Forward Looking Statements

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

• Our dependence on our contracts with Federal Government agencies, particularly within the U.S. Department of Defense, for substantially all our revenue; a change in funding of our contracts due to bid protests, changes in spending patterns or changes in priorities due to the change in administration

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

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

• Failure to identify and successfully integrate future acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions

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

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

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

Some of these important factors are outlined under Item 1A. Risk Factors and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC, and from time to time, in other filings with the SEC, such as our Forms 8-K and 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, or performance. We undertake no obligation to update publicly or revise any forward-looking statements. You should not place undue reliance on the forward-looking statements.

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

OVERVIEW

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

• Enterprise systems management

• Network engineering

• Information assurance and cybersecurity

• Systems engineering and integration

• Program management, acquisition, and lifecycle support

• Engineering and logistics

• Medical transformation/health IT

• Distance learning and training.

We generate the 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
                                                              March 31,
                                                         2009           2008
     Department of Defense and intelligence agencies       85.5 %         79.8 %
     Federal civilian agencies                             13.2 %         18.3 %
     Commercial and state & local entities                  1.3 %          1.9 %

Contract Types

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

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

                                           Three months ended
                                                March 31,
                                           2009           2008
                    Time-and-materials       52.0 %         39.9 %
                    Cost-plus                15.8           25.9
                    Fixed-price              32.2           34.2

Results of Operations

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
                                                  March 31,                         March 31,
                                              2009           2008           2009                2008
                                                                    (unaudited)
Revenue                                    $  105,017      $ 91,501            100.0 %             100.0 %

Operating costs and expenses:
Cost of revenue                                91,324        79,344             87.0                86.7
General and administrative expenses             4,762         4,746              4.5                 5.2
Depreciation and amortization                     498           481              0.5                 0.5
Amortization of intangible assets                 448           323              0.4                 0.4

Total operating costs and expenses             97,032        84,894             92.4                92.8

Operating income                                7,985         6,607              7.6                 7.2
Interest income                                    20            54               -                   -
Interest expense                                 (212 )        (584 )           (0.2 )              (0.6 )

Income before taxes                             7,793         6,077              7.4                 6.6
Provision for income taxes                      3,118         2,446              2.9                 2.6

Net income                                 $    4,675      $  3,631              4.5 %               4.0 %

Three Months Ended March 31, 2009, Compared to Three Months Ended March 31, 2008

Revenue

For the three months ended March 31, 2009, total revenue increased by 14.8% or $13.5 million, over the same period a year ago. The increase was due in part to the acquisition of the PEO Soldier contract, which occurred during the late part of first quarter 2008. Additionally, we added a number of new contracts as well as new task orders under our GWAC vehicles, primarily ITES-2S, TEIS, and NETCENTS, and had growth on a number of existing programs, including the expected contract increases under the NETCOM ESTA EMS contract. These increases were slightly offset by revenue reductions due to tasks that ended and lower product related sales under our NETCENTS contract and the implementation of the Microsoft Exchange 2007 Messaging Solution for the Air National Guard which occurred in first quarter 2008.

Cost of revenue

Cost of revenue increased 15.1%, or $12.0 million, for the three months ended March 31, 2009, as compared to the same period a year ago. The increase was attributable to an increase in direct labor and associated indirect costs, and subcontractor costs related to the increase in revenue. As a percentage of revenue, cost of revenue was 87.0% and 86.7% for the quarters ended March 31, 2009 and 2008, respectively. The 0.3% increase in cost of revenue as a percentage of revenue for the quarter ended March 31, 2009, compared to the quarter ended March 31, 2008, resulted primarily from a slight increase in indirect expenses as a percentage of cost of revenue.

General and Administrative Expenses

General and administrative expense increased insignificantly in both absolute dollar and percentage terms for the three months ended March 31, 2009, as compared to the same period a year ago. As a percentage of revenue, general and administrative expenses decreased to 4.5% from 5.2% for the quarters ended March 31, 2009 and 2008, respectively, as we leveraged our corporate infrastructure expenses over a larger revenue base.

Depreciation and Amortization

Depreciation and amortization expense was approximately $0.5 million for the quarters ended March 31, 2009 and 2008.

Amortization of Intangible Assets

Amortization of intangible assets was approximately $0.4 and $0.3 million for the quarters ended March 31, 2009 and 2008, respectively. The increase is due to the amortization of intangible assets from our acquisition during 2008.

Operating income

For the three months ended March 31, 2009, operating income was $8.0 million, or 7.6% of revenue, compared to $6.6 million, or 7.2% of revenue, for the three months ended March 31, 2008. Operating income was higher for the three months ended March 31, 2009, due to the higher revenue volume as compared to the same period in the prior year and operating margin increased due to the lower general and administrative expenses as a percentage of revenue.

Interest Income/Expense

Net interest expense was $0.2 million as compared to $0.5 million for the quarters ended March 31, 2009 and 2008, respectively. The decrease is due to both lower borrowing costs and lower average loan balances.

Income Taxes

The increase in income taxes of $0.7 million is the result of the increase in operating income. The effective income tax rate for the quarter ended March 31, 2009, is approximately 40.0% as compared to an effective income tax rate of 40.2% for the quarter ended March 31, 2008.

Contract Backlog

At March 31, 2009, and December 31, 2008, our estimated backlog was $1,191 million and $1,189 million, respectively, of which $249 million and $234 million, respectively, was funded. We define backlog as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period and from the option periods of those contracts, assuming the exercise of all related options. We define funded backlog as the portion of backlog for which funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing agency, less the amount of revenue we have previously recognized. Our backlog does not include any estimate of future potential delivery orders that might be awarded under our GWAC or other multiple award contract vehicles. Additional information on how we determine backlog is included in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC.

Liquidity and Capital Resources

Our primary liquidity needs are for financing working capital, investing in capital expenditures, and making strategic acquisitions. Historically, we have relied primarily on our cash flows from operations and borrowings under our credit facility to provide the capital for our liquidity needs. We expect the combination of our current cash and cash equivalent balances, cash flows 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.

Generally, our most significant use of working capital is for accounts receivables. During the first quarter of 2009, the balance of accounts receivable decreased by $6.9 million to $85.3 million at the end of the quarter. Days sales outstanding of accounts receivable (DSO) decreased to 73 days as of March 31, 2009. This compares to a DSO of 83 days as of December 31, 2008.

Credit Agreement: The borrowing capacity under our Loan and Security Agreement (the Agreement) consists of a revolving credit facility with an original principal amount of up to $90 million, which includes a swingline facility with an original principal amount of up to $5 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.

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 March 31, 2009, there was $30.5 million outstanding under the credit facility.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

There have been no significant changes to our Critical Accounting Policies during 2009. Refer to our Critical Accounting Policies section in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC.