Forward Looking Statements

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

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

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

• risk of contract performance or termination;

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

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

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

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

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

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

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

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

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

OVERVIEW

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

• enterprise systems management;

• network engineering;

• information assurance;

• systems engineering and integration;

• program management, acquisition, and lifecycle support;

• engineering and logistics;

• medical transformation/health IT; and

• distance learning and training.

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

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

Revenue

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

Contract Types

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

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

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

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

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

Operating Expenses

Cost of Revenue

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

General and Administrative Expenses

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

Depreciation and Amortization

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

Amortization of Intangible Assets

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

Interest Income and Expense

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

Results of Operations

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

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



                                                                                      As a Percentage of Revenue
                                                                                          Three months ended
                                          Three months ended September 30,                   September 30,
                                             2008                   2007               2008                2007
                                                                       (unaudited)
Revenue                                $         101,141       $        85,208            100.0 %             100.0 %

Operating costs and expenses:
Cost of revenue                                   87,632                73,841             86.6                86.7
General and administrative expenses                4,810                 4,063              4.8                 4.8
Depreciation and amortization                        455                   465              0.4                 0.5
Amortization of intangible assets                    483                   516              0.5                 0.6

Total operating costs and expenses                93,380                78,885             92.3                92.6

Operating income                                   7,761                 6,323              7.7                 7.4
Interest income                                       24                   103               -                  0.1
Interest expense                                    (498 )                (901 )           (0.5 )              (1.0 )

Income before taxes                                7,287                 5,525              7.2                 6.5
Provision for income taxes                         2,890                 2,185              2.9                 2.6

Net income                             $           4,397       $         3,340              4.3 %               3.9 %

Revenue

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

Cost of revenue

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

General and Administrative Expenses

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

Depreciation and Amortization

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

Amortization of Intangible Assets

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

Operating income

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

Interest Income/Expense

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

Income Taxes

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

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

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

                                                                           As a Percentage of Revenue
                                              Nine months ended                 Nine months ended
                                                September 30,                     September 30,
                                             2008           2007            2008                2007
                                                                    (unaudited)
Revenue                                    $ 288,979      $ 216,203            100.0 %             100.0 %

Operating costs and expenses:
Cost of revenue                              249,547        187,587             86.4                86.8
General and administrative expenses           15,016         10,722              5.2                 5.0
Depreciation and amortization                  1,425          1,191              0.5                 0.5
Amortization of intangible assets              1,289            916              0.4                 0.4

Total operating costs and expenses           267,277        200,416             92.5                92.7

Operating income                              21,702         15,787              7.5                 7.3
Interest income                                   97            458               -                  0.2
Interest expense                              (1,685 )         (984 )           (0.5 )              (0.4 )

Income before taxes                           20,114         15,261              7.0                 7.1
Provision for income taxes                     8,020          6,028              2.8                 2.8

Net income                                 $  12,094      $   9,233              4.2 %               4.3 %

Revenue

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

Cost of revenue

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

General and Administrative Expenses

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

Depreciation and Amortization

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

Amortization of Intangible Assets

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

Operating income

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

Interest Income/Expense

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

Income Taxes

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

Contract Backlog

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

Liquidity and Capital Resources

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

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

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

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

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

There have been no significant changes to our Critical Accounting Policies . . .