract Types

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

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



|                   |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|------------------ |  | -------------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                   |  | Three months ended September 30, |   |  | Nine months ended September 30, |  
|                   |  | 2009                             |   |  | 2008                            |   |  | 2009 |   |  | 2008 |  
|Time-and-materials |  | 48.2                             | % |  | 44.1                            | % |  | 51.0 | % |  | 43.7 | %
|Cost-plus          |  | 13.2                             | % |  | 20.0                            | % |  | 14.9 | % |  | 22.9 | %
|Fixed-price        |  | 38.6                             | % |  | 35.9                            | % |  | 34.1 | % |  | 33.4 | %

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.



8



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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.

Results of Operations

Three Months Ended September 30, 2009, Compared to Three Months Ended September 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 September 30, |         |   | Three months ended September 30, |  
|                                    |  | 2009                             |         |   | 2008                             |   |         | 2009 |  |       | 2008 | 
|                                    |  | (in thousands)                   |         |   | (as a percentage of revenue)     |  
|Revenue                             |  | $                                | 130,198 |   |                                  | $ | 101,141 |      |  | 100.0 | %    |  | 100.0 | %
|                                    |  |                                  |         |  
|Operating costs and expenses:       |  |                                  |         |   |                                  |   |         |      |  |       |      |  |       |  
|Cost of revenue                     |  |                                  | 113,403 |   |                                  |   | 87,632  |      |  | 87.1  |      |  | 86.6  |  
|General and administrative expenses |  |                                  | 6,271   |   |                                  |   | 4,810   |      |  | 4.8   |      |  | 4.8   |  
|Depreciation and amortization       |  |                                  | 518     |   |                                  |   | 455     |      |  | 0.4   |      |  | 0.4   |  
|Amortization of intangible assets   |  |                                  | 578     |   |                                  |   | 483     |      |  | 0.5   |      |  | 0.5   |  
|                                    |  |                                  |         |   |                                  |   |         |      |  |       |      |  |       |  
|Total operating costs and expenses  |  |                                  | 120,770 |   |                                  |   | 93,380  |      |  | 92.8  |      |  | 92.3  |  
|                                    |  |                                  |         |   |                                  |   |         |      |  |       |      |  |       |  
|                                    |  |                                  |         |  
|Operating income                    |  |                                  | 9,428   |   |                                  |   | 7,761   |      |  | 7.2   |      |  | 7.7   |  
|Interest income                     |  |                                  | 15      |   |                                  |   | 24      |      |  |      |      |  |      |  
|Interest expense                    |  |                                  | (160    | ) |                                  |   | (498    | )    |  | (0.1  | )    |  | (0.5  | )
|                                    |  |                                  |         |   |                                  |   |         |      |  |       |      |  |       |  
|                                    |  |                                  |         |  
|Income before taxes                 |  |                                  | 9,283   |   |                                  |   | 7,287   |      |  | 7.1   |      |  | 7.2   |  
|Provision for income taxes          |  |                                  | 3,658   |   |                                  |   | 2,890   |      |  | 2.8   |      |  | 2.9   |  
|                                    |  |                                  |         |   |                                  |   |         |      |  |       |      |  |       |  
|Net income                          |  | $                                | 5,625   |   |                                  | $ | 4,397   |      |  | 4.3   | %    |  | 4.3   | %
|                                    |  |                                  |         |   |                                  |   |         |      |  |       |      |  |       |  

Revenue

For the three months ended September 30, 2009, total revenue increased by 28.7%, or $29.1 million, over the same period a year ago. This increase was due to new contact awards, numerous new tasks
orders under our GWAC contract vehicles, as well as growth on existing programs, particularly the NETCOM EMS and PEO Soldier contracts, and increased sales of hardware and software under the NETCENTS contract. These increases were offset by revenue
reductions due to tasks that have been completed.

Cost of revenue

Cost of revenue increased 29.4%, or $25.8 million, for the three months ended September 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, and increases in hardware and software purchases for our clients, and other direct costs due to the increase in revenue. As a percentage of revenue, cost of revenue was 87.1% and 86.6% for the quarters ended
September 30, 2009, and 2008, respectively. The increase of cost of revenue as a percentage of revenue was due to the higher level of materials sales in the third quarter 2009, which carries a lower margin than labor related revenue.

General and Administrative Expenses

General and administrative expense increased 30.4%, or $1.5 million, for the three months ended September 30, 2009, as compared to the same period a year ago. The increase was due to higher indirect
support expenses to support the significant corporate growth and our acquisitions, as well as a change in the allocation of certain costs between overhead and general and administrative expenses. As a percentage of revenue, general and
administrative expenses were 4.8% for both the quarters ended September 30, 2009, and 2008.

Depreciation and Amortization

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

Amortization of Intangible Assets

Amortization of intangible assets was approximately $0.6 million and $0.5 million for the quarters ended September 30, 2009, and 2008, respectively. The increase is due to the amortization of intangible assets over their estimated
lives from our acquisitions.



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##### Table of Contents

Operating income

For the three months ended September 30, 2009, operating income was $9.4 million, or 7.2% of revenue, compared to $7.8 million, or 7.7% of revenue, for the three months ended September 30, 2008.
Operating income was higher for the three months ended September 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 lower for the three months ended
September 30, 2009, compared to the same period in the prior year due to a higher percentage of revenue derived from hardware and product related sales, which typically carry a lower margin.

Interest Income/Expense

Net
interest expense was approximately $0.1 million for the quarter ended September 30, 2009, as compared to $0.5 million for the same period in the prior year. The change is primarily due to lower interest rates, as well as using available cash to
reduce our outstanding debt. During the third quarter of 2009, we had an average outstanding loan balance of $35.5 million which accrued interest at approximately 1.3%. During the third quarter of 2008, we had an average outstanding loan balance of
$50.1 million which accrued interest at approximately 3.5%.

Income Taxes

The increase in income taxes of $0.8 million is the result of the increase in operating income. There was also a 0.3% rate decrease during third quarter 2009
compared to third quarter 2008. The effective income tax rate for the quarter ended September 30, 2009, is approximately 39.4% as compared to an effective income tax rate of 39.7% for the quarter ended September 30, 2008.

Nine Months Ended September 30, 2009, Compared to Nine Months Ended September 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.



|                                    |  |                                 |         |   |                                 |   |         |      |  |       |      |  |       |  
|----------------------------------- |  | ------------------------------- | ------- | - | ------------------------------- | - | ------- | ---- |  | ----- | ---- |  | ----- | -
|                                    |  | Nine months ended September 30, |         |   | Nine months ended September 30, |  
|                                    |  | 2009                            |         |   | 2008                            |   |         | 2009 |  |       | 2008 | 
|                                    |  | (in thousands)                  |         |   | (as a percentage of revenue)    |  
|Revenue                             |  | $                               | 343,733 |   |                                 | $ | 288,979 |      |  | 100.0 | %    |  | 100.0 | %
|                                    |  |                                 |         |  
|Operating costs and expenses:       |  |                                 |         |   |                                 |   |         |      |  |       |      |  |       |  
|Cost of revenue                     |  |                                 | 298,703 |   |                                 |   | 249,547 |      |  | 86.9  |      |  | 86.4  |  
|General and administrative expenses |  |                                 | 15,926  |   |                                 |   | 15,016  |      |  | 4.6   |      |  | 5.2   |  
|Depreciation and amortization       |  |                                 | 1,559   |   |                                 |   | 1,425   |      |  | 0.5   |      |  | 0.5   |  
|Amortization of intangible assets   |  |                                 | 1,474   |   |                                 |   | 1,289   |      |  | 0.4   |      |  | 0.4   |  
|                                    |  |                                 |         |   |                                 |   |         |      |  |       |      |  |       |  
|Total operating costs and expenses  |  |                                 | 317,662 |   |                                 |   | 267,277 |      |  | 92.4  |      |  | 92.5  |  
|                                    |  |                                 |         |   |                                 |   |         |      |  |       |      |  |       |  
|                                    |  |                                 |         |  
|Operating income                    |  |                                 | 26,071  |   |                                 |   | 21,702  |      |  | 7.6   |      |  | 7.5   |  
|Interest income                     |  |                                 | 45      |   |                                 |   | 97      |      |  |      |      |  |      |  
|Interest expense                    |  |                                 | (533    | ) |                                 |   | (1,685  | )    |  | (0.2  | )    |  | (0.5  | )
|                                    |  |                                 |         |   |                                 |   |         |      |  |       |      |  |       |  
|                                    |  |                                 |         |  
|Income before taxes                 |  |                                 | 25,583  |   |                                 |   | 20,114  |      |  | 7.4   |      |  | 7.0   |  
|Provision for income taxes          |  |                                 | 10,163  |   |                                 |   | 8,020   |      |  | 2.9   |      |  | 2.8   |  
|                                    |  |                                 |         |   |                                 |   |         |      |  |       |      |  |       |  
|Net income                          |  | $                               | 15,420  |   |                                 | $ | 12,094  |      |  | 4.5   | %    |  | 4.2   | %
|                                    |  |                                 |         |   |                                 |   |         |      |  |       |      |  |       |  

Revenue

For the nine months ended September 30, 2009, total revenue increased by 18.9% or $54.8 million, over the same period a year ago. This increase is the result of new contract awards and significant
increases on some existing programs, particularly NETCOM EMS and PEO Soldier. Additionally, we received many new task orders under our numerous GWAC contract vehicles. These increases were offset by revenue reductions due to contracts that have
ended.

Cost of revenue

Cost of revenue increased 19.7%, or $49.2 million, for the nine months ended September 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 due to the increase in revenue. As a percentage of revenue, cost of revenue was 86.9% and 86.4% for the nine months ended September 30, 2009, and 2008,
respectively. The 0.5% increase in cost of revenue as a percentage of revenue for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, is due to a higher level of hardware and product related
revenue, which typically carries lower margins than labor related revenue, as well as slightly lower margins on the start of new contracts.



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##### Table of Contents

General and Administrative Expenses

General and administrative expense increased 6.1%, or $0.9 million, for the nine months ended September 30, 2009, as compared to the same period a year
ago. As a percentage of revenue, general and administrative expenses decreased to 4.6% from 5.2% for the nine months ended September 30, 2009, and 2008, respectively, due to leveraging the general and administrative expenses over a much larger
revenue base. The increase in general and administrative expenses is due to higher indirect support costs, higher stock compensation expense, and a reallocation of certain expenses from overhead into general and administrative expenses.

Depreciation and Amortization

Depreciation and amortization expense was approximately $1.6 million and $1.4 million for the nine months ended September 30, 2009, and 2008, respectively. The increase in depreciation and amortization is due primarily to the
additional assets from overall corporate growth.

Amortization of Intangible Assets

Amortization of intangible assets was approximately $1.5 million for the nine months ended September 30, 2009, and $1.3 million for the same period
during 2008. The increase is due to the amortization of intangible assets over their estimated lives from our acquisitions.

Operating
income

For the nine months ended September 30, 2009, operating income was $26.1 million, or 7.6% of revenue, compared to $21.7
million, or 7.5% of revenue, for the nine months ended September 30, 2008. Operating income was higher for the nine months ended September 30, 2009, due to the higher revenue volume as compared to the same period in the prior year.

Interest Income/Expense

Net interest expense was approximately $0.5 million for the nine months ended September 30, 2009, as compared to $1.6 million for the same period in the prior year. The change is primarily due to lower interest rates, as well as using
available cash to reduce our outstanding debt. During the first nine months of 2009, we had an average outstanding loan balance of $34.3 million which accrued interest at approximately 1.3%. During the first nine months of 2008, we had an average
outstanding loan balance of $50.2 million which accrued interest at approximately 3.5%.

Income Taxes

The increase in income taxes of approximately $2.1 million is the result of the increase in operating income. There was also a 0.2% decrease in the effective
income tax rate. The effective income tax rate for the nine months ended September 30, 2009, is approximately 39.7% as compared to an effective income tax rate of 39.9% for the nine months ended September 30, 2008.

Contract Backlog

At September 30,
2009, and December 31, 2008, our estimated backlog was $1,259 million and $1,189 million, respectively, of which $267 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 year 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



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##### Table of Contents

flow from operations, and the available borrowing capacity on our credit facility to continue to meet our normal working capital and capital expenditure requirements. As part of our growth
strategy, we may pursue acquisitions that could require us to obtain additional debt or issue equity.

During the third quarter of 2009, we
borrowed approximately $17.0 million from our credit facility for the acquisition of TRS Consulting, Inc., but we repaid approximately $11.0 million of that amount during the quarter from cash generated from operations. During the third quarter of
2009, the balance of accounts receivable increased by $13.5 million to $94.0 million at the end of the quarter. Days sales outstanding of accounts receivable (DSO) decreased to 66 days as of September 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. Typically, we see an increase in DSOs at year-end
due to the start of the new government fiscal year, and so we expect that DSOs will increase in the near term. An increase in our DSOs will impact our cash flow and working capital requirements.

Credit Agreement:The borrowing capacity under our Loan and Security Agreement consists of a revolving credit facility with a principal amount of up
to $90.0 million, which includes a swingline facility with a principal amount of up to $5.0 million. The outstanding balance of the facility accrues interest based on LIBOR plus an applicable margin, ranging from 100 to 175 basis points, based on a
ratio of funded debt to earnings. Interest was accruing at LIBOR plus 100 basis points, or 1.26%, as of September 30, 2009. The credit facility expires on March 14, 2011. Our interest rate is indexed to the one month LIBOR and resets
monthly. We do not currently hedge our interest rate risk.

Funds borrowed under the agreement will be used to finance possible future
acquisitions, to provide for working capital expenditures, and for general corporate uses. As of September 30, 2009, there was approximately $32.0 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 Loan and Security Agreement. A 1% change in interest rates would have changed our interest expense and cash flow
by approximately $89,000 for the quarter ended September 30, 2009, and approximately $257,000 for the nine months ended September 30, 2009. Given the current credit environment, it is expected that when we renew or replace our existing
credit facility, our interest rate will increase.

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 September 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



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participation of management, including the Companys Chief Executive Officer and Chief Financial Officer. Based upon the evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded that, as of September 30, 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 September 30, 2009, that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.



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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
|------- | ---------------------------------------------------

None.



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

None.



|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 (File No.
333-127006), 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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SIGNATURES

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



|                       |  |     |  |                                     
|---------------------- |  | --- |  | ------------------------------------
|                       |  |     |  | NCI, Inc.                           
|                       |  |     |  | Registrant                          
|                       |  |    
|Date: November 5, 2009 |  | By: |  | /s/    CHARLES K.
NARANG            
|                       |  |     |  | Charles K. Narang                   
|                       |  |     |  | Chairman of the Board,              
|                       |  |     |  | Chief Executive Officer and Director
|                       |  |     |  | (Principal Executive Officer)       



|                       |  |     |  |                                             
|---------------------- |  | --- |  | --------------------------------------------
|                       |  |    
|Date: November 5, 2009 |  | By: |  | /s/    JUDITH L.
BJORNAAS                   
|                       |  |     |  | Judith L. Bjornaas                          
|                       |  |     |  | Executive Vice President                    
|                       |  |     |  | Chief Financial Officer                     
|                       |  |     |  | (Principal Financial and Accounting Officer)



15