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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2007
|- | ---------------------------------------------------------------------------------------------------------------------------



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

Commission File Number

000-51579



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NCI, Inc.

(Exact name of registrant as specified in its charter)



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



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

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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 August 1, 2007, there were 7,027,760 shares outstanding of the registrants Class A common stock. In addition, there are 6,300,000 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 June 30, 2007 (unaudited), and December 31, 2006                          |  | 1   
|                              |  | Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2007 and 2006 |  | 2   
|                              |  | Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2007 and 2006           |  | 3   
|                              |  | Notes to Consolidated Financial Statements (unaudited)                                                      |  | 4   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 9   
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 14  
|Item 4.                       |  | Controls and Procedures                                                                                     |  | 14  
|                              | 
|PART II: OTHER INFORMATION    |  | 15                                                                                                         
|Item 1.                       |  | Legal Proceedings                                                                                           |  | 15  
|Item 1A.                      |  | Risk Factors                                                                                                |  | 15  
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |  | 15  
|Item 3.                       |  | Defaults Upon Senior Securities                                                                             |  | 15  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                         |  | 15  
|Item 5.                       |  | Other Information                                                                                           |  | 16  
|Item 6.                       |  | Exhibits                                                                                                    |  | 16  
|                              |  | Signatures                                                                                                  |  | 17  



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##### Table of Contents

PART 1

FINANCIAL INFORMATION

Item 1. Financial Statements

NCI, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share data)



|                                                                                                             |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                             |  | June 30, 2007 |         |   | December 31,2006 |  
|                                                                                                             |  | (unaudited)   |         |   |                  |  
|Assets                                                                                                       |  |               |         |   |                  |   |         |  
|Current assets:                                                                                              |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                    |  | $             | 8,680   |   |                  | $ | 13,930  |  
|Accounts receivable, net                                                                                     |  |               | 74,940  |   |                  |   | 65,841  |  
|Deferred tax assets                                                                                          |  |               | 1,809   |   |                  |   | 1,678   |  
|Prepaid expenses and other current assets                                                                    |  |               | 699     |   |                  |   | 1,280   |  
|                                                                                                             |  |               |         |   |                  |   |         |  
|Total current assets                                                                                         |  |               | 86,128  |   |                  |   | 82,729  |  
|                                                                                                             |  |              
|Property and equipment, net                                                                                  |  |               | 5,272   |   |                  |   | 4,925   |  
|Other assets                                                                                                 |  |               | 866     |   |                  |   | 785     |  
|Deferred tax assets, net                                                                                     |  |               | 499     |   |                  |   | 552     |  
|Intangible assets, net                                                                                       |  |               | 1,892   |   |                  |   | 381     |  
|Goodwill                                                                                                     |  |               | 79,298  |   |                  |   | 17,427  |  
|                                                                                                             |  |               |         |   |                  |   |         |  
|Total assets                                                                                                 |  | $             | 173,955 |   |                  | $ | 106,799 |  
|                                                                                                             |  |               |         |   |                  |   |         |  
|Liabilities and stockholders equity                                                                         |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                         |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                             |  | $             | 22,033  |   |                  | $ | 22,712  |  
|Accrued salaries and benefits                                                                                |  |               | 12,435  |   |                  |   | 9,036   |  
|Other accrued expenses/liabilities                                                                           |  |               | 5,766   |   |                  |   | 3,402   |  
|Deferred revenue                                                                                             |  |               | 2,596   |   |                  |   | 1,259   |  
|                                                                                                             |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                    |  |               | 42,830  |   |                  |   | 36,409  |  
|                                                                                                             |  |              
|Line of credit                                                                                               |  |               | 55,000  |   |                  |   |        |  
|Other liabilities                                                                                            |  |               | 112     |   |                  |   | 168     |  
|Deferred rent                                                                                                |  |               | 3,379   |   |                  |   | 3,636   |  
|                                                                                                             |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                            |  |               | 101,321 |   |                  |   | 40,213  |  
|                                                                                                             |  |               |         |   |                  |   |         |  
|Stockholders equity:                                                                                        |  |               |         |   |                  |   |         |  
|Class A common stock, $0.019 par value37,500,000 shares authorized; 7,027,760 shares issued and outstanding |  |               | 134     |   |                  |   | 134     |  
|Class B common stock, $0.019 par value12,500,000 shares authorized; 6,300,000 shares issued and outstanding |  |               | 120     |   |                  |   | 120     |  
|Additional paid-in capital                                                                                   |  |               | 57,626  |   |                  |   | 57,580  |  
|Deferred compensation                                                                                        |  |               | (398    | ) |                  |   | (507    | )
|Retained earnings                                                                                            |  |               | 15,152  |   |                  |   | 9,259   |  
|                                                                                                             |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                   |  |               | 72,634  |   |                  |   | 66,586  |  
|                                                                                                             |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                   |  | $             | 173,955 |   |                  | $ | 106,799 |  
|                                                                                                             |  |               |         |   |                  |   |         |  

See accompanying notes



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##### Table of Contents

NCI, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(amounts in thousands, except per share data)



|                                                                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                     |  | Three months ended June 30, |        |   | Six months ended June 30, |  
|                                                                                     |  | 2007                        |        |   | 2006                      |   |        | 2007 |  |   | 2006    |  
|Revenue                                                                              |  | $                           | 66,703 |   |                           | $ | 47,857 |      |  | $ | 130,994 |   |  | $ | 93,891 |  
|                                                                                     |  |                             |        |  
|Operating costs and expenses:                                                        |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Cost of revenue (exclusive of depreciation and amortization, shown separately below) |  |                             | 58,237 |   |                           |   | 41,096 |      |  |   | 113,746 |   |  |   | 80,566 |  
|General and administrative expense                                                   |  |                             | 3,078  |   |                           |   | 2,939  |      |  |   | 6,658   |   |  |   | 6,193  |  
|Depreciation and amortization                                                        |  |                             | 356    |   |                           |   | 406    |      |  |   | 726     |   |  |   | 816    |  
|Amortization of intangible assets                                                    |  |                             | 217    |   |                           |   | 242    |      |  |   | 400     |   |  |   | 488    |  
|                                                                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Total operating costs and expenses                                                   |  |                             | 61,888 |   |                           |   | 44,683 |      |  |   | 121,530 |   |  |   | 88,063 |  
|                                                                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Operating income                                                                     |  |                             | 4,815  |   |                           |   | 3,174  |      |  |   | 9,464   |   |  |   | 5,828  |  
|Interest income                                                                      |  |                             | 212    |   |                           |   | 208    |      |  |   | 354     |   |  |   | 325    |  
|Interest expense                                                                     |  |                             | (58    | ) |                           |   | (19    | )    |  |   | (82     | ) |  |   | (45    | )
|                                                                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Income before income taxes                                                           |  |                             | 4,969  |   |                           |   | 3,363  |      |  |   | 9,736   |   |  |   | 6,108  |  
|Income tax expense                                                                   |  |                             | 1,961  |   |                           |   | 1,316  |      |  |   | 3,843   |   |  |   | 2,391  |  
|                                                                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income                                                                           |  | $                           | 3,008  |   |                           | $ | 2,047  |      |  | $ | 5,893   |   |  | $ | 3,717  |  
|                                                                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Earnings per common and common equivalent share:                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Basic:                                                                               |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Weighted average shares outstanding                                                  |  |                             | 13,328 |   |                           |   | 13,328 |      |  |   | 13,328  |   |  |   | 13,328 |  
|                                                                                     |  |                             |        |  
|Net income per share                                                                 |  | $                           | 0.23   |   |                           | $ | 0.15   |      |  | $ | 0.44    |   |  | $ | 0.28   |  
|                                                                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Diluted:                                                                             |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|                                                                                     |  |                             |        |  
|Weighted average shares and equivalent shares outstanding                            |  |                             | 13,524 |   |                           |   | 13,503 |      |  |   | 13,516  |   |  |   | 13,502 |  
|                                                                                     |  |                             |        |  
|Net income per share                                                                 |  | $                           | 0.22   |   |                           | $ | 0.15   |      |  | $ | 0.44    |   |  | $ | 0.28   |  
|                                                                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  

See accompanying notes



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NCI, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(amounts in thousands)



|                                                                                  |  |                           |         |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                  |  | Six months ended June 30, |        
|                                                                                  |  | 2007                      |         |   | 2006 |  
|Cash flows from operating activities                                              |  |                           |         |   |      |   |        |  
|Net income                                                                        |  | $                         | 5,893   |   |      | $ | 3,717  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |      |   |        |  
|Depreciation and amortization                                                     |  |                           | 1,126   |   |      |   | 1,304  |  
|(Gain) on sale and disposal of property and equipment                             |  |                           |        |   |      |   | (1     | )
|Non-cash stock compensation expense                                               |  |                           | 154     |   |      |   | 57     |  
|Deferred income taxes                                                             |  |                           | (77     | ) |      |   | 1,426  |  
|Changes in operating assets and liabilities:                                      |  |                           |         |   |      |   |        |  
|Accounts receivable, net                                                          |  |                           | 7,776   |   |      |   | 3,685  |  
|Prepaid expenses and other assets                                                 |  |                           | 915     |   |      |   | (336   | )
|Accounts payable                                                                  |  |                           | (3,774  | ) |      |   | 1,630  |  
|Accrued expenses/other current liabilities                                        |  |                           | 1,682   |   |      |   | (385   | )
|Deferred rent                                                                     |  |                           | (232    | ) |      |   | (203   | )
|                                                                                  |  |                           |         |   |      |   |        |  
|Net cash provided by operating activities                                         |  |                           | 13,463  |   |      |   | 10,894 |  
|                                                                                  |  |                           |         |   |      |   |        |  
|Cash flows from investing activities                                              |  |                           |         |   |      |   |        |  
|Purchase of property and equipment                                                |  |                           | (443    | ) |      |   | (177   | )
|Proceeds from sale of property and equipment                                      |  |                           |        |   |      |   | 4      |  
|Cash paid for acquisitions, net of cash received                                  |  |                           | (73,146 | ) |      |   |       |  
|                                                                                  |  |                           |         |   |      |   |        |  
|Net cash used in investing activities                                             |  |                           | (73,589 | ) |      |   | (173   | )
|                                                                                  |  |                           |         |   |      |   |        |  
|Cash flows from financing activities                                              |  |                           |         |   |      |   |        |  
|Proceeds from line of credit                                                      |  |                           | 55,000  |   |      |   |       |  
|Principal payments under capital lease obligations                                |  |                           | (124    | ) |      |   | (147   | )
|Distributions to stockholders                                                     |  |                           |        |   |      |   | (5,866 | )
|                                                                                  |  |                           |         |   |      |   |        |  
|Net cash provided by (used in) financing activities                               |  |                           | 54,876  |   |      |   | (6,013 | )
|                                                                                  |  |                           |         |   |      |   |        |  
|Net change in cash and cash equivalents                                           |  |                           | (5,250  | ) |      |   | 4,708  |  
|Cash and cash equivalents, beginning of year                                      |  |                           | 13,930  |   |      |   | 12,323 |  
|                                                                                  |  |                           |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                          |  | $                         | 8,680   |   |      | $ | 17,031 |  
|                                                                                  |  |                           |         |   |      |   |        |  
|Supplemental disclosure of cash flow information                                  |  |                           |         |   |      |   |        |  
|Cash paid during the period for:                                                  |  |                           |         |   |      |   |        |  
|Interest                                                                          |  | $                         | 82      |   |      | $ | 45     |  
|                                                                                  |  |                           |         |   |      |   |        |  
|Income taxes                                                                      |  | $                         | 3,645   |   |      | $ | 26     |  
|                                                                                  |  |                           |         |   |      |   |        |  
|Supplemental disclosure of noncash activities:                                    |  |                           |         |   |      |   |        |  
|Equipment acquired under capital leases                                           |  | $                         | 2       |   |      | $ | 156    |  
|                                                                                  |  |                           |         |   |      |   |        |  

See accompanying notes



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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 for NCI, Inc. and its wholly-owned subsidiaries (the Company or NCI) as of and for the three and six months ended June 30, 2007 and 2006, have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. In the
opinion of management, the accompanying unaudited interim consolidated financial statements reflect all necessary adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary to a fair presentation of the
results for such periods. The information disclosed in the notes to the financial statements for these periods is unaudited. For further information, refer to the financial statements and footnotes included in NCI's Form 10-K for the year ended
December 31, 2006, as filed with the Securities and Exchange Commission. The current periods results of operations are not necessarily indicative of results that may be achieved for any future period.

2. Business Overview

NCI is a provider of information technology
services and solutions to federal government agencies. The Companys focus is on designing, implementing, maintaining and upgrading secure information technology (IT) systems and networks by leveraging the Companys skills across four core
service offerings: network engineering; information assurance; systems development and integration; and enterprise systems management. The Company provides these services to defense, intelligence and federal civilian agencies. Substantially all of
the Companys revenue was derived from contracts with the federal government, directly as a prime contractor or as a subcontractor. The Company conducts business throughout the United States. In addition, the Company may conduct business
internationally in support of federal government contracts.

The Companys operations are subject to certain risks and uncertainties including, among
others, dependence on contracts with federal government agencies, dependence on significant clients, existence of contracts with fixed pricing, dependence on subcontractors to fulfill contractual obligations, current and potential competitors with
greater resources, dependence on key management personnel, ability to recruit and retain qualified employees, and uncertainty of future profitability and possible fluctuations in financial results.

3. Summary of Significant Accounting Policies

Income Taxes

In June 2006, FASB issued FIN 48, Accounting for Uncertainty in Income Taxes (FIN 48) an interpretation of SFAS No. 109, Accounting
for Income Taxes (SFAS No. 109). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. This guidance is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 effective January 1, 2007. The Companys analysis of
uncertain tax positions as required under FIN 48 determined that the Company had no material unrecorded liabilities and there was no cumulative effect on retained earnings of applying the provisions of the interpretation. Interest and penalties
accrued under FIN 48 will be classified as Interest Expense and General and Administrative Expense, respectively.



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NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



3. Summary of Significant Accounting Policies (continued)



Earnings Per Share

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

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

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



|                                                                            |  |                                      |        |                                      |   |        |  |      |        |  |   |       
|--------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ------------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                                            |  | Three months ended June 30,          |        | Six months ended June 30,           
|                                                                            |  | 2007                                 |        | 2006                                 |   | 2007   |  | 2006
|                                                                            |  | (in thousands, exceptper share data) |        | (in thousands, exceptper share data)
|Net Income                                                                  |  | $                                    | 3,008  |                                      | $ | 2,047  |  | $    | 5,893  |  | $ | 3,717 
|                                                                            |  |                                      |        |                                      |   |        |  |      |        |  |   |       
|Weighted average number of basic shares outstanding during the period       |  |                                      | 13,328 |                                      |   | 13,328 |  |      | 13,328 |  |   | 13,328
|Dilutive effect of stock options after application of treasury stock method |  |                                      | 196    |                                      |   | 175    |  |      | 188    |  |   | 174   
|                                                                            |  |                                      |        |                                      |   |        |  |      |        |  |   |       
|Weighted average number of diluted shares outstanding during the period     |  |                                      | 13,524 |                                      |   | 13,503 |  |      | 13,516 |  |   | 13,502
|                                                                            |  |                                      |        |                                      |   |        |  |      |        |  |   |       
|Basic earnings per share                                                    |  | $                                    | 0.23   |                                      | $ | 0.15   |  | $    | 0.44   |  | $ | 0.28  
|                                                                            |  |                                      |        |                                      |   |        |  |      |        |  |   |       
|Diluted earnings per share                                                  |  | $                                    | 0.22   |                                      | $ | 0.15   |  | $    | 0.44   |  | $ | 0.28  
|                                                                            |  |                                      |        |                                      |   |        |  |      |        |  |   |       

4. Stock Compensation

The following table summarizes stock compensation for the three and six months ending June 30, 2007 and 2006:



|                           |  |                             |     |                           |   |      |  |      |     |  |   |   
|-------------------------- |  | --------------------------- | --- | ------------------------- | - | ---- |  | ---- | --- |  | - | --
|                           |  | Three months ended June 30, |     | Six months ended June 30,
|                           |  | 2007                        |     | 2006                      |   | 2007 |  | 2006
|                           |  | (in thousands)             
|Cost of Revenue            |  | $                           | 55  |                           | $ | 20   |  | $    | 82  |  | $ | 2 
|General and Administrative |  |                             | 57  |                           |   | 28   |  |      | 72  |  |   | 55
|                           |  |                             |     |                           |   |      |  |      |     |  |   |   
|                           |  | $                           | 112 |                           | $ | 48   |  | $    | 154 |  | $ | 57
|                           |  |                             |     |                           |   |      |  |      |     |  |   |   

As of June 30, 2007, there was approximately $1.4 million of total unrecognized compensation cost related to
unvested stock compensation agreements. Of this amount, approximately $0.4 million is related to options accounted for under APB No. 25, and approximately $1.0 million related to options accounted for under SFAS No. 123(R). This cost is
expected to be fully amortized over the next four years, with approximately $222,000 during the remainder of 2007, and approximately $442,000 during 2008, $435,000 during 2009, $286,000 during 2010, and $39,000 during 2011. The Company issued
options during 2003 where vesting will accelerate when the company reaches certain performance benchmarks. SFAS No. 123(R) requires that the cost of the options be included in the Companys Statement of Operations before or in conjunction
with the vesting of options. The future amortized cost stated above does not take into account any accelerated vesting of options.



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NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. Acquisitions

Karta Technologies, Inc.

On June 27, 2007, the Company completed
the acquisition of Karta Technologies, Inc. (Karta). Karta generated revenues for calendar year 2006 of approximately $51 million (unaudited). Karta has approximately 400 employees located throughout the United States. NCI paid approximately $67.3
million for Karta. The purchase price includes $64.8 million for Karta, $0.2 million for a non-compete agreement, $1.5 million as a working capital adjustment and $0.8 million in transactions costs. The acquisition of Karta meets many of NCIs
strategic acquisition objectives, including: opening new and important DoD market areas; expanding NCIs service offerings to include healthcare IT, DoD medical transformation, high-end training solutions and distance learning, and
modernization, readiness and sustainment engineering solutions; expanding NCIs DoD and civilian agency customer base; providing additional valuable GWAC/MAC/IDIQ contract vehicles to NCIs existing portfolio of contracts; and adding
management, professional and business development staff to NCIs team.

The Company is in the process of determining the fair values of Kartas
identifiable intangible assets. On June 27, 2007, Karta had net tangible assets with a fair value of $10.3 million. The Karta assets and liabilities were recorded at fair value under the purchase method of accounting. As the cost of the
acquisition exceeded the fair value of the assets acquired, goodwill was recorded in the amount of $56.9 million. The amount of goodwill presently recorded will be reduced by the fair value of Kartas identifiable intangible assets as of
June 27, 2007 when the independent third party valuation is complete.

The following table represents the preliminary purchase price allocation of
Kartas assets and liabilities at fair value:



|                       |  |                |        |  
|---------------------- |  | -------------- | ------ | -
|                       |  | June 27, 2007  |       
|                       |  | (in thousands) |       
|Cash                   |  | $              | 1,415  |  
|Accounts receivable    |  |                | 15,546 |  
|Other current assets   |  |                | 149    |  
|Property and equipment |  |                | 620    |  
|Others assets          |  |                | 234    |  
|Intangible assets      |  |                | *      |  
|Goodwill               |  |                | 56.925 |  
|Liabilities            |  |                | (7,637 | )
|                       |  |                |        |  
|Net assets acquired    |  | $              | 67,252 |  
|                       |  |                |        |  

---

|* | To be determined. NCI has engaged an independent third party to assist in valuing Kartas intangible assets.
|- | ------------------------------------------------------------------------------------------------------------

Pro Forma Financial Information

The unaudited financial information
in the table below summarizes the combined results of operations of NCI and Karta, on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented
for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition and borrowings under our Credit Agreement (see Note 6) had taken place at the beginning of each of the periods
presented. The pro forma financial information for the three and six months ended June 30, 2007 exclude closing bonuses, stock option termination payments and other transaction related expenses of $5.3 million recorded by Karta in their
historical statements of operations related to our Stock Purchase Agreement dated June 27, 2007. The pro forma financial information for all periods presented also includes the business combination accounting effect on historical NCI for
amortization charges from acquired intangible assets, interest expense at our current level of debt, and the related tax effects.



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##### Table of Contents

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



5. Acquisitions (continued)



All amounts are in thousands except per share amounts



|                                  |  |                                  |        |                                |   |        |  |      |         |  |   |        
|--------------------------------- |  | -------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                                  |  | Three Months Ended June 30, 2007 |        | Six Months Ended June 30, 2007
|                                  |  | 2007                             |        | 2006                           |   | 2007   |  | 2006
|Revenue                           |  | $                                | 80,372 |                                | $ | 61,474 |  | $    | 158,193 |  | $ | 120,738
|Income from continuing operations |  |                                  | 3,778  |                                |   | 2,549  |  |      | 7,986   |  |   | 5,373  
|Net income                        |  | $                                | 2,287  |                                | $ | 1,552  |  | $    | 4,834   |  | $ | 3,269  
|                                  |  |                                  |        |                                |   |        |  |      |         |  |   |        
|Diluted net income per share      |  | $                                | 0.17   |                                | $ | 0.11   |  | $    | 0.36    |  | $ | 0.24   
|                                  |  |                                  |        |                                |   |        |  |      |         |  |   |        

Operational Technologies Services, Inc.

Effective January 31, 2007, the Company completed the acquisition of Operational Technologies Services, Inc. (OTS). OTS generated revenues for calendar year 2006 of approximately $10 million (unaudited), all
derived from contracts with the Federal Aviation Administration. OTS has approximately 70 employees located primarily within the Greater Washington, DC area. NCI paid approximately $7.7 million in cash at closing including approximately $0.4 million
of transaction costs. The acquisition of OTS fits NCIs strategy of pursuing companies that add new customers, specifically the Federal Aviation Administration, and capabilities to NCI and its customers and is directly supportive of our long
term growth objectives for the Federal Civilian market sector.

On January 31, 2007, OTS had net assets including identifiable intangibles with a fair
value of $2.8 million. The identified intangibles value was determined by an unrelated third party valuation expert. The OTS assets and liabilities were recorded at fair value under the purchase method of accounting. As the cost of the acquisition
exceeded the fair value of the assets acquired, goodwill was recorded in the amount of $4.9 million.

In addition, the definitive agreement for the
acquisition of OTS provided for various contingent consideration. NCI will pay up to an additional $2.5 million over the next 18 months following closing based on achievement of certain milestones. During the third quarter of 2007, NCI will pay
approximately $180,000 for earnout payments to the prior stockholders of OTS. Pursuant to the provisions of SFAS No. 141, Business Combinations, the Company believes the payment of any contingent consideration will be treated as
additional cost of the acquisition and added to goodwill as the contingencies are resolved.

6. Loan and Security Agreement

On June 27, 2007, the Company entered into the Second Amendment of the Companys Loan and Security Agreement (as amended, the Credit Agreement) which increased
the Companys line of credit from $60.0 million to $90.0 million and approved the acquisition of Karta. The borrowing capacity under the Credit Agreement consists of a revolving credit facility with an original principal amount of up to $90.0
million, which includes a swingline facility with an original principal amount of up to $5.0 million. The outstanding balance of the facility accrues interest based on LIBOR plus an applicable margin, ranging from 100 to 175 basis points, based on a
ratio of funded debt to earnings. The credit facility expires on March 14, 2011.

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

The
Credit Agreement 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 Agreement 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.

In conjunction with the acquisition Karta (see note 5), the Company borrowed $55.0 million under the Credit Agreement As of June 30, 2007, the outstanding balance
was $55.0 million and interest accrues at a rate of LIBOR plus 150 basis points, or 6.82%.



7



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##### Table of Contents

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7. Related Party Transactions

The Company purchased services from Net Commerce Corporation, which is a government contractor wholly-owned by Rajiv Narang, the son of Charles K. Narang, the Chairman
and Chief Executive Officer of the Company, under a subcontract and a blanket purchase order. For the three and six months ended June 30, 2006, the payments for services and expenses incurred under these agreements were approximately $96,000
and 198,000, of which $45,000 was included in accounts payable at June 30, 2006. No amounts were paid during the three and six months ended June 30, 2007 as these agreements expired during May 2006.

The Company rents office space from Gur Parsaad Properties, Ltd. which is controlled by one of Kartas previous stockholders and who is now a member of the NCI
Board of Directors. The lease is for approximately 34,000 square feet at $14.00 per square foot with annual escalation and expires on June 30, 2012. The lease was renegotiated and signed as of June 27, 2007 in conjunction with the purchase
of Karta. For the three and six months ended as of June 30, 2007, NCI has made no rent payments to Gur Parsaad Properties, Ltd.

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



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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 entitled Managements Discussion and Analysis of Financial Condition
and Results of Operations, contains forward-looking statements regarding our business, financial condition, results of operations and prospects. There are statements made herein which may not address historical facts and, therefore, could be
interpreted to be forward looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. The
factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following: our dependence on our contracts with federal government agencies, particularly within the U.S. Department of Defense,
for substantially all of our revenue; continued funding of our contracts by the U.S. Government, based on a change in spending patterns, or in the event of a priority need for funds, such as homeland security, the war on terrorism or rebuilding
Iraq; risk of contract performance or termination; failure to achieve contract awards in connection with recompetes for present business and/or competition for new business; government contract procurement (such as bid protest, small business set
asides, etc.) and termination risks; competitive factors such as pricing pressures and competition to hire and retain employees (particularly those with security clearances); failure to successfully integrate Operational Technologies Services, Inc.,
Karta Technologies, Inc., and future acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions; failure to identify, execute and effectively integrate acquisitions appropriate to
the achievement of our strategic plans; economic conditions in the United States, including conditions that result from terrorist activities or war; material changes in laws or regulations applicable to our businesses, particularly legislation
affecting (i) government contracts for services, (ii) outsourcing of activities that have been performed by the government, (iii) delays related to agency specific funding freezes, and (iv) competition for task orders under
Government Wide Acquisition Contracts (GWACs) and/or schedule contracts with the General Services Administration; and our own ability to achieve the objectives of near term or long range business plans. Some of these important factors are outlined
under Item 1A. Risk Factors and elsewhere in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC) for the period ended December 31, 2006, 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.

Overview

We are a provider of information technology services and
solutions to federal government agencies. We focus on designing, implementing, maintaining and upgrading secure IT systems and networks. 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 four core service offerings:



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



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



| |  |  | systems development and integrations; and
| | - |  | -----------------------------------------



| |  |  | enterprise systems management.
| | - |  | ------------------------------

We generate
substantially all of our revenue from federal government contracts. We report operating results and financial data as one operating segment. Funding for 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 periods shown.



9



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##### Table of Contents

|                                                |  |                             |   |  |                           |   |  |      |   |  |      |  
|----------------------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ---- | -
|                                                |  | Three months ended June 30, |   |  | Six months ended June 30, |  
|                                                |  | 2007                        |   |  | 2006                      |   |  | 2007 |   |  | 2006 |  
|Department of Defense and intelligence agencies |  | 81.6                        | % |  | 78.6                      | % |  | 80.9 | % |  | 78.2 | %
|Federal civilian agencies                       |  | 18.4                        | % |  | 21.2                      | % |  | 19.1 | % |  | 21.6 | %
|Commercial and state & local entities           |  |                            | % |  | 0.2                       | % |  |     | % |  | 0.2  | %

Revenue

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

Contract Types

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

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



|                   |  |                             |   |  |                           |   |  |      |   |  |      |  
|------------------ |  | --------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ---- | -
|                   |  | Three months ended June 30, |   |  | Six months ended June 30, |  
|                   |  | 2007                        |   |  | 2006                      |   |  | 2007 |   |  | 2006 |  
|Time-and-materials |  | 41.4                        | % |  | 44.6                      | % |  | 40.0 | % |  | 45.7 | %
|Cost-plus          |  | 31.8                        | % |  | 29.1                      | % |  | 29.7 | % |  | 30.5 | %
|Fixed-price        |  | 26.8                        | % |  | 26.3                      | % |  | 30.3 | % |  | 23.8 | %

We have been experiencing an increase in the percentage of fixed price revenue we recognize, and a decrease in the
percentage of time and materials revenue. This is due to the increased use of our government wide acquisition contracts (GWACs), where the majority of the tasks are fixed price or fixed price level of effort instead of on a time-and-materials or
cost-plus basis.

Operating Expenses

Cost of
Revenue

Cost of revenue primarily includes direct costs incurred to provide our services and solutions to clients. The most significant portion of
these costs is salaries and wages, plus associated fringe benefits including stock compensation, of our employees directly serving clients, in addition to the related management, facilities and infrastructure costs. Cost of revenue also includes the
costs of subcontractors and outside consultants, third-party materials, such as hardware or software that we purchase on behalf of our clients, and any other related direct costs, such as travel expenses. These other direct costs are incurred in
response to specific client tasks, and vary from period to period. Changes in the mix of services and equipment provided under our contracts can result in variability in our contract margins. In general, the use of subcontractors increases costs and
decreases margin due to the fact that most subcontractors are billed as a direct expense to the customer with a lower margin than we earn on our services. Typically, hardware or software purchases decrease margins significantly since most of these
costs are billed to the customer with little to no margin, depending on the contract.

General and Administrative Expenses

General and administrative expenses include the salaries and wages, plus associated fringe benefits including stock compensation, of our employees not performing work
directly for clients. Among the functions covered by these costs are corporate business development, bid and proposal, contracts administration, finance and accounting, legal, corporate governance, and executive and senior management.



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##### Table of Contents

Amortization of Intangible Assets

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

Results of Operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

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



|                                    |  |                             |        |   |                                                       |   |        |      |  |       |      |  |       |  
|----------------------------------- |  | --------------------------- | ------ | - | ----------------------------------------------------- | - | ------ | ---- |  | ----- | ---- |  | ----- | -
|                                    |  | Three months ended June 30, |        |   | As a percentage of revenueThree months ended June 30, |  
|                                    |  | 2007                        |        |   | 2006                                                  |   |        | 2007 |  |       | 2006 | 
|                                    |  | (unaudited)                 |       
|Revenue                             |  | $                           | 66,703 |   |                                                       | $ | 47,857 |      |  | 100.0 | %    |  | 100.0 | %
|                                    |  |                             |        |  
|Operating costs and expenses:       |  |                             |        |   |                                                       |   |        |      |  |       |      |  |       |  
|Cost of revenue                     |  |                             | 58,237 |   |                                                       |   | 41,096 |      |  | 87.3  |      |  | 85.9  |  
|General and administrative expenses |  |                             | 3,078  |   |                                                       |   | 2,939  |      |  | 4.7   |      |  | 6.1   |  
|Depreciation and amortization       |  |                             | 356    |   |                                                       |   | 406    |      |  | 0.5   |      |  | 0.9   |  
|Amortization of intangible assets   |  |                             | 217    |   |                                                       |   | 242    |      |  | 0.3   |      |  | 0.5   |  
|                                    |  |                             |        |   |                                                       |   |        |      |  |       |      |  |       |  
|Total operating costs and expenses  |  |                             | 61,888 |   |                                                       |   | 44,683 |      |  | 92.8  |      |  | 93.4  |  
|                                    |  |                             |        |   |                                                       |   |        |      |  |       |      |  |       |  
|Operating income                    |  |                             | 4,815  |   |                                                       |   | 3,174  |      |  | 7.2   |      |  | 6.6   |  
|Interest income                     |  |                             | 212    |   |                                                       |   | 208    |      |  | 0.3   |      |  | 0.4   |  
|Interest expense                    |  |                             | (58    | ) |                                                       |   | (19    | )    |  |      |      |  |      |  
|                                    |  |                             |        |   |                                                       |   |        |      |  |       |      |  |       |  
|Income before taxes                 |  |                             | 4,969  |   |                                                       |   | 3,363  |      |  | 7.5   |      |  | 7.0   |  
|Provision for income taxes          |  |                             | 1,961  |   |                                                       |   | 1,316  |      |  | 3.0   |      |  | 2.7   |  
|                                    |  |                             |        |   |                                                       |   |        |      |  |       |      |  |       |  
|Net income                          |  | $                           | 3,008  |   |                                                       | $ | 2,047  |      |  | 4.5   | %    |  | 4.3   | %
|                                    |  |                             |        |   |                                                       |   |        |      |  |       |      |  |       |  

Revenue

For
the three months ended June 30, 2007, total revenue increased by 39.4% or $18.8 million, over the same period a year ago. This increase was primarily due to new task orders under our GWAC contract vehicles, primarily NETCENTS, ITES, and TEIS,
as well as growth on existing programs and revenue from our acquisitions. Revenue from OTS for the three months ended June 30, 2007 was approximately $2.5 million and Karta revenue for the period June 28, 2007 until June 30, 2007 was
approximately $0.5 million. These increases were slightly offset by revenue reductions due to tasks that ended and a reduction in the volume of NETCENTS product sales.

Cost of revenue

Cost of revenue increased 41.7%, or $17.1 million, for the three months ended June 30, 2007, as
compared to the same period a year ago. The increase was attributable to an increase in subcontractor costs, hardware and software purchases for our clients, direct labor and associated indirect costs and other direct costs due to the increase in
revenue. As a percentage of revenue, cost of revenue was 87.3% and 85.9% for the quarters ended June 30, 2007 and 2006, respectively. The 1.4% increase in cost of revenue as a percentage of revenue for the quarter ended June 30, 2007
compared to the quarter ended June 30, 2006 resulted primarily from an increase in subcontractor, hardware and software, and other direct costs as a percentage of cost of revenue, which typically carry lower gross margins than labor revenue.

General and Administrative Expenses

General and
administrative expense increased 4.7%, or $0.1 million, for the three months ended June 30, 2007, as compared to the same period a year ago. The increase is due mainly to increased accounting and audit related fees. As a percentage of revenue,
general and administrative expenses decreased to 4.7% from 6.1% for the quarters ended June 30, 2007 and 2006, respectively. The decrease is due to the leveraging of our general and administrative expenses over a larger revenue base.



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##### Table of Contents

Amortization of Intangible Assets

Amortization of intangible assets was approximately $0.2 million for the quarters ended June 30, 2007 and 2006. After Kartas acquired intangibles are valued, we expect amortization of intangible assets to
increase significantly beginning the third quarter of 2007.

Operating income

For the three months ended June 30, 2007, operating income was $4.8 million, or 7.2% of revenue, compared to $3.1 million, or 6.6% of revenue, for the three months ended June 30, 2006. Operating income was
higher for the three months ended June 30, 2007 due to the higher revenue volume as compared to the same period in the prior year. Operating income, as a percent of revenue, was higher for the three months ended June 30, 2007 compared to
the same period in the prior year due to the leveraging of our infrastructure costs, primarily general and administrative expenses, over a larger revenue base. This leveraging is a result of the high percentage of our revenue that comes from
time-and-materials and fixed-price contracts.

Interest Income/Expense

Net interest income was approximately $0.2 million for each of the quarters ended June 30, 2007 and 2006. Due to the increase in our line of credit balance in relation to the Karta acquisition, interest expense
will increase significantly during the third quarter of 2007.

Income Taxes

The increase in income taxes of $0.6 million is the result of the increase in operating income and a 0.4% rate increase. The effective income tax rate for the quarter ended June 30, 2007 is approximately 39.5% as
compared to an effective income tax rate of 39.1% for the quarter ended June 30, 2006.

Six Months Ended June 30, 2007 Compared to Six Months
Ended June 30, 2006

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



|                                    |  |                           |         |   |                                                     |   |        |      |  |       |      |  |       |  
|----------------------------------- |  | ------------------------- | ------- | - | --------------------------------------------------- | - | ------ | ---- |  | ----- | ---- |  | ----- | -
|                                    |  | Six months ended June 30, |         |   | As a percentage of revenueSix months ended June 30, |  
|                                    |  | 2007                      |         |   | 2006                                                |   |        | 2007 |  |       | 2006 | 
|                                    |  | (unaudited)               |        
|Revenue                             |  | $                         | 130,994 |   |                                                     | $ | 93,891 |      |  | 100.0 | %    |  | 100.0 | %
|                                    |  |                           |         |  
|Operating costs and expenses:       |  |                           |         |   |                                                     |   |        |      |  |       |      |  |       |  
|Cost of revenue                     |  |                           | 113,746 |   |                                                     |   | 80,566 |      |  | 86.8  |      |  | 85.8  |  
|General and administrative expenses |  |                           | 6,658   |   |                                                     |   | 6,193  |      |  | 5.1   |      |  | 6.6   |  
|Depreciation and amortization       |  |                           | 726     |   |                                                     |   | 816    |      |  | 0.6   |      |  | 0.9   |  
|Amortization of intangible assets   |  |                           | 400     |   |                                                     |   | 488    |      |  | 0.3   |      |  | 0.5   |  
|                                    |  |                           |         |   |                                                     |   |        |      |  |       |      |  |       |  
|Total operating costs and expenses  |  |                           | 121,530 |   |                                                     |   | 88,063 |      |  | 92.8  |      |  | 93.8  |  
|                                    |  |                           |         |   |                                                     |   |        |      |  |       |      |  |       |  
|Operating income                    |  |                           | 9,464   |   |                                                     |   | 5,828  |      |  | 7.2   |      |  | 6.2   |  
|Interest income                     |  |                           | 354     |   |                                                     |   | 325    |      |  | 0.3   |      |  | 0.3   |  
|Interest expense                    |  |                           | (82     | ) |                                                     |   | (45    | )    |  | (0.1  | )    |  |      |  
|                                    |  |                           |         |   |                                                     |   |        |      |  |       |      |  |       |  
|Income before taxes                 |  |                           | 9,736   |   |                                                     |   | 6,108  |      |  | 7.4   |      |  | 6.5   |  
|Provision for income taxes          |  |                           | 3,843   |   |                                                     |   | 2,391  |      |  | 2.9   |      |  | 2.5   |  
|                                    |  |                           |         |   |                                                     |   |        |      |  |       |      |  |       |  
|Net income                          |  | $                         | 5,893   |   |                                                     | $ | 3,717  |      |  | 4.5   | %    |  | 4.0   | %
|                                    |  |                           |         |   |                                                     |   |        |      |  |       |      |  |       |  

Revenue

For
the six months ended June 30, 2007, total revenue increased by 39.5% or $37.1 million, over the same period a year ago. This increase was primarily due to new task orders under our GWAC contract vehicles, primarily NETCENTS, ITES, TEIS and VA
GITTS, as well as growth on existing programs and revenue from our acquisitions. OTS revenue for the period from February 1, 2007 until June 30, 2007 was $4.2 million. Karta revenue for the period June 28, 2007 until June 30,
2007 was $0.5 million. These increases were slightly offset by revenue reductions due to tasks that ended.

Cost of revenue

Cost of revenue increased 41.2%, or $33.2 million, for the six months ended June 30, 2007, as compared to the same period a year ago. The increase was attributable
to an increase in subcontractor costs, direct labor and associated indirect costs and other direct costs due to the increase in revenue. As a percentage of revenue, cost of revenue was



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##### Table of Contents

86.8% and 85.8% for the six months ended June 30, 2007 and 2006, respectively. The 1.0% increase in cost of revenue as a percentage of revenue for the
six months ended June 30, 2007 compared to the six months ended June 30, 2006 resulted primarily from an increase in subcontractor and other direct costs, including hardware and software purchases under NETCENTS, as a percentage of cost of
revenue.

General and Administrative Expenses

General
and administrative expense increased 7.5%, or $0.5 million, for the six months ended June 30, 2007, as compared to the same period a year ago. The increase is due mainly to increased accounting and audit fees along with higher bid and proposal
costs. These cost increases were partially offset by reduced legal expenses. As a percentage of revenue, general and administrative expenses decreased to 5.1% from 6.6% for the six months ended June 30, 2007 and 2006, respectively. The decrease
is due to the leveraging of our general and administrative expenses over a larger revenue base.

Amortization of Intangible Assets

Amortization of intangible assets was approximately $0.4 million for the six months ended June 30, 2007 and $0.5 million for the same period during 2006. After
Kartas acquired intangibles are valued, we expect amortization of intangible assets to increase significantly beginning the third quarter of 2007.

Operating income

For the six months ended June 30, 2007, operating income was $9.5 million, or 7.2% of revenue, compared to $5.8
million, or 6.2% of revenue, for the six months ended June 30, 2006. Operating income was higher for the six months ended June 30, 2007 due to the higher revenue volume as compared to the same period in the prior year. Operating income, as
a percent of revenue, was higher for the six months ended June 30, 2007 compared to the same period in the prior year due to the leveraging of our infrastructure costs, primarily general and administrative expenses, over a larger revenue base.
This leveraging is a result of the high percentage of our revenue that comes from time-and-materials and fixed-price contracts.

Interest Income/Expense

Net interest income was approximately $0.3 million for each of the six months ended June 30, 2007 and 2006. Due to the increase in our line of
credit balance in relation to the Karta acquisition, interest expense will increase significantly during the third quarter of 2007.

Income Taxes

The increase in income taxes of $1.4 million is the result of the increase in operating income and a 0.4% rate increase. The effective income tax rate for
the six months ended June 30, 2007 is approximately 39.5% as compared to an effective income tax rate of 39.1% for the six months ended June 30, 2006.

Contract Backlog

At June 30, 2007 and December 31, 2006, our estimated backlog was $755 million and $612 million, respectively,
of which $137 million and, $123 million, respectively, was funded. We define backlog as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period and from the option periods of
those contracts, assuming the exercise of all related options. We define funded backlog as the portion of backlog for which funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an
authorized purchasing agency, less the amount of revenue we have previously recognized. Our backlog does not include any estimate of future potential delivery orders that might be awarded under our GWAC or other multiple award contract vehicles.
Additional information on how we determine backlog is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 as previously filed with the SEC.

Liquidity and Capital Resources

Our primary liquidity needs are for financing working capital, investing in capital
expenditures and making selective strategic acquisitions. Historically, we have relied primarily on our cash flow from operations and borrowings under our credit facility to provide the capital for our liquidity needs. We expect the combination of
our current cash, cash flow from operations and the available borrowing capacity on our credit facility to continue to meet our normal working capital and capital expenditure requirements. As part of our growth strategy, we may pursue acquisitions
that could require us to raise additional external capital or increase our borrowings.



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During the first half of 2007, we used approximately $20.0 million of cash on hand and borrowed approximately $55.0
million for acquisitions. Our other significant use of working capital is for accounts receivables. Days sales outstanding of accounts receivable (DSO), including Karta on a pro-forma basis, decreased to 85 days as of June 30, 2007, compared to
93 days as of December 31, 2006. This improvement in DSO generated $7.8 million in operating cash flow during the first six months of 2007. Total net accounts receivable were $74.9 million as of June 30, 2007.

Funds borrowed under the revolving credit facility will be used to finance possible future acquisitions, to provide for working capital expenditures and for general
corporate uses. As of June 30 2007, there was approximately $55.0 million outstanding under the credit facility.

Credit Agreement: The
borrowing capacity under our Loan and Security Agreement (as amended, the Credit Agreement) consists of a revolving credit facility with an original principal amount of up to $90.0 million, which includes a swingline facility with an original
principal amount of up to $5.0 million. The outstanding balance of the facility accrues interest based on LIBOR plus an applicable margin, ranging from 100 to 175 basis points, based on a ratio of funded debt to earnings. Interest is accruing at
LIBOR plus 150 basis points or 6.82% as of June 30, 2007. The credit facility expires on March 14, 2011.

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 2007. Refer to our Critical
Accounting Policies section in our Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk relates to changes in
interest rates for borrowings under our Credit Agreement. Since our borrowing related to the Karta acquisition occurred close to the end of the quarter ended June 30, 2007, a change in interest rates would have had no material impact on our
interest expense or cash flow for the three or six months ended June 30, 2007.

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 that requires we
invest excess cash in high quality investments which preserve principal, provide liquidity, and minimize investment risk. We also believe that our credit risk associated with accounts receivable is limited as they are primarily with the federal
government or prime contractors working for the federal government.

Item 4. Controls and Procedures

Evaluation of the Effectiveness of Disclosure Controls and Procedures

Management carried out an evaluation as of June 30, 2007 of the effectiveness of the design and operation of the Companys disclosure controls
and procedures. This evaluation was done under the supervision and with the participation of management, including the Companys Chief Executive Officer and Chief Financial Officer. Based upon the evaluation, the Companys Chief Executive
Officer and Chief Financial Officer have concluded that, as of June 30, 2007, the Companys disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

The Company made no change to its internal control over financial reporting
during the three months ended June 30, 2007 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

In addition to those discussed in Risk Factors included in NCI, Inc.s Form
10-K, filed with the Securities and Exchange Commission NCI is adding the following risk factor.

The Company has substantial investments in recorded
goodwill as a result of prior acquisitions, and changes in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce the Companys operating income.

As of June 30, 2007, goodwill accounted for approximately $79 million, or approximately 46%, of the Companys recorded total assets. The Company evaluates the
recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists. The annual impairment test is based on several factors requiring judgment. Principally, a decrease in expected reporting unit cash flows or
changes in market conditions may indicate potential impairment of recorded goodwill. If goodwill becomes impaired, the Company would be required to write-off the impaired amount, which may significantly reduce or eliminate our profits.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

Our Annual Meeting of Shareholders was held on
June 13, 2007 (the Annual Meeting). The following proposals were voted upon at the Annual Meeting:



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

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



|                   |  |            |  |                    |  |         |  |                
|------------------ |  | ---------- |  | ------------------ |  | ------- |  | ---------------
|Proposal           |  | For        |  | Against orWithheld |  | Abstain |  | BrokerNon-Votes
|Proposal 1         |  |            |  |                    |  |         |  |                
|Charles K. Narang  |  | 69,750,918 |  | 142,492            |  |        |  |               
|Terry W. Glasgow   |  | 69,885,117 |  | 8,293              |  |        |  |               
|James P. Allen     |  | 69,885,217 |  | 8,193              |  |        |  |               
|John E. Lawler     |  | 69,885,217 |  | 8,193              |  |        |  |               
|Paul V. Lombardi   |  | 69,885,117 |  | 8,293              |  |        |  |               
|J. Patrick McMahon |  | 69,885,117 |  | 8,293              |  |        |  |               
|Daniel R. Young    |  | 69,885,117 |  | 8,293              |  |        |  |               
|Proposal 2         |  | 69,890,510 |  | 900                |  | 2,000   |  |               



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Item 5. Other Information

None.

Item 6. Exhibits

Exhibits



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



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SIGNATURES

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



|                     |  |                      |  |                                             
|-------------------- |  | -------------------- |  | --------------------------------------------
|                     |  | NCI, Inc. Registrant
|                     |  |                     
|Date: August 6, 2007 |  | By:                  |  | /s/ Charles K. Narang                       
|                     |  |                      |  | Charles K. Narang                           
|                     |  |                      |  | Chairman of the Board,                      
|                     |  |                      |  | Chief Executive Officer and Director        
|                     |  |                      |  | (Principal Executive Officer)               
|                     |  |                     
|Date: August 6, 2007 |  | By:                  |  | /s/ Judith L. Bjornaas                      
|                     |  |                      |  | Judith L. Bjornaas                          
|                     |  |                      |  | Senior Vice President                       
|                     |  |                      |  | Chief Financial Officer                     
|                     |  |                      |  | (Principal Financial and Accounting Officer)



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