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UNITED STATES SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

|(Mark One)                                        |  |                                                                                                     
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------
|**x**                                             |  | ANNUAL REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934      
|For the
      fiscal year ended December 31, 2008
|                                                 
|**o**                                             |  | TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934

For the transaction period
from                    
to


Commission file number
000-26621


___________ NIC INC. (Exact name of
registrant as specified in its charter)


|**Colorado**                          | **52-2077581**        
|------------------------------------- | ----------------------
|(State or
      other jurisdiction of | (I.R.S.
      Employer
|incorporation or organization)        | Identification
No.)   

25501 West Valley Parkway, Suite 300,
Olathe, Kansas 66061(Address of principal
executive offices, including Zip Code)

Registrant's telephone number, including
area code: (877) 234-3468

Securities registered pursuant to
Section 12(b) of the Act:

|Title of Each Class                        | Name of Each Exchange on Which
      Registered
|------------------------------------------ | -----------------------------------------------
|Common
      Stock, no par value per share | The NASDAQ
      Stock Market, LLC             

Securities registered pursuant to
Section 12(g) of the Act: None___________

Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes oNo x

Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
oNo x

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. Yes
xNo o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference Part III of
this Form 10-K or any amendment to this Form 10-K. o

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


| | Large accelerated filer
      o | Accelerated filer x              
| | ------------------------------- | ---------------------------------
| | Non-accelerated filer
      o   | Smaller reporting company
      o

(Do not check if a smaller reporting
company)


Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes oNo x

The
aggregate market value of voting stock held by non-affiliates of the registrant,
as of June 30, 2008, was approximately $329,285,000 (based on the closing price
for shares of the registrant's common stock as reported by the NASDAQ Global
Select Market on that date). Shares of common stock held by each executive
officer, director and holder of 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status for purposes of this calculation is not
intended as a conclusive determination of affiliate status for other
purposes.

On February 28, 2009, 62,793,033
shares of the registrant's common stock, no par value per share, were
outstanding.

DOCUMENTS INCORPORATED BY
REFERENCE

Portions of the registrant's
definitive Proxy Statement to be issued in connection with its Annual Meeting of
Shareholders to be held in 2009 are incorporated by reference into Part III of
this Form 10-K.

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TABLE OF CONTENTSNIC
INC.FORM 10-K ANNUAL
REPORT

|               |  |                                                                                                                    |  | Page
|-------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ----
|PART I        
|Item 1         |  | Business                                                                                                           |  | 2   
|Item 1A.       |  | Risk Factors                                                                                                       |  | 12  
|Item 1B.       |  | Unresolved Staff
      Comments                                                                                    |  | 25  
|Item 2         |  | Properties                                                                                                         |  | 25  
|Item 3         |  | Legal
      Proceedings                                                                                            |  | 25  
|Item 4         |  | Submission of Matters to a Vote of Security Holders                                                                |  | 25  
|PART
      II 
|Item 5         |  | Market for Registrant's Common Equity, Related Shareholder Matters
      and Issuer Purchases of Equity Securities |  | 26  
|Item 6         |  | Selected
      Consolidated Financial Data                                                                         |  | 28  
|Item 7         |  | Management's Discussion and Analysis of Financial Condition and
      Results of Operations                        |  | 29  
|Item 7A.       |  | Quantitative and
      Qualitative Disclosures About Market Risk                                                   |  | 44  
|Item 8         |  | Consolidated Financial Statements and Supplementary Data                                                           |  | 45  
|Item 9         |  | Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure                   |  | 75  
|Item 9A.       |  | Controls and Procedures                                                                                            |  | 75  
|Item 9A(T)     |  | Controls and
      Procedures                                                                                      |  | 75  
|Item 9B.       |  | Other Information                                                                                                  |  | 75  
|PART
      III
|Item 10        |  | Directors, Executive Officers and Corporate Governance                                                             |  | 76  
|Item 11        |  | Executive
      Compensation                                                                                       |  | 76  
|Item 12        |  | Security Ownership of Certain Beneficial Owners and Management and
      Related Shareholder Matters               |  | 76  
|Item 13        |  | Certain
      Relationships and Related Transactions, and Director Independence                                    |  | 77  
|Item 14        |  | Principal Accountant Fees and Services                                                                             |  | 77  
|PART
      IV 
|Item 15        |  | Exhibits, Financial Statement Schedules                                                                            |  | 78  

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PART I

CAUTIONS ABOUT FORWARD LOOKING
STATEMENTS

Safe Harbor statement under the
Private Securities Litigation Reform Act of 1995: Statements in this Annual
Report on Form 10-K regarding NIC and its business, which are not current or
historical facts, are forward-looking statements that involve risks and
uncertainties. Certain matters discussed in this report may constitute
forward-looking statements within the meaning of the federal securities laws
that inherently include certain risks and uncertainties. Forward-looking
statements include, but are not limited to, statements of plans and objectives,
statements of future economic performance or financial projections, statements
of assumptions underlying such statements, and statements of NICs or
management's intentions, hopes, beliefs, expectations or predictions of the
future. For example, statements like we expect, we believe, we plan, we
intend or we anticipate are forward-looking statements. Investors should be
aware that our actual operating results and financial performance may differ
materially from our expressed expectations because of risks and uncertainties
about the future including risks related to economic and competitive conditions.
In addition, we will not necessarily update the information in this Annual
Report on Form 10-K if any forward-looking statement later turns out to be
inaccurate. No one should assume that results projected in or contemplated by
the forward-looking statements will continue to be accurate in the future.
Details about risks affecting various aspects of our business are included
throughout this Form 10-K. Investors should read all of these risks carefully,
and should pay particular attention to risks affecting competition issues
discussed on page**[****XX]**,the other specific risk factors discussed on
pages **[****XX to
XX]**,and
commitments and contingencies described in Notes2, 3, 7 and 8to the consolidated financial statements included
in this Form 10-K. Other factors not presently identified may also cause actual
results to differ.

AVAILABLE INFORMATION

Our Web site
address is www.nicusa.com. Through this Web site, we make available, free of
charge, on the Investor Relations section of our Web site
(http://www.nicusa.com/html/info/investor/edgar.php) our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to these reports, as soon as reasonably practicable after these
reports are electronically filed with or furnished to the Securities and
Exchange Commission (the SEC). We also make available through our Web site
other reports filed with the SEC under the Exchange Act, including our proxy
statements and reports filed by officers and directors under Section 16(a) of
that Act. We do not intend for information contained in our Web site to be part
of this Annual Report on Form 10-K.

The public may read and copy any
materials that the Company files with the SEC at the SECs Public Reference Room
at 100F Street, NE, Washington, D.C., 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding the issuers that file electronically with the SEC.

FREQUENTLY USED TERMS

In this
Annual Report on Form 10-K, we use the terms NIC, the Company, we, our,
and us to refer to NIC and its subsidiaries. All references to years, unless
otherwise noted, refer to our fiscal year, which ends on December 31. We use the
term eGovernment to refer to electronic government, and we use the term
portal to refer to an official government Web site outsourced to NIC. We also
use the term partner to refer to our government clients, with which we have
contractual relationships for eGovernment services.

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ITEM 1. BUSINESS

Business Overview

NIC is a provider of eGovernment
services that helps governments use the Internet to increase internal
efficiencies and provide a higher level of service to businesses and citizens.
We accomplish this currently through two divisions: our portal outsourcing
businesses and our software & services businesses. In our primary portal
outsourcing business, we enter into long-term contracts with governments to
design, build and operate Web-based portals on their behalf. These portals
consist of Web sites and applications we have built that allow businesses and
citizens to access government information online and complete transactions,
including applying for a permit, retrieving driver's license records or filing a
government-mandated form or report. Our self-funding business model is one where
we absorb the costs to build the portal's technical infrastructure and develop
eGovernment services. After the applications have launched, we and our
government partners share a portion of the fees generated from electronic
transactions. This allows us to reduce our government partners' financial and
technology risks and generate revenues by sharing in the fees we collect from
eGovernment transactions. Our government partners benefit through gaining a
centralized, customer-focused presence on the Internet, while businesses and
citizens receive a faster, more convenient and more cost-effective means to
interact with governments.

Currently, we have contracts to
provide portal outsourcing services to 21 states. We typically enter into three-
to five-year contracts with our government partners and manage operations for
each contractual relationship through separate local subsidiaries that operate
as decentralized businesses with a high degree of autonomy. We intend to
increase our revenues by signing long-term portal contracts with new government
partners and by delivering new services to a growing number of government
entities within our existing contractual relationships.

Our software & services
businesses primarily include our Uniform Commercial Code (UCC) and corporate
filings software development and ethics & elections businesses. Our UCC and
corporate filings software development business, NIC Conquest, is primarily a
provider of software applications and services for electronic filings and
document management solutions for the California Secretary of State and is not
actively marketing its applications and services in respect of new engagements.
We offer UCC applications through several of our state portals, typically
through the Secretary of States office; however, transactional revenues
associated with these applications are not associated with NIC Conquest and are
included in portal revenues. Our ethics & elections business, NIC
Technologies, designs and develops online campaign expenditure and ethics
compliance systems for federal and state government agencies. Currently, our
ethics & elections business is primarily engaged in servicing its contracts
with the Federal Election Commission and the state of Michigan.

Segment Information

Our two reportable segments consist
of our portal outsourcing segment and software & services segment. The
portal outsourcing segment includes our subsidiaries that operate outsourced
government portals and the corporate divisions that support portal operations.
The software & services segment primarily includes our UCC and corporate
filings software development business with the California Secretary of State and
our ethics & elections business with the Federal Election Commission and the
state of Michigan. For additional information relating to our reportable
segments, refer to Note 12 in the Notes to Consolidated Financial Statements
included in this Form 10-K.

Industry Background

The market for government-to-business
and government-to-citizen transactions

Government regulation of commercial
and consumer activities requires billions of transactions and exchanges of large
volumes of information between government agencies and the businesses and
citizens they regulate. These transactions and exchanges include driver's
license record retrieval, motor vehicle registrations, tax returns, permit
applications and requests for government-gathered information. Government
agencies typically defray the cost of processing these transactions and of
storing, retrieving and distributing information through a combination of
general tax revenues, service fees and charges for direct access to public
records.

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The limits of traditional government
transaction methods

Traditionally, government agencies
have transacted, and in many cases continue to transact, with businesses and
citizens using processes that are inconvenient and labor-intensive, require
extensive paperwork and use large amounts of scarce staff resources.
Transactions and information requests are often made in person or by mail, and
may result in the compromise of sensitive personal information if data tapes are
lost during the shipping process. In addition, such transactions and information
requests are processed manually, increasing the potential for errors and the
need for numerous revisions and follow-ups. Even newer methods, including
telephone response systems, tape exchanges and dial-up computer networks, rely
on multiple systems and potentially incompatible data formats, and require
significant expertise and expenditures to introduce and maintain. As a result,
businesses and citizens often have no choice but to face costly delays to
complete essential tasks. These delays include waiting in line at a government
agency, waiting for answers by telephone or waiting for responses by mail.
Businesses and citizens encounter further inconvenience and delay because they
usually can work with government agencies only during normal business hours.
Even when electronic alternatives are available, they often require a cumbersome
process of multiple contacts with different government agencies. Increases in
the level of economic activity and in the population have exacerbated these
problems and increased the demand for new services.

Growth of the Internet, electronic
commerce and eGovernment

The Internet is a global medium that
enables millions of people worldwide to share information, communicate and
conduct business electronically. According to Internet WorldStats.com, 1.4
billion people worldwide had Internet access in 2008. According to eMarketer,
194 million people in the U.S. regularly used the Internet in 2008, and
eMarketer expects this number to grow to 200 million in 2009.

Penetration of personal computers
also continues to rise. According to Forrester Research, the number of personal
computers in use globally will grow to 1.3 billion units by 2010. Mature
markets, including North America, Europe, and Asia-Pacific, will have added 150
million new personal computers by the end of this decade, while emerging markets
will have increased personal computer penetration by 572 million
units.

Access to high-speed Internet
services provides users with a more responsive Web browsing experience.
eMarketer estimates there were 312 million households with access to broadband
services worldwide in 2007 and estimates this number will jump to 534 million by
2012. In the U.S. alone, eMarketer estimates there were 66 million households
with access to broadband services in 2007, and believes this number will grow to
94 million in 2012.

The volume of electronic commerce
has grown in parallel with the Internet itself. eMarketer estimates that the
total value of non-travel eCommerce spending in the United States surpassed $136
billion in 2008, up more than 10 percent from 2007.

Similar growth trends are seen for
eGovernment. Research firm Input predicts that spending on state and local
government information technology outsourcing will grow to $20 billion by
2010.

Emergence of the Internet as a medium
for eGovernment

The growing acceptance of the
Internet and electronic commerce presents a significant opportunity for the
development of eGovernment, in which government agencies conduct transactions
and distribute information over the Internet. By using the Internet, government
agencies can increase the volume and efficiency of interactions with
constituents without increasing expenditures or demands on current personnel. In
addition, regardless of physical distance, businesses and citizens can obtain
government information quickly and easily over the Internet. For example, motor
vehicle administrators can provide instantaneous responses to auto insurers'
requests for driving record data by allowing controlled access to government
databases through the Internet. This online interaction reduces costs for both
government and users and decreases response times compared to providing the same
data by mail or special purpose dial-up computer connections.

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Challenges to the implementation of
eGovernment services

Despite the potential benefits of
eGovernment, barriers to creating successful Internet-based services
occasionally preclude governments from implementing them. Some of these barriers
are similar to those the private sector encounters, including:

- the high cost of implementing and maintaining
  Internet technology in a budget-constrained environment;
- the financial, operational and technological risks
  of moving from older, established technologies to rapidly evolving Internet
  technologies;
- the need to quickly assess the requirements of
  potential customers and cost-effectively design and implement eGovernment
  services that are tailored to meet these requirements; and
- the intense competition for qualified technical
  personnel.

Governments also face some unique
challenges that exacerbate the difficulty of advancing to Internet-based
services, including:

- lengthy and potentially politically charged
  appropriations processes that make it difficult for governments to acquire
  resources and to develop Internet services quickly;
- a diverse and substantially autonomous group of
  government agencies that have adopted varying and fragmented approaches to
  providing information and transactions over the Internet;
- a lack of marketing expertise to ensure that
  services are designed to meet the needs of businesses and citizens and that
  they are aware of their availability and encouraged to use the online service
  delivery channel;
- security and privacy concerns that are amplified
  by the confidential nature of the information and transactions available from
  and conducted with governments and the view that government information is
  part of the public trust; and
- changes in administration and turnover in
  government personnel among influencers and key decision makers.

We believe traditional private
sector services generally do not address the unique needs of eGovernment. Most
service providers do not fully understand and are not well-equipped to deal with
the unique political, regulatory and security structures of governments. These
providers, including large systems integrators, typically take a
time-and-materials, project-based pricing approach and provide off-the-shelf
solutions designed for other industries that may not adequately balance the
responsiveness to change of a successful Internet business with the longer time
horizons and extended commitment periods of government projects.

What We Provide to
Governments

In our core portal outsourcing
segment, we provide Internet-based eGovernment services that meet the needs of
governments, businesses and citizens. The key elements of our service delivery
are:

Customer-focused, one-stop government
portal

Using our marketing and technical
expertise and our government experience, we develop, build and operate portals
for our government partners that are designed to meet their needs as well as
those of the businesses and citizens they serve. Our portals are designed to
create a single point of presence on the Internet that allows businesses and
citizens to reach the Web site of every government agency in a specific
jurisdiction from one online location. We strive to employ a common look and
feel in the Web sites of all government agencies associated with our government
portals and make them useful, appealing and easy to use. In addition to
developing and managing the government portal, we develop applications that
allow businesses and citizens to complete processes that have traditionally
required separate offline interaction with several different
government agencies. These applications also permit businesses and citizens to
conduct transactions with government agencies and to obtain information 24 hours
per day and seven days per week. We also help our government partners to
generate awareness and educate businesses and citizens about the availability
and potential benefits of eGovernment services.

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Compelling and flexible financial
models for governments

With our
self-funding business model, we allow governments to implement comprehensive
eGovernment services at minimal cost and risk. We take on the responsibility and
cost of designing, building and operating government portals and applications,
with minimal use of government resources. We employ our technological resources
and accumulated expertise to help governments avoid the risks of selecting and
investing in new and often untested technologies that may be implemented by
unproven third-party providers. We implement our services rapidly, efficiently
and accurately, using our well-tested and reliable infrastructure and processes.
Once we establish a portal and the associated applications, we manage
transaction flows, data exchange and payment processing, and we fund ongoing
costs from the fees received from portal users, who access information and
conduct transactions through the portal. We are also able to provide specific
fee-based application and portal outsourcing solutions to governments who cannot
or do not wish to pursue a self-funding portal solution.

Focused relationship with
governments

We form relationships with
governments by developing an in-depth understanding of their interests and then
aligning our interests with theirs. By tying our revenues to the development of
successful services and applications, we work to assure government agencies and
constituents that we are focused on their needs. Moreover, we have pioneered and
encourage our partners to adopt a model for eGovernment policymaking that
involves the formation of oversight boards to bring together interested
government agencies, business and consumer groups and other vested interest
constituencies in a single forum. We work within this forum to maintain constant
contact with government agencies and constituents and strive to ensure their
participation in the development of eGovernment services. We attempt to
understand and facilitate the resolution of potential political disputes among
these participants to maximize the benefits of our services. We also design our
services to observe relevant privacy and security regulations, so that they meet
the same high standards of integrity, confidentiality and public service as
government agencies would observe in their own actions.

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Government Contracts

Our portal outsourcing
businesses

Through our
portal outsourcing businesses, we currently have contracts with 21 state
governments. At December 31, 2008, we maintained outsourced government portal
service contracts with the following portals:

|                                    |  |                             |                         | Year
      Services |  | Contract
      Expiration Date                   
|----------------------------------- |  | --------------------------- | ----------------------- | ------------------- |  | -------------------------------------------------
|NIC Subsidiary                      |  |                             | Portal Web Site
(State) |                     |  | Commenced                                        
|West Virginia Interactive           |  | www.WV.gov (West Virginia)  |                         | 2007                |  | 6/30/2009 (6/30/2010)                            
|NICUSA, AZ Division                 |  | www.AZ.gov (Arizona)        |                         | 2007                |  | 6/26/2010
      (6/26/2013)                      
|Vermont Information Consortium      |  | www.Vermont.gov (Vermont)   |                         | 2006                |  | 10/14/2012                                       
|Colorado Interactive                |  | www.Colorado.gov (Colorado) |                         | 2005                |  | 5/19/2010
      (5/19/2014)                      
|South Carolina Interactive          |  | www.SC.gov (South Carolina) |                         | 2005                |  | 7/15/2009                                        
|Kentucky Interactive                |  | www.Kentucky.gov (Kentucky) |                         | 2003                |  | 3/31/09
      (1/31/2013)                        
|Alabama Interactive                 |  | www.Alabama.gov (Alabama)   |                         | 2002                |  | 2/28/2010 (2/28/2012)                            
|Rhode
      Island Interactive      |  | www.RI.gov (Rhode Island)   |                         | 2001                |  | 8/7/2010
      (8/7/2012)                        
|Oklahoma Interactive                |  | www.OK.gov (Oklahoma)       |                         | 2001                |  | 6/30/2009                                        
|Montana Interactive                 |  | www.MT.gov (Montana)        |                         | 2001                |  | 12/31/2010                                       
|NICUSA, TN Division                 |  | www.TN.gov (Tennessee)      |                         | 2000                |  | 8/27/2010                                        
|Hawaii
      Information Consortium |  | www.Hawaii.gov (Hawaii)     |                         | 2000                |  | 1/3/2013
      (unlimited 3-year renewal options)
|Idaho Information Consortium        |  | www.Idaho.gov (Idaho)       |                         | 2000                |  | 6/30/2011 (6/30/2015)                            
|Utah
      Interactive              |  | www.Utah.gov (Utah)         |                         | 1999                |  | 5/6/2009                                         
|Maine Information Network           |  | www.Maine.gov (Maine)       |                         | 1999                |  | 3/14/2012 (3/14/2018)                            
|Arkansas Information Consortium     |  | www.Arkansas.gov (Arkansas) |                         | 1997                |  | 6/30/2010                                        
|Iowa Interactive                    |  | www.Iowa.gov (Iowa)         |                         | 1997                |  | 3/31/2011 (3/31/2012)                            
|Virginia Interactive                |  | www.Virginia.gov (Virginia) |                         | 1997                |  | 8/31/2012                                        
|Indiana Interactive                 |  | www.IN.gov (Indiana)        |                         | 1995                |  | 6/30/2010 (6/30/2014)                            
|Nebraska Interactive                |  | www.Nebraska.gov (Nebraska) |                         | 1995                |  | 1/31/2010                                        
|Kansas Information Consortium       |  | www.Kansas.gov (Kansas)     |                         | 1992                |  | 12/31/2012 (12/31/2016)                          

Our government portals operate under
separate contracts that generally have an initial term of three to five years.
Under a typical self-funding contract, a government agrees that:

- we have the right to develop a comprehensive
  Internet portal owned by that government to deliver eGovernment
  services;
- the portal we establish is the primary electronic
  and Internet interface between the government and its
  citizens;
- it advocates the use of the portal for all
  commercially valuable applications in order to support the operation and
  expansion of the portal;
- it sponsors access to agencies for the purpose of
  entering into agreements with these agencies to develop applications for their
  data and transactions and to link their Web pages to the portal;
  and
- it establishes a policy-making and fee approval
  board, which typically includes agency members, business customers and others,
  to establish prices for services and to set other policies.

In return, we agree to:

- develop, manage, market, maintain and expand that
  government's portal and information and electronic commerce
  applications;
- assume the investment risk of building and
  operating that government's portal and applications without the direct use of
  tax dollars;

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- bear the risk of collecting transaction fees;
  and
- have an independent audit conducted upon that
  government's request.

We typically
own all the software we develop under our government portal contracts. After
completion of the initial contract term, our government partners typically
receive a perpetual, royalty-free license to use the software only in their own
portals.

We also enter into separate
agreements with various agencies and divisions of our government partners for
the sale of electronic access to public records and to conduct other
transactions. These agreements preliminarily establish the pricing of the
electronic transactions and data access services we provide and the amounts we
must remit to the agency. These terms are then submitted to the policy-making
and fee approval board for approval. Generally, our contracts provide that the
amount of any fees we retain to provide us with a reasonable return or profit is
set by governments. We have limited control over the level of fees we are
permitted to retain. Any changes made to the amount or percentage of fees
retained by NIC, or to the amounts charged for the services offered, could
adversely affect the profitability of the respective contract to NIC. We do,
however, have the ability to control our expenses.

Any renewal of these contracts
beyond the initial term is optional and a government may terminate its contract
prior to the expiration date upon specific cause events that are not cured
within a specified period and, in certain circumstances, upon passing
legislation. Six contracts under which we provide portal outsourcing services
can be terminated without cause on a specified period of notice. Collectively,
revenues generated from contracts that can be terminated without cause
represented 30% of our portal revenues for the year ended December 31, 2008. In
the event that any of these contracts would be terminated without cause, the
terms of the respective contract may require the government to pay a fee to us
in order to continue to use our software in its portal. In addition, the loss of
one or more of our larger state portal partners, such as Indiana, Colorado,
Utah, Virginia, Tennessee, Arkansas or Kentucky, as a result of the expiration,
termination or failure to renew the respective contract, if such partner is not
replaced, could significantly reduce our revenues.

Our software & services
businesses

UCC and corporate filings software
development

Our UCC and corporate
filings software development business, NIC Conquest, primarily provides software
applications and services for electronic filings and document management
solutions for the California Secretary of State and is not actively marketing
its applications and services for any new engagements.

Ethics & elections

Our ethics & elections business,
NIC Technologies, designs and develops online campaign expenditure and ethics
compliance systems for federal and state government agencies. Our current
government clients include the Federal Election Commission (www.FEC.gov) and the
state of Michigan (www.Michigan.gov/sos).

Our Portal Service
Offerings

We work with our government partners
to develop, manage and enhance comprehensive, Internet-based portals to deliver
eGovernment services to their constituents. Our portals are designed to provide
user-friendly and convenient access to in-demand government information and
services and include numerous fee-based transaction services and applications
that we have developed. These fee-based services and applications allow
businesses and citizens to access constantly changing government information and
to file necessary government documents. The types of services and the fees
charged vary in each portal installation according to the unique preferences of
that jurisdiction. In an effort to reduce the frustration businesses and
citizens often encounter when dealing with multiple government agencies, we
handle cross-agency communications whenever feasible and shield businesses and
citizens from the complexity of older, mainframe-based systems that agencies
commonly use, creating an intuitive and efficient interaction with
governments.

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Some of the online services we
currently offer in different jurisdictions include:

|Product or
      Service                           |  |                                                                                                                                                                                                                                                                  | Description |                                                                                                                  |  | Primary
      Users | 
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---------------------------------------------------------------------------------------------------------------- |  | ------------------- | 
|Driver's License Records Retrieval                 |  | For those legally authorized businesses, this service offers
      controlled instant look-up of driving records. Includes commercial
      licenses.                                                                                                            |             | Insurance companies                                                                                             
|                                                  
|Vehicle Title, Lien & Registration                 |  | Provides controlled interactive title, registration and lien
      database access. Permits citizens to renew their vehicle registrations
      online.                                                                                                          |             | Insurance companies, lenders, citizens                                                                          
|                                                  
|LIAB (Lobbyist in a Box)                           |  | Allows the user to monitor state legislative activity. Users
      can tag bills by key word or bill number, and LIAB will send an e-mail
      when a change occurs in the status of the bill. Legislative activity can
      be monitored via wireless access. |             | Attorneys, lobbyists                                                                                            
|                                                  
|Health Professional License Services               |  | Allows users to search databases on several health
      professions to verify license status.                                                                                                                                                                   |             | Hospitals, clinics, health insurers, citizens                                                                   
|                                                  
|Secretary of State Searches                        |  | Allows users to access filings of corporations, partnerships
      and other entities, including charter documents.                                                                                                                                              |             | Attorneys, lenders                                                                                              
|                                                  
|Uniform Commercial Code (UCC) Searches and Filings |  | Permits searches of the UCC database to verify financial
      liens, and permits filings of secured financial documents.                                                                                                                                        |             | Attorneys, lenders                                                                                              
|                                                  
|Professional License Renewal                       |  | Permits professionals to renew their licenses online using a
      credit card.                                                                                                                                                                                  |             | Attorneys, doctors, nurses, architects and other licensed
      professionals                                   
|                                                  
|Drivers License Renewal                           |  | Permits citizens to renew their drivers license online using
      a credit card.                                                                                                                                                                               |             | Citizens                                                                                                        
|                                                  
|Limited Criminal History Searches                  |  | For those legally authorized, provides users with the ability
      to obtain a limited criminal history report on a specified
      individual.                                                                                                                 |             | Schools, governments, human resource professionals,
      nonprofits working with children or handicapped adults
|                                                  
|Income and Property Tax Payments                   |  | Allows users to file and pay for a variety of state and local
      income and property taxes.                                                                                                                                                                   |             | Businesses and citizens                                                                                         
|                                                  
|Hunting and Fishing Licenses                       |  | Permits citizens to obtain and pay for outdoor recreation
      licenses over the Internet or from point-of-purchase retail
    kiosks.                                                                                                                          |             | Citizens                                                                                                        
|                                                  
|Business Registrations and Renewals                |  | Allows business owners to search for and reserve a business
      name, submit and pay for the business registration, and renew the business
      registration on an annual basis.                                                                              |             | Businesses                                                                                                      

In addition to these services, we
also provide customer service and support. Our customer service representatives
serve as a liaison between our government partners and businesses and citizens.
In many of the portals we operate, customer service representatives are available 24 hours a day, seven days a week.

8

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Revenues

In our
outsourced portal businesses, we currently derive revenue from three main
sources: transaction-based fees, time and materials-based fees for application
development and fixed fees for portal management services.

In most of our outsourced portal
businesses, the majority of our revenues are generated from transactions, which
generally include the collection of transaction-based and subscription fees from
users. The highest volume, most commercially valuable service we offer is access
to motor vehicle records through our insurance industry records exchange
network. This service accounted for approximately 59% of our portal revenues in
2006, 54% in 2007 and 48% in 2008. ChoicePoint, which resells these records to
the auto insurance industry, accounted for approximately 47% of portal revenues
in 2006, 40% in 2007 and 33% in 2008. Transaction-based revenues accounted for
approximately 92% of our outsourced portal revenues in 2006, 88% in 2007 and 84%
in 2008. Fees for application development accounted for approximately 5% of our
outsourced portal revenues in 2006, 6% in 2007 and 8% in 2008. Fixed fees for
portal management accounted for approximately 3% of our outsourced portal
revenues in 2006, 6% in 2007 and 8% in 2008.

Our portal operations in the state
of Indiana accounted for approximately 14% of our portal revenues in 2006 and
11% of our portal revenues in 2007 and 2008. Our portal operations in the state
of Indiana accounted for approximately 13% of our consolidated revenues in 2006,
11% of our consolidated revenues in 2007 and 10% of our consolidated revenues in
2008. No other state portal accounted for more than 10% of portal or
consolidated revenues during the last three years.

Sales and Marketing

We have two primary sales and
marketing goals:

- to develop new sources of revenue
  through new government relationships; and
- to retain and grow our revenue streams
  from existing government relationships.

We have well-established sales and
marketing processes for achieving these goals, which are managed by our national
sales division and a marketing department within most of our outsourced portal
businesses.

Developing new sources of
revenue

We focus our new government sales
and marketing efforts on increasing the number of governments and government
agencies that are receptive to a public/private model for delivering information
and/or completing transactions over the Internet. We meet regularly with
interested government officials to educate them on the public/private model and
its potential advantages for their jurisdictions. Members of our management team
are also regular speakers at conferences devoted to the application of Internet
technologies to facilitate the relationship between governments and their
citizens. In states where we believe interest is significant, we seek to develop
supportive, educational relationships with professional and business
organizations that may benefit from the government service improvements our
service delivery can produce. We also focus our corporate marketing efforts on
key government decision makers through the use of print media, advertising,
white paper development, media relations and corporate
communications.

Once a government decides to
implement a public/private model for managing Internet access to information
resources and transactions, it typically starts a selection process that
operates under special rules that apply to government purchasing. These rules
typically require open bidding by possible service providers against a list of
requirements established by the government under existing procedures or
procedures specifically created for the Internet provider selection process. We
respond to requests for bids with a proposal that outlines in detail our
philosophy and plans for implementing our business model. Once our proposal is
selected, we enter into negotiations for a contract.

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Growing existing markets

In our existing government
relationships, our marketing efforts focus on:

- expanding the number of government
  agencies that provide services or information on the government portal;
- identifying new information and
  transactions that can be usefully and cost-effectively delivered over the
  Internet;
- working with the governance authorities
  in our existing markets to ensure that online services are priced in a manner
  to encourage usage; and
- increasing the number of potential users
  who do business with governments over the Internet.

Although each government's unique
political and economic environment drives different marketing and development
priorities, we have found many of our core applications to be relevant across
multiple jurisdictions. Each of our outsourced portal businesses has a director
of marketing and additional marketing staff that meet regularly with government,
business and consumer representatives to discuss potential new services. We also
promote the use of our library of over 1,700 unique revenue-generating
eGovernment services to existing and new customers through speaking engagements
and targeted advertising to organizations for professionals, including lawyers,
bankers and insurance agents that have a need for regular interaction with
government. We identify services that have been developed and implemented
successfully for one government and replicate them in other
jurisdictions.

Technology and Operations

Over the past 16 years, we have made
substantial investments in the development of Internet-based applications and
operations specifically designed to allow businesses and citizens to transact
with and receive information from governments. The scope of our technological
expertise includes network engineering as it applies to the interconnection of
government systems to the Internet, Internet security, Web-to-legacy system
integration, Web-to-mainframe integration, database design, Web site
administration and Web page development. Within this scope, we have developed
and implemented a comprehensive Internet portal framework for governments, and a
broad array of stand-alone products and services using a combination of our own
proprietary technologies and commercially available, licensed technologies. We
believe that our technological expertise, coupled with our in-depth
understanding of governmental processes and systems, has made us adept at
rapidly creating tailored portal services that keep our partners on the
forefront of eGovernment.

Each of our government partners has
unique priorities and needs in the development of its eGovernment services. More
than half of our employees work in the Internet services and application
development and technology operations areas, and most are focused on a single
government partner's application needs. Our employees develop an understanding
of a specific government's application priorities, technical profiles and
information technology personnel and management. At the same time, all of our
development directors are trained by experienced technical staff from our other
operations on our standard technical framework, and there is frequent
communication and cooperation, which ensures that our government partners can
make use of the most advanced eGovernment services we have developed throughout
our organization.

Most of our portals and applications
are physically hosted in each jurisdiction in which we operate on servers that
we own or lease. Certain of our portals and applications are hosted at a central
data facility operated by a third party, with backup at a similar facility in
another location. We also provide links to sites that are maintained by
government agencies or organizations that we do not manage. Our businesses
provide uninterrupted online service 24 hours per day and seven days a week, and
our operations maintain thorough backup, security and disaster recovery
procedures.

History has proven that our systems
and applications are scalable and can easily be replicated from one government
entity to another. We focus on sustaining low-overhead operations, with all
major investments driven by the objective of deploying the highest value-added
technology and applications to each operation.

10

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Finally, we have designed our
government portals and applications to be compatible with virtually any existing
system and to be rapidly deployable. To enable speed and efficiency of
deployment, we license commercially available technology whenever possible and
focus on the integration and customization of these off-the-shelf hardware and
software components when necessary. While we expect that commercially licensed
technology will continue to be available at reasonable costs, there can be no
assurance that the licenses for such third-party technologies will not be
terminated or that we will be able to license third-party technology and
applications for future services. While we do not believe that one individual
technology or application we license is material to our business, changes in or
the loss of third party licenses could lead to a material increase in the costs
of licensing or to our products becoming inoperable or their performance being
materially reduced, with the result that we may need to incur additional
development or procurement costs in an attempt to ensure continued performance
of our services.

We regard our intellectual property
as important to our success. We rely on a combination of nondisclosure and other
contractual arrangements with governments, our employees, subcontractors and
other third parties, copyrights and privacy and trade secret laws to protect and
limit the distribution of the proprietary software applications, documentation
and processes we have developed in connection with the eGovernment services we
offer.

Competition

We believe that the principal
factors upon which our businesses compete are:

- our unique understanding of government
  needs;
- the quality and fit of eGovernment
  services;
- the speed and responsiveness to the
  needs of businesses and citizens; and
- cost-effectiveness.

We believe we compete favorably with
respect to the above-listed factors. In most cases, the principal substitute for
our services is a government-designed and managed service that integrates other
vendors' technologies, products and services. Companies that have expertise in
marketing and providing technical electronic services to government entities
compete with us by further developing their services and increasing their focus
on this segment of their business. Examples of companies that may compete and/or
currently compete with us are the following:

- large systems integrators, including CGI
  and Unisys;
- traditional software applications
  developers, including Microsoft and Oracle; and
- traditional consulting firms, including
  IBM Global Services, BearingPoint, and Accenture.

Seasonality

The use of some of our eGovernment
services is seasonal, particularly the accessing of drivers' records, resulting
in lower revenues from this service in the fourth quarter of each calendar year,
due to the lower number of business days in this quarter and a lower volume of
transactions during the holiday period.

Employees

As of December 31, 2008, we had 473
full-time employees, of which 68 were working in corporate operations, 389 were
in our outsourced portal businesses and 16 were in our software & services
businesses. Our future success will depend, in part, on our ability to continue
to attract, retain and motivate highly qualified technical and management
personnel. From time to time, we also employ independent contractors to support
our application development, marketing, sales and support and administrative
organizations. Our employees are not covered by any collective bargaining
agreement, and we have never experienced a work stoppage. We believe that our
relations with our employees are good.

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ITEM 1A. RISK FACTORS

The risks
and uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations. If any of
these risks actually occur, our business, financial condition and results of
operations could be materially adversely affected. In that case, the value of
our common stock could decline substantially.

***A prolonged economic
slowdown could harm our operations.***

A prolonged economic downturn or
recession could materially impact our operations to the extent it results in
reduced demand for Web-based access to governmental services. If current market
and economic conditions persist or deteriorate, we may experience adverse
impacts on our business, results of operations and financial condition.

***The resale of shares of
our common stock previously held by the National Information Consortium Voting
Trust, or the perception that those sales may occur, might adversely affect our
stock price.***

The National Information Consortium
Voting Trust, which previously owned approximately 34% of our outstanding common
stock, was dissolved as of June 20, 2008. Following a six-month holding period,
the shares held by beneficiaries of the Voting Trust who are not affiliates of
the Company became freely tradable under SEC Rule 144. Sales of substantial
amounts of shares of our common stock in the public market, or the perception
that those sales may occur, could cause the market price of our common stock to
decline or make it more difficult for us to sell equity securities in the future
at a time and a price that we consider appropriate.

***We may be unable to
sustain the usage levels of current services that provide a significant
percentage of our revenues.***

We obtain a
high proportion of our revenues from a limited number of services.
Transaction-based fees charged for access to motor vehicle records accounted for
approximately 48% of our portal revenues for the year ended December 31, 2008
and are expected to continue to account for a significant portion of our
revenues in the near future. Regulatory changes or the development of
alternative information sources, such as credit scoring, could materially reduce
our revenues from this service. A reduction in revenues from currently popular
services would harm our business, results of operations and financial condition.

***Because a major portion
of our current revenues is generated from a small number of users, the loss of
any of these users may harm our business and financial condition.***

A
significant portion of our revenues is derived from data resellers' use of our
portals to access motor vehicle records for sale to the automobile insurance
industry. For the year ended December 31, 2008, one of these data resellers,
ChoicePoint, accounted for approximately 33% of our portal revenues. It is
possible that these users will develop alternative data sources or new business
processes that would materially diminish their use of our portals. The loss of
all or a substantial portion of business from any of these entities would harm
our business, results of operations and financial condition.

***We may face damage to
our professional reputation if our partners are not satisfied with our services
or services provided by our third-party credit card merchant processors.***

We depend to
a large extent on our relationships with our government partners, our reputation
for high quality professional services and commitment to preserving public trust
to attract and retain customers. As a result, if one of our government partners
is not satisfied with our services or services provided by our third-party
credit card merchant processors, it may be more damaging in our business than in
other businesses.

12

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***Because a major portion
of our accounts receivable is from a small number of users, negative trends in
their businesses could cause us significant credit loss and negatively impact
our operating cash flows and liquidity.***

ChoicePoint and other data resellers
have a period of time, generally within 25 days of billing, to remit payment. As
a result, we are subject to a significant concentration of credit risk that
these users will not pay for their purchases. Our credit risk may increase due
to liquidity or solvency issues experienced by these users, for example, as a
result of the current severe economic downturn. At December 31, 2008,
ChoicePoint accounted for approximately 27% of our consolidated accounts
receivable. In addition, our business is generally subject to the risk that our
customers and counterparties will fail to meet their obligations when due,
particularly given the current state of the economy. While we perform ongoing
credit evaluations of our customers, we generally do not require collateral to
secure accounts receivable. If we were unable to collect a major portion of our
accounts receivable, we may suffer significant losses and our cash flow and
liquidity may be adversely affected.

***Our portal revenues
could be harmed as a result of government budget deficits.***

Although the
majority of our portal revenues are derived from fees we charge to users for
transactions conducted through our portals, approximately 8% of our portal
revenues in 2008 were derived from time and materials-based fees for application
development and approximately 8% of our portal revenues in 2008 were derived
from fixed fees for portal management services, both of which are paid directly
to us by governments. In the event of budget deficits, our government clients
may be required to curtail discretionary spending on such projects and our
portal revenues could be harmed.

***The fees we collect for
many of our services are subject to regulation that could limit growth of our
revenues and profitability.***

Under the
terms of our self-funded outsourced portal government contracts, we remit a
portion of the fees we collect to state agencies. Generally, our contracts
provide that the amount of any fees we retain is set by governments to provide
us with a reasonable return or profit. We have limited control over the level of
fees we are permitted to retain. Our business, results of operations and
financial condition may be harmed if the level of fees we are permitted to
retain in the future is too low or if our costs rise without a commensurate
increase in fees.

If our
competitors are more successful in attracting and retaining customers and users,
then our revenues and profits could decline.

The
principal substitute for our services is a government-designed and managed
service that integrates other vendors' technologies, products and services.
Companies that have expertise in marketing and providing technical electronic
services to government entities compete with us by further developing their
services and increasing their focus on this piece of their business. Many of our
potential competitors are national or international in scope and have greater
resources than we do. These resources could enable our potential competitors to
initiate severe price cuts or take other measures in an effort to gain market
share. Additionally, in some geographic areas, we may face competition from
smaller consulting firms with established reputations and political
relationships with potential government partners. If we do not compete
effectively or if we experience any pricing pressures, reduced margins or loss
of market share resulting from increased competition, our business and financial
condition may be adversely affected.

***Because we have portal
outsourcing contracts with a limited number of governments, the termination of
certain of these contracts may harm our business.***

Currently,
the majority of our revenues are derived from the operation of our outsourced
portal businesses. We have portal contracts with 21 state governments. These
contracts typically have initial terms of three to five years with optional
renewal periods of one to five years. However, any renewal is optional and a
government may terminate its contract prior to the expiration date upon specific
cause events that are not cured within a specified period and, in certain
circumstances, upon passing legislation.

Additionally, six contracts under which we provide portal management and
application development services can be terminated without cause on a specified
period of notice. Collectively, revenues generated from contracts that can be
terminated without cause represented 30% of our portal revenues for the year
ended December 31, 2008. In the event that any of these contracts would be
terminated without cause, the terms of the respective contract may require the
government to pay a fee to us in order to continue to use our software in its
portal. In addition, the loss of one or more of our larger state portal
partners, such as Indiana, Colorado, Utah, Virginia, Tennessee, Arkansas, or
Kentucky, if not replaced, could significantly reduce our revenues. If these
revenue shortfalls were to occur, our business and financial condition would be
harmed. We cannot be certain if, when or to what extent governments might fail
to renew or terminate any or all of their contracts with us.

13

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The
growth in our revenues may be limited by the number of governments that choose
to provide eGovernment services and to adopt our business model and by the
finite number of governments with which we may contract for our eGovernment
services.

Our revenues
are generated principally from contracts with state governments to provide
eGovernment services on behalf of those governments to complete transactions and
distribute public information electronically. The growth in our revenues largely
depends on government entities adopting our public/private model. We cannot
assure that government entities will choose to provide eGovernment services at
all, or that they will not provide such services themselves without private
assistance or adopting our model. In addition, as there is a finite number of
states remaining with which we can contract for our services, future increases
in our revenues may depend in part on our ability to expand our business model
to include multi-state cooperative organizations, local governments and federal
agencies and to broaden our service offerings to diversify our revenue streams
across our lines of business. We cannot assure that we will succeed in expanding
into new markets, broadening our service offerings, or that our services will be
adaptable to those new markets.

***Because we have certain
portal outsourcing contracts that contain performance bond requirements and/or
indemnification provisions against claims arising from our performance, we may
suffer monetary or reputational damages if we fail to meet our contractual
obligations.***

We are bound
by performance bond commitments on certain portal outsourcing contracts.
Performance deficiencies by us or our subcontractors could result in a default
of a performance bond, which could expose us to liability and have an adverse
effect on our business prospects, financial condition, and on our ability to
compete for future portal outsourcing contracts. Further, under certain of our
portal outsourcing contracts, we are required to fully indemnify our government
clients against claims arising from our performance or the performance of our
subcontractors. If we fail to meet our contractual obligations or our
performance or our subcontractors' performance gives rise to claims, we could be
subject to legal liability, monetary damages and loss of customer relationships.

***We may be unable to
obtain future contracts through the request for proposal process.***

A high
percentage of our current revenues is derived from contracts with governments
and government agencies that operate under special rules that apply to
government purchasing. Where this process applies, there are special rules that
typically require open bidding by possible service providers like us against a
list of requirements established by governments under existing or
specially-created procedures. To respond successfully to these requests for
proposals, commonly known as RFPs, we must estimate accurately our cost
structure for servicing a proposed contract, the time required to establish
operations for the proposed client and the likely terms of any other proposals
submitted. We also must assemble and submit a large volume of information within
the strict time schedule mandated by an RFP. Whether or not we are able to
respond successfully to RFPs in the future will significantly impact our
business. We cannot guarantee that we will win any bids in the future through
the RFP process, or that any winning bids will ultimately result in contracts.
Our business, results of operations and financial condition would be harmed if
we fail to obtain profitable future contracts through the RFP process.

***If our potential
customers are not willing to switch to or adopt our online government portals
and other electronic services, our growth and revenues will be limited.***

The failure
to generate a large customer base would harm our growth and revenues. This
failure could occur for several reasons. Our future revenues and profits depend
upon the widespread acceptance and use of the Internet as an effective medium
for accessing public information, particularly as a medium for government
filings. We cannot assure that customer acceptance and use of the Internet will
continue to grow. Additionally, we face intense competition in all sectors of
our business. As a result, our efforts to create a larger customer base may be
more difficult than expected even if we are perceived to offer services superior
to those of our competitors. Further, because the government-to-citizen and
government-to-business portal access and electronic filing market is relatively
new, potential customers in this market may be confused or uncertain about the
relative merits of each eGovernment application and of which application to
adopt, if any. Confusion and uncertainty in the marketplace may inhibit
customers from adopting our applications, which could harm our business, results
of operations and financial condition.

14

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***We may lose the right to
the content distributed through our outsourced portals, which is provided to us
entirely by government entities.***

We do not
own or create the content distributed through our outsourced portals. We depend
on the governments with which we contract to supply information and data feeds
to us on a timely basis to allow businesses and citizens to complete
transactions and obtain government information. We cannot assure that these data
sources will continue to be available in the future. Government entities could
terminate their contracts to provide data. Changes in regulations could mean
that governments no longer collect some types of data or that the data is
protected by more stringent privacy rules preventing uses now made of it.
Moreover, our data sources are not always subject to exclusive agreements, so
that data included in our services also may be included in those of our
potential competitors. In addition, we are dependent upon the accuracy and
reliability of government computer systems and data collection for the content
of our portals. The loss or the unavailability of our data sources in the
future, or the loss of our exclusive right to distribute some of the data
sources, could harm our business, results of operations and financial condition.

***Our business with
various government entities sometimes requires specific government legislation
to be passed for us to initiate and maintain our government contracts.***

Because a
central part of our business includes the execution of contracts with
governments under which we remit a portion of user fees charged to businesses
and citizens to state agencies, it is often necessary for governments to draft
and adopt specific legislation before the government can circulate an RFP to
which we can respond. Furthermore, the maintenance of our government contracts
requires the continued acceptance of enabling legislation and any implementing
regulations. In the past, various entities that use the portals we operate to
obtain government information have challenged the authority of governments to
electronically provide these services exclusively through portals like those we
operate. A successful challenge in the future could result in a proliferation of
alternative ways to obtain these services, which would harm our business,
results of operations and financial condition. The repeal or modification of any
enabling legislation would also harm our business, results of operations and
financial condition.

***Because a large portion
of our business relies on a contractual bidding process whose parameters are
established by governments, the length of our sales cycles is uncertain and can
lead to shortfalls in revenues.***

Our
dependence on a bidding process to initiate many new projects, the parameters of
which are established by governments, results in uncertainty in our sales cycles
because the duration and the procedures for each bidding process vary
significantly according to each government entity's policies and procedures. The
time between the date of initial contact with a government for a bid and the
award of the bid may range from as little as 180 days to up to several years.
The bidding process is subject to factors over which we have little or no
control, including:

- political acceptance of the concept of
  government agencies contracting with third parties to distribute public
  information, which has been offered traditionally only by the government
  agencies and often without charge;
- the internal review process by the
  government agencies for bid acceptance;
- the need to reach a political
  accommodation among various interest groups;
- changes to the bidding procedure by the
  government agencies;
- changes to state legislation authorizing
  government's contracting with third parties to distribute public
  information;
- changes in government administrations;

15

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- the budgetary restrictions of government
  entities;
- the competition generated by the bidding
  process;
- the possibility of cancellation or delay
  by the government entities; and
- government's manner of drafting bid
  documents, which may partially, or not at all, utilize our method of providing
  eGovernment services.

We are
dependent on the bidding process for a significant part of our business.
Therefore, any material delay in the bidding process, changes to the bidding
practices and policies, the failure to receive the bid or the failure to execute
a contract may disrupt our financial results for a particular period and harm
our financial condition.

***We may need more working
capital to fund operations and expand our business.***

We believe
that our current financial resources will be sufficient to meet our present
working capital and capital expenditure requirements for at least the next
twelve months. However, we may need to raise additional capital before this
period ends to further:

- fund operations, if unforeseen costs or
  revenue shortfalls arise;
- support our expansion into other states
  and government agencies beyond what is contemplated in 2009 if unforeseen
  opportunities arise;
- expand our product and service offerings
  beyond what is contemplated in 2009 if unforeseen opportunities
  arise;
- respond to unforeseen competitive
  pressures; and
- acquire technologies beyond what is
  contemplated.

Our future liquidity and capital
requirements will depend upon numerous factors, including the success of our
existing and new service offerings and potentially competing technological and
market developments. However, any projections of future cash flows are subject
to substantial uncertainty. If current cash, lines of credit and cash generated
from operations are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities, issue debt securities or draw on the
unused portion of our line of credit. The sale of additional equity securities
could result in dilution to the Company's shareholders. From time to time, we
expect to evaluate the acquisition of or investment in businesses and
technologies that complement our various eGovernment businesses. Acquisitions or
investments might impact the Company's liquidity requirements or cause the
Company to sell additional equity securities or issue debt securities. Recently,
credit and capital markets have experienced unusual volatility and disruption,
and equity and debt financing have become more expensive and difficult to
obtain. There can be no assurance that financing will be available in amounts or
on terms acceptable to the Company, if at all. If adequate funds were not
available on acceptable terms, our ability to develop or enhance our
applications and services, take advantage of future opportunities or respond to
competitive pressures would be significantly limited. This limitation could harm
our business, results of operations and financial condition.

***In the event that we
need debt financing in the future, recent uncertainty in the credit markets
could affect our ability to obtain debt financing on reasonable terms.***

Although we
do not currently need debt financing, in the event we were to require debt
financing in the future, the severe dislocations and liquidity disruptions in
the credit markets could materially impact our ability to obtain debt financing
on reasonable terms. The inability to access debt financing on reasonable terms
could materially impact our ability to make acquisitions or materially expand
our business in the future.

16

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***If we fail to coordinate
or expand our operational procedures and controls, we may not effectively manage
our growth.***

Our growth rate may increase rapidly
in response to the acceptance of our services under new or existing government
contracts. If we cannot manage our growth effectively, we may not be able to
coordinate the activities of our technical, accounting and marketing staffs, and
our business could be harmed. We intend to plan for the acceptance of new bids
by a number of governmental entities so that we may be ready to begin operations
as soon as possible after acceptance of a bid. Additionally, we plan to continue
our expansion of eGovernment services into new government markets. As part of
this growth plan, we must implement new operational procedures and controls to
expand, train and manage our employees and to coordinate the operations of our
various subsidiaries. If we cannot manage the growth of our government portals,
staff, software installation and maintenance teams, offices and operations, our
business may be harmed.

***We may be unable to
hire, integrate or retain qualified personnel.***

The growth
in our business has resulted in an increase in the responsibilities for both
existing and new management personnel. Some of our personnel are presently
serving in more than one executive capacity. The loss of any of our executives
could harm our business. In addition, we expect that we will need to hire
additional personnel in all areas throughout 2009, including personnel for new
operations in jurisdictions in which we may obtain contracts. We may not be able
to retain our current key employees or attract, integrate or retain other
qualified employees in the future. If we do not succeed in attracting new
personnel or integrating, retaining and motivating our current personnel, our
business could be harmed. In addition, new employees generally require
substantial training in the presentation, policies and positioning of our
government portals and other services. This training will require substantial
resources and management attention.

***The seasonality of use
for some of our eGovernment services may harm our fourth quarter results of each
calendar year.***

The use of
some of our eGovernment services is seasonal, particularly the accessing of
drivers' records, resulting in lower revenues from this service in the fourth
quarter of each calendar year, due to the smaller number of business days in
this quarter and a lower volume of transactions during the holiday period. As a
result, seasonality could cause our quarterly results to fluctuate, which could
harm our business, results of operations and financial condition.

***Our quarterly results of
operations may be volatile and difficult to predict. If our quarterly results of
operations fail to meet the expectations of public market analysts or investors,
the market price of our common stock may decrease significantly.***

Our future
revenues and results of operations may vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control,
and any of which may harm our business. These factors include:

- the commencement, completion or
  termination of contracts during any particular quarter;
- the introduction of new eGovernment
  services by us or our competitors;
- technical difficulties or system
  downtime affecting the Internet generally or the operation of our eGovernment
  services;
- the amount and timing of operating costs
  and capital expenditures relating to the expansion of our business operations
  and infrastructure;
- the result of negative cash flows due to
  capital investments; and
- the incurrence of significant charges
  related to acquisitions.

17

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Due to the
factors noted above, our revenues in a particular quarter may be lower than we
anticipate and if we are unable to reduce spending in that quarter, our results
of operations for that quarter may be harmed. One should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
future performance. It is possible that in some future periods our results of
operations may be below the expectations of public market analysts and
investors. If this occurs, the price of our common stock may decline.

***Our acquisitions and
strategic alliances entail numerous risks and uncertainties.***

As part of
our business strategy, we have made and may continue to make acquisitions or
enter into strategic alliances that we believe will complement our existing
businesses, increase traffic to our government clients' sites, enhance our
services, broaden our software and applications offerings or technological
capabilities or increase our profitability. Future acquisitions or joint
ventures could present numerous risks and uncertainties, including:

- difficulties in the assimilation of
  operations, personnel, technologies and information systems of the acquired
  companies;
- the inability to successfully market,
  distribute, deploy and manage new products and services that we have limited
  or no experience in managing;
- the diversion of management's attention
  from our core business;
- the risk that an acquired business will
  not perform as expected;
- risks associated with entering markets
  in which we have limited or no experience;
- potential loss of key employees,
  particularly those of our acquired businesses;
- adverse effects on existing business
  relationships with existing suppliers and customers;
- potentially dilutive issuances of equity
  securities, which may be freely tradable in the public market;
- erosion of our brand equity in the
  eGovernment or financial markets;
- impairment, restructuring and other
  charges related to goodwill and other intangible assets; and
- the incurrence of debt or other
  expenses.

We cannot be
sure that any acquisitions we may announce will ultimately close. Moreover, even
after we close such transactions, we cannot assure that we will be able to
successfully integrate the new businesses or any other businesses, products or
technologies we may acquire in the future.

***Our intellectual
property rights are valuable and any inability to protect them could harm our
company.***

We regard
our intellectual property as important to our success. We rely on a combination
of nondisclosure and other contractual arrangements with governments, our
employees, subcontractors and other third parties, copyrights and privacy and
trade secret laws to protect and limit the distribution of the proprietary
applications, documentation and processes we have developed in connection with
the eGovernment services we offer. Despite our precautions, third parties may
succeed in misappropriating our intellectual property or independently
developing similar intellectual property. If we fail to adequately protect our
intellectual property rights and proprietary information or if we become
involved in litigation relating to our intellectual property rights and
proprietary technology, our business could be harmed. Any actions we take may
not be adequate to protect our proprietary rights, and other companies may
develop technologies that are similar or superior to our proprietary
technology.

18

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***We may be subject to
intellectual property infringement claims, which are costly to defend and could
limit our ability to use certain technologies in the future.***

We may become subject to claims
alleging infringement of third-party intellectual property rights. Any claims
could subject us to costly litigation, and may require us to pay damages and
develop non-infringing intellectual property or acquire licenses to the
intellectual property that is the subject of the alleged infringement. Licenses
for such intellectual property may not be available on acceptable terms or at
all. Litigation regarding intellectual property rights is common in the Internet
and software industries. We expect third-party infringement claims involving
Internet technologies and software products and services to increase. If an
infringement claim is filed against us, we may be prevented from using certain
technologies and may incur significant costs resolving the claim. We cannot
assure that our applications and services do not infringe on the intellectual
property rights of third parties. In addition, we have agreed, and expect that
we may agree in the future, to indemnify certain of our customers against claims
that our services infringe upon the intellectual property rights of others. We
could incur substantial costs in defending ourselves and our customers against
infringement claims. In the event of a claim of infringement, we and our
customers may be required to obtain one or more licenses from third parties. We
cannot assure that we or our customers could obtain necessary licenses from
third parties at a reasonable cost or at all.

***We generally grant our
customers fully paid licenses to use the software and applications we develop
for use in their portals. If customers elect to terminate our contracts and
manage portal operations internally, our revenues and profits could decline.***

After
termination of our contracts, it is possible that governments and their
successors and affiliates may use their right of use license rights to the
software programs and other applications we have developed for them in the
operation of their portals to operate the portals themselves. This could
adversely affect our revenues and profits. Additionally, they may inadvertently
allow our intellectual property or other information to fall into the hands of
third parties, including our competitors.

***We depend on technology
licensed to us by third parties, and the loss of this technology could delay
implementation of our services or force us to pay higher license fees.***

We license
numerous third-party technologies and applications that we incorporate into our
existing service offerings, on which, in the aggregate, we are substantially
dependent. There can be no assurance that the licenses for such third-party
technologies will not be terminated or that we will be able to license
third-party technology and applications for future services. While we do not
believe that one individual technology or application we license is material to
our business, changes in or the loss of third party licenses could lead to a
material increase in the costs of licensing or to our products becoming
inoperable or their performance being materially reduced, with the result that
we may need to incur additional development or procurement costs in an attempt
to ensure continued performance of our services, and either the cost of such
undertakings or the failure to successfully complete such undertakings could
have a material adverse effect on our business, results of operations and
financial condition.

***We depend on the
increasing use of the Internet and on the growth of online government
information systems. If the use of the Internet and eGovernment information
systems does not grow as anticipated, our business will be seriously harmed.***

Our business
depends on the increased acceptance and use of the Internet as a medium for
accessing public information and completing government filings. Rapid growth in
the use of the Internet is a relatively recent phenomenon. As a result,
acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of individual and business customers may not adopt or
continue to use the Internet as a medium for accessing government portals and
other online services. Demand and market acceptance for recently introduced
services over the Internet are subject to a high level of uncertainty, and there
exist few proven services.

Our business would be seriously
harmed if:

- use of the Internet and other online
  services does not continue to increase or increases more slowly than expected;
  or
- the technology underlying the Internet
  and other online services does not effectively support any expansion that may
  occur.

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***If the Internet
infrastructure fails to develop or be adequately maintained, our business would
be harmed because users may not be able to access our government portals.***

The Internet
has experienced, and is expected to continue to experience, significant growth
in the number of users and amount of traffic. If the Web continues to experience
increased numbers of users, frequency of use or increased bandwidth
requirements, the Internet infrastructure may not be able to support these
increased demands or perform reliably. The Internet has experienced a variety of
outages and other delays as a result of damage to portions of its
infrastructure, and could face such outages and delays in the future. These
outages and delays could reduce the level of Internet usage and traffic on our
government portals. Such outages and delays would also hinder our customers'
ability to complete eGovernment transactions. In addition, the Internet could
lose its viability due to delays in the development or adoption of new standards
and protocols to handle increased levels of activity or due to increased
governmental regulation. If the Internet infrastructure is not adequately
developed or maintained, use of our government portals and our
government-to-citizen and government-to-business services may be reduced.

Our success
depends on the increase in Internet usage generally and in particular as a means
to access public information electronically. This in part requires the
development and maintenance of the Internet infrastructure. If this
infrastructure fails to develop or be adequately maintained, our business would
be harmed because users may not be able to access our government portals. Among
other things, this development and maintenance will require a reliable network
backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access and
services.

***To be successful, we
must develop and market comprehensive, efficient, cost-effective and secure
electronic access to public information and new services.***

Our success
depends in part upon our ability to attract a greater number of Internet users
to access public information electronically by delivering a comprehensive
composite of public information and an efficient, cost effective and secure
method of electronic access and transactions. Moreover, in order to increase
revenues in the future, we must continue to develop services that businesses and
citizens will find valuable, and there is no guarantee that we will be able to
do so. If we are unable to develop services that allow us to attract, retain and
expand our current user base, our revenues and future results of operations may
be harmed. We cannot assure that the services we offer will appeal to a
sufficient number of Internet users to generate continued revenue growth. Our
ability to attract Internet users to our government portals depends on several
factors, including:

- the
  comprehensiveness of public records available through our government
  portals;
- the perceived
  efficiency and cost-effectiveness of accessing public records
  electronically;
- the effectiveness of
  security measures;
- the increased usage
  and continued reliability of the Internet; and
- the user acceptance
  of our online applications and services.

***Security breaches or
system failures may harm our reputation and adversely affect future earnings.***

A
significant challenge to electronic commerce is the secure transmission of
sensitive and/or personal information (information) over public networks. In
addition to complying with requirements established for protecting information
contained in federal and state laws, we are also required to comply with the
Payment Card Industrys Data Security Standards, or PCI DSS, because we provide
online payment processing services. Since we provide the electronic transmission
of information released from various government entities and we perform online
payment processing services, we represent a target for criminal hackers.

Despite the
various security measures we have in place to protect information from
unauthorized disclosure, a compromise or breach may still occur. Hackers have
become increasingly sophisticated and serious, and therefore, cyber security is
an ever moving target. A party who is able to circumvent our security measures
could misappropriate information, including, but not limited to customer credit
card information, or cause interruptions or direct damage to our government
portals.

20

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Any breach
in our security resulting in the compromise of information, could expose us to
finesimposed by the Payment Card Industry and jeopardize our ability to
continue processing transactions with specific payment card brands. Also, should
hackers compromise information, or create bugs or viruses in an attempt to
sabotage the functionality of our applications and services, we may receive
negative publicity, incur liability to our portal users and our partners or lose
the confidence of the governments with whom we contract, any of which may cause
the termination or modification of our government contracts.

***We are subject to
independent audits by our government customers. Deficiencies in our performance
under a government contract could result in contract termination, reputational
damage or financial penalties.***

Each
government entity with which we contract for outsourced portal services has the
authority to require an independent audit of our performance. The scope of
audits could include inspections of income statements, balance sheets, fee
structures, collections practices, service levels and our compliance with
applicable laws, regulations and standards. We cannot assure that a future audit
will not find any material performance deficiencies that would result in an
adjustment to our revenues and result in financial penalties. Moreover, the
consequent negative publicity could harm our reputation among other governments
with which we would like to contract. All of these factors could harm our
business, results of operations and financial condition.

***We may be unable to
integrate new technologies and industry standards effectively.***

Our future
success will depend on our ability to enhance and improve the responsiveness,
functionality and features of our services in accordance with industry standards
and to address the increasingly sophisticated technological needs of our
customers on a cost-effective and timely basis. Our ability to remain
competitive will depend, in part, on our ability to:

- enhance and improve
  the responsiveness, functionality and other features of the government portals
  we offer;
- continue to develop
  our technical expertise;
- develop and
  introduce new services, applications and technology to meet changing customer
  needs and preferences; and
- influence and
  respond to emerging industry standards and other technological changes in a
  timely and cost-effective manner.

We cannot
assure that we will be successful in responding to the above technological and
industry challenges in a timely and cost-effective manner. If we are unable to
integrate new technologies and industry standards effectively, our business
could be harmed.

***We may be held liable
for content that we obtain from government agencies.***

Because we
aggregate and distribute sometimes private and sensitive public information over
the Internet, we may face potential liability for defamation, libel, negligence,
invasion of privacy, copyright or trademark infringement, and other claims based
on the nature and content of the material that is published on our outsourced
government portals. Most of the agreements through which we obtain consent to
disseminate this information do not contain indemnity provisions in our favor.
These types of claims have been brought, sometimes successfully, against online
services and Web sites in the past. We cannot assure that our general liability
or errors and omissions insurance will be adequate to indemnify us for all
liability that may be imposed. Any liability that is not covered by our
insurance or is in excess of our insurance coverage could severely harm our
business operations and financial condition.

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***Our systems may fail or
limit user traffic.***

Most of our
communications hardware and computer hardware operations for delivering our
eGovernment services are located individually in each state or city where we
provide those services. We cannot assure that during the occurrence of fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events that the modem banks and direct dial-up
connections we have to serve as back-up systems will not prevent damage to our
systems or cause interruptions to our services. Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting our government portals and could cause our partners to terminate
agreements with us. If any of these circumstances occurred, our business could
be harmed. Our insurance policies may not adequately compensate us for any
losses that may occur due to any failures of or interruptions in our
systems.

Our
government portals must accommodate a high volume of traffic and deliver
frequently updated information. These government portals may experience
interruptions due to any failure or delay by government agencies in the
transmission or receipt of this information. Due to holidays and technical
problems with state computer systems, our Web sites have experienced slower
response times or decreased traffic in the past and may experience the same
incidents in the future. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our government portals and other online government-to-citizen and
government-to-business services. Many of these providers and operators have
experienced significant outages in the past due to system failures unrelated to
our systems, holidays and heavy user traffic, and could experience the same
outages, delays and other difficulties in the future. Any of these system
failures could harm our business, results of operations and financial condition.

We may
become subject to liability under NACHA rules and standards for processing
electronic direct debit payments from bank accounts.

Our
electronic check processing for online payments made by direct debit to a bank
account is governed by rules and standards promulgated by the National Automated
Clearing House Association, or NACHA, an industry trade association of banking
institutions and regional automated clearing house associations. Under those
rules, we may become potentially liable for failing to handle transactions in
accordance with those rules, or for failing to return funds within the
prescribed time frame to the bank account of the person or entity disputing our
authorization to debit those funds, before the dispute regarding our
authorization is resolved. Our agreements with governmental agencies at the
state, federal, and local level transfer this obligation for rapid funds return
during dispute resolution to the government agencies affected, but in the event
that such return does not happen, we may be potentially liable notwithstanding
the governments failure, and we may not be able to obtain reimbursement from
the government involved or from the individual user or entity that initiated the
debit without authorization. If this were to happen, our business, results of
operations and financial condition may be adversely affected.

We may
become liable for violations of the Driver Privacy Protection Act as adopted
federally or in each state.

We act as an
outsourced manager on behalf of states, for electronic access to records
pertaining to motor vehicles and motor vehicle operators (driver history
records) by users and certain permitted resellers. These records are the largest
group of records for which we process electronic access for any state agency,
and are processed in each of our portal states. These records contain personal
information and sensitive personal information as defined by the federal
Driver Privacy Protection Act, and state versions of that Act adopted in every
state (collectively, the DPPA). The DPPA regulates categories and
circumstances under which personal information and sensitive personal
information may be disclosed to requestors. Each state has procedures for
complying with the DPPA, and such procedures may vary from state to state. We
closely follow the states existing compliance procedures for general access,
with our electronic access. If we fail to follow such procedures, or we grant
access to users not in compliance with such procedures, or if such procedures
are deemed inadequate in some way, our business, results of operations and
financial condition may be adversely affected. The DPPA permits statutory
damages to be awarded to the subjects of such records, even without proof of
actual damage, for certain infringements or violations of the DPPA. We may be
potentially liable for such damages in such instances, and we may have no
recourse against the state, or the state may not be jointly and severally liable
with us.

22

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***Compliance with changing regulation of corporate
governance and public disclosure may result in additional expenses.***

Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new
SEC regulations and NASDAQ Global Select Market rules, are creating uncertainty
for companies such as ours. These new or changed laws, regulations and standards
are subject to varyinginterpretations in many cases due to their lack of
specificity, and as a result, their application in practice may evolve over time
as new guidance is provided by regulatory and governing bodies, which could
result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices. We are
committed to maintaining high standards of corporate governance and public
disclosure. As a result, our efforts to comply with evolving laws, regulations
and standards have resulted in, and are likely to continue to result in,
increased general and administrative expenses and a diversion of management time
and attention from revenue-generating activities to compliance activities. In
particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of
2002 and the related regulations regarding our required assessment of our
internal control over financial reporting has required the commitment of
significant financial and managerial resources. Further, our board members,
chief executive officer and chief financial officer could face an increased risk
of personal liability in connection with the performance of their duties. As a
result, we may have difficulty attracting and retaining qualified board members
and executive officers, which could harm our business. If our efforts to comply
with new or changed laws, regulations and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities related to
practice, our reputation may be harmed.

***An SEC investigation
involving us has resulted in significant costs to us, may result in future costs
to us, and could adversely affect us.***

As further discussed in Note 8 in
the Notes to the Consolidated Financial Statements included in this Form 10-K,
we have been the subject of an informal SEC inquiry (now a formal SEC
investigation) of expense reporting by certain officers of the Company and
certain potentially related matters. In connection with this matter, a review
was undertaken by the Audit Committee of our Board of Directors, with the
assistance of outside, independent counsel, which focused on such expense
reporting. The review revealed that expense reimbursement deficiencies occurred
during the period from January 2004 through October 2006 related to Jeffery S.
Fraser, who was then our Chairman of the Board and Chief Executive Officer, and
that the amount of such deficiencies was not material to our financial condition
or results of operations.

During the second quarter of 2008,
we received notice from the SEC that a formal order of investigation was issued
with respect to these matters. As is frequently the case in such situations, the
SEC took the step of obtaining a formal order of investigation to ensure the
thoroughness of its investigation. Both we and our Audit Committee intend to
continue to fully cooperate with the SEC investigation. However, there can be no
assurance that the SEC will not take any action that could adversely affect us
as a result of the matters it is reviewing. We have incurred significant legal
fees and other expenses in connection with the SEC investigation and the Audit
Committee review and could incur significant legal fees and other expenses in
connection with the ongoing, SEC investigation. In addition, members of our
management have devoted in the past, and may need to devote in the future, a
significant amount of time to these matters, which would reduce the amount of
time they can devote to our business and therefore have an adverse effect on our
business.

***Increases in credit card
association fees may result in the loss of customers or a reduction in our
earnings.***

From time to time,
Visa, MasterCard, American Express and Discover increase the fees (interchange
and assessment fees) that they charge processors such as us. We could attempt to
pass these increases along to our government client customers, but this might
result in the loss of those customers. If we elect not to pass along such
increased fees to our government client customers in the future, we may have to
absorb all or a portion of such increases thereby increasing our operating costs
and reducing our earnings.

***Our UCC and corporate
filings software development business has incurred losses under its fixed-fee
contracts in the past, and our results of operations could be harmed if the
costs that this business incurs to meet contractual commitments exceed our
current estimates.***

Our UCC and
corporate filings software development business, NIC Conquest, develops and
delivers applications, typically for a fixed development fee, that improve the
back-office administration of government records and better enable electronic
filing and distribution of business entity and UCC records for secretaries of
state. This business recognizes revenues on the percentage-of-completion method
of accounting utilizing costs incurred to date as compared to the estimated
total costs for each contract. This method is used because management considers expended costs to be the best available measure of
progress on our fixed-price contracts and results in our recognizing contract
revenues over the contract term in proportion to our incurrence of contract
costs. The earnings or losses recognized on individual contracts are based on
estimates of contract revenues and costs. Contract losses are recognized in full
when determined, and contract profit estimates are adjusted based on ongoing
reviews of contract profitability. Actual results could differ from estimated
amounts and could result in a reduction or elimination of previously recognized
earnings. In certain circumstances, such adjustments could be significant.

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In the first
quarter of 2005, we recorded a $5.0 million charge due to anticipated cost
overruns on our contract with the California Secretary of State, as further
discussed in Note 2 in the Notes to Consolidated Financial Statements included
in this Form 10-K. In June 2006, the California Secretary of State officially
accepted the UCC system, which also commenced the maintenance and operations
phase of the contract. However, it is possible that our costs will similarly
exceed revenues in the future, as a result of unforeseen difficulties in the
creation of an application called for in the contract, unforeseen challenges in
ensuring compatibility with existing systems, rising development, subcontractor
and personnel costs, delays in completing the contract, or other reasons. If
this occurs, our results of operations, financial condition and cash flows could
be seriously harmed.

***We depend on other
contractors and subcontractors in connection with our performance under our UCC
and corporate filings software development engagement with the California
Secretary of State. If these parties fail to satisfy their obligations to us or
the California Secretary of State, or if we are unable to maintain these
relationships, our operating results and business prospects could be adversely
affected.***

A
significant portion of the work we are obligated to deliver to the California
Secretary of State is performed by subcontractors. There is a risk that the
California Secretary of State or we may have disputes with our subcontractors
arising from, among other things, the quality and timeliness of work performed
by the subcontractors and customer concerns about the subcontractors. Disputes
with subcontractors or the California Secretary of State could lead to legal
disputes and litigation. Adverse judgments or settlements in legal disputes may
result in significant monetary damages or injunctive relief against us. In
addition, if any of our subcontractors fails to deliver on a timely basis the
agreed-upon supplies and/or perform the agreed-upon services, our ability to
fulfill our obligations as a prime contractor may be jeopardized. Subcontractor
performance deficiencies could result in the termination of our contract for
default. A termination for default could expose us to liability and have an
adverse effect on our business prospects, financial condition, and on our
ability to compete for future contracts and orders.

***We have incurred
significant net losses in the past, and may do so again in the future.***

We expanded
rapidly following our initial public offering in July 1999 and incurred
substantial net losses through mid-2002 primarily as a result of our acquired
software & services businesses. However, as part of a broad strategic
refocusing of the Company on our profitable core outsourced portal business
during 2002, we exited our eProcurement business, NIC Commerce, decided to wind
down our transportation business, IDT, and restructured the other software &
services businesses, in an effort to accelerate our path to profitability. As a
result, the Company became profitable in the second half of 2002 and has been
profitable since that time with the exception of the first quarter of 2005, as a
result of the $5.0 million charge we recorded on our UCC and corporate filings
software development engagement with the California Secretary of State, our only
remaining legacy contract from this business. Further, even though we were
profitable in 2008, we may not be able to sustain or increase profitability on a
quarterly or annual basis thereafter. We will need to generate significantly
higher revenues while containing costs and operating expenses if we are to
achieve growing profitability. We cannot be certain that our revenues will
continue to grow or that we will ever achieve sufficient revenues to remain
profitable on a long-term, sustained basis.

***We may be unable to
generate sufficient taxable income from future operations to fully utilize our
significant tax net operating loss carryforwards.***

We have a
history of unprofitable operations primarily due to operating losses incurred in
the software & services companies we have acquired since September 1999, as
further discussed above. These losses have generated significant federal tax net
operating losses, or NOLs. We had available at December 31, 2008, total NOL
carryforwards for federal tax purposes of approximately $7.3 million that will
expire in the year 2022. As of December 31, 2008 total net deferred tax assets,
including NOL carryforwards, comprised approximately 9% of our total assets. We became profitable in the second half of 2002 and have
been profitable since that time with the exception of the first quarter of 2005,
as further discussed above. Further, even though we currently expect to be
profitable and generate taxable income in 2009 and beyond, we may not be able to
sustain the necessary levels of taxable income to fully utilize our NOL
carryforwards prior to expiration. There is considerable management judgment
necessary to determine future taxable income, and accordingly, actual results
could vary significantly from such estimates. Accordingly, the recorded amount
of the deferred tax assets considered realizable could be reduced in the near
term if estimates of future taxable income during the carryforward periods are
reduced. If this occurs, our results of operations, financial condition and cash
flows could be seriously harmed.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal administrative office occupies a total of approximately
20,000 square feet of leased space at 25501 West Valley Parkway, Suite 300,
Olathe, Kansas 66061. All of our subsidiaries also lease their facilities. We do
not own any real property and do not currently anticipate acquiring real
property or buildings in the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

As discussed in Note 8 in the Notes to the Consolidated Financial
Statements included in this Form 10-K, as well as under Item 1A of this Form
10-K, we are currently the subject of an SEC investigation of expense reporting
by certain officers of the Company and certain potentially related matters. In
connection with this matter, a review was undertaken by the Audit Committee of
our Board of Directors, with the assistance of outside, independent counsel,
which focused on such expense reporting. The review revealed that expense
reimbursement deficiencies occurred during the period from January 2004 through
October 2006 related to Jeffery S. Fraser, who was then our Chairman of the
Board and Chief Executive Officer, and that the amount of such deficiencies was
not material to our financial condition or results of operations.

In addition, the Company is involved from time to time in legal
proceedings and litigation arising in the ordinary course of business. However,
the Company is not currently involved with any other legal
proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS

No matters were submitted to a vote of the shareholders during the fourth
quarter of fiscal 2008.

25

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the NASDAQ Global Select Market under the
symbol "EGOV." The following table shows the range of high and low sales prices
reported on the NASDAQ Global Select Market for the periods indicated. On
February 28, 2009, the closing price of our common stock was $4.98.

Fiscal Year
      Ended December 31, 2007
    
    
    High
    
    LowFirst
      Quarter
    
    $5.82
    
    $4.96Second Quarter
    
    $6.94
    
    $5.23Third
      Quarter
    
    $7.70
    
    $6.23Fourth Quarter
    
    $8.90
    
    $6.70Fiscal Year
      Ended December 31, 2008
    
    
    High
    
    LowFirst
      Quarter
    
    $8.81
    
    $5.86Second Quarter
    
    $8.58
    
    $6.48Third
      Quarter
    
    $7.75
    
    $6.36Fourth Quarter
    
    $6.61
    
    $3.59


As of February 28, 2009, there were approximately 388 holders of record
of shares of our common stock.

Dividend Policy

On February 3, 2009, the NIC Board of Directors declared a special cash
dividend of $0.30 per share, payable to shareholders of record as of February
17, 2009. The dividend, totaling approximately $19.2 million, was paid on
February 27, 2009, out of the Companys available cash.

On February 4, 2008, the NIC Board of Directors declared a special cash
dividend of $0.25 per share, payable to shareholders of record as of February
18, 2008. The dividend, totaling approximately $15.7 million, was paid on
February 28, 2008, out of the Companys available cash and short-term
investments.

On January 29, 2007, the NIC Board of Directors declared a special cash
dividend of $0.75 per share, payable to shareholders of record as of February
12, 2007. The dividend, totaling approximately $46.7 million, was paid on
February 20, 2007 out of the Companys available cash and short-term
investments.

Any future determination as to the payment of dividends will be made at
the discretion of the NIC Board of Directors and will depend on our operating
results, financial condition, capital requirements, general business conditions
and such other factors as the Board of Directors deems relevant.

Performance Graph

The
following performance graph below compares the annual change in our cumulative
total shareholder return on our common stock during a period commencing on
December 31, 2003, and ending on December 31, 2008 (as measured by dividing (i)
the sum of (A) the cumulative amount of dividends for the measurement period,
assuming dividend reinvestment and (B) the difference between our share price at
the end and the beginning of the measurement period; by (ii) the share price at
the beginning of the measurement period) with the cumulative total return of
each of: (a) the NASDAQ Composite (U.S.) Index and (b) a Peer Group, assuming a
$100 investment on December 31, 2003. It should be noted that on February 20,
2007 we paid a special cash dividend of $0.75 per share and on February 28, 2008
we paid a special cash dividend of $0.25 per share, both of which are included
in the presentation of our performance. We did not pay any other dividends on
our common stock during the period commencing on December 31, 2003, and ending
on December 31, 2008. The stock price performance on the graph below is not
necessarily indicative of our future price performance.

26

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Comparison of Cumulative Total Return
AmongNIC Inc., NASDAQ Composite (U.S.) Index and a Peer Group




|Total Return
      Analysis
|---------------------------
|                           
|NIC Inc.                   
|Peer Group                 
|Nasdaq
      Composite     

The Peer Group
consists of six companies, each of whose business focus is similar to that of
NIC. While not all of the companies provide services exclusively to governments,
the services provided are similar to those we provide. The members of the Peer
Group are as follows: PEC Solutions, Inc. (PECS), Bearing Point, Inc. (BE)
(formerly known as KPMG Consulting, Inc. (KCIN)), Accenture, Ltd. (ACN),
International Business Machines Corp. (IBM), Maximus, Inc. (MMS) and American
Management Systems, Inc. (AMSY). American Management Systems, Inc. was included
until May 3, 2004, when, as a result of the merger with CGI Group, Inc., it was
no longer a member of the Peer Group. PEC Solutions, Inc. was included until
April 26, 2005, when, as a result of its merger with a subsidiary of Nortel
Networks, Inc., it was no longer a member of the Peer Group.

The performance graph and related text are being furnished to and not
filed with the SEC, and will not be deemed to be soliciting material or
subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to
the liabilities of Section 18 of the Securities Exchange Act of 1934, and will
not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent we specifically incorporate such information by reference into such a
filing.

27

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(c) During
2008, the Company acquired shares of common stock surrendered by employees to
pay income taxes due upon the vesting of restricted stock, as follows:

|                  |           |            | Total Number of           | Maximum Number (or                
|----------------- | --------- | ---------- | ------------------------- | ----------------------------------
|                  | Total     |            | Shares Purchased
      as | Approximate Dollar Value)
      of
|                  | Number of | Average    | Part of
    Publicly      | Shares that May Yet
      Be      
|                  | Shares    | Price Paid | Announced Plans
    or    | Purchased Under the Plans
      or
|Period            | Purchased | per Share  | Programs                  | Programs                          
|January 29, 2008  | 2,012     | $7.24      | N/A                       | N/A                               
|May 1, 2008       | 1,829     | $7.09      | N/A                       | N/A                               
|June 1, 2008      | 1,830     | $8.07      | N/A                       | N/A                               
|July 24, 2008     | 1,271     | $7.48      | N/A                       | N/A                               
|July 31, 2008     | 32,300    | $7.66      | N/A                       | N/A                               
|August 1, 2008    | 18,714    | $7.38      | N/A                       | N/A                               
|October 19, 2008  | 5,117     | $5.25      | N/A                       | N/A                               
|November 5, 2008  | 739       | $5.41      | N/A                       | N/A                               
|November 19,
2008 | 325       | $3.74      | N/A                       | N/A                               

ITEM 6. SELECTED CONSOLIDATED FINANCIAL
DATA

The selected consolidated financial
data set forth below should be read in conjunction with the consolidated
financial statements and related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included in this
Form 10-K.

|                                                            |  | Year Ended December
      31,              
|----------------------------------------------------------- |  | -------------------------------------------
|                                                            |  | 2004                                       
|Consolidated
      Statement of Income Data:                |  | (in
      thousands, except per share data)
|Total
      revenues                                        |  | $55,762                                    
|Operating income                                            |  | 11,800                                     
|Income from continuing operations                           |  | 7,105                                      
|Net income                                                  |  | 7,105                                      
|Income per share from continuing operations 
    basic     |  | 0.12                                       
|Income per share from
      continuing operations  diluted |  | 0.12                                       
|Net
      income per share  basic                          |  | 0.12                                       
|Net income per share 
      diluted                        |  | 0.12                                       

28

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As further discussed in Note
2 in the Notes to Consolidated Financial Statements included in this Form 10-K,
we recorded a $5.0 million charge for the anticipated contract loss under our
contract with the California Secretary of State in the first quarter of 2005.

|                                                        |  | December 31,                                 
|------------------------------------------------------- |  | ---------------------------------------------
|                                                        |  | 2004                                         
|Consolidated Balance
      Sheet Data:                  |  | (in thousands, except for dividends declared)
|Total
      assets                                      |  | $                                            
|Long-term debt
      (includes current portion of notes |  |                                              
|payable/capital lease
      obligations)                |  |                                              
|Dividends declared per share outstanding on             |  |                                              
|February 12, 2007                                       |  |                                              
|February 18, 2008                                       |  |                                              
|Total
      shareholders' equity                        |  |                                              

As further discussed in Note
9 in the Notes to Consolidated Financial Statements included in this Form 10-K,
we paid a special dividend totaling approximately $46.7 million out of our
available cash and short-term investments in February 2007 and we paid a special
dividend totaling approximately $15.7 million out of our available cash and
short-term investments in February 2008.

ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Caution about Forward-Looking
Statements

"Safe Harbor" statement under the Private
Securities Litigation Reform Act of 1995: Statements in this Annual Report on
Form 10-K regarding NIC and its business, which are not current or historical
facts, are forward-looking statements that involve risks and uncertainties.
Certain matters discussed in this report may constitute forward-looking
statements within the meaning of the federal securities laws that inherently
include certain risks and uncertainties. Forward-looking statements include, but
are not limited to, statements of plans and objectives, statements of future
economic performance or financial projections, statements of assumptions
underlying such statements, and statements of the Company's or management's
intentions, hopes, beliefs, expectations or predictions of the future. For
example, statements like we "expect," we "believe," we "plan," we "intend" or we
"anticipate" are forward-looking statements. Investors should be aware that our
actual operating results and financial performance may differ materially from
our expressed expectations because of risks and uncertainties about the future
including those risks discussed in this 2008 Annual Report on Form 10-K. In
addition, we will not necessarily update the information in this Form 10-K if
any forward-looking statement later turns out to be inaccurate. Investors are
cautioned not to put undue reliance on any forward-looking statement.

*There are a number of
important factors that could cause actual results to differ materially from
those suggested or indicated by such forward-looking statements. These include,
among others, the success of the Company in signing contracts with new states
and government agencies, including continued favorable government legislation;
NIC's ability to develop new services; existing states and agencies adopting
those new services; acceptance of eGovernment services by businesses and
citizens; competition; and general economic conditions (including the recent
deterioration in general economic conditions) and the other factors discussed
under CAUTIONS ABOUT FORWARD LOOKING STATEMENTS in Part I and RISK FACTORS
in Part I, Item 1A of this 2008 Annual Report on Form 10-K. Investors should
read all of these discussions of risks carefully.*

What We Do  An Executive Summary

We are a leading provider of
eGovernment services that help governments use the Internet to reduce costs and
provide a higher level of service to businesses and citizens. We accomplish this
currently through two divisions: our core portal outsourcing businesses and our
software & services businesses.

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In our core
business, portal outsourcing, we enter into contracts primarily with state
governments and design, build and operate Web-based portals on their behalf. We
enter into long-term contracts, typically three to five years, andmanage operations for each government partner through separate
subsidiaries that operate as decentralized businesses with a high degree of
autonomy. Our portals consist of Web sites and applications that we build, which
allow businesses and citizens to access government information online and
complete transactions, including applying for a permit, retrieving driver's
license records or filing a form or report. We help increase our government
partners revenues by expanding the distribution of their information assets and
increasing the number of financial transactions conducted with governments. We
do this by marketing portal services and soliciting users to complete
government-based transactions and to enter into subscriber contracts that permit
users to access the portal and the government information contained therein in
exchange for transactional and/or subscription user fees. We are typically
responsible for funding up-front investment and ongoing operational costs of the
government portals. Our unique self-funding business model allows us to reduce
our government partners' financial and technology risks and obtain revenues by
sharing in the fees generated from eGovernment services. Our partners benefit
because they gain a centralized, customer-focused presence on the Internet.
Businesses and citizens gain a faster, more convenient and more cost-effective
means to interact with governments.

On behalf of our government partners, we enter into separate agreements
with various agencies and divisions of the government to provide specific
services and to conduct specific transactions. These agreements preliminarily
establish the pricing of the transaction and data access services we provide and
the division of revenues between the Company and the government agency. The
government must approve prices and revenue sharing agreements. We generally own
all the applications developed under these contracts. After completion of a
defined contract term, the government agency typically receives a perpetual,
royalty-free license to the applications for use only. If our contract were not
renewed after a defined term, the government agency would be entitled to take
over the portal in place with no future obligation of the Company. In some
cases, we enter into contracts to provide consulting, application development
and portal management services to governments in exchange for an agreed-upon
fee.

Currently, we have contracts to provide portal outsourcing services for
21 states. Our closest competitor operates one state portal.

Our objective is to strengthen our position as the leading provider of
Internet-based eGovernment services. Key strategies to achieve this objective
include:

- Renew all current outsourced government portal contracts First and foremost, we will strive to
  obtain renewal of all currently profitable outsourced government portal
  contracts. In the history of our company, we have not lost a contract renewal
  opportunity or re-bid process and are very proud of our highly reference-able
  list of government partners.
- Win new portal contracts A key
  objective of the Company, beginning in 2007, was to accelerate new state
  portal contract wins by making incremental expenditures in the areas of
  business development and marketing, through a combination of additional sales
  personnel, strategic advertising and public relations initiatives. In2008, we continued with similar levels of
  investment in business development and portal operations to drive long-term
  growth. Our goal is to continue expanding our number of government partners by
  leveraging our strong relationships with current government partners and our
  reputation for providing proven eGovernment services. We intend to continue
  marketing our services to new governments. Our expansion efforts include
  developing relationships and sponsors throughout an individual government
  entity, pursuing strategic technology alliances, making presentations at
  conferences of government executives with responsibility for information
  technology policy, and developing contacts with organizations that act as
  forums for discussions between these executives.
- Increase transactional revenues from our existing government portals Part of our strategy is to increase
  transactional revenues from our existing government portals by building new
  applications and services, taking successful applications and services and
  implementing them in our other government portal states, and increasing the
  adoption of existing portal applications and services. We intend to accomplish
  this with new service offerings, increased operational focus and expanded
  marketing initiatives. In addition, we will work closely with the governance
  entities in our partner portals to evaluate the pricing of new and existing
  services to encourage higher usage and increased revenue streams. We plan to
  continue our development of new online transactional services that enable
  government agencies to interact more effectively and efficiently with
  businesses, citizens and other government agencies. We will continue to work
  with government agencies, professional associations and other organizations to better understand the current and future needs of our customers. We will continue to work with our government partners to create awareness of the online alternatives to traditional government interaction through initiatives such as informational brochures, government voicemail recordings and inclusion of Web site information on government communication materials. In addition, we will continue to update our portals to highlight new government service information provided on the portals. We plan to work with professional associations to directly and indirectly communicate to their members the potential convenience, ease of use and other benefits of the services our portals offer.

30

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In addition to
overall portal revenue growth, which includes both organic revenue growth and
growth from new portal contracts, an important financial metric that we use to
gauge our success in increasing transactional revenues in our existing portal
businesses is same state revenue growth. Prior to July 1, 2006, we defined same
state revenues as those from states in operation and generating DMV revenues for
two full years. DMV revenues are transaction fees that we earn from the sale of
driver history records through the portals we operate. Our Indiana portal
subsidiary signed a new long-term contract with the state of Indiana that
commenced on July 1, 2006. This contract is based on a funding model that
includes recurring fixed monthly fees for baseline services and primarily time
and materials pricing for variable services. Historically, the majority of
revenues under this contract were DMV and non-DMV transaction-based. Under the
new contract, the majority of revenues will be classified as portal management.
Because the majority of revenues from the Indiana contract are generally
recurring, we have continued to include Indiana portal revenues in the
calculation of same state revenue growth even though we no longer earn DMV
transaction-based revenues under the contract. In June 2007, we signed a similar
long-term contract with the state of Arizona that is based on a funding model
that includes recurring fixed monthly fees for baseline services and primarily
time and materials pricing for variable services. Under this contract, the
majority of revenues are classified as portal management.

Our long-term
goal is to grow same state revenues 10-15% per year, absent online DMV price
increases. Same state portal revenues grew 11% in 2008, 15% in 2007 and 10% in
2006, including DMV price increases in 2007 as described below. Our same state
revenue growth in 2007 was higher than our growth in 2008 and 2006 primarily due
to increases in same state DMV and non-DMV transaction based revenue growth. In
2007, same state DMV revenues grew by 10% (excluding Indiana from the
calculation) primarily due to DMV price increases in three of our portal states
in late 2006. In 2008, same state DMV revenues grew by 1% (excluding Indiana
from the calculation) and were not impacted by DMV price increases. In 2006,
same state DMV revenues grew by 3% (excluding Indiana from the calculation) and
were not impacted by DMV price increases. Historically, DMV price increases have
been relatively infrequent, and our ability to grow same state DMV revenues has
been limited, as such revenues have beendriven by broader economic factors outside of
our control. Absent DMV price increases, same state DMV revenues have
historically grown at a rate of 1% to 3% per year, with our historical average
closer to 3%. We believe our DMV revenues in 2008 were negatively affected by
the worsening of the broader macroeconomic conditions throughout the year, which
we currently expect may continue into 2009. As a result, we currently project
same-state DMV revenue growth to be flat or slightly negative in 2009.

An important
component of same state revenue growth is the growth in non-DMV transaction
revenues, which are transaction fees generated by other means than from the sale
of DMV records, for transactions conducted primarily by business users and, to a
lesser extent, consumer users through our portals. In 2008, same state non-DMV
revenues grew 25% (excluding Indiana from the calculation), down from 31% in
2007and 27% in 2006. We are able to grow non-DMV revenues by continually
deploying new revenue generating applications and by driving adoption of
existing applications within our existing portal businesses. We believe a key
factor in organically growing our revenues is to continually focus on driving
adoption, and on implementation of new non-DMV revenue generating applications.
We currently expect same-state non-DMV transaction based revenues to grow by
our historical average of approximately 25% in 2009.

- *Continue to grow profitability* In addition to driving same state revenue
  growth, part of our strategy is to increase profitability by driving cost
  containment efforts throughout the Company and maintaining a lean
  organizational structure that fosters entrepreneurial decision-making and
  innovation and accentuates the strong financial leverage of our business
  model.

31

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An important financial
metric that we use to gauge our portal profitability is portal gross profit
percentage, or gross profit rate, which is calculated by dividing portal
gross profit (portal revenues minus cost of portal revenues, excluding
depreciation and amortization) by portal revenues. Our portal gross profit rate
was 45% in 2008, down from 47% in 2007 and 2006. The decrease in 2008 was
attributable to several factors including weak DMV revenue growth, additional
personnel in several of our portals due to our continued growth and reinvestment
in our core business, and higher stock-based compensation for annual grants of
restricted stock to the Companys management-level portal employees. Also
contributing to this decrease was an increase in bank fees. A growing percentage
of our non-DMV transaction-based revenues are generated from online applications
whereby users pay for information or transactions via credit cards. We typically
earn a percentage of the credit card transaction amount, but also must pay an
associated fee to the bank that processes the credit card transaction. We earn a
lower gross profit percentage on these transactions as compared to our other
non-DMV applications. However, we plan to continue to implement these services
as they contribute favorably to our operating income growth. We carefully
monitor our portal gross profit percentage to strike the balance between
generating a solid return for our shareholders and delivering value to our
government partners through reinvestment in our portal operations. We currently
expect our portal gross profit percentage to be in the mid-40 percent range in
2009.

We also view
selling & administrative costs, expressed as a percentage of portal revenue,
to be an important indicator of the relative year-over-year growth in our
corporate level expenses. Selling & administrative costs as a percentage of
portal revenue were 23% in 2008, 26% in 2007, and 22% in 2006. In 2007, the
increase in selling & administrative costs as a percentage of portal revenue
resulted primarily from our incremental investment in business development and
portal operations to drive long-term growth, as further discussed above. In
2009, we currently expect selling & administrative costs as a percentage of
portal revenue to range from 22% to 23%, which reflects a return to historical
levels of modest expense growth. We also currently expect depreciation and
amortization expense as a percentage of portal revenue to range from 3% to 4%,
as we plan to continue to make key IT infrastructure and security investments to
support our long-term expansion and enhance corporate-wide information
technology security and portal operations.

Finally, our
consolidated operating margin (operating income or loss divided by portal
revenues) is an important measure of our overall profitability. This metric was
19% in 2008 and 20% in 2007, down from 23% in 2006. The decrease from 2006
resulted primarily from our incremental investment in business development and
portal operations to drive long-term growth, as further discussed above. In
addition, stock-based compensation increased by approximately $1.1 million from
2006 to 2008 as a result of annual grants of restricted stock to certain
management-level employees, executive officers, and non-employee directors
pursuant to a company-wide equity compensation program that commenced in
2006.

Overview of Business Models and Revenue
Recognition

We
classify our revenues and cost of revenues into two categories: (1) portal and
(2) software & services. The portal category includes revenues and cost of
revenues primarily from our subsidiaries operating government portals on an
outsourced basis. The software & services category includes revenues and
cost of revenues primarily from our UCC and corporate filings business with the
California Secretary of State and our ethics & elections business with the
Federal Election Commission and the state of Michigan. We currently derive
revenue from three main sources: transaction-based fees, time and
materials-based fees for application development and fixed fees for portal
management services. Each of these revenue types and the corresponding business
models are further described below.

Our portal outsourcing businesses

We
categorize our portal revenues according to the underlying source of revenue. A
brief description of each category follows:

- DMV transaction-based: these are transaction fees from the sale of electronic access
  to driver history records, referred to as DMV records, from our state portals
  to data resellers, insurance companies and other pre-authorized customers on
  behalf of our state partners, and are generally recurring.
- Non-DMV transaction-based: these are transaction fees from sources other
  than the sale of DMV records, for transactions conducted by business users and
  consumer users through our portals, and are generally recurring. For a representative listing of non-DMV services we
  currently offer through our portals, refer to Part I, Item 1 in this Form
  10-K.

32

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- Portal management: these are revenues from the performance of fixed fee portal
  management services for our government partners in the states of Arizona and
  Indiana, and are generally recurring.
- Portal software development: these are revenues from the performance of
  application development projects and other time and materials services for our
  government partners. While we actively market these services, they do not have
  the same degree of predictability as our transaction-based or portal
  management revenues. As a result, these revenues are excluded from our
  recurring portal revenue percentage.

The
highest volume, most commercially valuable service we offer is electronic access
to DMV records through our insurance industry records exchange network. This
service accounted for approximately 48% of our portal revenues in 2008, 54% in
2007, and 59% in 2006. We believe that while this application will continue to
be an important source of revenue, its contribution as a percentage of total
revenues on an individual portal basis will decline modestly as other sources
grow. ChoicePoint, which resells these records to the auto insurance industry,
accounted for approximately 33% of portal revenues in 2008, 40% in 2007, and 47%
in 2006.

In
our outsourced portal businesses for 2008, DMV transaction-based revenues
represented approximately 48% of portal revenues, non-DMV transaction-based
revenues represented approximately 36%, portal software development revenues
represented approximately 8%, and portal management revenues represented
approximately 8%. Portal management revenues as a percentage of total portal
revenues increased in 2008 due to a full year of revenues from our Arizona
portal contract, as further discussed below. Approximately 80% of our
transaction-based revenues related to business-to-government transactions, while
the remaining 20% related to citizen-to-government transactions.

Transaction-based revenues from our outsourced state portal business units are
highly correlated to population, but are also affected by pricing policies
established by government entities for public records, the number and growth of
commercial enterprises and the government entity's development of policy and
information technology infrastructure supporting electronic government.

ChoicePoint and other data resellers and companies who access DMV records
electronically through our insurance industry records exchange network have
entered into contracts with the portals our subsidiaries operate to request
these records from the various states with which we have contracts. Under the
terms of these contracts, we provide data resellers with driver's license and
traffic records that vary by contract, for fees that currently range from $2.00
to $20.00 per record requested. The fees charged to all entities that access DMV
records are the same for records of a particular state. We typically collect the
entire fee, of which a certain portion is remitted to the state by statute.
These contracts are generally self-renewing until canceled by one side or the
other, and generally may be terminated at any time after 60-days notice. These
contracts may be terminated immediately at the option of any party upon a
material breach of the contract by the other party. Furthermore, these contracts
are immediately terminable if the state statute allowing for the public release
of these records is repealed.

We
charge for electronic access to records on a per-record basis and, depending
upon government policies, also on a fixed or sliding scale bulk basis. Our fees
are set by negotiation with the government agencies that control the records and
are typically approved by a government sanctioned oversight body. Generally, our
contracts provide that the amount of any fees we retain to provide us with a
reasonable return or profit is set by governments. We have limited control over
the level of fees we are permitted to retain. We recognize revenues from
transactions (primarily transaction-based information access fees and filing
fees) on an accrual basis net of the transaction fee due to the government, and
we bill end-user customers primarily on a monthly basis. We typically receive a
majority of payments via electronic funds transfer and credit card within 25
days of billing and remit payment to governments within 30 to 45 days of the
transaction. The costs that we pay state agencies for data access are accrued as
accounts receivable and accounts payable at the time revenue from the access of
public information is recognized. We must remit a certain amount or percentage
of these fees to government agencies regardless of whether we ultimately collect
the fees. The pricing of transactions varies by the type of transaction and by
state.

We
expense as incurred all employee costs to start up, operate and maintain
outsourced government portals as costs of performance under the contracts
because, after the completion of a defined contract term, the government
entities with which we contract typically receive a perpetual, royalty-free
license to the applications we developed. Such costs are included in cost of
portal revenues in the consolidated statements of income.

33

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Our software & services businesses

UCC and corporate
filings

Our
UCC and corporate filings software development business derives the majority of
its revenues from fixed-price application development contracts and recognizes
revenues on the percentage of completion method. At December 31, 2008, this
business was primarily engaged in servicing its contract with the California
Secretary of State, as further discussed below, and no longer markets its
applications and services for any new engagements.

Ethics & elections

Our
ethics & elections business derives the majority of its revenues from time
and materials application development and maintenance outsourcing contracts and
recognizes revenues as services are provided. At December 31, 2008, our ethics
& elections business was primarily engaged in servicing its contracts with
the Federal Election Commission and the state of Michigan.

Critical Accounting Policies

Many
estimates and assumptions involved in the application of generally accepted
accounting principles have a material impact on reported financial condition and
operating performance and on the comparability of such reported information over
different reporting periods. A critical accounting policy is one which is both
important to the portrayal of the Companys financial condition and results of
operations and requires managements most difficult, subjective or complex
judgments, often as a result of the need to make estimates and assumptions about
the effect of matters that are inherently uncertain. Our significant accounting
policies are described in Note 2 to the Notes to Consolidated Financial
Statements included in this Form 10-K. We have identified the policies below as
critical to our business operations and the understanding of our results of
operations. Note that the preparation of our consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. There can be no assurance that actual results will
not differ from those estimates.

Management
has discussed the development and selection of the critical accounting policies
described below with the Audit Committee of the Board of Directors, and the
Audit Committee has reviewed the Companys disclosure relating to it in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

Uncertain Tax Positions

We account for uncertain tax
positions in accordance with FASB Interpretation No. (FIN) 48,Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109. The application of income tax law is
inherently complex. Laws and regulations in this area are voluminous and are
often ambiguous. We are required to make many subjective assumptions and
judgments regarding our income tax exposures. Interpretations of and guidance
surrounding income tax laws and regulations change over time. Changes in our
subjective assumptions and judgments can materially affect amounts recognized in
the consolidated balance sheets and statements of income. See Notes 2 and 10 in
the Notes to the Consolidated Financial Statements included in this Form 10-K
for additional detail on our adoption of FIN 48 in the first quarter of 2007 and
our uncertain tax positions.

34

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Deferred income taxes

We recognize deferred income taxes
for the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each year-end
based on enacted laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.

We have a history of unprofitable
operations prior to 2003 primarily due to operating losses incurred in our
software & services businesses. These losses generated significant federal
tax net operating losses, or NOLs. We had available at December 31, 2008, total
NOL carryforwards for federal tax purposes of approximately $7.3 million that
will expire in the year 2022. We became profitable in the second half of 2002.
We currently expect the Company to continue to be profitable and generate
taxable income, and have focused the business on operations that have
demonstrable ability to produce positive taxable income and sustainable cash
flow in the future. We believe it is more likely than not that we will generate
sufficient taxable income from future operations to fully utilize the NOL
carryforwards prior to expiration. Based on our current projections, we
currently expect to fully utilize the NOL carryforwards by the end of 2009. The
recorded amount of the deferred tax assets considered realizable could be
reduced in the near term if estimates of future taxable income during the
carryforward periods are reduced. There is considerable management judgment
necessary to determine future taxable income, and accordingly, actual results
could vary significantly from such estimates. For additional discussion of
deferred income taxes, see Note 10in the Notes to Consolidated Financial
Statements included in this Form 10-K. For the years ended December 31, 2008 and
2007, total net deferred tax assets, including NOL carryforwards, comprised
approximately 9% and 16% of our total assets.

Application development contracts

Our UCC and
corporate filings software development business, NIC Conquest, derives the
majority of its revenues from fixed-price application development contracts and
recognizes revenues on the percentage of completion method, utilizing costs
incurred to date as compared to the estimated total costs for each contract.
This method is used because management considers expended costs to be the best
available measure of progress on our fixed-price contracts and results in our
recognizing contract revenues over the contract term in proportion to our
incurrence of contract costs. The earnings or losses recognized on individual
contracts are based on managements estimates of contract revenues and costs.
Contract losses are recognized in full when determined, and contract profit
estimates are adjusted based on ongoing reviews of contract profitability. Use
of the percentage of completion method requires that management be able to
reasonably estimate total contract costs and costs to complete at each reporting
date. We continuously review and reassess our estimates of contract
profitability.

Our UCC and
corporate filings software development business has historically incurred
substantial losses under its fixed-price contracts primarily due to cost
overruns. In the first quarter of 2005, we recorded a $5.0 million charge due to
anticipated cost overruns on our contract with the California Secretary of State
(as further discussed below and in Note 2 to the Notes to Consolidated Financial
Statements included in this Form 10-K). In June 2006, the California Secretary
of State officially accepted the UCC system, which also commenced the
maintenance and operations phase of the contract. However, it is possible that
our costs will similarly exceed revenues in the future, as a result of
unforeseen difficulties such as rising development, subcontractor and personnel
costs or other reasons. If this occurs, the Companys results of operations,
financial condition and cash flows could be adversely affected. Because of the
inherent uncertainties in estimating the costs of completion, it is at least
reasonably possible that our estimates will change in the near term.

Financial Analysis of Years Ended
December 31, 2008, 2007, and 2006

In this section, we are providing
more detailed information about our operating results and changes in financial
position over the past three years. This section should be read in conjunction
with the consolidated financial statements and related notes included in this
Form 10-K.

35

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Stock-Based Compensation

Effective January 1,
2006, we adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123R (revised 2004), Share-Based Payment, which requires
companies to expense the grant date fair value of stock options and other equity
based compensation issued to employees. For vested stock option awards that were
outstanding on January 1, 2006, the modified prospective application transition
method did not require us to record any additional compensation expense. For
unvested stock option awards that were outstanding on January 1, 2006, awards
that were previously included as part of the pro forma net income and earnings
per share calculations of SFAS No. 123 have been charged to expense over the
remaining vesting period, without any changes in measurement. For all new
equity-based awards that have been granted or modified after January 1, 2006, we
have used SFAS No. 123Rs measurement model, expense recognition, and settlement
provisions.

Beginning January 1, 2006 with the
adoption of SFAS No. 123R, we began recognizing stock-based compensation expense
for the cost of stock options, restricted stock awards and shares issued under
our employee stock purchase plan. The following table presents stock-based
compensation expense included in our consolidated statements of income for the
three years ended December 31, 2008 (in thousands):

|                                                           | **Year Ended December
  31,**
|---------------------------------------------------------- | -----------------------------
|                                                           | **2008**                     
|Cost of portal
      revenues, exclusive of depreciation & |                              
|amortization                                               | $                            
|Cost of software & services
      revenues, exclusive of   |                              
|depreciation
      and amortization                        |                              
|Selling &
      administrative                             |                              
|Stock-based compensation expense
      before income taxes |                              
|Income tax
      benefit                                   |                              
|                                                           |                              
|Net stock-based
      compensation expense                 | $                            

As of
December 31, 2008, there was approximately $0.1 millionof total unrecognized
compensation cost, net of estimated forfeitures, related to nonvested stock
options and approximately $4.9 million of total unrecognized compensation cost,
net of estimated forfeitures, related to service-based nonvested restricted
stock awards (excluding performance-based awards). We expect to recognize the
cost related to stock options over a weighted-average period of one year and the
cost related to restricted stock awards over the next 2.7 years. We did not
grant any stock options during the three years ended December 31, 2008, and do
not currently anticipate granting stock options in the future. Instead, we
expect to grant only restricted stock awards.

We believe that equity-based
compensation, particularly restricted stock awards, will continue to play an
important role in supporting employee retention and providing individuals with
long-term incentives to meet Company goals. For additional information regarding
our adoption of SFAS No. 123R, see Note 11 in the Notes to Consolidated
Financial Statements included in this Form 10-K.

Results of Operations

|Key Financial Metrics                                           |     | 2008 |     | 2007 |     | 2006
|--------------------------------------------------------------- | --- | ---- | --- | ---- | --- | ----
|Revenue growth  outsourced portals                             | 17% |      | 18% |      | 21%
|Same
      state revenue growth  outsourced portals            | 11% |      | 15% |      | 10%
|Recurring portal revenue %                                      | 92% |      | 93% |      | 95%
|Gross
      profit % - outsourced portals                       | 45% |      | 47% |      | 47%
|Selling & administrative expenses as % of portal
      revenues | 23% |      | 26% |      | 22%
|Operating income margin % (operating income as a % of           |     |      |     |      |    
|portal revenues)                                                | 19% |      | 20% |      | 23%

36

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PORTAL REVENUES.
In the analysis below, we have categorized our portal revenues according to the
underlying source of revenue (in thousands), with the corresponding percentage
increase or decrease from the prior year period.

|                            |   |        |  | Increase  |   |      |   |           | Increase |      |   | 
|--------------------------- | - | ------ |  | --------- | - | ---- | - | --------- | -------- | ---- | - | 
|Portal Revenue Analysis     |   | 2008   |  | from 2007 |   | 2007 |   | from 2006 |          | 2006
|DMV
      transaction-based | $ | 46,342 |  | 4         | % |      | $ | 44,387    |          | 8    | % | 
|Non-DMV transaction-based   |   | 34,600 |  | 24        | % |      |   | 27,981    |          | 21   | % | 
|Portal management           |   | 8,342  |  | 58        | % |      |   | 5,289     |          | 140  | % | 
|Portal software development |   | 7,511  |  | 57        | % |      |   | 4,795     |          | 41   | % | 
|                           
|Total                       | $ | 96,795 |  | 17        | % |      | $ | 82,452    |          | 18   | % | 

Portal revenues for 2008 increased 17%, or approximately $14.3 million,
over 2007. This increase was mainly attributable to an 11% increase, or
approximately $9.1 million, in same state portal revenues (outsourced portals in
operation and generating recurring revenue for two full years) and a 6%
increase, or approximately $5.2 million, in revenues from our newer portals,
including Vermont ($0.3 million), which began to generate DMV revenues in March
2007, Arizona ($3.5 million), which began to generate revenues in October 2007
and West Virginia ($1.4 million), which began to generate DMV revenues in
February 2008.

Our Indiana portal subsidiary signed a new long-term contract with the
state of Indiana that commenced on July 1, 2006. The new contract is based on a
funding model that includes recurring fixed monthly fees for baseline services
and primarily time and materials pricing for variable services. Historically,
the majority of revenues under this contract were DMV and non-DMV
transaction-based. Under the new contract, the majority of revenues will be
classified as portal management. Prior to July 1, 2006, we defined same state
revenues as those from states in operation and generating DMV revenues for two
full years. Because the majority of revenues from the new Indiana contract are
generally recurring, we have continued to include Indiana portal revenues in the
calculation of same state revenue growth even though we no longer earn DMV
transaction-based revenues under the contract. Same state portal revenues in
2008 increased 11% over 2007 primarily due to increased transaction revenues
from our Alabama, Arkansas, Colorado, Oklahoma and Utah portals, among others.

Excluding Indiana, same state portal revenues in 2008 increased 12%, or
approximately $8.4 million, over 2007, with same state DMV transaction-based
revenues increasing 1%, or approximately $0.4 million, and same state non-DMV
transaction-based revenues increasing 25%, or approximately $6.1 million
(primarily due to the addition of several new revenue generating applications in
existing portals). Our same state revenue growth in the current year was lower
than the 18% growth we achieved in 2007 primarily due to decreases in same state
DMV and non-DMV transaction-based revenue growth. Excluding Indiana, same state
DMV revenue growth in 2008 was 1% compared to 10% in 2007. The higher growth in
2007 was primarily due to the effect of substantial DMV price increases in three
of our portal states in late 2006. There were no such price increases effective
in 2008. Absent DMV price increases, same state DMV revenues have historically
grown at a rate of 1% to 3% per year, with our historical average closer to 3%.
We also believe our DMV revenues in 2008 were negatively affected by the
worsening of the broader macroeconomic conditions throughout the year, which we
expect may continue into 2009. As a result, we project same-state DMV revenue
growth to be flat or slightly negative in 2009. Same state non-DMV transaction
based revenue growth was 31% in 2007.

Portal revenues for 2007 increased 18%, or approximately $12.4 million,
over 2006. This increase was attributable to a 15% increase, or approximately
$10.5 million, in same state portal revenues and a 3% increase, or approximately
$1.9 million, in revenues at our newer portals, including Vermont ($1.0
million), which began to generate DMV revenues in March 2007 and Arizona ($0.9
million), which began to generate DMV revenues in October 2007.

Excluding Indiana, same
state portal revenues in 2007 increased 18%, or approximately $10.6 million,
over 2006, with same state DMV transaction-based revenues increasing 10%, or
approximately $3.9 million, and same state non-DMV transaction-based revenues
increasing 31%, or approximately $5.8 million (primarily due to the addition of
several new revenue generating applications in existing portals). Our same state
revenue growth in 2007 was higher than the 11% growth we achieved in 2006
primarily due to increases in same state DMV and non-DMV transaction-based
revenue growth. Excluding Indiana, same state DMV revenue growth in 2007 was 10%
compared to3% in
2006. The higher growth in 2007 was primarily due to the effect of substantial
DMV price increases in three of our portal states in late 2006. Same state
non-DMV transaction based revenue growth was 27% in 2006.

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COST OF PORTAL
REVENUES. In the analysis below, we have categorized our cost of portal revenues
between fixed and variable costs (in thousands), with the corresponding
percentage increase or decrease from the prior year period. Fixed costs include
such costs as employee compensation, telecommunication and all other costs
associated with the provision of dedicated client service such as dedicated
facilities. Variable costs consist of costs that vary with our level of portal
revenues and include bank fees required to process credit card and automated
clearinghouse transactions and costs associated with revenue share arrangements
with our state partners.

|                                |   |        |  | Increase from |   |      |   |        | Increase from |      |   | 
|------------------------------- | - | ------ |  | ------------- | - | ---- | - | ------ | ------------- | ---- | - | 
|Cost of Portal Revenue Analysis |   | 2008   |  | 2007          |   | 2007 |   | 2006   |               | 2006
|Fixed
      costs               | $ | 39,919 |  | 19            | % |      | $ | 33,481 |               | 17   | % | 
|Variable costs                  |   | 13,573 |  | 34            | % |      |   | 10,167 |               | 17   | % | 
|                               
|Total                           | $ | 53,492 |  | 23            | % |      | $ | 43,648 |               | 17   | % | 

Cost of portal revenues in 2008 increased 23%, or approximately $9.8
million, over 2007. Of this increase, 14%, or approximately $6.0 million, was
attributable to an increase in same state cost of portal revenues, and 9%, or
$3.8 million, was primarily attributable to our newer state portal businesses in
Vermont, Arizona and West Virginia.

The increase in same state cost of portal revenues in 2008 was primarily
attributable to additional personnel in several of our portals due to our
continued growth and reinvestment in our core business in addition to higher
stock-based compensation of approximately $0.7 million for annual grants of
restricted stock to management-level portal employees. Also contributing to this
increase was an increase in bank fees. A growing percentage of our non-DMV
transaction-based revenues are generated from online applications whereby users
pay for information or transactions via credit cards. We typically earn a
percentage of the credit card transaction amount, but also must pay an
associated fee to the bank that processes the credit card transaction. We earn a
lower gross profit percentage on these transactions as compared to our other
non-DMV applications. However, we plan to continue to implement these services
as they contribute favorably to our operating income growth.

Cost of portal revenues in 2007 increased 17%, or approximately $6.4
million, over 2006. Of this increase, 12%, or approximately $4.5 million, was
attributable to an increase in same state cost of portal revenues, and 5%, or
approximately $1.9 million, was primarily attributable to our newer state portal
businesses in Vermont, Arizona and West Virginia.

The increase in same state cost of portal revenues in 2007 was partially
attributable to additional personnel in several of our portals due to our
continued growth and reinvestment in our core business. Also contributing to
this increase was an increase in bank fees, as described above.

Our portal gross profit percentage was 45% in 2008, down from 47% in 2007
and 2006. The decrease in 2008 was due to the increase in cost of portal
revenues, as described above. We carefully monitor our portal gross profit
percentage to strike the balance between generating a solid return for our
shareholders and delivering value to our government partners through
reinvestment in our portal operations (which we believe also benefits our
shareholders). We currently expect our portal gross profit percentage to be in
the mid-40% range in 2009.

38

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SOFTWARE & SERVICES REVENUES. In the analysis below, we
have categorized our software & services revenues by business (in
thousands), with the corresponding percentage increase or decrease from the
prior year period.

|                                                   |   |       |  | Increase/  |    |      |   |           | Increase/  |      |    |  |  
|-------------------------------------------------- | - | ----- |  | ---------- | -- | ---- | - | --------- | ---------- | ---- | -- |  | -
|                                                   |   |       |  | (Decrease) |    |      |   |           | (Decrease) |      |    |  |  
|Software & Services Revenue
      Analysis         |   | 2008  |  | from 2007  |    | 2007 |   | from 2006 |            | 2006
|Ethics & elections                                 | $ | 2,616 |  | 10         | %  |      | $ | 2,389     |            | 29   | %  |  | $
|UCC
      & corporate filings software development |   | 619   |  | (11        | %) |      |   | 694       |            | 179  | %  |  |  
|Other                                              |   | 545   |  | 148        | %  |      |   | 220       |            | (45  | %) |  |  
|                                                  
|Total                                              | $ | 3,780 |  | 14         | %  |      | $ | 3,303     |            | 142  | %  |  | $

Software & services revenues for 2008 increased 14%, or approximately
$0.5 million, over 2007. This increase was primarily due to a contract renewal
with the state of Michigan in our ethics & elections business that enhanced
the revenues we earn and from a consulting services engagement with a private
company. Software & services revenues for 2007 increased 142%, or
approximately $1.9 million, over 2006. This increase was partially due to
additional revenues generated by our ethics & elections business related to
our contract with the Federal Election Commission, which experienced budget
reductions in 2006 in light of federal spending on the Hurricane Katrina relief
effort. Furthermore, software & services revenues in 2006 primarily reflect
revenue adjustments under percentage of completion accounting relating to our
contract with the California Secretary of State, as further discussed in Note 2
in the Notes to Consolidated Financial Statements included in this Form 10-K. We
recognize revenue on our contract with the California Secretary of State using
the percentage of completion method as we make progress, utilizing costs
incurred to date as compared to the estimated total cost for the
contract.

COST OF SOFTWARE & SERVICES REVENUES. Cost of software & services
revenues for 2008 increased 23%, or approximately $0.4 million, over 2007. This
increase was primarily attributable to an increase in salary expense and
subcontractor consulting costs to support new contract initiatives in our ethics
& elections business. Cost of software & services revenues for 2007
increased 216%, or approximately $1.3 million, over 2006, as amounts for 2006
primarily reflect expense adjustments under percentage of completion accounting
relating to our contract with the California Secretary of State as further
discussed above and in Note 2 in the Notes to Consolidated Financial Statements
included in this Form 10-K.

SELLING & ADMINISTRATIVE. Selling & administrative expenses in
2008 increased 4%, or approximately $0.9 million, over 2007. This increase was
primarily attributable to increased salary expense for additional personnel to
support and enhance corporate wide information technology security and portal
operations, in addition to sales and marketing growth initiatives. As discussed
in Item 1A, Item 3 and Note 8 in the Notes to the Consolidated Financial
Statements included in this Form 10-K, we have been the subject of an informal
SEC inquiry of expense reporting by certain officers of our Company and certain
potentially related matters. In connection with the informal SEC inquiry, a
review was undertaken by the Audit Committee of our Board of Directors, with the
assistance of outside, independent counsel, which focused on such expense
reporting. The SEC issued a formal order of investigation in the second quarter
of 2008. Selling & administrative expenses for the year ended December 31,
2008 and 2007 include approximately $0.5 million and $0.7 million, respectively,
of legal fees and other expenses incurred in connection with the ongoing SEC
investigation and the Audit Committee review. We could incur significant legal
fees and other expenses in connection with the ongoing SEC
investigation.

Selling & administrative expenses in 2007 increased 41%, or
approximately $6.3 million, over 2006. The increase in selling &
administrative expenses was primarily attributable to the previously discussed
incremental investment in business development, marketing and operations in an
effort to accelerate new state portal contract wins and drive continued non-DMV
growth, coupled with additional information technology personnel to support our
long-term expansion and enhance corporate-wide information technology security
and portal operations. As a result of these initiatives, our corporate-level
headcount increased by approximately 23% in 2007. In addition, as further
discussed above, selling & administrative expenses for the year ended
December 31, 2007 included approximately $0.7 million of legal fees and other
expenses incurred in connection with the ongoing SEC investigation and the Audit
Committee review.

39

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As a percentage
of portal revenues, selling & administrative expenses were 23% in 2008, 26%
in 2007 and 22% in 2006. We currently expect selling & administrative costs
as a percentage of portal revenue to range from 22% to 23% in 2009, which
reflects only modest corporate overhead growth.

DEPRECIATION & AMORTIZATION  Depreciation & amortization expense
in 2008 increased 45%, or approximately $1.1 million, over 2007. This increase
was primarily attributable to capital expenditures for normal fixed asset
additions in our outsourced portal business, including Web servers, purchased
software and office furniture and equipment to support and enhance
corporate-wide information technology security and portal operations, in
addition to capital expenditures for furniture, fixtures and leasehold
improvements made in the second half of 2007 for our new corporate
headquarters.

As a percentage of portal revenues, depreciation & amortization was
4% in 2008, and 3% in 2007 and 2006. We currently expect depreciation and
amortization expense as a percentage of portal revenues to range from 3% to 4%
in 2009, as we will continue to make key information technology infrastructure
and security investments to support the long-term expansion of our portal
business.

INTEREST INCOME. Interest income reflects
interest earned on our investable cash and short-term investment portfolio.
Interest income in 2008 decreased 60%, or approximately $1.0 million, from 2007
due primarily to the declining short-term interest rate environment we
experienced throughout the year. As further discussed in Note 9 in the Notes to
Consolidated Financial Statements included in this Form 10-K, we paid a special
cash dividend of $0.25 per share on February 28, 2008 totaling approximately
$15.7 million, and we paid a special cash dividend of $0.75 per share totaling
approximately $46.7 million in February 2007 out of our available cash and
short-term investments. Interest income was lower in 2008 and 2007 as a result
of these dividends. As further discussed in Note 13 to the Consolidated
Financial Statements included in this Form 10-K, we paid a special cash dividend
of $0.30 per share on February 27, 2009 totaling approximately $19.2 million out
of our available cash. We currently expect interest income in 2009 to be lower
than in 2008, partially as a result of paying this special dividend, but
primarily because of the declining short-term interest rate environment we are
currently experiencing.

GAIN (LOSS) ON AFFILIATE INVESTMENTS 
Results of operations for the year ended December 31, 2007 include a $0.5
million gain on the sale of our remaining investment in e-Government Solutions
Limited, a private joint venture based in London, England, as further discussed
in Note 6 in the Notes to Consolidated Financial Statements included in this
Form 10-K.

INCOME TAXES. Our effective tax rate was approximately 38% in 2008, 35%
in 2007, and 42% in 2006. Our effective tax rate for 2008 and 2007 was lower
than the amount customarily expected due primarily to the effect of decreases in
the liability for uncertain tax positions totaling approximately $0.2 million
and $0.4 million in 2008 and 2007, respectively, as further discussed in Note 10
in the Notes to Consolidated Financial Statements included in this Form 10-K.
Our income tax provision for 2006 includes the establishment of a valuation
allowance totaling approximately $177,000 for state income tax loss
carryforwards that we may be unable to use, as further discussed in Note 10 in
the Notes to Consolidated Financial Statements included in this Form 10-K.
Prospectively, we currently expect our effective tax rate to be between 40% and
42%.

Liquidity and Capital Resources

Operating
Activities

Net cash
provided by operating activities was $22.7 million in 2008 compared to $24.6
million in 2007. The decrease in cash flow from operations was primarily the
result of a year-over-year increase in operating income, excluding non-cash
charges for depreciation & amortization and stock-based compensation, offset
by a $1.8 million decrease in cash flows relating to a net increase in operating
assets and liabilities, mainly attributable to accounts receivable. The increase
in accounts receivable (and accounts payable) in 2008 was primarily attributable
to an increase in fourth quarter payment processing services in several portals
and the related timing of cash receipts and payments to our government partners,
in addition to the general increase in revenues across our portal businesses in
2008.

40

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The increase
in accrued expenses in 2008 was primarily attributable to an increase in accrued
payroll and benefit costs of approximately $1.4 million resulting from a
combination of an increase in self-funded insurance reserves, executive bonus
accruals related to the 2008 annual cash incentive plan and increased staffing.

Net cash
provided by operating activities was $24.6 million in 2007 compared to $25.7
million in 2006. The decrease in cash flow from operations was primarily the
result of a year-over-year increase in operating income, excluding non-cash
charges for depreciation & amortization and stock-based compensation, offset
by a smaller increase in accounts payable in 2007 (as compared to 2006) mainly
due to the timing of payment processing for tax filing applications.

The smaller
increase in accounts payable in 2007 was primarily attributable to an increase
in fourth quarter tax payment processing from tax filing applications across
various portal businesses. Such tax payments are frequently made via ACH or
credit cards at the end of the year, whereby we do not receive payment until
after year-end. The majority of these tax receipts were remitted to our
government partners in early January 2008.

The increase
in accrued expenses in 2007 was primarily due to increases in accrued payroll
and benefit costs of approximately $0.7 million resulting from increased
staffing.

We had a
history of unprofitable operations prior to 2003 primarily due to operating
losses incurred in our software & services businesses. These losses
generated significant federal and state tax net operating losses, or NOLs, as
further discussed above. As a result of our NOL carryforwards, we are not
currently paying federal income taxes, with the exception of alternative minimum
tax, and are only paying income taxes in certain states. This positively impacts
our operating cash flow and will continue to positively impact our operating
cash flow during the NOL carryforward periods. Based on our current projections,
we currently expect to fully utilize our federal NOL carryforwards by the end of
2009. For the years ended December 31, 2008, 2007 and 2006, combined federal and
state income tax payments totaled approximately $1.1 million, $0.8 million and
$0.4 million, respectively.

Investing
Activities

Cash
provided by investing activities in 2008 reflects the liquidation of a portion
of our student loan auction-rate securities (SLARS) to pay the $15.7 million
special cash dividend in February 2008 and the repurchase of our remaining SLARS
by our broker-dealer at par value in October 2008. Capital expenditures in 2008
were primarily for normal fixed asset additions in our outsourced portal
business, including Web servers, purchased software and office equipment. In
2008, we capitalized approximately $0.7 million of internal use software
development costs relating to the standardization of customer management,
billing and payment processing systems that support our portal operations and
accounting systems.

Cash
provided by investing activities in 2007 primarily reflects the liquidation of
our investment portfolio to pay the $46.7 million special cash dividend in
February 2007, partially offset by the purchase of $18 million in marketable
debt securities in an effort to increase investment income from our excess cash
and $4.9 million of capital expenditures. Capital expenditures in 2007 were
primarily for normal fixed asset additions in our outsourced portal business,
including Web servers, purchased software and office furniture and equipment to
support and enhance corporate-wide information technology security and portal
operations. Capital expenditures in 2007 also included approximately $1.0
million for furniture, fixtures and leasehold improvements made during the
fourth quarter of the year for the Companys new corporate headquarters.
Investing activities in 2007 also included $0.5 million in proceeds from the
sale of our remaining investment in the e-Government Solutions Limited joint
venture, as further discussed in Note 6 in the Notes to Consolidated Financial
Statements included in this Form 10-K. In 2007, we capitalized approximately
$0.6 million of internal use software development costs relating to the
standardization of customer management, billing and payment processing systems
that support our portal operations and accounting systems.

Cash used in
investing activities in 2006 primarily reflects $24.5 million in purchases of
marketable debt securities in an effort to increase the investment income from
our cash reserves, and $2.6 million of capital expenditures, which were
primarily for normal fixed asset additions in our outsourced portal business,
including Web servers, purchased software and office furniture and equipment, in
addition to corporate-wide spending on information technology security.

41

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Financing
Activities

Financing
activities in 2008 reflect the payment of a $15.7 million special cash dividend,
in addition to $1.9 million in proceeds from the exercise of employee stock
options for cash and $0.3 million in proceeds from our employee stock purchase
program. Although we cannot predict the annual amount of proceeds we expect to
receive from employee stock options exercised for cash in the future, we expect
that our employees will continue to exercise vested stock options that have
intrinsic value. At December 31, 2008, approximately 0.4 million employee stock
options were exercisable at a weighted average exercise price of $4.61 per
share. The closing price of our common stock on December 31, 2008 was $4.60 per
share.

Financing activities in 2007 reflect the payment of a $46.7 million
special cash dividend, in addition to $0.9 million in proceeds from the exercise
of employee stock options for cash and $0.2 million in proceeds from our
employee stock purchase program.

Financing activities in 2006 primarily reflect $1.2 million in proceeds
from the exercise of employee stock options for cash and $0.2 million in
proceeds from our employee stock purchase program.

Liquidity

We recognize revenue primarily from providing outsourced government
portal services net of the transaction fees due to the government when the
services are provided. The fees that we must remit to the government are accrued
as accounts payable and accounts receivable at the time services are provided.
As a result, trade accounts payable and accounts receivable reflect the gross
amounts outstanding at the balance sheet dates. Gross billings for the
three-months ended December 31, 2008 and 2007 were approximately
$432.8million and $303.8 million, respectively. The Company calculates days
sales outstanding by dividing trade accounts receivable at the balance sheet
date by gross billings for the period and multiplying the resulting quotient by
the number of days in that period. Days sales outstanding for the three-month
periods ended December 31, 2008 and 2007 was 8 and 9, respectively.

We believe that working capital is an important measure of our short-term
liquidity. Working capital, defined as current assets minus current liabilities,
increased to $53.5 million at December 31, 2008, from $49.8 million at December
31, 2007. Our current ratio, defined as current assets divided by current
liabilities, at December 31, 2008 was 2.0 compared to 2.1 at December 31, 2007.
We expect our working capital and current ratio to decrease during the first
quarter of 2009 due to the $19.2 million special dividend paid on February 27,
2009, as further discussed below and in Note 13 in the Notes to the Consolidated
Financial Statements included in this Form 10-K.

At December 31, 2008, our total cash,
cash equivalents and short-term investment balance was $60.4 million compared to
$55.8 million at December 31, 2007. We believe that our currently available
liquid resources and cash generated from operations will be sufficient to meet
our operating requirements, capital expenditure requirements, current growth
initiatives and special dividend payments for at least the next twelve months
without the need of additional capital. We have a $10 million unsecured
revolving credit facility with a bank. This revolving credit facility is
available to finance working capital, issue letters of credit and finance
general corporate purposes. We can obtain letters of credit in an aggregate
amount of $5 million, which reduces the maximum amount available for borrowing
under the facility. In total, we had $3.7 million in available capacity to issue
additional letters of credit and $8.7 million of unused borrowing capacity at
December 31, 2008 under the facility. The credit facility expires in May 2009.
However, letters of credit may have an expiration date of up to one year beyond
the expiration date of the credit agreement. We intend to renew the credit
facility prior to its expiration date in May 2009. For additional discussion of
our credit facility, see Note 7 in the Notes to the Consolidated Financial
Statements included in this Form 10-K.

42

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On February 3, 2009, our Board of Directors declared a special cash
dividend of $0.30 per share, payable to shareholders of record as of February
17, 2009. On February 27, 2009, we paid the special cash dividend totalling
approximately $19.2 million out of available cash. We do not believe that this
dividend will have a significant effect on our future liquidity. However, we may
need to raise additional capital within the next twelve months to further:

- fund operations if unforeseen costs
  arise;
- support our expansion into other states and
  government agencies beyond what is contemplated if unforeseen opportunities
  arise;
- expand our product and service offerings beyond
  what is contemplated if unforeseen opportunities arise;
- respond to unforeseen competitive pressures;
  and
- acquire technologies beyond what is contemplated.

Any projections
of future earnings and cash flows are subject to substantial uncertainty. If our
cash, short-term investments and cash generated from operations are insufficient
to satisfy our liquidity requirements, we may seek to sell additional equity
securities or issue debt securities. The sale of additional equity securities
could result in dilution to the Company's shareholders. Recently, credit and
capital markets have experienced unusual volatility and disruption, and equity
and debt financing have become more expensive and difficult to obtain. There can
be no assurance that financing will be available in amounts or on terms
acceptable to the Company, if at all.

We issue letters of credit as collateral for performance on certain of
our outsourced government portal contracts, as collateral for certain
performance bonds and as collateral for certain office leases. These irrevocable
letters of credit are generally in force for one year, for which we currently
pay bank fees of 1% of face value per annum. We had unused outstanding letters
of credit totaling approximately $1.3 million at December 31, 2008. We are not
currently required to cash collateralize these letters of credit. However, even
though we currently expect to be profitable in fiscal 2009 and beyond, we may
not be able to sustain or increase profitability on a quarterly or annual basis.
We will need to generate sufficient revenues while containing costs and
operating expenses if we are to achieve sustained profitability. If we are not
able to sustain profitability, our cash collateral requirements may increase.
Had we been required to post 100% cash collateral at December 31, 2008 for the
face value of all performance bonds (which are partially supported by letters of
credit) and our line of credit in conjunction with a corporate credit card
agreement, unrestricted cash would have decreased by approximately $4.3 million
and would have been classified as restricted cash.

At December
31, 2008, we were bound by performance bond commitments totaling approximately
$3.3 million on certain government portal outsourcing contracts. These
performance bonds are collateralized by a $1.0 million letter of credit. We have
never had any defaults resulting in draws on performance bonds or letters of
credit.

Off-Balance Sheet Arrangements and
Contractual Obligations

We do not have off-balance sheet arrangements or significant exposures to
liabilities that are not recorded or disclosed in our financial statements. The
following table sets forth our future contractual obligations and commercial
commitments as of December 31, 2008 (in thousands):

|                                   |  |           |       |                            |   | 1-3   |  | 3-5   |       | More than 5
|---------------------------------- |  | --------- | ----- | -------------------------- | - | ----- |  | ----- | ----- | -----------
|**Contractual
      Obligations**  |  | **Total** |       | **Less than 1
      year** |   | years |  | years |       | years      
|Operating lease obligations        |  | $         | 8,337 |                            | $ | 2,480 |  | $     | 3,434 |            
|Income tax
      uncertainties     |  |           | 468   |                            |   |      |  |       | 468   |            
|Long-term debt obligations         |  |           |      |                            |   |      |  |       |      |            
|Capital lease
      obligations    |  |           |      |                            |   |      |  |       |      |            
|Purchase obligations               |  |           |      |                            |   |      |  |       |      |            
|Other long-term
      liabilities  |  |           |      |                            |   |      |  |       |      |            
|Total contractual cash obligations |  | $         | 8,805 |                            | $ | 2,480 |  | $     | 3,902 |            

While we have
significant operating lease commitments for office space, those commitments are
generally tied to the period of performance under related contracts. We have
income tax uncertainties of approximately $0.5 million at December 31, 2008.
These obligations are classified as non-current on our consolidated balance
sheet, as resolution is expected to take more than a year. We estimate that
these matters could be resolved in one to threeyears as reflected in the table above. However, the ultimate timing of
resolution is uncertain. See Notes 2 and 10 in the Notes to the Consolidated
Financial Statements included in this Form 10-K for further discussion on income
taxes.

43

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Recent Accounting Pronouncements

Fair Value Measurements

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS No. 157 does not
require any new fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify the source of
the information. Except for the portion of SFAS No. 157 that addresses
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis,
which has been deferred for one additional year, we adopted this standard
effective January 1, 2008. The partial adoption of SFAS No. 157 did not have a
material impact on our consolidated financial statements. We are currently
evaluating the requirements of SFAS No. 157 that address nonfinancial assets and
liabilities and have not yet determined the impact on our consolidated financial
statements.

In February
2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No. 115.
SFAS No. 159 permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings. SFAS No. 159 does not
affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value. We did not elect to choose the fair
value option and record unrealized gains and losses in earnings for any of our
financial instruments. Accordingly, the adoption of SFAS No. 159 on January 1,
2008 did not have any impact on our consolidated financial statements.

*Share-Based Payments*

In June 2008, the FASB issued FASB
Staff Position Emerging Issues Task Force 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP-EITF 03-6-1). Under FSP-EITF 03-6-1, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. FSP-EITF 03-6-1 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those years
and requires retrospective application. Because our service-based restricted
stock awards contain non-forfeitable rights to dividends, we will have to treat
these awards as participating securities. Total unvested service-based
restricted shares totaled 0.9 million at December 31, 2008. The Company
anticipates that the adoption of this standard will likely have a negative
impact on basic and diluted earnings per share.

ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

INTEREST
RATE RISK. Our cash and cash equivalents are subject to market risk due to
changes in interest rates. Cash held in sweep accounts is invested primarily in
U.S. government money market accounts that purchase U.S. agency instruments or
direct obligations of the U.S. Treasury or repurchase agreements secured by U.S.
agency instruments. Interest rates related to these floating rate securities may
produce less income than expected if interest rates fall. Current yields
associated with these securities have been decreasing due to the increased
demand for more conservative investments in light of the current credit crisis.
Due in part to these factors, our future interest income may fall short of
expectations due to changes in interest rates, but is not expected to materially
impact results of operations.

Borrowings
under our line of credit bear interest at a floating rate. Interest on amounts
borrowed is payable at a base rate equal to the higher of the Federal Funds Rate
plus 0.5% or the banks prime rate. We currently have no principal amounts of
indebtedness outstanding under our line of credit.

We do not
use derivative financial instruments. A 10% change in interest rates would not
have a material effect on our financial condition, results of operations or cash
flows.

44

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ITEM 8. CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

NIC INC.CONSOLIDATED BALANCE SHEETS

|                                                              |  | December 31,
|------------------------------------------------------------- |  | ------------
|                                                              |  | 2007        
|ASSETS                                                       
|Current assets:                                               |  |             
|Cash and cash equivalents                                     |  | $           
|Short-term investments                                        |  |             
|Trade accounts receivable                                     |  |             
|Unbilled revenues                                             |  |             
|Deferred income taxes, net                                    |  |             
|Prepaid expenses & other current
      assets                 |  |             
|Total current
      assets                                    |  |             
|Property and equipment,
      net                             |  |             
|Deferred income taxes, net                                    |  |             
|Other assets                                                  |  |             
|Total assets                                                  |  | $           
|                                                             
|LIABILITIES AND SHAREHOLDERS' EQUITY                         
|Current
      liabilities:                                    |  |             
|Accounts payable                                              |  | $           
|Accrued expenses                                              |  |             
|Application development contracts                             |  |             
|Other current liabilities                                     |  |             
|Total current
      liabilities                               |  |             
|                                                             
|Other
      long-term liabilities                             |  |             
|Total
      liabilities                                       |  |             
|                                                             
|Commitments and contingencies (Notes 2, 3, 7 and
      8)     |  |             
|                                                             
|Shareholders' equity:                                         |  |             
|Common stock, no par, 200,000,000 shares
      authorized     |  |             
|62,031,312 and 62,778,564
      shares issued and outstanding |  |             
|Additional paid-in capital                                    |  |             
|Accumulated deficit                                           |  |             
|                                                              |  |             
|Less treasury stock                                           |  |             
|Total shareholders'
      equity                              |  |             
|Total liabilities and
      shareholders' equity              |  | $           

The accompanying notes are an
integral part of these consolidated financial statements.

45

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NIC INC.CONSOLIDATED STATEMENTS OF INCOME

|                                                                                     |  | Year Ended December 31,
|------------------------------------------------------------------------------------ |  | -----------------------
|                                                                                     |  | **2006**               
|Revenues:                                                                            |  |                        
|Portal revenues                                                                      |  | $                      
|Software & services revenues                                                         |  |                        
|Total
      revenues                                                                 |  |                        
|                                                                                     |  |                        
|Operating expenses:                                                                  |  |                        
|Cost of portal revenues, exclusive of depreciation &
      amortization              |  |                        
|Cost of software & services revenues,
      exclusive of depreciation & amortization |  |                        
|Selling & administrative                                                             |  |                        
|Depreciation & amortization                                                          |  |                        
|Total operating expenses                                                             |  |                        
|Operating income                                                                     |  |                        
|                                                                                     |  |                        
|Other income (expense):                                                              |  |                        
|Interest income                                                                      |  |                        
|Gain (loss) on affiliate investments                                                 |  |                        
|Other expense, net                                                                   |  |                        
|Total other income                                                                   |  |                        
|Income before
      income taxes                                                     |  |                        
|Income tax provision                                                                 |  |                        
|Net
      income                                                                     |  | $                      
|                                                                                    
|Basic net income per share                                                           |  | $                      
|Diluted net
      income per share                                                   |  | $                      
|                                                                                    
|Weighted average shares outstanding                                                  |  |                        
|Basic                                                                                |  |                        
|Diluted                                                                              |  |                        

The accompanying notes are an
integral part of these consolidated financial statements.

46

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NIC INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                  |  |              |   | Additional |   |             |  |          |             |      
|------------------------------------------------- |  | ------------ | - | ---------- | - | ----------- |  | -------- | ----------- | -----
|                                                  |  | Common Stock |   | Paid-in    |   | Accumulated |  | Treasury |             |      
|                                                  |  | Shares       |   | Amount     |   | Capital     |  | Deficit  |             | Stock
|Balance, January 1,
      2006                    |  | 61,073,505   |   |            | $ |            |  | $        | 207,444,750 |      
|Cumulative effect of SAB No. 108 (Note
      2)   |  |             |   |            |   |            |  |          |            |      
|Net income                                        |  |             |   |            |   |            |  |          |            |      
|Sale of treasury stock                            |  | 11,154       |   |            |   |            |  |          | 50,004      |      
|Stock options
      exercised                     |  | 448,898      |   |            |   |            |  |          | 1,226,638   |      
|Stock-based compensation                          |  |             |   |            |   |            |  |          | 1,331,603   |      
|Issuance of common stock
      under              |  |              |   |            |   |             |  |          |             |      
|employee
      stock purchase plan                |  | 40,343       |   |            |   |            |  |          | 157,398     |      
|Balance, December 31,
      2006                  |  | 61,573,900   |   |            |   |            |  |          | 210,210,393 |      
|Cumulative effect of FIN 48
      (Note 2)        |  |             |   |            |   |            |  |          |            |      
|Net income                                        |  |             |   |            |   |            |  |          |            |      
|Cash dividends on common
      stock (Note 9)     |  |             |   |            |   |            |  |          | (46,729,871 | )    
|Shares surrendered to pay exercise price
      of |  |              |   |            |   |             |  |          |             |      
|stock
      options                               |  | (33,446      | ) |            |   |            |  |          | (246,998    | )    
|Shares surrendered upon
      exercise of         |  |              |   |            |   |             |  |          |             |      
|stock options and vesting of restricted           |  |              |   |            |   |             |  |          |             |      
|stock to satisfy tax withholdings                 |  | (50,204      | ) |            |   |            |  |          | (343,185    | )    
|Stock option exercises and restricted
      stock |  |              |   |            |   |             |  |          |             |      
|vestings                                          |  | 488,440      |   |            |   |            |  |          | 1,127,341   |      
|Stock-based
      compensation                    |  |             |   |            |   |            |  |          | 1,676,890   |      
|Issuance of common stock under                    |  |              |   |            |   |             |  |          |             |      
|employee stock
      purchase plan                |  | 52,622       |   |            |   |            |  |          | 239,746     |      
|Balance, December 31,
      2007                  |  | 62,031,312   |   |            |   |            |  |          | 165,934,316 |      
|Net income                                        |  |             |   |            |   |            |  |          |            |      
|Retirement of treasury stock
      (Note 9)       |  |             |   |            |   |            |  |          | (167,675    | )    
|Cash dividends on common stock (Note
      9)     |  |             |   |            |   |            |  |          | (15,709,073 | )    
|Shares surrendered upon
      exercise of         |  |              |   |            |   |             |  |          |             |      
|stock options and vesting of restricted           |  |              |   |            |   |             |  |          |             |      
|stock to satisfy tax withholdings                 |  | (64,137      | ) |            |   |            |  |          | (469,378    | )    
|Stock option exercises and restricted
      stock |  |              |   |            |   |             |  |          |             |      
|vestings                                          |  | 749,706      |   |            |   |            |  |          | 1,861,329   |      
|Stock-based
      compensation                    |  |             |   |            |   |             |  |          | 2,470,687   |      
|Issuance of common stock under                    |  |              |   |            |   |             |  |          |             |      
|employee stock
      purchase plan                |  | 61,683       |   |            |   |            |  |          | 279,979     |      
|Balance, December 31,
      2008                  |  | 62,778,564   |   |            | $ |            |  | $        | 154,200,185 |      

The accompanying notes are an integral part of
these consolidated financial statements.

47

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NIC INC.CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                            |  | Year Ended December 31,
|--------------------------------------------------------------------------- |  | -----------------------
|                                                                            |  | 2006                   
|Cash
      flows from operating activities:                                 |  |                        
|Net income                                                                  |  | $                      
|Adjustments to reconcile net income to net
      cash provided by operating |  |                        
|activities:                                                                 |  |                        
|Depreciation &
      amortization                                           |  |                        
|Stock-based compensation
      expense                                      |  |                        
|Accretion of discount on
      marketable securities                        |  |                        
|Application development
      contracts                                     |  |                        
|Deferred income
      taxes                                                 |  |                        
|Gain (loss) on affiliate
      investments                                  |  |                        
|Impairment loss on
      property and equipment                             |  |                        
|Loss on disposal of
      property and equipment                            |  |                        
|Changes in operating assets and
      liabilities                           |  |                        
|(Increase) decrease in
      trade accounts receivable                      |  |                        
|Decrease in unbilled
      revenues                                         |  |                        
|(Increase) decrease in
      prepaid expenses & other current assets        |  |                        
|(Increase) decrease in
      other assets                                   |  |                        
|Increase in accounts
      payable                                          |  |                        
|Increase (decrease) in
      accrued expenses                               |  |                        
|Increase (decrease) in
      other current liabilities                      |  |                        
|Increase (decrease) in
      other long-term liabilities                    |  |                        
|Net cash provided by operating
      activities                             |  |                        
|                                                                            |  |                        
|Cash
      flows from investing activities:                                 |  |                        
|Purchases of property and equipment                                         |  |                        
|Proceeds from sale of property and
      equipment                          |  |                        
|Capitalized internal use software
      development costs                   |  |                        
|Purchases of marketable securities                                          |  |                        
|Sales and maturities of marketable
      securities                         |  |                        
|Proceeds from sale of affiliate                                             |  |                        
|Net cash provided by (used in) investing
      activities                   |  |                        
|                                                                            |  |                        
|Cash
      flows from financing activities:                                 |  |                        
|Cash dividends on common stock                                              |  |                        
|Proceeds from sale of treasury stock                                        |  |                        
|Proceeds from employee common stock
      purchases                         |  |                        
|Proceeds from exercise of employee stock
      options                      |  |                        
|Net cash provided by (used in) financing
      activities                   |  |                        
|                                                                            |  |                        
|Net
      increase (decrease) in cash and cash equivalents                  |  |                        
|Cash
      and cash equivalents, beginning of year                          |  |                        
|Cash
      and cash equivalents, end of year                                |  | $                      
|                                                                            |  |                        
|Other
      cash flow information:                                          |  |                        
|Income taxes paid                                                           |  | $                      

The accompanying notes are an
integral part of these consolidated financial statements.

48

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NIC INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

NIC Inc.
(the "Company" or "NIC") is a provider of eGovernment services that helps
governments use the Internet to increase internal efficiencies and provide a
higher level of service to businesses and citizens. The Company accomplishes
this currently through two divisions: its primary portal outsourcing businesses
and its software & services businesses.

In its
primary portal outsourcing business, the Company designs, builds and operates
Internet-based portals on behalf of state and local governments desiring to
provide access to government information and to complete government-based
transactions online. These portals consist of Web sites and applications the
Company has built that allow businesses and citizens to access government
information online and complete transactions, including applying for a permit,
retrieving drivers license records or filing a government-mandated form or
report. Operating under multiple-year contracts (see Note 3), NIC markets the
services and solicits users to complete government-based transactions and to
enter into subscriber contracts permitting users to access the portal and the
government information contained therein in exchange for transactional and/or
subscription user fees. The Company manages operations for each contractual
relationship through separate local subsidiaries that operate as decentralized
businesses with a high degree of autonomy. NICs self-funding business model
allows the Company to reduce its government partners financial and technology
risks and generate revenues by sharing in the fees the Company collects from
eGovernment transactions. The Companys government partners benefit through
gaining a centralized, customer-focused presence on the Internet, while
businesses and citizens receive a faster, more convenient and more
cost-effective means to interact with governments. The Company is typically
responsible for funding up front investment and ongoing operational costs of the
government portals.

The Companys software &
services businesses primarily include its Uniform Commercial Code (UCC) and
corporate filings software development business and its ethics & elections
business. The Companys UCC and corporate filings software development business,
NIC Conquest, is primarily a provider of software applications and services for
electronic filings and document management solutions for the California
Secretary of State and is not actively marketing its applications and services
in respect of new engagements. NIC offers UCC applications through several of
its state portals, typically through the Secretary of States office; however,
transactional revenues associated with these applications are not associated
with NIC Conquest and are included in portal revenues. The Companys ethics
& elections business, NIC Technologies, designs and develops online campaign
expenditure and ethics compliance systems for federal and state government
agencies. Currently, NIC Technologies is primarily engaged in servicing its
contracts with the Federal Election Commission and the state of
Michigan.

2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Basis of presentation

The Company classifies its revenues
and cost of revenues into two categories: (1) portal and (2) software &
services. The portal category includes revenues from the Companys subsidiaries
operating government portals under long-term contracts on an outsourced basis.
The software & services category includes revenues primarily from the
Companys software & services businesses. The primary categories of
operating expenses include: cost of portal revenues, cost of software &
services revenues, selling & administrative, and depreciation &
amortization. Cost of portal revenues consist of all direct costs associated
with operating government portals on an outsourced basis including employee
compensation (including stock-based compensation), telecommunications, merchant
fees required to process credit card and automated clearinghouse transactions,
and all other costs associated with the provision of dedicated client service
such as dedicated facilities. Cost of software & services revenues consist
of all direct project costs to provide software development and services such as
employee compensation (including stock-based compensation), subcontractor labor
costs, and all other direct project costs including hardware, software,
materials, travel and other out-of-pocket expenses. Selling & administrative
costs consist primarily of corporate-level expenses relating to human resource
management, administration, information technology, security, legal and finance,
and all costs of non-customer service personnel from the Companys software
& services businesses, including information systems and office rent.
Selling & administrative costs also consist of stock-based compensation and
corporate-level expenses for marketdevelopment
and public relations.

49

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Basis of consolidation

The accompanying consolidated
financial statements consolidate the Company together with all of its direct and
indirect wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated.

Cash and cash equivalents

Cash and cash equivalents primarily
include cash on hand in the form of bank deposits and money market funds. Cash
held in sweep accounts is invested primarily in U.S. government money market
accounts that purchase U.S. agency instruments or direct obligations of the U.S.
Treasury or repurchase agreements secured by U.S. agency instruments. For
purposes of the consolidated balance sheets and consolidated statements of cash
flows, the Company considers all non-restricted highly liquid instruments
purchased with an original maturity of one month or less to be cash
equivalents.

Investments

The Company accounts for investments
in debt securities in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The Company's investments at December 31, 2007, consisting entirely of
student loan auction-rate securities (SLARS), were classified as
available-for-sale at the time of purchase. The Company re-evaluates such
designation as of each consolidated balance sheet date.

The Companys SLARS were structured
with short-term interest rates that were reset through the auction process at
28day intervals, but with contractual debt maturities that were in excess of 22
years. Historically, the Company had the option to liquidate its SLARS whenever
the interest rates on these securities were reset. Accordingly, such securities
were classified as short-term at December 31, 2007. The Company held no SLARS at
December 31, 2008.

Investments are reported at fair
value with any unrealized holding gains or losses included in accumulated other
comprehensive income or loss, a component of shareholders equity, net of tax,
until realized. The fair values of the Company's investments are based on market
prices or broker quotes at the reporting date. See Note 4. Realized gains or
losses on the sale of investments are determined using the
specific-identification method and have not historically been material. The
Company assesses other-than-temporary impairment of investments in accordance
with FASB Staff Position No. FAS 115-1, The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments. The Company evaluates its
investments periodically for possible other-than-temporary impairment by
reviewing factors such as the length of time and extent to which fair value has
been below cost basis, the financial condition of the issuer and the Companys
ability and intent to hold the investment for a period of time which may be
sufficient for anticipated recovery of market value. The Company records an
impairment charge to the extent that the carrying value of available-for-sale
securities exceeds the estimated fair market value of the securities and the
decline in value is determined to be other-than-temporary. For the three years
ended December 31, 2008, the Company did not recognize any impairment charge on
its investment portfolio.

Unbilled revenues

Unbilled revenues consist of
revenues earned in excess of billings under long-term application development
contracts accounted for under the percentage of completion method relating to
the Companys UCC and corporate filings software development business and
revenues earned in excess of billings relating to the Companys ethics &
elections and portal businesses. Unbilled revenues arise when revenues have been
recorded but the amounts cannot currently be billed under the terms of the
contracts. Such amounts are recoverable from customers upon various measures of
performance including, among others, achievement of certain milestones and
completion of services during a specified period.

At each balance sheet date, the
Company makes a determination as to the portion of the unbilled receivable
relating to the Companys long-term application development contracts that will
be collected within one year andrecords that
amount as a current asset in the consolidated balance sheets. The remainder of
the receivable, if any, is classified as a long-term asset. All unbilled
revenues at the balance sheet dates have been classified as current assets.

50

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Unbilled revenues relating to the
Companys contract with the California Secretary of State at December 31, 2007
and 2008 were $0.2 million. Unbilled revenues relating to the Companys ethics
& election business at December 31, 2007 and 2008 were $0.3 million and $0.1
million. Unbilled revenues relating to the Companys portal businesses at
December 31, 2007 were $0.2 million. There were no unbilled revenues relating to
the Companys portal business at December 31, 2008.

Property and equipment

Property and equipment are carried
at cost less accumulated depreciation. Depreciation is computed using the
straight-line method over estimated useful lives of 8 years for furniture and
fixtures, 3-10 years for equipment, 3-5 years for purchased software and the
lesser of the term of the lease or 5 years for leasehold improvements. When
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in results of operations for the period. The cost of maintenance and
repairs is charged to expense as incurred. Significant renewals and betterments
are capitalized.

The Company periodically evaluates
the carrying value of property and equipment to be held and used when events and
circumstances warrant such a review. The carrying value of property and
equipment is considered impaired when the anticipated undiscounted cash flows
from the asset is separately identifiable and is less than its carrying value.
In that event, a loss is recognized based on the amount by which the carrying
value exceeds the fair value of the asset. Fair value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with the risk
involved. Losses on assets to be disposed of are determined in a similar manner,
except that fair values are reduced for the cost to dispose. In 2007, the
Company recognized an impairment loss of $164,075 related primarily to
furniture, fixtures and leasehold improvements at its former corporate
headquarters. The Company did not record any impairment losses on property and
equipment during 2006 or 2008.

Software development costs and
intangible assets

The Company expenses as incurred all
employee costs to start up, operate and maintain government portals on an
outsourced basis as costs of performance under the contracts because, after the
completion of a defined contract term, the government entities with which the
Company contracts typically receive a perpetual, royalty-free license to the
applications the Company developed. Such costs are included in cost of portal
revenues in the consolidated statements of income.

The Company accounts for the costs
of developing internal use computer software in accordance with the American
Institute of Certified Public Accountants Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" and
Emerging Issues Task Force (EITF) Issue 00-2, Accounting for Website Development Costs.Costs capitalized pursuant to EITF Issue 00-2 would be included as part
of the total of internal use software development costs capitalized pursuant to
SOP 98-1.

The net
carrying value of intangible assets at December 31, 2007 and 2008 was
approximately $730,000 and $1,105,000 and was included in other long-term assets
in the consolidated balance sheets. At December 31, 2007 and 2008, intangible
assets consisted of capitalized internal use software development costs, and are
being amortized over a three-year period. Accumulated amortization at December
31, 2007 and 2008 totaled approximately $147,000 and $450,000.

At each balance sheet date, or
whenever events or changes in circumstances warrant, the Company assesses the
carrying value of intangible assets for possible impairment based primarily on
the ability to recover the balances from expected future cash flows on an
undiscounted basis. If the sum of the expected future cash flows on an
undiscounted basis were to be less than the carrying amount of the intangible
asset, an impairment loss would be recognized for the amount by which the
carrying value of the intangible asset exceeds its estimated fair value. There
is considerable management judgment necessary to determine future cash flows,
and accordingly, actual results could vary significantly from such estimates. The Company has not
recorded any impairment losses on intangible assets during the periods
presented.

51

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Revenue recognition

Portal revenuesThe Company
recognizes revenue from providing outsourced government portal services
(primarily transaction-based information access fees and filing fees) net of the
transaction fees due to the government when the services are provided. The fees
that the Company must remit to state agencies for data access and other
statutory fees are accrued as accounts payable at the time services are
provided. The Company must remit a certain amount or percentage of these fees to
government agencies regardless of whether the Company ultimately collects the
fees. As a result, trade accounts receivable and accounts payable reflect the
gross amounts outstanding at the balance sheet dates.

Revenue from service contracts to
provide portal consulting, application development and management services to
governments is recognized as the services are provided at rates provided for in
the contract.

Amounts received prior to providing
services are recorded as unearned revenue. At each balance sheet date, the
Company makes a determination as to the portion of unearned revenue that will be
earned within one year and records that amount in other current liabilities in
the consolidated balance sheets. The remainder, if any, is recorded in other
long-term liabilities. Unearned revenues at December 31, 2008 were approximately
$1.1 million. There were no unearned revenues at December 31, 2007.

Software & services
revenuesThe Companys UCC and
corporate filings software development business recognizes revenues from
fixed-fee, long-term application development contracts on the percentage of
completion method, utilizing costs incurred to date as compared to the estimated
total costs for each contract, following the guidance outlined in Alternative B
as set forth in paragraph .81 of SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. The Company primarily
includes internal labor and subcontractor labor costs in actual and estimated
total costs for purposes of determining the percentage of completion for each
contract. The Company also includes costs for hardware and software provided
directly to the customer as part of the system and other direct project costs
such as travel in actual and estimated total costs, but does not include such
costs for determining the percentage of completion for each contract. The
Company recognizes revenue and expenses for such costs with no associated profit
margin. Contract revenues and estimated costs to complete are adjusted to
reflect change orders when approved by the customer and the Company regarding
both scope and price. Revenues and profits from these contracts are based on the
Companys estimates to complete and are reviewed periodically, with adjustments
recorded in the period in which the revisions are made. Any anticipated contract
losses are charged to operations as soon as determinable.

In 2001, NICUSA and the Companys
NIC Conquest subsidiary were awarded a five-year, $25 million contract by the
California Secretary of State (the California SOS) to develop and implement a
comprehensive information management and filing system. Revenues are recognized
on the contract using the percentage of completion method utilizing costs
incurred to date as compared to the estimated costs for the contract, as further
described above. The Company believes costs incurred are a more representative
measure of project progress than either the completion of billing or significant
project milestones, as most of the significant milestone payments under this
contract are concentrated toward the latter half of the project and do not
appropriately reflect project progress and project costs incurred, especially in
between milestone payment dates.

The contract contains early
termination clauses that give the California SOS the right to terminate early
including, among others, termination for non-appropriation of funds and
termination for convenience. Such early termination clauses are generally
standard in most government contracts and are not unique to the Companys
contract with the California SOS. However, in the event the contract is
terminated for non-appropriation of funds, the Company would be required to take
back any affected goods furnished under the contract and to relieve the
California SOS of any further obligations therefrom. The Company does not
recognize revenues in excess of what has been appropriated for the project. If
the contract is terminated for the convenience of the State, the parties are to
negotiate a settlement, which the Company believes would include billed and
unbilled receivables for goods, manufacturing materials and/or services
performed or delivered under the contract.

52

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Prior to the
first quarter of 2005, key elements of the Companys obligations under the
California SOS contract were subcontracted to various third parties under fixed
price contracts. At the end of the first quarter of 2005, as a result of system
delivery issues and the concern over the ability of one of the two remaining
subcontractors to meet the criteria set forth by the California SOS, the Company
determined it would assume the lead project manager role on the contract, which
was previously performed by this subcontractor. As a result of this change, the
Company further evaluated the status of the project and concluded that a further
modification to the management and oversight structure of the project was
necessary to improve performance under the contract and that additional internal
project management and technical personnel would be required on the engagement.
The Company also reevaluated the expected completion date of the project, which
was previously estimated to be in the first quarter of 2006, and determined to
revise the estimated completion date to the end of 2006. As a result of the
Companys decision to commit these additional resources and the extension of the
expected project completion date, the Company recorded a $5.0 million adjustment
under percentage of completion accounting in the first quarter of 2005, as the
Company expected to incur a loss of approximately $4.2 million on this project,
instead of a previously projected profit of approximately $1.0
million.

In March 2006, the Company and the
California SOS entered into an amendment (the Amendment) to the California
Business Programs Automation Agreement (the Agreement). Among other changes to
the Agreement, the Amendment reduced the aggregate contract value to
approximately $19 million and released the Company from the obligation to
deliver the business filings, or BE, portion of the project, except for
maintenance of hardware and delivery of BE images as expressly set forth in the
Amendment. The Amendment also set forth the final criteria in order for the
California SOS to accept the UCC portion of the project and move it into the
maintenance and operations phase.

As a result of the Amendment, the
Company recorded an adjustment under percentage of completion accounting in the
first quarter of 2006. The adjustment in the Companys consolidated statement of
income for the year ended December 31, 2006 resulted in a reduction of software
& services revenues of approximately $2.1 million and a reduction of cost of
software & services revenues of approximately $2.1 million. The adjustment
in the Companys consolidated balance sheet was a reduction in unbilled revenues
of approximately $2.1 million, a reduction of accrued liabilities of
approximately $1.6 million, and a reduction of application development contracts
of approximately $0.5 million. This adjustment did not affect operating income,
net income or earnings per share.

In June 2006, the California SOS
officially accepted the UCC portion of the project, which also commenced the
42-month maintenance and operations phase. Upon acceptance, the Company was
relieved of its obligation to provide a $5 million performance bond to the
California SOS. The bond was collateralized by a $5 million letter of credit.
Also upon acceptance, approximately $1.5 million in milestone payments became
due to the Company, thus reducing unbilled revenues.

The Company regularly reviews its
cost estimates to complete and does not currently believe its estimated contract
loss will exceed the $4.2 million estimate established in the first quarter of
2005. However, it is at least reasonably possible that the estimate will change
in the near term. Further, it is possible that the Company will similarly incur
cost overruns in the future as it has in the past as a result of unforeseen
difficulties such as rising development, subcontractor and personnel costs or
other reasons. If this occurs, the Companys results of operations, financial
condition and cash flows could be adversely affected.

At December
31, 2008, the Companys UCC and corporate filings software development business
was primarily engaged in servicing the maintenance and operations obligation
under its contract with the California Secretary of State. This software &
services business is not marketing its applications and services for new
engagements.

The Companys ethics & elections
business recognizes revenues from professional services as the services are
provided. This business has entered into contracts with the state of Michigan
and the Federal Election Commission that contain general fiscal funding clauses.
The Company recognizes revenue under these contracts if the probability of
cancellation is determined to be a remote contingency.

53

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Stock-based compensation

Effective January 1, 2006, the
Company adopted the provisions of SFAS No. 123R (revised 2004), Share-Based Payment, which
establishes the accounting for equity instruments exchanged for employee
services. See Note 11.

Income taxes

The Company, along with its wholly
owned subsidiaries, files a consolidated federal income tax return. Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year-end based on enacted laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized.

The Company accounts for uncertain
tax positions in accordance with FASB Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes 
an interpretation of FASB Statement No. 109.
Accordingly, the Company does not recognize a tax benefit for uncertain tax
positions unless managements assessment concludes that it is more likely than
not that the position is sustainable, based on its technical merits. If the
recognition threshold is met, the Company recognizes a tax benefit based upon
the largest amount of the tax benefit that is greater than 50 percent likely to
be realized. The Company recognizes interest and penalties, if any, related to
unrecognized tax benefits in income tax expense in the consolidated statements
of income. The Company adopted the provisions of FIN 48 on January 1, 2007, with
the cumulative effect recorded as an adjustment to the opening balance of
accumulated deficit. See Note 10 for additional discussion of the Companys
adoption of FIN 48.

Fair Value of Financial Instruments

Effective January 1, 2008, the
Company adopted the provisions of SFAS No. 157, Fair Value Measurements, (SFAS No.
157) that relate to financial assets and liabilities. SFAS No. 157 defines fair
value as the price that would be received to sell an asset or the price paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS No. 157 establishes a three-level hierarchy that
prioritizes the inputs to valuation techniques used to measure the fair value of
financial instruments. The valuation hierarchy is based upon the transparency of
inputs to the valuation of an asset or liability as of the measurement date. The
three levels are defined as follows:

| | Level 1 |  | Inputs to the valuation methodology
      are unadjusted quoted prices for identical assets or liabilities in active
      markets.                                                                                                                                                           
| | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |         |  |                                                                                                                                                                                                                                                                                               
| | Level 2 |  | Inputs to the valuation methodology
      include quoted prices for similar assets and liabilities in active
      markets, and inputs that are observable for the asset or liability, either
      directly or indirectly, for substantially the full term of the financial
      instrument.
| |         |  |                                                                                                                                                                                                                                                                                               
| | Level 3 |  | Inputs to the valuation methodology
      are unobservable and significant to the fair value
    measurement.                                                                                                                                                                                 

A financial instruments
categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. The Companys assets or
liabilities required to be measured at fair value on a recurring basis within
the valuation hierarchy of SFAS No. 157 consisted entirely of its student loan
auction-rate securities (SLARS) during 2008. Such securities were classified
within Level 3 of the fair value hierarchy because there was limited, or no,
trading activity due to continued failed auctions and little, or no, price
transparency until the Companys broker-dealer repurchased its SLARS at par
value in October 2008. At December 31, 2008, the Company did not hold any
investment securities, other than cash equivalents, which primarily included
bank deposits and U.S. government money market accounts that purchase U.S.
agency instruments or direct obligations of the U.S. Treasury.

54

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The following table presents a
reconciliation of all financial instruments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the year
ended December 31, 2008:

Year endedDecember 31,
      2008Balance, December 31, 2007
    
    $
    Impact of adoption of SFAS No. 157
    
    
    Beginning Balance
    
    $
    Total gains/(losses)
    (realized/unrealized):Included in earnings
    
    
    Included in accumulated other comprehensive
      loss
    
    
    Purchases, issuances and settlements
    
    
    Sales and maturities
    
    
    (6,950,000
    )Transfers in and/or out of Level 3
    
    
    6,950,000Balance, December 31, 2008
    
    $
    


The availability of observable
inputs can vary and is affected by a wide variety of factors, such as the type
of security and characteristics particular to a transaction. To the extent that
valuation is based on models or inputs that are less observable in the market,
the determination of fair value requires more judgment. Accordingly, the degree
of judgment exercised by the Company in determining fair value is greatest for
instruments categorized in Level 3. When observable prices are not available,
the Company either uses implied pricing from similar instruments or valuation
models based on net present value of estimated future cash flows, adjusted as
appropriate for liquidity, credit, market and/or other risk factors.

Comprehensive income

The Company has no material
components of other comprehensive income or loss and, accordingly, the Company's
comprehensive income is approximately the same as its net income for all periods
presented.

Earnings per share

Basic earnings per share are
calculated on the basis of the weighted average number of common shares
outstanding during the period. Diluted earnings per share are calculated on the
basis of the weighted average number of common shares outstanding during the
period and common stock equivalents that would arise from the exercise of stock
options or the issuance of restricted stock awards to employees and nonemployee
directors using the treasury stock method. The following table sets forth the
computation of basic and diluted earnings per share:

|                                                |  | Year
      ended December 31,
|----------------------------------------------- |  | -----------------------------
|                                                |  | 2006                         
|Numerator:                                      |  |                              
|Net income                                      |  | $                            
|Denominator:                                    |  |                              
|Weighted average shares 
    basic             |  |                              
|Stock options and restricted stock
      awards |  |                              
|Weighted average shares 
      diluted         |  |                              
|                                               
|Basic
      net income per share                |  | $                            
|                                               
|Diluted net income per share                    |  | $                            

Outstanding stock options totaling
0.3 million, 0.2 million and 0.1 million common shares during the years ended
December 31, 2006, 2007 and 2008, respectively, were not included in the
computation of diluted weighted average shares outstanding because their
exercise prices were in excess of the average stock price of the Company during
the periods.

55

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Concentration of credit risk

Financial instruments that
potentially subject the Company to significant concentrations of credit risk
consist primarily of cash and cash equivalents, short-term investments and
accounts receivable. During November 2008, the Federal Deposit Insurance
Corporation (FDIC) adopted the Temporary Liquidity Guarantee Program to
strengthen investor confidence and encourage liquidity in the banking system by
providing full coverage on non-interest bearing deposit transaction accounts,
regardless of dollar amount, for participating banks through December 31, 2009.
At December 31, 2008, the amount of cash in domestic non-interest bearing
commercial checking accounts was approximately $19.4 million, while the amount
of cash held in interest-bearing sweep accounts was approximately $19.9 million.
The Company limits its exposure to credit loss by investing the cash held in its
sweep accounts primarily in U.S. government money market accounts that purchase
U.S. agency instruments or direct obligations of the U.S. Treasury or repurchase
agreements secured by U.S. agency instruments. The Company performs ongoing
credit evaluations of its customers and generally requires no collateral to
secure accounts receivable.

Segment reporting

The Company reports segment
information in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 uses the "management"
approach, which designates the internal organization that is used by management
for making operating decisions and assessing performance as the source of the
Company's segments. SFAS No. 131 also requires disclosures about products and
services and major customers. See Note 12.

Quantifying Financial Statement Errors

In September 2006, the
staff of the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements. SAB No.
108 was issued in order to eliminate the diversity in practice surrounding how
public companies quantify financial statement misstatements.

Traditionally, there have been two
widely-recognized methods for quantifying the effects of financial statement
misstatements: the roll-over method and the iron curtain method. The
roll-over method focuses primarily on the impact of a misstatement on the income
statementincluding the reversing effect of prior year misstatementsbut its use
can lead to the accumulation of misstatements in the balance sheet. The
iron-curtain method, on the other hand, focuses primarily on the effect of
correcting the period-end balance sheet with less emphasis on the reversing
effects of prior year errors on the income statement. Prior to application of
the guidance in SAB No. 108, the Company used the roll-over method for
quantifying financial statement misstatements.

In SAB No. 108, the SEC staff
established an approach that requires quantification of financial statement
misstatements based on the effects of the misstatements on each of the Company's
financial statements and the related financial statement disclosures. This model
is commonly referred to as a "dual approach" because it requires quantification
of errors under both the iron curtain and the roll-over methods.

SAB No. 108 permits public companies
to initially apply its provisions either by (i) restating prior financial
statements as if the dual approach had always been applied or (ii) recording the
cumulative effect of initially applying the dual approach as adjustments to the
carrying values of assets and liabilities as of January 1, 2006 with an
offsetting adjustment recorded to the opening balance of retained earnings
(accumulated deficit). The Company elected to record the effects of applying SAB
No. 108 using the cumulative effect transition method.

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The following table summarizes the
effects (up to January 1, 2006) of applying the guidance in SAB No.
108:

**Period in which the Misstatement****Originated
      (1)**Cumulative Effect Prior to
    
    Adjustment Recorded as ofJanuary 1, 2004
    
    January 1,
      2006Deferred income taxes (2)
    
    $565,564
    
    $565,564Net loss (3)
    
    $565,564Accumulated deficit (4)
    
    
    
    $565,564  (1)
    
    The Company previously quantified
      this error under the roll-over method and concluded that it was
      immaterial.(2)
    
    The Company did not record tax net
      operating loss carryforwards acquired upon the acquisition of SDR
      Technologies in 2000, resulting in an overstatement of goodwill and an
      understatement of deferred tax assets by $565,564. The tax benefits of the
      net operating loss carryforwards were subsequently realized. As a result
      of the misstatement, the Company overstated its net loss in 2001 by
      overstating its impairment loss when it determined that the goodwill and
      other acquired intangible assets related to the SDR Technologies
      acquisition were impaired.(3)
    
    Represents the overstatement of the
      Companys net loss resulting from this misstatement.(4)
    
    Represents the decrease in
      accumulated deficit recorded as of January 1, 2006 to record the initial
      application of SAB No. 108.


Use of estimates

The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Recent Accounting Pronouncements

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS No. 157 does not
require any new fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify the source of
the information. Except for the portion of SFAS No. 157 that addresses
nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis, which has been
deferred for one additional year, the Company adopted this standard effective
January 1, 2008. The partial adoption of SFAS No. 157 did not have a material
impact on the Companys consolidated financial statements. The Company is
currently evaluating the requirements of SFAS No. 157 that address nonfinancial
assets and liabilities and has not yet determined the impact on its consolidated
financial statements.

In February
2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No. 115.
SFAS No. 159 permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings. SFAS No. 159 does not
affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value. The Company did not elect to choose the
fair value option and record unrealized gains and losses in earnings for any of
its financial instruments. Accordingly, the adoption of SFAS No. 159 on January
1, 2008 did not have any impact on the Companys consolidated financial
statements.

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In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (FSP-EITF 03-6-1). Under FSP-EITF 03-6-1, unvested
share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method. FSP-EITF 03-6-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those years and requires retrospective application. Because the Companys
service-based restricted stock awards contain non-forfeitable rights to
dividends, the Company will have to treat these awards as participating
securities. Total unvested service-based restricted shares totaled 0.9 million
at December 31, 2008. The Company anticipates that the adoption of this standard
will likely have a negative impact on basic and diluted earnings per share.

3. OUTSOURCED GOVERNMENT PORTAL
CONTRACTS

The Company's outsourced government
portal contracts generally have an initial term of three to five years with
provisions for renewals for various periods at the option of the government. The
Company's primary business obligation under these contracts is to design, build
and operate Internet-based portals on behalf of governments desiring to provide
access to government information and to complete government-based transactions
online. NIC typically markets the services and solicits users to complete
government-based transactions and to enter into subscriber contracts permitting
the user to access the portal and the government information contained therein
in exchange for transactional and/or subscription user fees. The Company enters
into separate agreements with various agencies and divisions of the government
to provide specific services and to conduct specific transactions. These
agreements preliminarily establish the pricing of the electronic transactions
and data access services the Company provides and the division of revenues
between the Company and the government agency. The government oversight
authority must approve prices and revenue sharing agreements.

The Company is typically responsible
for funding up front investment and ongoing operational costs of the government
portals, and generally owns all the applications developed under these
contracts. After completion of a defined contract term, the government agency
typically receives a perpetual, royalty-free license to the applications for use
only. If the Company's contract were not renewed after a defined term, the
government agency would be entitled to take over the portal in place with no
future obligation of the Company.

At December 31, 2008, the Company
was bound by performance bond commitments totaling approximately $3.3 million on
certain portal outsourcing contracts. Under a typical portal contract, the
Company is required to fully indemnify its government clients against claims
that the Companys services infringe upon the intellectual property rights of
others and against claims arising from the Companys performance or the
performance of the Companys subcontractors under the contract.

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The following is a summary of the
Companys twenty-one outsourced state government portal contracts at December
31, 2008:

|                                |  |                             |                             | Year
      Services |           | Contract
      Expiration Date             
|------------------------------- |  | --------------------------- | --------------------------- | ------------------- | --------- | -------------------------------------------
|NIC Subsidiary                  |  |                             | Portal Web Site
    (State) |                     | Commenced |                                            
|West Virginia Interactive       |  | www.WV.gov (West Virginia)  |                             | 2007                |           | 6/30/2009 (6/30/2010)                      
|NICUSA, AZ Division             |  | www.AZ.gov (Arizona)        |                             | 2007                |           | 6/26/2010 (6/26/2013)                      
|Vermont Information Consortium  |  | www.Vermont.gov (Vermont)   |                             | 2006                |           | 10/14/2012                                 
|Colorado Interactive            |  | www.Colorado.gov (Colorado) |                             | 2005                |           | 5/19/2010 (5/19/2014)                      
|South Carolina Interactive      |  | www.SC.gov (South Carolina) |                             | 2005                |           | 7/15/2009                                  
|Kentucky Interactive            |  | www.Kentucky.gov (Kentucky) |                             | 2003                |           | 3/31/09 (1/31/2013)                        
|Alabama Interactive             |  | www.Alabama.gov (Alabama)   |                             | 2002                |           | 2/28/2010 (2/28/2012)                      
|Rhode Island Interactive        |  | www.RI.gov (Rhode Island)   |                             | 2001                |           | 8/7/2010 (8/7/2012)                        
|Oklahoma Interactive            |  | www.OK.gov (Oklahoma)       |                             | 2001                |           | 6/30/2009                                  
|Montana Interactive             |  | www.MT.gov (Montana)        |                             | 2001                |           | 12/31/2010                                 
|NICUSA, TN Division             |  | www.TN.gov (Tennessee)      |                             | 2000                |           | 8/27/2010                                  
|Hawaii Information Consortium   |  | www.Hawaii.gov (Hawaii)     |                             | 2000                |           | 1/3/2013 (unlimited 3-year renewal options)
|Idaho Information Consortium    |  | www.Idaho.gov (Idaho)       |                             | 2000                |           | 6/30/2011 (6/30/2015)                      
|Utah Interactive                |  | www.Utah.gov (Utah)         |                             | 1999                |           | 5/6/2009                                   
|Maine Information Network       |  | www.Maine.gov (Maine)       |                             | 1999                |           | 3/14/2012 (3/14/2018)                      
|Arkansas Information Consortium |  | www.Arkansas.gov (Arkansas) |                             | 1997                |           | 6/30/2010                                  
|Iowa Interactive                |  | www.Iowa.gov (Iowa)         |                             | 1997                |           | 3/31/2011 (3/31/2012)                      
|Virginia Interactive            |  | www.Virginia.gov (Virginia) |                             | 1997                |           | 8/31/2012                                  
|Indiana Interactive             |  | www.IN.gov (Indiana)        |                             | 1995                |           | 6/30/2010 (6/30/2014)                      
|Nebraska Interactive            |  | www.Nebraska.gov (Nebraska) |                             | 1995                |           | 1/31/2010                                  
|Kansas Information Consortium   |  | www.Kansas.gov (Kansas)     |                             | 1992                |           | 12/31/2012
(12/31/2016)                    

During the
first quarter of 2008, the Company received a new five-year contract from the
state of Hawaii. This contract includes unlimited renewal options under which
the state can extend the contract for additional three-year periods. The Company
also received a new four-year contract with the state of Maine, which includes
an option for the state to extend the contract for three additional two-year
terms. In addition, the Company received a one-year contract extension from the
state of Alabama.

During the
second quarter of 2008, the Company received one-year contract extensions from
the states of South Carolina and Oklahoma, and a two-year contract extension
from the state of Arkansas. The Company also received a new three-year contract
from the state of Idaho, which includes options for the government to extend the
contract for two additional two-year terms.

During the
third quarter of 2008, the Company received a one-year contract extension from
the state of West Virginia and a three-year contract extension from the state of
Vermont. The Company also received a new three-year contract from the state of
Kansas, which includes options for the government to extend the contract for two
additional two-year terms.

During the
fourth quarter of 2008, the Company received a one-year contract extension from
the state of Alabama.

During the
first quarter of 2009, the Company received a one-year contract extension from
the state of Nebraska.

59

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4. INVESTMENTS

The par value and fair value of the
Companys investments was as follows at December 31:

|                             |  | December 31,
      2007 |            | December 31, 2008
|---------------------------- |  | ----------------------- | ---------- | -----------------
|                             |  | Unrealized              |            | Unrealized       
|                             |  | Par
    Value           |            | Gain
      (Loss)
|Auction-rate debt securities |  | $                       | 17,600,000 |                  

The
Companys investments at December 31, 2007, consisting entirely of student loan
auction-rate securities (SLARS), were classified as available-for-sale at the
time of purchase. Gross realized gains and losses and unrealized holding gains
and losses for each of the periods presented were not significant.

The
Companys SLARS were structured with short-term interest rates that were reset
through the auction process at 28day intervals, but with contractual debt
maturities that were in excess of 22 years. Historically, the Company had the
option to liquidate its SLARS whenever the interest rates on these securities
were reset. Accordingly, such securities were classified as short-term at
December 31, 2007.

During
January 2008, the Company began to liquidate its SLARS at each interest rate
reset date in anticipation of paying the special cash dividend of $0.25 per
share on February 28, 2008, totaling approximately $15.7 million (see Note 9).
The Company had successful auctions on these securities with scheduled 28-day
reset dates through mid-February 2008, at which time the Company had liquidated
approximately $11.6 million of its portfolio. Furthermore, there were successful
actions during January 2008 for each auction-rate security the Company held.
Accordingly, the Company determined that there was no impairment of these
securities at December 31, 2007. The Company encountered its first failed
auction in mid-February 2008, as the amount of securities submitted for sale in
those auctions exceeded the amount of bids. The Company did not subsequently
have a successful auction related to its SLARS. However, in October 2008, the
broker-dealer of the Companys SLARS repurchased all of the Companys SLARS at
par value totaling approximately $6.9 million.

5. PROPERTY AND
EQUIPMENT

Property and equipment consisted of
the following at December 31:

2007
    
    2008Furniture and fixtures
    
    $
    2,090,399
    
    
    $
    2,480,647Equipment
    
    
    8,983,240
    
    
    
    10,245,036Purchased software
    
    
    3,261,314
    
    
    
    3,937,780Leasehold
      improvements
    
    
    685,487
    
    
    
    799,70715,020,440
    
    
    
    17,463,170Less accumulated
      depreciation
    
    
    (8,910,365
    )
    
    
    (10,822,301
    )$
    6,110,075
    
    
    $
    6,640,869


Depreciation expense for the years
ended December 31, 2006, 2007 and 2008, was $2,032,456, $2,362,652 and
$3,330,022, respectively.

6. INVESTMENTS IN AFFILIATES AND JOINT
VENTURES

In 2000, NIC made a $5
million cash investment in E-Filing.com, Inc. (E-Filing), a provider of online
filing applications for legal services, giving NIC ownership of 21% of E-Filing,
a non-public company. The investment was accounted for under the equity method.
In 2004, E-Filing repurchased the Companys ownership interest in E-Filing for
approximately $0.5 million, which approximated the carrying value of the
Companys investment at the date of the repurchase. The Company received
approximately $0.3 million in cash and a $0.2 million subordinated promissory
note with principal plus 5% interest payable annually in three equal
installments on each of the first, second and third anniversary dates of the
issuance of the note. The Company had no investment balance remaining in
E-Filing after the repurchase. During 2006, the Company wrote off the remaining
balance of the promissory note ($96,954) due to E-Filings deteriorated
financial condition, and recorded the loss in gain (loss) on affiliate
investments in the consolidated statements of income.

60

---

In 2000, NIC made an initial $0.5
million cash investment in e-Government Solutions Limited (eGS), a private
joint venture based in London, England. The investment had been accounted for
under the equity method. As a result of a modification to the joint venture
agreement in 2002, the Company began to account for its investment in eGS under
the cost method and had no investment balance remaining in eGS after the
modification. NICs cash contributions since the inception of the joint venture
totaled approximately $1.0 million. In September 2007, a member of the joint
venture purchased the Companys ownership interest in eGS for approximately $0.5
million in cash. The Company had no investment balance in eGS at the date of the
purchase and recorded a $0.5 million gain on the purchase in gain (loss) on
affiliate investments in the consolidated statements of income.

7. DEBT OBLIGATIONS AND COLLATERAL
REQUIREMENTS

In May 2007, the Company entered
into a $10 million unsecured credit agreement with a bank. This revolving credit
facility is available to finance working capital, issue letters of credit and
finance general corporate purposes. The Company can obtain letters of credit in
an aggregate amount of $5 million, which reduces the maximum amount available
for borrowing under the facility. Interest on amounts borrowed is payable at a
base rate or a Eurodollar rate, in each case as defined in the agreement. The
base rate is equal to the higher of the Federal Funds Rate plus 0.5% or the
banks prime rate. Fees on outstanding letters of credit are either 1% (if the
Companys consolidated leverage ratio is less than or equal to 1.25:1) or 1.25%
(if the Companys consolidated leverage ratio is greater than 1.25:1) of face
value per annum. The Company also pays a quarterly commitment fee on the unused
portion of the facility, which is either 0.1% per annum (if the Companys
consolidated leverage ratio is less than or equal to 1.25:1) or 0.15% per annum
(if the Companys consolidated leverage ratio is greater than 1.25:1).

The terms of the agreement provide
for customary representations and warranties, affirmative and negative covenants
and events of default. The Company also is required to maintain compliance with
the following financial covenants (in each case, as defined in the agreement):

- Consolidated minimum annual EBITDA of at
  least $12 million, computed quarterly on a rolling 12-month basis
- Consolidated tangible net worth of at
  least $36 million
- Consolidated maximum leverage ratio of
  1.5:1

The Company
was in compliance with each of the covenants listed above at December 31, 2008.
The credit agreement expires in May 2009. However, letters of credit may have an
expiration date of up to one year beyond the expiration date of the credit
agreement. The Company intends to renew the credit facility prior to its
expiration date in May 2009.

The Company issues letters of credit
as collateral for performance on certain of its outsourced government portal
contracts, as collateral for certain performance bonds and as collateral for
certain office leases. In total, the Company and its subsidiaries had unused
outstanding letters of credit of approximately $1.3 million at both December 31,
2007 and 2008. The Company had $3.7 million in available capacity to issue
additional letters of credit and $8.7 million of unused borrowing capacity at
December 31, 2008 under the facility.

The Company has a $1.0 million line
of credit with a separate bank in conjunction with a corporate credit card
agreement.

61

---

8. COMMITMENTS AND
CONTINGENCIES

Operating leases

The Company and its subsidiaries
lease office space and certain equipment under noncancellable operating leases.
Future minimum lease payments under all noncancellable operating leases at
December 31, 2008 are as follows:

Fiscal
      Year2009
    
    $
    2,479,9662010
    
    
    2,052,0002011
    
    
    1,382,4312012
    
    
    1,121,9912013
    
    
    540,494Thereafter
    
    
    760,089


Rent expense for operating leases
for the years ended December 31, 2006, 2007 and 2008 was approximately $1.9
million, $2.4 million and $2.9 million, respectively.

SEC Investigation

The Company has been the subject of
an informal SEC inquiry of expense reporting by certain officers of the Company
and certain potentially related matters. In connection with that inquiry, a
review was undertaken by the Audit Committee of the Companys Board of
Directors, with the assistance of outside, independent counsel, which focused on
such expense reporting. The review revealed that expense reimbursement
deficiencies occurred during the period from January 2004 through October 2006
related to Jeffery S. Fraser, who was then the Companys Chairman of the Board
and Chief Executive Officer, that these expense reimbursement deficiencies were
isolated to Mr. Fraser and that the amount of such deficiencies was not material
to the Companys financial condition or results of operations. During the second
quarter of 2008, the Company received notice from the SEC that a formal order of
investigation had been issued with respect to these matters. As is frequently
the case in such situations, the SEC has taken the step of obtaining a formal
order of investigation to ensure the thoroughness of its investigation. The
Company believes the investigation conducted by NICs Audit Committee was
thorough and independent and it is not anticipated that the SEC investigation
will reveal any significant additional instances of misreporting of expenses by
employees.

Litigation

The Company is involved from time to
time in legal proceedings and litigation arising in the ordinary course of
business. However, the Company is not currently involved with any legal
proceedings.

9. SHAREHOLDERS' EQUITY

Common stock

On June 30, 1998, the Company and
the National Information Consortium Voting Trust (the Voting Trust) consisting
of all the Company's then current shareholders, entered into a stock purchase
agreement for the Company's shareholders to sell a 25% interest in the Company
to an investment management firm. Under the Voting Trust agreement, two
principal shareholders had the right to vote all of the Voting Trust's common
shares and to sell all or any part of such shares. In 2006, the Voting Trust
sold approximately 2.1 million shares of NIC common stock in the open market. At
December 31, 2007, the Voting Trust held approximately 21.4 million shares of
NIC common stock. Of this balance, 116,441 shares were held on behalf of the
Company by the Voting Trust, and were recorded as treasury stock with an
assigned value of $167,675 in the consolidated balance sheets.

During the second quarter of 2008,
the Company was informed that the trustees of the Voting Trust dissolved the
Voting Trust as of June 20, 2008. During the third quarter of 2008, the trustees
distributed the Voting Trusts stock in the Company to the Voting Trust
beneficiaries, and the Company exchanged its Voting Trust units for the 116,441
shares of NIC common stock and retired these shares.

62

---

Common stock transactions and
additional paid-in capital

As a condition of separation and
severance from the Company in the second quarter of 2002, a former executive had
the right to request the Company to repurchase all of the shares of the
Companys common stock, totaling 149,488 shares, beneficially owned by the
former executive that were held of record in the Voting Trust for $1.44 per
share. In October 2002, the former executive exercised this right and caused the
Company to repurchase his Voting Trust units for $215,260. The shares of NIC
common stock represented by the Voting Trust Units have been recorded as
treasury stock in the consolidated balance sheets. Since this time, the Voting
Trust has, on occasion, distributed shares of NIC common stock to its members
and sold shares of NIC common stock in the open market, which has reduced the
number of shares remaining in treasury stock. In 2006, the Voting Trust sold
approximately 2.1 million shares of NIC common stock in the open market. This
affected 11,154 shares of NIC common stock held by the Company as treasury
stock. The Company received $64,965 in proceeds from the sale. These shares had
an assigned value of $16,373, which was credited to treasury stock, with the
remaining $50,004 credited directly to additional paid-in capital. At December
31, 2007, the Company had 116,441 shares remaining in treasury stock. As further
discussed above, the Voting Trust was dissolved during 2008, and the Company
exchanged its Voting Trust units for 116,441 shares of NIC common stock and
retired these shares.

On January
29, 2007, the Companys Board of Directors declared a special cash dividend of
$0.75 per share, payable to shareholders of record as of February 12, 2007. The
dividend, totaling approximately $46.7 million, was paid on February 20, 2007 on
61,686,425 outstanding shares of common stock. A dividend equivalent of $0.75
per share was also paid simultaneously on 618,038 unvested shares of restricted
stock granted under the Companys 2006 Stock Option and Incentive Plan. The
dividend was paid out of the Companys available cash and short-term
investments.

On February 4, 2008, the Companys
Board of Directors declared a special cash dividend of $0.25 per share, payable
to shareholders of record as of February 18, 2008. The dividend, totaling
approximately $15.7 million, was paid on February 28, 2008 on 62,039,256
outstanding shares of common stock.A dividend equivalent of $0.25 per
share was also paid simultaneously on 790,032 unvested shares of restricted
stock granted under the Companys 2006 Stock Option and Incentive Plan. The
dividend was paid out of the Companys available cash and short-term
investments.

10. INCOME TAXES

The provision for income taxes
consists of the following:

Year Ended December 31,2006
    
    2007
    
    2008Current income taxes:Federal
    $
    185,944
    
    $
    (60,483
    )
    
    $
    132,945State
    
    313,348
    
    
    245,358
    
    
    
    666,572Total
    
    499,292
    
    
    184,875
    
    
    
    799,517Deferred income taxes:Federal
    
    6,083,043
    
    
    5,288,011
    
    
    
    5,568,245State
    
    1,096,061
    
    
    932,166
    
    
    
    966,587Total
    
    7,179,104
    
    
    6,220,177
    
    
    
    6,534,832Total income tax provision
    $
    7,678,396
    
    $
    6,405,052
    
    
    $
    7,334,349


63

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Significant
components of the Company's deferred tax assets and liabilities were as follows
at December 31:

|                                                                      | 2007 |            | 2008
|--------------------------------------------------------------------- | ---- | ---------- | ----
|Deferred tax assets:                                                  |      |            |     
|                                                                     
|Net operating loss
      carryforwards                                | $    | 11,209,229 |     
|Amortization and impairment of purchase accounting
      goodwill and |      |            |     
|software intangibles                                                  |      | 6,029,979  |     
|Capital losses on sale of
      affiliates                            |      | 2,430,378  |     
|Stock-based compensation pursuant to SFAS No. 123R                    |      | 573,486    |     
|                                                                     
|Accrued vacation                                                      |      | 441,639    |     
|Unearned revenue                                                      |      |           |     
|Amortization of internal use software
      development costs         |      | 275,575    |     
|Accrued contract expenses under percentage of
      completion        |      |            |     
|accounting                                                            |      | 171,614    |     
|Application development contract
      loss                           |      | 143,821    |     
|Other                                                                 |      | 72,509     |     
|                                                                      |      | 21,348,230 |     
|Less: Valuation allowance                                             |      | (3,107,948 | )   
|Total                                                                 |      | 18,240,282 |     
|Deferred tax
      liabilities:                                       |      |            |     
|Depreciation & capitalized internal use
      software development    |      |            |     
|costs                                                                 |      | (684,986   | )   
|Total                                                                 |      | (684,986   | )   
|Net deferred tax
      asset                                          | $    | 17,555,296 |     

For federal income tax purposes, the
Company had available at December 31, 2008, total net operating loss ("NOL")
carryforwards of approximately $7.3 million that will expire in 2022. The
Company believes it is more likely than not it will generate sufficient taxable
income from future operations to fully utilize its federal NOL carryforwards
prior to expiration. The amount of the deferred tax asset considered realizable
relating to these NOLs could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced.

A portion of the Companys total deferred
tax asset valuation allowance relates to estimated state NOL carryforwards. The
Company has identified certain estimated state NOL carryforwards that it had
previously recognized it might be unable to use. Based on a review of applicable
state tax statutes, the Company concluded that there is substantial doubt it
would be able to realize the full amount of certain estimated NOL carryforwards
in states where the Company cannot file a consolidated income tax return. As a
result, the Company recorded a deferred tax asset valuation allowance in 2003
totaling $483,386. In 2007, the Company increased its valuation allowance by
$17,043 for additional state NOL carryforwards that the Company may be unable to
use. In 2008, the Company decreased its valuation allowance by $68,780 for state
NOL carryforwards that the Company expects to be able to use.

A portion of the Companys total deferred tax valuation allowance at
December 31, 2008, totaling $1,881,598 relates to capital losses realized on
certain of the Companys previous equity method investments, and $548,780
relates to an expected capital loss on the Companys investment in its European
joint venture, eGS. At present, there is substantial doubt about the Companys
ability to generate capital gains in the future. As a result, the Company has
recorded a full valuation allowance on both of these deferred tax assets at
December 31, 2008. There was no change in the valuation allowance for capital
loss carryforwards in 2008.

See Note 11 for discussion of the accounting for income tax deductions
relating to the exercise of non-qualified stock options and vesting of
restricted stock.

64

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The following table reconciles the
effective income tax rate indicated by the consolidated statements of income and
the statutory federal income tax rate:

|                                            | Year Ended December 31,
|------------------------------------------- | -----------------------
|                                            | 2006                   
|Effective federal and state income tax rate | 41.7                   
|State income
      taxes                    | (4.8                   
|Valuation allowance                         | (1.0                   
|Uncertain tax
      positions               |                       
|Book gain on sale of investment             |                       
|Other                                       | (0.9                   
|Statutory federal income tax rate           | 35.0                   

The Company
adopted the provisions of FIN 48 on January 1, 2007 (see Note 2). As a result,
the Company recognized a $68,376 increase in the liability for unrecognized tax
benefits, which resulted in an increase to the January 1, 2007 accumulated
deficit balance of $68,376. As of January 1, 2007, after the implementation of
FIN 48, the Companys unrecognized tax benefits were $1,119,104, all of which
would affect the Companys effective tax rate if recognized. This amount
decreased by $405,608 during 2007 as the Company considered additional
information relating to its uncertain tax positions, and by $245,631 in 2008, as
the statute of limitations for certain tax years relating to unrecognized tax
benefits expired. It is expected that the amount of unrecognized tax benefits
will change in the next 12 months. However, the Company does not expect the
change to have a significant impact on its results of operations or financial
condition. A reconciliation of the beginning and ending amount of the
consolidated liability for unrecognized income tax benefits (included in other
long-term liabilities in the consolidated balance sheets) during the years ended
December 31, 2007 and 2008 is as follows:

|                                                 | 2007 |           | 2008
|------------------------------------------------ | ---- | --------- | ----
|Balance at January 1                             | $    | 1,119,104 |     
|Additions for
      tax positions of prior years |      | 4,782     |     
|Reductions for tax positions of prior years      |      | (410,390  | )   
|Settlements                                      |      |          |     
|Expiration of the statute of limitations         |      |          |     
|Balance at
      December 31                     | $    | 713,496   |     

The Company,
along with its wholly owned subsidiaries, files a consolidated U.S. federal
income tax return and separate income tax returns in many states throughout the
U.S. The Companys tax returns are not currently under examination by any of
these tax authorities. The Company remains subject to U.S. federal examination
for the tax years ended on or after December 31, 2005. State income tax returns
are generally subject to examination for a period of three to five years after
filing of the respective return.

The Company
recognizes accrued interest and penalties associated with uncertain tax
positions as part of income tax expense in the consolidated statements of
income. Upon the adoption date of FIN 48 and at December 31, 2007 and 2008,
accrued interest and penalty amounts were not material.

11. STOCK-BASED COMPENSATION AND
EMPLOYEE BENEFIT PLANS

Effective January 1, 2006, the
Company adopted the provisions of SFAS No. 123R (revised 2004), Share-Based
Payment, which establishes the accounting for equity instruments exchanged for
employee services. Under the provisions of SFAS No. 123R, stock-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as expense over the employees requisite
service period (generally the vesting period of the grant). The Company elected
to adopt the modified prospective application transition method as provided by
SFAS No. 123R. For vested stock-based awards that were outstanding on January 1,
2006, the Company was not required to record any additional compensation
expense. For unvested stock-based awards that were outstanding on January 1,
2006, awards that were previously included as part of the pro-forma net income
and earnings per share calculations of SFAS No. 123 have been charged to expense
over the remaining vesting period, without any changes in measurement. For all
new stock-based awards that have been granted or modified after January 1, 2006,
the Company has used SFAS No. 123Rs measurement model, expense recognition and
settlement provisions. Upon adoption of SFAS No. 123R, the Company discontinued
its historical accounting practice of recognizing forfeitures when they occurred
and now estimates compensation cost related to awards not expected to
vest.

65

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The following
table presents stock-based compensation expense included in the Companys
consolidated statements of income pursuant to the provisions of SFAS No. 123R:

Year Ended December 31,2006
    
    2007
    
    2008Cost of portal revenues, exclusive of depreciation
    $
    346,392
    
    
    $
    410,822
    
    
    $
    1,060,811& amortizationCost of software
      & services revenues, exclusive of
    
    19,051
    
    
    
    17,986
    
    
    
    28,655depreciation and amortizationSelling & administrative
    
    966,160
    
    
    
    1,248,082
    
    
    
    1,312,044Stock-based compensation expense before income
    
    1,331,603
    
    
    
    1,676,890
    
    
    
    2,401,510taxesIncome tax
      benefit
    
    (519,732
    )
    
    
    (654,993
    )
    
    
    (937,309
    )Net stock-based compensation expense
    $
    811,871
    
    
    $
    1,021,897
    
    
    $
    1,464,201


Stock option and restricted stock plans

The Company has two formal stock-option and incentive plans (the NIC
plan and the SDR plan) to provide for the granting of incentive stock options,
non-qualified stock options or restricted stock awards to encourage certain
employees of the Company and its subsidiaries, and directors of the Company, to
participate in the ownership of the Company, and to provide additional incentive
for such employees and directors to promote the success of its business through
sharing the future growth of such business.

The NIC plan was adopted in May 1998, amended in November 1998 and May
1999, revised in August 1999, and amended and restated in May 2004 and May 2006.
The May 2006 amendment and restatement, as approved by the Companys Board of
Directors and shareholders, modified the NIC plan to allow for the granting of
restricted stock awards in addition to stock options. Under the NIC plan, the
Company is authorized to grant stock options and restricted stock awards for up
to 9,286,754 common shares. At December 31, 2008, a total of 801,748 shares were
available for future grants under the NIC plan. There have been no option
repricings under the NIC plan.

The SDR plan was adopted in May 2000 in conjunction with NICs
acquisition of SDR Technologies. Under the SDR plan, the Company is authorized
to grant options for up to 229,965 common shares. No options in addition to the
227,566 options granted upon the close of the SDR acquisition will be granted
under the SDR plan. There have been no option repricings under the SDR
plan.

Stock options are generally exercisable one year from date of grant in
cumulative annual installments of 25% and expire five years after the grant
date. The Company did not grant any stock options in 2006, 2007 or 2008, and
does not currently anticipate granting stock options in the future. Instead, the
Company expects to grant only restricted stock awards, as further discussed
below.

66

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Stock options

Summary stock
option activity for the year ended December 31, 2008 is presented below:

|                                   |            |   |           |              |          |                 |           | **Weighted**  |  |   |        
|---------------------------------- | ---------- | - | --------- | ------------ | -------- | --------------- | --------- | ------------- |  | - | -------
|                                   |            |   |           | **Weighted** |          | **Average**     |           |               | 
|                                   |            |   |           | **Average**  |          | **Remaining**   |           | **Aggregate**
|                                   |            |   |           | **Exercise** |          | **Contractual** |           | **Intrinsic**
|                                   | **Shares** |   | **Price** |              | **Term** |                 | **Value**
|Outstanding at January 1           | 1,190,183  |   |           | $            | 4.46     |                 |           |               |  |   |        
|                                  
|Granted                            |           |   |           |              |         |                 |           |               |  |   |        
|Exercised                          | (554,125   | ) |           | $            | 3.36     |                 |           |               |  |   |        
|Expired                            | (189,750   | ) |           | $            | 6.82     |                 |           |               |  |   |        
|Canceled                           | (21,250    | ) |           | $            | 7.59     |                 |           |               |  |   |        
|                                  
|Outstanding at December 31         | 425,058    |   |           | $            | 4.69     |                 |           | 1.0           |  | $ | 139,992
|                                  
|Options exercisable at December 31 | 367,683    |   |           | $            | 4.61     |                 |           | 0.6           |  | $ | 135,442

The aggregate intrinsic value of options
exercised during the years ended December 31, 2006, 2007 and 2008 was
approximately $1.5 million, $1.1 million and $2.0 million, respectively. Cash
proceeds from the exercise of employee stock options for the years ended
December 31, 2006, 2007 and 2008 were approximately $1.2 million, $0.9 million
and $1.9 million, respectively.

The fair value of shares vested during the years ended December 31, 2006,
2007 and 2008 was approximately $0.8 million, $0.9 million and $0.3 million,
respectively. As of December 31, 2008, there was approximately $0.1
millionof
total unrecognized compensation cost, net of estimated forfeitures, related to
nonvested stock options. The Company expects to recognize this cost over a
weighted-average period of one year.

Restricted stock

The Company
began granting shares of restricted stock awards in the second quarter of 2006.
Grants of restricted stock generally vest beginning one year from the date of
grant in cumulative annual installments of 25%. Restricted stock is valued at
the date of grant, based on the closing market price of the Companys common
stock, and expensed using the straight-line method over the requisite service
period.

During 2008,
the Board of Directors of the Company granted certain management-level
employees, executive officers and non-employee directors service-based
restricted stock awards totaling 731,756 shares with a grant-date fair value
totaling approximately $5.3 million.

During 2008, the Board of Directors of the Company also granted certain
executive officers performance-based restricted stock awards pursuant to the
terms of the Companys new executive compensation program totaling 141,125
shares, with a grant date fair value of $5.86 per share, totaling approximately
$0.8 million, which represents the maximum number of shares able to be earned by
the executive officers at the end of a three-year performance period ending
December 31, 2010. The actual number of shares earned will be based on the
Companys performance related to the following performance criteria over the
performance period:

- Operating income growth (three-year compound
  annual growth rate)  25% weighting
- Total revenue growth (three-year compound annual growth rate)
   25% weighting
- Cash flow return on invested capital (three-year average) 
  50% weighting

67

---

At the end
of the three-year period, the executive officers will receive a number of shares
per the following schedule of threshold, target or superior Company performance
for the performance criteria:

Performance Threshold
    
    Performance LevelsThreshold
    
    Target
    
    SuperiorOperating income growth (three-year compound annual
      growth rate)
    15
    %
    
    20
    %
    
    25
    %Total
      revenue growth (three-year compound annual growth rate)
    15
    %
    
    20
    %
    
    25
    %Cash flow return on invested capital (three-year
      average)
    15
    %
    
    20
    %
    
    25
    %


For each performance criteria, no
shares will be awarded if threshold performance is not achieved, and no
additional shares will be awarded for performance in excess of the superior
level. For amounts between the threshold and target levels or between the target
and superior levels, straight line interpolation, rounded up to the next whole
share, will be used to determine the portion of the award that becomes vested.
Performance-based restricted stock is valued at the date of grant, based on the
closing market price of the Companys common stock, and expensed over the
requisite service period, beginning on the date of grant, based upon the
probable number of shares expected to vest.

A summary of restricted stock
activity for the year ended December 31, 2008 is presented below:

|                           |                |   |               | **Weighted**     
|-------------------------- | -------------- | - | ------------- | -----------------
|                           |                |   |               | **Average Grant**
|                           | **Restricted** |   | **Date Fair**
|                           | **Shares**     |   | **Value**    
|Outstanding at January 1   | 489,416        |   |               | $                
|                           |               
|Granted                    | 872,881        |   |               | $                
|Vested                     | (195,581       | ) |               | $                
|Expired                    |               |   |               |                  
|Canceled                   | (75,702        | ) |               | $                
|                          
|Outstanding at December 31 | 1,091,014      |   |               | $                

The fair value of restricted stock
vested during the year ended December 31, 2008 was approximately $1.2 million.
At December 31, 2008, the Company had approximately $4.9 millionof total unrecognized
compensation cost, net of estimated forfeitures, related to service-based
nonvested restricted stock awards (excluding performance-based awards discussed
above). The Company expects to recognize this cost over the next 2.7
years.

Income taxes

Prior to 2006, the Company received
federal income tax deductions, or windfall tax benefits, when certain employees
of the Company would exercise non-qualified stock options. The tax benefit for
the deductions increased deferred tax assets and was credited directly to
additional paid-in capital. Under the guidance of footnote 82 of paragraph A94
of SFAS No. 123R, the Company is not permitted to recognize a credit to
additional paid-in capital for windfall tax benefits resulting from the exercise
of non-qualified stock options or vesting of restricted stock unless such
windfall tax benefits reduce income taxes payable. Since the Company is not
currently paying federal income taxes (with the exception of federal alternative
minimum tax), such windfall tax benefits generally increase the Companys tax
net operating loss carryforwards. Following the with-and-without approach for
utilization of tax attributes, which results in windfall tax benefits being
utilized after utilization of available tax net operating loss carryforwards to
offset current year taxable income, the Company did not record an increase to
deferred tax assets with an offsetting increase to additional paid-in capital
for the windfall tax benefit of approximately $0.6 million, $0.3 million and
$0.6 million relating to the exercise of non-qualified stock options and vesting
of restricted stock awards during the years ended December 31, 2006, 2007 and
2008.

Paragraph 81
of SFAS No. 123R indicates that for purposes of calculating the pool of excess
tax benefits available to absorb tax deficiencies recognized subsequent to the
adoption of SFAS No. 123R (i.e., the pool of additional paid-in capital, or the
APIC pool), the Company shall include the net excess tax benefits that would
have qualified as such had the entity adopted SFAS No. 123 for recognition
purposes. The Company elected to use the alternative transition method described
in FASB Staff Position No. FAS 123(R)-3 (the short cut method) for calculating
the APIC pool upon adoption of SFAS No. 123R, and determined it had no such pool
available. At December 31, 2008, the Companys APIC pool totaled approximately
$1.5 million.

68

---

Earnings per share

In calculating
diluted earnings per share under SFAS No. 128, Earnings Per Share, the assumed
proceeds in the treasury stock calculation are adjusted for any stock option
windfall tax benefits or shortfalls that would be credited or debited,
respectively, to additional paid-in capital. Upon adoption of SFAS No. 123R
using the modified prospective application transition method, the Company
elected to exclude the impact of pro forma deferred tax assets (i.e., the
windfall or shortfall that would be recognized in the financial statements upon
exercise of an award) when calculating diluted earnings per share.

Employee Stock Purchase Plan

In 1999, the Company's Board of Directors approved an employee stock
purchase plan (ESPP) intended to qualify as an "employee stock purchase plan"
under Section 423 of the Internal Revenue Code. A total of 2,321,688 shares of
NIC common stock have been reserved for issuance under this plan. Terms of the
plan permit eligible employees to purchase NIC common stock through payroll
deductions up to 15% of each employee's compensation. Amounts deducted and
accumulated by the participant are used to purchase shares of NIC's common stock
at 85% of the lower of the fair value of the common stock at the beginning or
the end of the offering period, as defined in the plan.

In the offering period commencing on April 1, 2005 and ending on March
31, 2006, 40,343 shares were purchased at a price of $3.9015 per share,
resulting in total cash proceeds to the Company of approximately $157,000. In
the offering period commencing on April 1, 2006 and ending on March 31, 2007,
52,622 shares were purchased at a price of $4.556 per share, resulting in total
cash proceeds to the Company of approximately $240,000. In the offering period
commencing on April 1, 2007 and ending on March 31, 2008, 61,683 shares were
purchased at a price of $4.539 per share, resulting in total cash proceeds to
the Company of approximately $280,000. The next offering period under this plan
commenced on April 1, 2008. The closing fair market value of NIC common stock on
the first day of the current offering period was $7.38 per share.

The fair values of the offerings were estimated on the dates of grant
using the Black-Scholes model using the assumptions in the following
table.

March 31, 2007
    
    March 31, 2008
    
    March 31, 2009Offering
    
    Offering
    
    OfferingRisk-free interest rate
    
    4.77
    %
    
    4.93
    %
    
    1.62
    %Expected
      dividend yield
    
    0.00
    %
    
    0.00
    %
    
    0.00
    %Expected life
    
    1.0 year
    
    1.0 year
    
    1.0 yearExpected stock
      price volatility
    
    30.11
    %
    
    34.11
    %
    
    42.84
    %Weighted average fair value of ESPP rights
    
    $1.60
    
    
    $1.52
    
    
    $2.21


The Black-Scholes option-pricing model was not developed for use in
valuing employee stock options, but was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, it requires the use of subjective assumptions
including expectations of future dividends and stock price volatility. Such
assumptions are only used for making the required fair value estimate and should
not be considered as indicators of future dividend policy or stock price
appreciation, or should not be used to predict the value ultimately realized by
employees who receive equity awards. Because changes in the subjective
assumptions can materially affect the fair value estimate and because employee
stock options have characteristics significantly different from those of traded
options, the use of the Black-Scholes option-pricing model may not provide a
reliable estimate of the fair value of employee stock options.

69

---

Defined Contribution 401(k) Profit
Sharing Plan

The Company and its subsidiaries sponsor a defined
contribution 401(k) profit sharing plan. In accordance with the plan, all
full-time employees are eligible immediately upon employment. A discretionary
match by the Company of an employees contribution of up to 5% of base salary
and a discretionary contribution may be made to the plan as determined by the
Board of Directors. Expense related to Company matching contributions totaled
approximately $0.5 million, $0.6 million and $0.8 million for the years ended
December 31, 2006, 2007 and 2008, respectively.

12. REPORTABLE SEGMENTS AND RELATED
INFORMATION

The Companys two reportable segments consist of its Outsourced Portal
businesses and Software & Services businesses. The Outsourced Portals
segment includes the Company's subsidiaries operating outsourced government
portals and the corporate divisions that directly support portal operations. The
Software & Services segment primarily includes the Companys UCC and
corporate filings software development business (NIC Conquest) with the
California Secretary of State and ethics & elections filings business (NIC
Technologies) with the Federal Election Commission and the state of Michigan.
Each of the Companys Software & Services businesses is an operating segment
and has been aggregated to form the Software & Services reportable segment.
Unallocated corporate-level expenses are reported in the reconciliation of the
segment totals to the related consolidated totals as "Other Reconciling Items."
There have been no significant intersegment transactions for the periods
reported. The summary of significant accounting policies applies to all
segments.

The measure of profitability by which management evaluates the
performance of its segments and allocates resources to them is operating income
(loss). Segment asset or other segment balance sheet information is not
presented to the Companys chief operating decision maker. Accordingly, the
Company has not presented information relating to segment assets.

70

---

The table below reflects summarized financial information for the
Company's reportable segments for the years ended December 31:

Outsourced
    
    Software &
    
    Other Reconciling
    
    ConsolidatedPortals
    
    Services
    
    Items
    
    Total2006Revenues
    $
    70,008,598
    
    $
    1,367,248
    
    $
    
    
    
    $
    71,375,846Costs & expenses
    
    40,433,646
    
    
    1,169,498
    
    
    11,584,270
    
    
    
    53,187,414Depreciation
      &amortization
    
    1,863,437
    
    
    65,131
    
    
    111,830
    
    
    
    2,040,398Operating income (loss)
    $
    27,711,515
    
    $
    132,619
    
    $
    (11,696,100
    )
    
    $
    16,148,0342007Revenues
    $
    82,451,763
    
    $
    3,303,171
    
    $
    
    
    
    $
    85,754,934Costs & expenses
    
    47,580,543
    
    
    2,160,340
    
    
    17,385,470
    
    
    
    67,126,353Depreciation
      &amortization
    
    2,310,968
    
    
    24,371
    
    
    166,276
    
    
    
    2,501,615Operating income (loss)
    $
    32,560,252
    
    $
    1,118,460
    
    $
    (17,551,746
    )
    
    $
    16,126,9662008Revenues
    $
    96,795,170
    
    $
    3,780,333
    
    $
    
    
    
    $
    100,575,503Costs & expenses
    
    58,008,631
    
    
    2,929,112
    
    
    17,395,345
    
    
    
    78,333,088Depreciation
      &amortization
    
    3,215,636
    
    
    57,641
    
    
    359,924
    
    
    
    3,633,201Operating income (loss)
    $
    35,570,903
    
    $
    793,580
    
    $
    (17,755,269
    )
    
    $
    18,609,214


The following is a reconciliation of total segment operating income to
total consolidated income before income taxes for the years ended December
31:

|                                               | 2006 |            | 2007 |  | 2008
|---------------------------------------------- | ---- | ---------- | ---- |  | ----
|Total operating income for reportable segments | $    | 16,148,034 |      |  | $   
|Interest
      income                          |      | 2,401,504  |      |  |     
|Gain (loss) on affiliate investments           |      | (96,954    | )    |  |     
|Other income
      (expense), net              |      | (35,187    | )    |  |     
|                                              
|Income before income taxes                     | $    | 18,417,397 |      |  | $   

The highest volume, most commercially valuable service the Company offers
is access to motor vehicle records through the Companys outsourced government
portals, referred to as DMV records. This service accounted for approximately
59%, 54% and 48% of the Companys portal revenues in 2006, 2007 and 2008,
respectively.

A primary source of revenue is derived from data resellers, who use the
Company's government portals to access DMV records for sale to the auto
insurance industry. For the year ended December 31, 2006, one of these data
resellers accounted for approximately 47% of the Companys portal revenues and
47% of the Company's total revenues. For the year ended December 31, 2007, one
of these data resellers accounted for approximately 40% of the Companys portal
revenues and 38% of the Company's total revenues. For the year ended December
31, 2008, one of these data resellers accounted for approximately 33% of the
Companys portal revenues and 32% of the Company's total revenues. At December
31, 2008, this one data reseller accounted for approximately 27% of the
Companys accounts receivable.

For the year ended December 31, 2006, the Companys Indiana portal
accounted for approximately 14% of the Companys portal revenues and 13% of the
Companys consolidated revenues. For the year ended December 31, 2007, the
Companys Indiana portal accounted for approximately 11% of the Companys portal
revenues and 11% of the Companys consolidated revenues. For the year ended
December 31, 2008, the Companys Indiana portal accounted for approximately 11%
of the Companys portal revenues and 10% of the Companys consolidated
revenues.

71

---

For the year ended December 31,
2006, revenues from the Companys UCC and corporate filings software development
contract with the California Secretary of State were negative ($940,000) as a
result of adjustments under percentage of completion accounting as further
discussed in Note 2.

13. SUBSEQUENT EVENTS

On February 3, 2009, the Companys
Board of Directors declared a special cash dividend of $0.30 per share, payable
to shareholders of record as of February 17, 2009. The dividend, totaling
approximately $19.2 million, was paid on February 27, 2008 on 62,792,786
outstanding shares of common stock. A dividend equivalent of $0.30 per share was
also paid simultaneously on 1,040,446 unvested shares of restricted stock
granted under the Companys 2006 Stock Option and Incentive Plan. The dividend
was paid out of the Companys available cash.

The dividend
may result in a partial return of capital to shareholders, with the balance
being taxable to shareholders as a qualified dividend. The exact amount of the
return of capital, if any, is dependent on the earnings and profits of the
Company through the end of its 2009 fiscal year.

14. UNAUDITED QUARTERLY OPERATING
RESULTS

The unaudited quarterly information
below is subject to seasonal fluctuations resulting in lower portal revenues in
the fourth quarter of each calendar year (on an individual portal basis, and
excluding revenue from new outsourced government portal contracts), due to the
lower number of business days in the quarter and a lower volume of
business-to-government and citizen-to-government transactions during the holiday
periods. For additional information on significant items affecting the quarterly
results for the periods presented, refer above to Notes 2, 6, 10 and 11.

72

---

|2007                                        |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|------------------------------------------- | ------------------ | ---------- | ------------- |  | ------------------ | ---------- | ----------------- |  | ----------------- | ---------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                            | Three Months Ended |            | Year Ended   
|                                            | March 31, 2007     |            | June 30, 2007 |  | September 30, 2007 |            | December 31, 2007 |  | December 31, 2007
|Revenues:                                   |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|Portal revenues                             | $                  | 19,868,121 |               |  | $                  | 20,610,064 |                   |  | $                 | 20,699,037 |   |  | $ | 21,274,541 |   |  | $ | 82,451,763  |  
|Software & services revenues                |                    | 765,716    |               |  |                    | 866,117    |                   |  |                   | 858,715    |   |  |   | 812,623    |   |  |   | 3,303,171   |  
|Total revenues                              |                    | 20,633,837 |               |  |                    | 21,476,181 |                   |  |                   | 21,557,752 |   |  |   | 22,087,164 |   |  |   | 85,754,934  |  
|Operating expenses:                         |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|Cost of portal revenues, exclusive of       |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|depreciation & amortization                 |                    | 10,454,148 |               |  |                    | 10,418,844 |                   |  |                   | 10,844,146 |   |  |   | 11,931,344 |   |  |   | 43,648,482  |  
|Cost of software & services
      revenues, |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|exclusive of depreciation & amortization    |                    | 470,716    |               |  |                    | 493,210    |                   |  |                   | 478,811    |   |  |   | 440,741    |   |  |   | 1,883,478   |  
|Selling & administrative                    |                    | 5,119,716  |               |  |                    | 5,445,394  |                   |  |                   | 5,206,679  |   |  |   | 5,822,604  |   |  |   | 21,594,393  |  
|Depreciation & amortization                 |                    | 535,670    |               |  |                    | 576,405    |                   |  |                   | 632,251    |   |  |   | 757,289    |   |  |   | 2,501,615   |  
|Total operating expenses                    |                    | 16,580,250 |               |  |                    | 16,933,853 |                   |  |                   | 17,161,887 |   |  |   | 18,951,978 |   |  |   | 69,627,968  |  
|Operating income                            |                    | 4,053,587  |               |  |                    | 4,542,328  |                   |  |                   | 4,395,865  |   |  |   | 3,135,186  |   |  |   | 16,126,966  |  
|Other income
      (expense):               |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|Interest income                             |                    | 580,425    |               |  |                    | 317,182    |                   |  |                   | 359,870    |   |  |   | 483,630    |   |  |   | 1,741,107   |  
|Gain (loss) on affiliate investments        |                    |           |               |  |                    |           |                   |  |                   | 508,209    |   |  |   |           |   |  |   | 508,209     |  
|Other income (expense), net                 |                    | 105        |               |  |                    | (166       | )                 |  |                   | 2,191      |   |  |   | (18,140    | ) |  |   | (16,010     | )
|Total other income (expense)                |                    | 580,530    |               |  |                    | 317,016    |                   |  |                   | 870,270    |   |  |   | 465,490    |   |  |   | 2,233,306   |  
|Income before taxes                         |                    | 4,634,117  |               |  |                    | 4,859,344  |                   |  |                   | 5,266,135  |   |  |   | 3,600,676  |   |  |   | 18,360,272  |  
|Income tax
      provision                  |                    | 1,888,403  |               |  |                    | 2,107,032  |                   |  |                   | 1,476,154  |   |  |   | 933,463    |   |  |   | 6,405,052   |  
|Net income                                  | $                  | 2,745,714  |               |  | $                  | 2,752,312  |                   |  | $                 | 3,789,981  |   |  | $ | 2,667,213  |   |  | $ | 11,955,220  |  
|                                           
|Basic net income per share:                 | $                  | 0.04       |               |  | $                  | 0.04       |                   |  | $                 | 0.06       |   |  | $ | 0.04       |   |  | $ | 0.19        |  
|Diluted net
      income per share          | $                  | 0.04       |               |  | $                  | 0.04       |                   |  | $                 | 0.06       |   |  | $ | 0.04       |   |  | $ | 0.19        |  
|                                           
|Weighted average shares outstanding:        |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|Basic                                       |                    | 61,652,154 |               |  |                    | 61,768,673 |                   |  |                   | 61,904,985 |   |  |   | 62,015,563 |   |  |   | 61,836,530  |  
|Diluted                                     |                    | 61,968,819 |               |  |                    | 62,255,725 |                   |  |                   | 62,536,688 |   |  |   | 62,646,298 |   |  |   | 62,525,249  |  
|                                           
|2008                                        |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|                                            | Three Months Ended |            | Year Ended   
|                                            | March 31, 2008     |            | June 30, 2008 |  | September 30, 2008 |            | December 31, 2008 |  | December 31, 2008
|Revenues:                                   |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|Portal revenues                             | $                  | 23,796,488 |               |  | $                  | 24,621,112 |                   |  | $                 | 24,146,566 |   |  | $ | 24,231,004 |   |  | $ | 96,795,170  |  
|Software & services revenues                |                    | 883,202    |               |  |                    | 1,080,574  |                   |  |                   | 794,066    |   |  |   | 1,022,491  |   |  |   | 3,780,333   |  
|Total revenues                              |                    | 24,679,690 |               |  |                    | 25,701,686 |                   |  |                   | 24,940,632 |   |  |   | 25,253,495 |   |  |   | 100,575,503 |  
|Operating expenses:                         |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|Cost of portal revenues, exclusive of       |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|depreciation & amortization                 |                    | 12,704,786 |               |  |                    | 13,006,541 |                   |  |                   | 13,502,289 |   |  |   | 14,278,676 |   |  |   | 53,492,292  |  
|Cost of software & services
      revenues, |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|exclusive of depreciation & amortization    |                    | 433,216    |               |  |                    | 706,566    |                   |  |                   | 541,266    |   |  |   | 642,110    |   |  |   | 2,323,158   |  
|Selling & administrative                    |                    | 5,962,666  |               |  |                    | 5,822,206  |                   |  |                   | 5,519,794  |   |  |   | 5,212,972  |   |  |   | 22,517,638  |  
|Depreciation & amortization                 |                    | 846,794    |               |  |                    | 898,649    |                   |  |                   | 902,874    |   |  |   | 984,884    |   |  |   | 3,633,201   |  
|Total operating expenses                    |                    | 19,947,462 |               |  |                    | 20,433,962 |                   |  |                   | 20,466,223 |   |  |   | 21,118,642 |   |  |   | 81,966,289  |  
|Operating income                            |                    | 4,732,228  |               |  |                    | 5,267,724  |                   |  |                   | 4,474,409  |   |  |   | 4,134,853  |   |  |   | 18,609,214  |  
|Other income
      (expense):               |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|Interest income                             |                    | 332,917    |               |  |                    | 109,941    |                   |  |                   | 140,020    |   |  |   | 112,489    |   |  |   | 695,367     |  
|Other income (expense), net                 |                    | (19,450    | )             |  |                    |           |                   |  |                   | (4,684     | ) |  |   | (25,021    | ) |  |   | (49,155     | )
|Total other income (expense)                |                    | 313,467    |               |  |                    | 109,941    |                   |  |                   | 135,336    |   |  |   | 87,468     |   |  |   | 646,212     |  
|Income before
      taxes                   |                    | 5,045,695  |               |  |                    | 5,377,665  |                   |  |                   | 4,609,745  |   |  |   | 4,222,321  |   |  |   | 19,255,426  |  
|Income tax provision                        |                    | 2,058,005  |               |  |                    | 2,197,447  |                   |  |                   | 1,550,035  |   |  |   | 1,528,862  |   |  |   | 7,334,349   |  
|Net
      income                            | $                  | 2,987,690  |               |  | $                  | 3,180,218  |                   |  | $                 | 3,059,710  |   |  | $ | 2,693,459  |   |  | $ | 11,921,077  |  
|                                           
|Basic net income per share:                 | $                  | 0.05       |               |  | $                  | 0.05       |                   |  | $                 | 0.05       |   |  | $ | 0.04       |   |  | $ | 0.19        |  
|Diluted net
      income per share          | $                  | 0.05       |               |  | $                  | 0.05       |                   |  | $                 | 0.05       |   |  | $ | 0.04       |   |  | $ | 0.19        |  
|                                           
|Weighted average shares outstanding:        |                    |            |               |  |                    |            |                   |  |                   |            |   |  |   |            |   |  |   |             |  
|Basic                                       |                    | 62,118,530 |               |  |                    | 62,496,747 |                   |  |                   | 62,724,047 |   |  |   | 62,774,036 |   |  |   | 62,530,672  |  
|Diluted                                     |                    | 62,631,010 |               |  |                    | 62,956,338 |                   |  |                   | 62,970,717 |   |  |   | 62,799,367 |   |  |   | 62,841,690  |  

73

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Report of Independent Registered Public
Accounting Firm

To the Board
of Directors and Shareholders of NIC Inc.:

In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a) present fairly, in all material respects, the financial
position of NIC Inc. and its subsidiaries at December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on criteria established inInternal Control  Integrated
Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control Over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on these
financial statements and on the Companys internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements
include examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.

As discussed
in Note 2 to the consolidated financial statements, in 2008, the Company changed
the manner in which it measures fair value in accordance with SFAS No. 157,
Fair Value Measurements and in 2007, the Company changed the manner in which
it accounts for uncertain tax positions.

A companys
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial
statements.

Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.



/s/ PricewaterhouseCoopers LLPKansas
City, MissouriMarch 12, 2009

74

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ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures- The Company maintains disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that
are designed to ensure that material information required to be disclosed in its
filings under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuer's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this Annual Report on Form 10-K. Based on this
evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were effective as of such
date.

**Managements Report on
Internal Control Over Financial Reporting** Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). Under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework inInternal Control  Integrated
Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework inInternal Control 
Integrated Framework,our management
concluded that our internal control over financial reporting was effective as of
December 31, 2008.

Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

The
effectiveness of the Companys internal control over financial reporting as of
December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.

**Changes in Internal Control
over Financial Reporting -**As of the end
of the period covered by this report, our management, including our principal
executive officer and principal financial officer, concluded that there have
been no changes in our internal control over financial reporting that occurred
during our fourth fiscal quarter of 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 9A(T). CONTROLS AND PROCEDURES

Not applicable.

ITEM 9B. OTHER INFORMATION

None.

75

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE

The information under Election of
Directors, Executive Officers, Section 16(a) Beneficial Ownership Reporting
Compliance and Structure and Practices of the Board of Directors - Corporate
Governance Principles and Practices and Code of Business Conduct and Ethics, 
Committees of the Board and  Nominations of Directors set forth in the
Company's definitive proxy statement related to its 2009 annual meeting of
shareholders (the "Proxy Statement"), which will be filed with the SEC not later
than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A, is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information under Executive
Compensation, Compensation Discussion and Analysis, Compensation Tables,
Compensation Committee Interlocks and Insider Participation, Employment
Agreements and Severance Payments, and Structure and Practices of the Board of
Directors  Director Compensation set forth in the Proxy Statement, which will
be filed with the SEC not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A, is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information under Security
Ownership of Certain Beneficial Owners and Management set forth in the Proxy
Statement, which will be filed with the SEC not later than 120 days after the
end of the Company's fiscal year pursuant to Regulation 14A, is incorporated
herein by reference.

The
following table shows the Companys common stock authorized for issuance under
the Company's equity compensation plans as of December 31, 2008:

|                            |  | A                             |  | B                    |              | C                              
|--------------------------- |  | ----------------------------- |  | -------------------- | ------------ | -------------------------------
|                            |  | Number of securities
      to |  |                      |              |                                
|                            |  | be issued upon
      exercise |  | Weighted average     |              |                                
|                            |  | of outstanding
      options, |  | exercise price of    |              |                                
|                            |  | warrants and
      rights     |  | outstanding options, |              | Number of
      securities     
|                            |  | outstanding as
      of       |  | warrants and rights  |              | available for issuance
      as
|Plan Category               |  | December 31, 2008             |  | shown in Column A    |              | of December 31, 2008           
|Equity compensation         |  |                               |  |                      |              |                                
|plans
      approved by     |  |                               |  |                      |              |                                
|shareholders                |  |                               |  |                      |              |                                
|·Stock
      options        |  | 410,375                       |  | $                    | 4.79         |                                
|·Restricted                 |  |                               |  |                      |              |                                
|stock                       |  | 1,091,014                     |  |                      |             |                                
|Total                       |  | 1,501,389                     |  |                      |              |                                
|                           
|Employee stock              |  |                               |  |                      |              |                                
|purchase plan               |  | See Note (1)                  |  |                      | See Note (1) |                                
|                           
|Equity compensation         |  |                               |  |                      |              |                                
|plans
      not approved by |  |                               |  |                      |              |                                
|shareholders (2)            |  | 14,683                        |  | $                    | 2.03         |                                

|(1) |  | March 31, 2008 was the purchase date
      of common stock for the most recently completed offering period under the
      Companys employee stock purchase plan. Therefore, as of such date, no
      purchase rights were outstanding. The purchase price for the offering
period ended March 31, 2008, was $4.539 per share, and the total number of
shares purchased was 61,683.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

76

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|(2) |  | In
connection with the Company's acquisition of SDR Technologies, Inc. in May 2000,
the Company adopted the 1999 Stock Option Plan of SDR Technologies, Inc (the
SDR Plan). Options to purchase 227,566 shares were granted in connection with
the acquisition of SDR. However, no options in addition to those granted at the
close of the SDR transaction will be granted under this plan. The SDR Plan is
administered by the Compensation Committee of the
Company Board of Directors.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information under Certain
Relationships and Related Transactions, Election of Directors, and Structure
and Practices of the Board of Directors - Independence set forth in the Proxy
Statement, which will be filed with the SEC not later than 120 days after the
end of the Company's fiscal year pursuant to Regulation 14A, is incorporated
herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

The information under Ratification
of Appointment of Independent Registered Public Accounting Firm set forth in
the Proxy Statement, which will be filed with the SEC not later than 120 days
after the end of the Company's fiscal year pursuant to Regulation 14A, is
incorporated herein by reference.

77

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|PART IV                                                                                         |                                                                
|----------------------------------------------------------------------------------------------- | ---------------------------------------------------------------
|                                                                                               
|ITEM 15. EXHIBITS, FINANCIAL
      STATEMENT SCHEDULES                                          |                                                                
|(a)                                                                                             | The
      following documents are filed as part of this report:
|                                                                                               
|(1)                                                                                             | Financial Statements.                                          
|                                                                                                |                                                                
|Index To Consolidated
      Financial Statements:                                               | Page                                                           
|Consolidated Balance Sheets                                                                     | 45                                                             
|Consolidated
      Statements of Income                                                         | 46                                                             
|Consolidated Statements of Changes in Shareholders' Equity                                      | 47                                                             
|Consolidated
      Statements of Cash Flows                                                     | 48                                                             
|Notes to Consolidated Financial Statements                                                      | 49                                                             
|Report of
      PricewaterhouseCoopers LLP, Independent Registered Public Accounting
      Firm | 74                                                             

| | (2) |  | Financial Statement
      Schedules. All schedules are omitted because they are not applicable or
      the required information is shown in the consolidated financial statements
      or notes thereto.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (3) |  | Exhibits. Pursuant to
      the rules and regulations of the Securities and Exchange Commission, we
      have filed or incorporated by reference the documents referenced below as
      exhibits to this Annual Report on Form 10-K. The documents include
      agreements to which the Company is a party or has a beneficial interest.
      The agreements have been filed to provide investors with information
      regarding their respective terms. The agreements are not intended to
      provide any other factual information about the Company or its business or
      operations. In particular, the assertions embodied in any representations,
      warranties and covenants contained in the agreements may be subject to
      qualifications with respect to knowledge and materiality different from
      those applicable to investors and may be qualified by information in
      confidential disclosure schedules not included with the exhibits. These
      disclosure schedules may contain information that modifies, qualifies and
      creates exceptions to the representations, warranties and covenants set
      forth in the agreements. Moreover, certain representations, warranties and
      covenants in the agreements may have been used for the purpose of
      allocating risk between the parties, rather than establishing matters as
      facts. In addition, information concerning the subject matter of the
      representations, warranties and covenants may have changed after the date
      of the respective agreement, which subsequent information may or may not
      be fully reflected in the Companys public disclosures. Accordingly,
      investors should not rely on the representations, warranties and covenants
      in the agreements as characterizations of the actual state of facts about
      the Company or its business or operations on the date
  hereof.

78

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|Exhibit |  |                                                                                                                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description                                                                                                                                                                                                      
|3.1     |  | Articles of Incorporation of the
  registrant(1)                                                                                                                                                                 
|3.2     |  | Articles of Amendment to Articles of Incorporation of the
      registrant(5)                                                                                                                                    
|3.3     |  | Amendments to Bylaws of registrant, as adopted February
      3, 2009(13)                                                                                                                                        
|3.4     |  | Bylaws of registrant, as amended February 3,
      2009(13)                                                                                                                                                      
|4.1     |  | Reference is made to Exhibits 3.1, 3.2, 3.3 and
    3.4                                                                                                                                                          
|4.2     |  | Investor Rights Agreement dated June 30,
  1998(1)                                                                                                                                                               
|4.3     |  | Investors' Rights Agreement, dated January 12,
      2000(2)                                                                                                                                                     
|4.4     |  | Specimen Stock Certificate of the
  registrant(1)                                                                                                                                                                
|10.1    |  | Form
      of Indemnification Agreement between the registrant and each of its
      executive officers and directors(1) **                                                                                      
|10.2    |  | Registrant's 1998 Stock Option Plan, as amended and
      restated(1) **                                                                                                                                         
|10.3    |  | Registrant's 1999 Employee Stock Purchase Plan(1)
      **                                                                                                                                                       
|10.4    |  | Employment Agreement between the registrant and Jeffery
      S. Fraser dated July 1, 1998(1) **                                                                                                                 
|10.5    |  | Employment agreement between the Registrant and William
      F. Bradley, dated September 1, 2000(3) **                                                                                                          
|10.6    |  | Employment agreement between the Registrant and Samuel R.
      Somerhalder, dated September 1, 2000(3) **                                                                                                       
|10.7    |  | Employment agreement between the Registrant and Harry H.
      Herington, dated September 1, 2000(3) **                                                                                                          
|10.8    |  | Employment agreement between the Registrant and Stephen
      M. Kovzan, dated September 1, 2000(3) **                                                                                                           
|10.9    |  | Business Programs Automation Agreement, dated September
      6, 2001, between National Information USA, Inc. and the State of
      California(4)                                                               
|10.10   |  | Employment agreement
      between the Registrant and Eric J. Bur dated April 1, 2001 (6)
  **                                                                                                                   
|10.11   |  | Amendment to Contract No. 00SA420104, SSD SOS 0010, California
      Business Programs Automation Project, dated March 13, 2006, between
      NICUSA, Inc. and the State of California, Secretary of State
  (7)
|10.12   |  | Registrants 2006
      Amended and Restated Stock Option and Incentive Plan (8) **                                                                                                                              
|10.13   |  | Credit
      Agreement Dated as of May 2, 2007 between NIC Inc., as borrower, and Bank
      of America, N.A., as Lender and L/C Issuer(9)                                                                       
|10.14   |  | Separation and
      Severance Agreement and Release of Claims, dated June 27, 2007, between
      the Registrant and Eric J. Bur(10) **                                                                         
|10.15   |  | Restricted Stock Agreement for NIC Inc. 2006 Amended and Restated
      Stock Option and Incentive Plan(11) **                                                                                                   
|10.16   |  | Stock Option Agreement
      for NIC Inc. 2006 Amended and Restated Stock Option and Incentive
      Plan(11)                                                                                                    
|10.17   |  | NIC
      Inc. Management Annual Cash Incentive Plan, dated March 4,
    2008(12)                                                                                                                                
|10.18   |  | Performance-Based
      Restricted Stock Agreement under the NIC Inc. 2006 Amended and Restated
      Stock Option and Incentive Plan(12)                                                                        
|21.1    |  | Subsidiaries of the registrant **                                                                                                                                                                                
|23.1    |  | Consent of
      PricewaterhouseCoopers LLP, Independent Registered Public
      Accountants                                                                                                                     
|31.1    |  | Certification of Chief Executive Officer Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002                                                                                                         
|31.2    |  | Certification of Chief
      Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002                                                                                                   
|32.1    |  | Section
      906 Certifications of Chief Executive Officer and Chief Financial
      Officer                                                                                                                    

79

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|(1)  |  | Incorporated by
      reference to Registration Statement on Form S-1, File No.
    333-77939
|---- |  | ---------------------------------------------------------------------------------------------
|(2)  |  | Incorporated by
      reference to Registration Statement on Form S-1, File No.
    333-30872
|(3)  |  | Incorporated by
      reference to Form 10-K filed with the SEC on April 2, 2001             
|(4)  |  | Incorporated by
      reference to Form 10-Q filed with the SEC on November 14,
2001         
|(5)  |  | Incorporated by
      reference to Form 10-Q filed with the SEC on May 14, 2002              
|(6)  |  | Incorporated by
      reference to Form 10-K filed with the SEC on March 25, 2002            
|(7)  |  | Incorporated by
      reference to Form 10-K filed with the SEC on March 16, 2006            
|(8)  |  | Incorporate by
      reference to Registration Statement on Form S-8, File No.
    333-136016
|(9)  |  | Incorporated by
      reference to Form 10-Q filed with SEC on May 7, 2007                   
|(10) |  | Incorporated by
      reference to Form 10-Q file with SEC on August 6, 2007                 
|(11) |  | Incorporated by
      reference to Form 10-Q file with SEC on November 11, 2007              
|(12) |  | Incorporated by
      reference to Form 10-Q filed with SEC on May 12, 2008                  
|(13) |  | Incorporated by
      reference to Form 8-K filed with the SEC on February 4, 2009           
|    

|** |  | Management contracts
      and compensatory plans and arrangements required to be filed as Exhibits
      pursuant to Item 15(b) of this report.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

80

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 13,
2009.

NIC INC.By:
    /s/Harry H. HeringtonHarry
      H. Herington, Chairman of the Board and Chief ExecutiveOfficer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|Signature                   |  | Title                                                   |  | Date          
|--------------------------- |  | ------------------------------------------------------- |  | --------------
|/s/Harry
      H. Herington |  | Chairman of the Board and
      Chief Executive Officer |  | March 13, 2009
|Harry H. Herington          |  | (Principal Executive
      Officer)                     |  |               
|                           
|/s/Stephen M. Kovzan        |  | Chief Financial
      Officer                           |  | March 13, 2009
|Stephen M. Kovzan           |  | (Principal Financial
      Officer and Principal        |  |               
|                            |  | Accounting Officer)                                     |  |               
|                           
|/s/ Art
      N. Burtscher  |  | Lead Director                                           |  | March 13, 2009
|Art N. Burtscher            |  |                                                         |  |               
|                           
|/s/John
      L. Bunce, Jr. |  | Director                                                |  | March 13, 2009
|John L. Bunce, Jr.          |  |                                                         |  |               
|                           
|/s/Daniel J. Evans          |  | Director                                                |  | March 13, 2009
|Daniel J. Evans             |  |                                                         |  |               
|                           
|/s/Jeffery S. Fraser        |  | Director and Chairman
      Emeritus                    |  | March 13, 2009
|Jeffery S. Fraser           |  |                                                         |  |               
|                           
|/s/Ross
      C. Hartley    |  | Director                                                |  | March 13, 2009
|Ross C. Hartley             |  |                                                         |  |               
|                           
|/s/Alexander C. Kemper      |  | Director                                                |  | March 13, 2009
|Alexander C. Kemper         |  |                                                         |  |               
|                           
|/s/Pete
      Wilson        |  | Director                                                |  | March 13, 2009
|Pete Wilson                 |  |                                                         |  |               

81

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