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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION WASHINGTON, D.C.
20549


__________________

FORM 10-K__________________

(Mark One)

|x | ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15 OF THE SECURITIES    
|- | ----------------------------------------------------------------------
|  | EXCHANGE ACT OF
    1934                                              
|  |                                                                       
|  | For the fiscal year ended
      December 31, 2007                     
|  |                                                                       
|o | TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15 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                                                                  
|(State or other jurisdiction of                                           
|incorporation or organization)                                            
|                                                                          
|**25501 West Valley Parkway, Suite 300, Olathe, Kansas
      66061**      
|(Address of principal executive office, including Zip
      Code)         
|                                                                          
|Registrants telephone number, including area code: (877) 234-3468        
|                                                                          
|Securities registered pursuant to Section 12(b) of the
      Act:         
|                                                                          
|                                                                          
|Common Stock, no par value per share                                      
|                                                                          
|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 oNox

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes o  No 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 xNoo

Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in 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 definition 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
      filerx | 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 o  Nox

The aggregate market value of voting
stock held by non-affiliates of the registrant, as of June 30, 2007, was
approximately $266,219,000 (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 29, 2008, 62,247,000 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
      2008 are incorporated by reference into Part III of this Form
    10-K.
|                                                                                                                                                                                                                            
|Except as otherwise stated, the information
      contained in this Form 10-K is as of February 29, 2008.                                                                                                                   

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TABLE OF CONTENTS NIC
INC.FORM 10-K ANNUAL
REPORT

|               |  |                                                                                                  | Page
|-------------- |  | ------------------------------------------------------------------------------------------------ | ----
|PART I        
|Item 1         |  | Business                                                                                         | 4   
|Item 1A.       |  | Risk Factors                                                                                     | 12  
|Item 1B.       |  | Unresolved Staff
      Comments                                                                  | 26  
|Item 2         |  | Properties                                                                                       | 26  
|Item 3         |  | Legal
      Proceedings                                                                          | 26  
|Item 4         |  | Submission of Matters to a Vote of Security Holders                                              | 26  
|PART
      II 
|Item 5         |  | Market for Registrants Common Equity, Related Shareholder Matters
      and                     |     
|               |  | Issuer Purchases of Equity Securities                                                            | 27  
|Item 6         |  | Selected
      Consolidated Financial Data                                                       | 29  
|Item 7         |  | Managements Discussion and Analysis of Financial Condition and
      Results of Operations      | 30  
|Item 7A.       |  | Quantitative and
      Qualitative Disclosures About Market Risk                                 | 47  
|Item 8         |  | Consolidated Financial Statements and Supplementary Data                                         | 48  
|Item 9         |  | Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure | 78  
|Item 9A.       |  | Controls and Procedures                                                                          | 78  
|Item 9A(T)     |  | Controls and
      Procedures                                                                    | 78  
|Item 9B.       |  | Other Information                                                                                | 78  
|PART
      III
|Item 10        |  | Directors, Executive Officers and Corporate Governance                                           | 79  
|Item 11        |  | Executive
      Compensation                                                                     | 79  
|Item 12        |  | Security Ownership of Certain Beneficial Owners and Management
      and                         |     
|               |  | Related Shareholder Matters                                                                      | 79  
|Item 13        |  | Certain
      Relationships and Related Transactions, and Director Independence                  | 80  
|Item 14        |  | Principal Accountant Fees and Services                                                           | 80  
|PART
      IV 
|Item 15        |  | Exhibits, Financial Statement Schedules                                                          | 81  

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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 the 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. Management continuously updates and
revises these estimates and assumptions based on actual conditions experienced.
However, it is not practicable to publish all revisions and, as a result, 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 Notes 2, 3, 7, 8 and 14 to 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 iswww.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, 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 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 a provider of software applications and services for electronic
filings and document management solutions for governments. This business focuses
on secretaries of state, whose offices are state governments principal agencies
for UCC and corporate filings. Currently, this business is primarily engaged in
servicing its contract with the California Secretary of State and is not
actively marketing its applications and services in respect of new engagements.
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 and ethics & elections
businesses. 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.

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

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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
eMarketer estimates, 1.2 billion people worldwide had Internet access in 2007
and nearly 275 million households had access to broadband services. ComScore
Networks reports that approximately 980 million people worldwide use the
Internet on a regular basis.

Penetration
of personal computers also continues to rise. According to Forrester Research,
the number of personal computers in use globally will double by 2010 to 1.3
billion units. 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. Nielsen/NetRatings reported in August 2007 that 84% of all U.S.
households have broadband availability. According to ComScore Networks, 97% of
broadband consumers have high speed Web access 24 hours a day and seven days a
week - at work, at home and increasingly across an array of portable devices
such as laptops, PDAs and mobile phones.

The volume
of electronic commerce has grown in parallel with the Internet itself. According
to ComScore Networks, the total value of non-travel eCommerce spending in the
United States surpassed $123 billion in 2007, up 20 percent from 2006.

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.

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;

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- the financial, operational and technology 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, in one location on the Internet, 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.

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

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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.

Government Contracts

Our portal outsourcing
businesses

Through our
portal outsourcing businesses, we currently have contracts with 21 state
governments. At December 31, 2007, we maintained outsourced government portal
service contracts with the following portals:

|                   |  | Year
      Contract |  |                  
|------------------ |  | ------------------- |  | -----------------
|Government Entity  |  | Commenced           |  | Web Address      
|West Virginia      |  | 2007                |  | www.WV.gov       
|Arizona            |  | 2007                |  | www.AZ.gov       
|Vermont            |  | 2006                |  | www.Vermont.gov  
|Colorado           |  | 2005                |  | www.Colorado.gov 
|South Carolina     |  | 2005                |  | www.SC.gov       
|Kentucky           |  | 2003                |  | www.Kentucky.gov 
|Alabama            |  | 2002                |  | www.Alabama.gov  
|Rhode
      Island |  | 2001                |  | www.RI.gov       
|Oklahoma           |  | 2001                |  | www.OK.gov       
|Montana            |  | 2001                |  | www.mt.gov       
|Tennessee          |  | 2000                |  | www.Tennessee.gov
|Hawaii             |  | 2000                |  | www.eHawaii.gov  
|Idaho              |  | 2000                |  | www.Idaho.gov    
|Utah               |  | 1999                |  | www.Utah.gov     
|Maine              |  | 1999                |  | www.Maine.gov    
|Arkansas           |  | 1997                |  | www.Arkansas.gov 
|Iowa               |  | 1997                |  | www.Iowa.gov     
|Virginia           |  | 1997                |  | www.Virginia.gov 
|Indiana            |  | 1995                |  | www.IN.gov       
|Nebraska           |  | 1995                |  | www.Nebraska.gov 
|Kansas             |  | 1992                |  | www.Kansas.gov   

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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;
- 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.

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 or, in some cases, upon passing
legislation. Some of the contracts under which we provide portal outsourcing
services can be terminated without cause on a specified period of notice. The
loss of one or more of our larger state portal partners, such as Indiana,
Virginia, Tennessee, Utah or Colorado, if not replaced, could dramatically
reduce our revenues.

Our software & services businesses

UCC and corporate filings software
development

Our UCC and
corporate filings software development business, NIC Conquest, focuses on
secretaries of state, whose offices are state governments principal agencies
for corporate filings. We have installed Uniform Commercial Code (UCC) and/or
business entity software applications for Web-enabling the back-office systems
and processes for business-to-government filings in several states.

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).

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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. 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  |  | Insurance companies        
|                                     |  | service offers controlled instant look-up      |  |                            
|                                     |  | of driving records. Includes commercial        |  |                            
|                                     |  | licenses.                                      |  |                            
|                                    
|Vehicle Title, Lien & Registration   |  | Provides controlled interactive title,         |  | Insurance companies,       
|                                     |  | registration and lien database access.         |  | lenders, citizens          
|                                     |  | Permits citizens to renew their vehicle        |  |                            
|                                     |  | registrations online.                          |  |                            
|                                    
|LIAB (Lobbyist in a Box)             |  | Allows the user to monitor state legislative   |  | Attorneys, lobbyists       
|                                     |  | 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.                           |  |                            
|                                    
|Health Professional License Services |  | Allows users to search databases on several    |  | Hospitals, clinics, health 
|                                     |  | health professions to verify license status.   |  | insurers, citizens         
|                                    
|Secretary of State Searches          |  | Allows users to access filings of              |  | Attorneys, lenders         
|                                     |  | corporations, partnerships and other           |  |                            
|                                     |  | entities, including charter documents.         |  |                            
|                                    
|Uniform Commercial Code (UCC)        |  | Permits searches of the UCC database to        |  | Attorneys, lenders         
|Searches and
      Filings           |  | verify financial liens, and permits filings of |  |                            
|                                     |  | secured financial documents.                   |  |                            
|                                    
|Professional License Renewal         |  | Permits professionals to renew their           |  | Attorneys, doctors, nurses,
|                                     |  | licenses on line using a credit card.          |  | architects and other       
|                                     |  |                                                |  | licensed professionals     
|                                    
|Drivers License Renewal             |  | Permits citizens to renew their drivers       |  | Citizens                   
|                                     |  | license on line
      using a credit card.     |  |                            
|                                    
|Limited Criminal History Searches    |  | For those legally authorized, provides users   |  | Schools, governments,      
|                                     |  | with the ability to obtain a limited criminal  |  | human resource             
|                                     |  | history report on a specified individual.      |  | professionals, nonprofits  
|                                     |  |                                                |  | working with children or   
|                                     |  |                                                |  | handicapped adults         
|                                    
|Income and Property Tax Payments     |  | Allows users to file and pay for a variety of  |  | Businesses and citizens    
|                                     |  | state and local income and property taxes.     |  |                            

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|Product or Service                  |  | Description                                   |  | Primary Users
|----------------------------------- |  | --------------------------------------------- |  | -------------
|Hunting and Fishing Licenses        |  | Permits citizens to obtain and pay for        |  | Citizens     
|                                    |  | outdoor recreation licenses over the Internet |  |              
|                                    |  | or from point-of-purchase retail kiosks.      |  |              
|                                   
|Business Registrations and Renewals |  | Allows business owners to search for and      |  | Businesses   
|                                    |  | reserve a business name, submit and pay       |  |              
|                                    |  | for the business registration, and renew the  |  |              
|                                    |  | business registration on an annual basis.     |  |              

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.

Revenues

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

In most of
our outsourced portal businesses, 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 62% of our portal
revenues in 2005, 59% in 2006 and 54% in 2007. ChoicePoint, which resells these
records to the auto insurance industry, accounted for approximately 46% of
portal revenues in 2005, 47% in 2006 and 40% in 2007. In 2007, transaction-based
revenues accounted for approximately 88% of our outsourced portal revenues. Fees
for application development and portal management accounted for approximately
12% of our outsourced portal revenues.

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 1,500 unique 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 15 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. 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.

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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. We expect that commercially
licensed technology will continue to be available at reasonable costs.

Competition

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

- the 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 industry. 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 smaller number of business days in
this quarter and a lower volume of transactions during the holiday period.

Employees

As of
December 31, 2007, we had 418 full-time employees, of which 69 were working in
corporate operations, 339 were in our outsourced portal businesses and 10 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.

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.

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The
principal associated with certain of our auction-rate debt securities may not be
accessible for in excess of 12 months, which could negatively impact our
short-term liquidity needs. In addition, our auction-rate debt securities may
experience an other-than-temporary decline in value, which would adversely
affect our results of operations.

Our
marketable securities portfolio, which totaled approximately $7.0 million (at
cost) on February 29, 2008, consisted entirely of short-term auction-rate debt
securities. These securities are structured with short-term interest rates that
are reset through an auction process at 28-day intervals, but with contractual
debt maturities that can be well in excess of 22 years. Historically, we have
had the option to liquidate our auction-rate debt securities whenever the
interest rates on these securities were reset. In mid-February 2008, liquidity
issues in the global credit markets resulted in the failure of auctions
representing all of the remaining auction-rate debt securities we currently
hold, as the amount of securities submitted for sale in those auctions exceeded
the amount of bids. A failed auction results in a lack of liquidity in the
securities but does not signify a default by the issuer. These securities are
currently AAA-rated by one or more credit rating agencies and are secured by
pools of student loans guaranteed by the U.S. Department of Education. This
guarantee is based upon a sliding scale of 97% to 98% of the unpaid principal
balance of eligible student loans, plus accrued interest, when the guarantors
claims experience is less than 5% of the original principal amount of the loans,
and decreases to 75% if the guarantors claims experience is greater than 9% of
the original principal amount of the loans. We have collected all interest
payable on all of our auction-rate debt securities when due. However, the
principal associated with failed auctions will not be accessible until a
successful auction occurs, a buyer is found outside of the auction process, the
issuers redeem the securities, the issuers establish a different form of
financing to replace these securities or final payments come due according to
contractual maturities ranging from 22 to 50 years. We understand that issuers
and financial markets are working on alternatives that may improve liquidity,
although it is not yet clear when or if such efforts will be
successful.

On February
28, 2008, we paid a special cash dividend totaling approximately $15.7 million
out of our available cash and marketable securities. Due to the illiquidity of
all of the remaining auction-rate debt securities we currently hold, as
described above, , we may be required to borrow against our $10 million line of
credit in the future for general working capital purposes. While the recent
auction failures will limit our ability to liquidate these investments for some
period of time, we believe that our currently available liquid resources,
coupled with the unused portion of our line of credit of approximately $8.7
million and cash generated from operations, will be sufficient to meet our
operating requirements, capital expenditure requirements and current growth
initiatives for at least the next twelve months without the need of additional
capital. However, as described below, we may need to raise additional capital
within the next twelve months to address unforeseen costs, opportunities,
competitive pressures or to acquire technologies beyond what is currently
contemplated.

If we still
hold our auction-rate debt securities at the end of the first quarter of 2008,
we may need to reclassify such securities as long-term investments, which would
reduce our working capital. Furthermore, based on an analysis of
other-than-temporary impairment factors, we may need to record a temporary
impairment within our comprehensive income or loss, net of tax, a component of
shareholders equity, on March 31, 2008 related to these auction-rate debt
securities. Although we currently believe that any decline in the fair market
value of these securities would be temporary, there is a risk that the decline
in value may ultimately be deemed to be other-than-temporary. In the future,
should we determine that the decline in value of these securities is
other-than-temporary, it would result in a loss being recognized in our
consolidated statements of income, which could be material.

***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
  arise;
- support our expansion into other states and
  government agencies beyond what is contemplated in 2008 if unforeseen opportunities arise;
- expand our product and service offerings beyond
  what is contemplated in 2008 if unforeseen opportunities arise;

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- 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. 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.

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 and market
shares. 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 master 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 or, in some
cases, upon passing legislation. Additionally, some of the contracts under which
we provide portal management and software development services can be terminated
without cause on a specified period of notice. The loss of one or more of our
larger state portal partners, such as Indiana, Virginia, Tennessee, Utah or
Colorado, if not replaced, could dramatically 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.

***We may face damage to
our professional reputation if our partners are not satisfied with our
services.***

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, it may be more damaging in our business than
in other businesses.

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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.
Therefore, our business, results of operations and financial condition would be
harmed if we fail to obtain profitable future contracts through the RFP
process.

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
over 54% of our portal revenues for the year ended December 31, 2007 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.

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.

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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.

***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 12% of our portal
revenues in 2007 were derived from software development or portal management
services paid directly to us by governments on a time-and-materials or fixed fee
basis. 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.

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, 2007, one of these data resellers,
ChoicePoint, accounted for approximately 40% 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
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.

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.

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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;
- 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.

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.

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***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;
  and
- the incurrence of debt or other expenses related
  to goodwill and other intangible assets.

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
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.

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.

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

We regard
our copyrights, patents, trademarks, trade dress, trade secrets and similar
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, 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.

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.

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

19

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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 2008, including general managers
for new operations in jurisdictions in which we are able to 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.

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.

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;

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- 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
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.

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.

***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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***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 an attractive 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.

Any breach
in our security resulting in the compromise of information, could expose us to
fines imposed 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.

Furthermore,
the PCI DSS is an evolving standard that has already been modified twice since
it was first issued in 2005. As it changes and new requirements are issued, we
may be required to expend significant capital and other resources to comply with
the PCI DSS.

***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 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

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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 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
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.

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
varying interpretations 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
informal SEC inquiry involving us has resulted in significant costs to us, may
result in future costs to us, and could adversely affect us.

As disclosed
in a Form 8-K and press release issued on February 6, 2008, we are currently 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 our Board of
Directors, with the assistance of outside, independent counsel, which focused on
such expense reporting. The review covered the period from January 1, 2004
through June 30, 2007 and was conducted with full cooperation by us and Jeffery
S. Fraser, who was then our Chief Executive Officer. Mr. Fraser has reimbursed
the Company approximately $97,000 in expenses as a result of the review, which
followed reimbursement by him of approximately $186,000 in expenses made prior
to the review. The reimbursement was made to correct expense reporting during
the period from January 2004 through October 2006 that was inconsistent with our
expense

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reimbursement policies. The review also revealed that these expense reimbursement
deficiencies were isolated to Mr. Fraser. We do not believe the amounts involved
in the review are material to our financial condition or results of operations.
However, in view of his recognition of the importance of the proper tone at the
top for effective corporate governance, Mr. Fraser decided to retire as our
Chief Executive Officer, effective February 4, 2008, but remained as a director
and our Chairman of the Board.

Both we and
our Audit Committee intend to continue to fully cooperate with the informal SEC
inquiry described above. 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 informal SEC inquiry and the Audit Committee review and
could incur significant legal fees and other expenses in connection with the
ongoing, informal SEC inquiry. 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.

In the
fourth quarter of 1998, we determined that the balance of revenues remaining to
be recognized under our existing contractual obligations was not expected to
cover anticipated costs of developing and implementing the related applications.
Estimated costs in excess of fixed contract prices of $1.3 million for
completing these applications were expensed under the percentage-of-completion
method of accounting in the fourth quarter of 1998. We accrued additional
anticipated losses of $1.1 million in 1999, $1.4 million in 2000, and $6.0
million in 2001 based on revised estimates relating to our then-existing
contracts. In 2002, we accrued approximately $3.5 million in anticipated losses
due to cost overruns on contracts in Arkansas, Minnesota and Oklahoma. We have
fulfilled all obligations under our contracts with the states of Minnesota and
Oklahoma, and the Arkansas system is currently in the maintenance phase. As
recently as 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.

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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 2007, 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, 2007, total NOL
carryforwards for federal tax purposes of approximately $25.1 million that will
expire in the years 2021 ($14.8 million) and 2022 ($10.3 million), respectively.
For the year ended December 31, 2007 total net deferred tax assets, including
NOL carryforwards, comprised approximately 16% 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 expect to be profitable and generate taxable income in
2008 and beyond, we may not be able to sustain the necessary levels of taxable
income to fully utilize our significant 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.

The
National Information Consortium Voting Trust owns a significant amount of our
common stock, which may impede attempts to replace or remove our board or
management.

As of
December 31, 2007, The National Information Consortium Voting Trust owned
approximately 34% of our outstanding common stock. This concentration of
ownership may have the effect of delaying or preventing a change in control or
changes in management, or limiting the ability of other shareholders to approve
or disapprove transactions that they may deem in their best interest.

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The
resale of shares owned by the National Information Consortium Voting Trust might
adversely affect our stock price.

The National
Information Consortium Voting Trust may sell shares in the open market from time
to time without advance notice to us or to the market. 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.

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 disclosed
in a Form 8-K and in a press release issued on February 6, 2008, as well as
under Item 1A of this Form 10-K, we are currently 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 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 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 2007.

26

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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 29, 2008, the
closing price of our common stock was $6.02.

Fiscal Year Ended December 31,
      2006
    
    High
    
    LowFirst Quarter
    
    $6.60
    
    $5.57Second
      Quarter
    
    $7.52
    
    $5.88Third Quarter
    
    $7.09
    
    $4.96Fourth
      Quarter
    
    $5.76
    
    $4.44Fiscal 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
    
    $6.70


As of February 29, 2008, there were
approximately 285 holders of record of shares of our common stock.

Dividend Policy

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 marketable securities.

On January
29, 2007, our 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 marketable securities. Any future determination as
to the payment of dividends will be made at the discretion of our 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, 2002, and ending on December 31, 2007 (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, 2002. It should be noted that on February 20,
2007 we paid a special cash dividend of $0.75 per share, which is 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, 2002, and ending on
December 31, 2007. The stock price performance on the graph below is not
necessarily indicative of our future price performance.

27

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



|Total Return
    Analysis |  | 12/31/2002 |  | 12/31/2003 |  | 12/31/2004 |  | 12/31/2005 |  | 12/31/2006 |  | 12/31/2007
|------------------------- |  | ---------- |  | ---------- |  | ---------- |  | ---------- |  | ---------- |  | ----------
|NIC
      Inc.            |  | $100.00    |  | $569.50    |  | $360.28    |  | $436.88    |  | $352.48    |  | $683.45   
|Peer Group                |  | $100.00    |  | $123.24    |  | $  88.13   |  | $  76.94   |  | $  92.73   |  | $103.19   
|Nasdaq
      Composite    |  | $100.00    |  | $150.01    |  | $162.89    |  | $165.13    |  | $180.85    |  | $198.60   

The Peer
Group consists of seven 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),
American Management Systems, Inc. (AMSY) and Official Payments Corporation
(OPAY). Bearing Point, Inc. began trading publicly on February 8, 2001, and
Accenture, Ltd. began trading publicly on July 18, 2001. 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.

28

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(c) During
2007, the Company acquired shares of common stock surrendered by employees to
pay income taxes due upon the vesting of restricted stock and to pay the
exercise price for stock options, as follows:

|                         |  |           |        |                  |  | Total Number
      of     |  | Maximum
      Number (or          
|------------------------ |  | --------- | ------ | ---------------- |  | ------------------------- |  | ----------------------------------
|                         |  | Total     |        |                  |  | Shares
      Purchased    |  | Approximate
      Dollar Value)   
|                         |  | Number of |        | Average          |  | as Part of
      Publicly |  | of Shares
      that May Yet Be   
|                         |  | Shares    |        | Price
      Paid |  | Announced
      Plans or  |  | Purchased
      Under the Plans or
|Period                   |  | Purchased |        | per Share        |  | Programs                  |  | Programs                          
|June 1, 2007             |  |           | 1,182  |                  |  | $5.70                     |  | N/A                               
|July 24,
      2007      |  |           | 1,223  |                  |  | $7.03                     |  | N/A                               
|July 28, 2007            |  |           | 36,192 |                  |  | $6.74                     |  | N/A                               
|August 15,
      2007    |  |           | 20,500 |                  |  | $7.21                     |  | N/A                               
|August 17, 2007          |  |           | 11,254 |                  |  | $7.52                     |  | N/A                               
|September 24,
      2007 |  |           | 7,254  |                  |  | $7.08                     |  | N/A                               
|October 19, 2007         |  |           | 6,045  |                  |  | $7.10                     |  | 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,        
|----------------------------------------------------------- |  | -------------------------------------
|                                                            |  | 2003                                 
|Consolidated
      Statement of Income Data:                |  | (in thousands, except per share data)
|Total revenues                                              |  | $50,831                              
|Operating
      income                                      |  | 7,338                                
|Income from continuing operations                           |  | 6,328                                
|Net
      income                                            |  | 6,328                                
|Income per share from continuing operations  basic         |  | 0.11                                 
|Income per share
      from continuing operations  diluted |  | 0.11                                 
|Net income per share  basic                                |  | 0.11                                 
|Net income per
      share  diluted                        |  | 0.11                                 

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,                                 
|---------------------------------------------------------------- |  | ---------------------------------------------
|                                                                 |  | 2003                                         
|Consolidated
      Balance Sheet Data:                           |  | (in thousands, except for dividends declared)
|Total assets                                                     |  | $85,740                                      
|Long-term debt
      (includes current portion of notes payable/ |  |                                              
|capital lease obligations)                                       |  | 363                                          
|Dividends declared per share outstanding on                      |  |                                              
|February 12, 2007                                                |  |                                             
|Total
      shareholders equity                                 |  | 63,164                                       

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 marketable securities in February
2007.

29

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|**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 2007 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 and the
other factors discussed under CAUTIONS ABOUT FORWARD LOOKING STATEMENTS in
Part I and RISK FACTORS in Part I, Item 1A of this 2007 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.

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, and manage
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

30

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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, 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. We also provide portal outsourcing
services to three local governments.

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 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. In 2008, we
  will continue 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.In addition to
  overall portal revenue growth, which includes both organic revenue growth and
  growth from new portal contract wins, 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

31

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as portal management.
Because the majority of revenues from the new Indiana contract are generally
recurring, we will continue 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 will be 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 15% in 2007, 10% in 2006 and
17% in 2005. Our same state revenue growth in 2007 was higher than our growth in
prior years 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 and in one portal state in the third quarter of
2007. In 2006, same state DMV revenues grew by 3% (excluding Indiana from the
calculation) and were not impacted by DMV price increases. In 2005, same state
DMV revenues grew by 9% primarily due to DMV price increases in two of our
portal states in late 2004. Historically, DMV price increases have been
relatively infrequent, and our ability to grow same state DMV revenues has been
limited, as such revenues have been driven 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.  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 2007, same state non-DMV
revenues grew 31% (excluding Indiana from the calculation), up from 27% in 2006
and down from 41% in 2005. 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.

- 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.  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 long-term outlook is for our portal gross profit rate to be in
  the 45-50% range. Our portal gross profit rate was 47% in 2007 and 2006, down
  from 49% in 2005. The decrease in 2006 was partially attributable to
  additional personnel in several of our portals due to our continued growth and
  reinvestment in our core business, coupled with mid-year 2006 non-executive
  salary increases across all portals that were in addition to normal annual
  increases, in an effort to better align our employee compensation structure
  with the general market. 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 range from 45% to 47% in 2008.

32

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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 26% in 2007, 22% in 2006 and 22% in 2005. 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
2008, we expect selling & administrative costs as a percentage of portal
revenue to range from 24% to 25%, which reflects a return to historical levels
of modest expense growth. We also expect depreciation and amortization expense
as a percentage of portal revenue to range from 3% to 4%, as we will 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
decreased to 20% in 2007, down from 23% in 2006 and up from 18% in 2005. The
decrease in 2007 resulted from our incremental investment in business
development and portal operations to drive long-term growth, as further
discussed above. The decrease in 2005 was mainly due to the effect of the
adjustment under percentage of completion accounting recorded in the first
quarter of 2005 relating to our contract with the California Secretary of State,
which resulted in a $3.5 million reduction in software & services revenues
in 2005 as further discussed below.

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 and ethics &
elections businesses. We currently derive revenue from two main sources:
transaction-based fees and fees for application development. 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.
- Software development & portal
  management: these are fees from the performance of software development
  projects and other time and materials or fixed fee services for our government
  partners. While we actively market portal software development services, they
  do not have the same degree of predictability as our transaction-based or
  portal management revenues.

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 54% of our portal revenues in 2007, 59% in 2006 and
62% in 2005. 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 40% of portal revenues in 2007, 47% in 2006 and 46%
in 2005.

33

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In our
outsourced portal businesses for 2007, DMV transaction-based revenues
represented approximately 54% of portal revenues, non-DMV transaction-based
revenues represented approximately 34%, and software development & portal
management revenues represented 12%. Software development & portal
management revenues as a percentage of total portal revenues increased modestly
in 2007 due to our new Arizona portal contract and the Indiana portal contract,
as further discussed above. Approximately 85% of our transaction-based revenues
related to business-to-government transactions, while the remaining 15% 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. 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.

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, 2007, 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 in respect of 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, 2007, our ethics
& elections business was primarily engaged in servicing its contracts with
the Federal Election Commission and the state of Michigan.

34

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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. As
such, 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. As such, 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.

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, 2007, total NOL carryforwards for federal tax purposes
of approximately $25.1 million that will expire in the years 2021 ($14.8
million) and 2022 ($10.3 million), respectively. 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 10 in the Notes to
Consolidated Financial Statements included in this Form 10-K. For the years
ended December 31, 2007 and 2006, total net deferred tax assets, including NOL
carryforwards, comprised approximately 16% of our total assets.

35

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Valuation of Marketable
Securities

Our
short-term investments at December 31, 2007, consist entirely of marketable
auction-rate debt securities. The fair values for marketable debt securities are
determined by independent pricing sources that value the securities based on
market prices or broker quotes and pricing models. Considerable judgment is
required in determining the assumptions used in valuation models for our
auction-rate debt securities, including interest rate, credit risk and liquidity
risk assumptions. Significant changes in these assumptions can have a
significant effect on carrying value.

We assess
other-than-temporary impairment of marketable debt securities in accordance with
FASB Staff Position No. FAS 115-1, The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments. This assessment requires
significant judgment. In making this determination, we employ a systematic
methodology that considers available quantitative and qualitative evidence in
evaluating potential impairment of our investments. If the cost of an investment
exceeds its fair value, we evaluate general market conditions, earnings
performance, credit rating, asset quality, and other key measures for our
investments. We also consider the duration and extent to which the fair value
has been less than cost, and our ability and intent to hold the investment. Once
a decline in fair value is determined to be other-than-temporary, an impairment
charge is recorded and a new costs basis in the investment is established. We
have not recorded any other-than-temporary impairments for marketable debt
securities. However, if market, industry and/or investee conditions deteriorate,
we may record impairments in the future, which could be material.

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 incurred substantial losses
under its fixed-price contracts primarily due to cost overruns. As recently as
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, 2007, 2006 and 2005

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.

California Secretary of State
Contract

Results of
operations for the year ended December 31, 2005 include a $5.0 million charge we
recorded on our software & services engagement with the California Secretary
of State (the California SOS) in the first quarter of 2005, as further
discussed in Note 2 in the Notes to Consolidated Financial Statements included
in this Form 10-K. Prior to the first quarter of 2005, key elements of our
obligations under the California SOS contract were

36

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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, we determined we would assume the lead project manager role on the
contract, which was previously performed by this subcontractor. As a result of
this change, we 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. We 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 our decision to commit these additional resources and the extension of
the expected project completion date, we recorded a $5.0 million adjustment
under percentage of completion accounting in the first quarter of 2005, as we
expected to incur a loss of approximately $4.2 million on this project, instead
of a previously projected profit of approximately $1.0 million.

The adjustment in our consolidated
statement of income for the year ended December 31, 2005 resulted in a reduction
of software & services revenues of approximately $3.5 million and an
increase in cost of software & services revenues of approximately $1.5
million.The adjustment in our consolidated
balance sheet was a reduction in unbilled revenues of approximately $3.5 million
and an increase in application development contracts (a current liability) of
approximately $1.5 million.

In March 2006, we entered into an
amendment to our contract with the California SOS. Among other changes, the
amendment reduced the aggregate contract value from approximately $25 million to
approximately $19 million, and released us 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 Uniform Commercial Code, or UCC, portion of the project and move it
into the maintenance and operations phase.

As a result
of the amendment, we recorded an adjustment under percentage of completion
accounting in the first quarter of 2006. The adjustment in our 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 our 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.

We regularly
review our cost estimates to complete and do not currently believe our 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 our estimate
will change in the near term. Further, it is possible that we will similarly
incur cost overruns in the future as we have in the past as a result of
unforeseen difficulties such as rising development, subcontractor and personnel
costs or other reasons. If this occurs, our results of operations, financial
condition and cash flows could be adversely affected.

At December
31, 2007, our corporate filings software & services business was primarily
engaged in servicing the maintenance and operations obligation under its
contract with the California SOS. This business is not marketing its
applications and services for new engagements.

Stock-Based Compensation

In December
2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123R (revised 2004), ShareBased
Payment, that requires companies to expense the grant-date fair value of stock
options and other equity-based compensation issued to employees. SFAS No. 123R
eliminates the use of the intrinsic value method prescribed in Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, that we used to account for our stock-based compensation plans prior
to January 1, 2006.

37

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Effective
January 1, 2006, we adopted the provisions of SFAS No. 123R using the modified
prospective application transition method, which did not require us to restate
our financial statements prior to the effective date of SFAS No. 123R. 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.

Prior to the
adoption of SFAS No. 123R, we did not recognize stock-based compensation expense
if the exercise price of stock options granted to employees or nonemployee
directors was greater than or equal to the price of our common stock on the
grant date. In addition, we did not recognize stock-based compensation expense
for shares issued under our employee stock purchase plan. 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 years ended December 31, 2006 and 2007 (in
thousands):

Year Ended December 31,2007
    
    2006Cost of portal revenues, exclusive of depreciation &
      amortization
    $
    411
    
    
    $
    346Cost of software
      & services revenues, exclusive of depreciationand amortization
    
    18
    
    
    
    19Selling & administrative
    
    1,248
    
    
    
    966Stock-based
      compensation expense before income taxes
    
    1,677
    
    
    
    1,331Income tax benefit
    
    (655
    )
    
    
    (520
    )Net stock-based
      compensation expense
    $
    1,022
    
    
    $
    811


As of
December 31, 2007, there was approximately $0.3 million of total unrecognized
compensation cost, net of estimated forfeitures, related to nonvested stock
options and approximately $2.1 million of total unrecognized compensation cost,
net of estimated forfeitures, related to nonvested restricted stock awards. We
expect to recognize the cost related to stock options over a weighted-average
period of 1.2 years and the cost related to restricted stock awards over the
next 3.0 years. We did not grant any stock options during the year-ended
December 31, 2007 and 2006, and do not currently anticipate granting stock
options in the future. Instead, the Company expects to grant only restricted
stock awards.

On October
26, 2005, our Board of Directors approved the acceleration of vesting of all
unvested options to purchase common stock of the Company that had an exercise
price that was greater than the market price on that date. The closing price of
our common stock on the NASDAQ Global Select Market on October 26, 2005 was
$5.63 per share. As a condition of the acceleration and to prevent unintended
personal benefit, the Companys directors, executive officers and employees must
refrain from selling common stock acquired upon the exercise of accelerated
options until the original vesting date or, if earlier, termination of
employment with or service to the Company. All other terms and conditions
applicable to such options, including exercise prices, remained unchanged. This
action resulted in the accelerated vesting of options to purchase 163,873 shares
of common stock of the Company, or approximately six percent of the total of all
then-outstanding Company options.

We
accelerated the vesting of these options because we believed it was in the best
interest of our shareholders to reduce future compensation expense that we would
otherwise have been required to report in our statement of income upon adoption
of SFAS No. 123R in the first quarter of 2006. Further, because the options had
exercise prices in excess of the then-current market price, they were viewed to
have limited economic value and were not achieving their objective of incentive
compensation and retention. As a result of the vesting acceleration,
approximately $0.5 million in aggregate future expense was
eliminated.

38

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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
    
    2007
    
    2006
    
    2005Revenue growth  outsourced portals
    
    18
    %
    
    21
    %
    
    19
    %Same state
      revenue growth  outsourced portals
    
    15
    %
    
    10
    %
    
    17
    %Recurring portal revenue %
    
    93
    %
    
    95
    %
    
    96
    %Gross profit % -
      outsourced portals
    
    47
    %
    
    47
    %
    
    49
    %Selling & administrative expenses as % of portal
      revenues
    
    26
    %
    
    22
    %
    
    22
    %Operating income
      margin % (operating income as a% of portal revenues)
    
    20
    %
    
    23
    %
    
    18
    %


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                  |  | 2007 |        | from 2006 |          | 2006 |  | from 2005 |        | 2005    
|DMV transaction-based                    |  | $    | 44,387 |           | 8        | %    |  | $         | 41,247 |          | 16  | % | 
|Non-DMV
      transaction-based          |  |      | 27,981 |           | 21       | %    |  |           | 23,165 |          | 15  | % | 
|Software development & portal management |  |      | 10,084 |           | 80       | %    |  |           | 5,597  |          | 167 | % | 
|Total                                    |  | $    | 82,452 |           | 18       | %    |  | $         | 70,009 |          | 21  | % | 

Portal
revenues for 2007 increased 18%, or approximately $12.4 million, over 2006. This
increase was mainly attributable to a 15% increase, or approximately $10.5
million, in same state portal revenues (outsourced portals in operation and
generating recurring revenue for two full years) and a 3% increase, or
approximately $1.9 million, in revenues from our newer portals, including
Vermont ($1.0 million), which began to generate DMV revenues in October 2006 and
Arizona ($0.9 million), which began to generate revenues in October
2007.

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 2007 increased 15% over 2006 primarily due to increased
transaction revenues from our Alabama, Arkansas, Idaho, Kentucky, Montana, and
South Carolina portals, among others.

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 the current year 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 to 3% in 2006. The higher growth in
2007 was primarily due to the effect of DMV price increases in three of our
portal states in late 2006 and in one portal state in the third quarter of 2007.
Absent DMV price increases, same state DMV revenues have historically grown at a
rate of 1% to 3% per year.

39

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Portal
revenues for 2006 increased 21%, or approximately $12.1 million, over 2005. This
increase was attributable to a 10% increase, or approximately $5.6 million, in
same state portal revenues and an 11% increase, or approximately $6.5 million,
in revenues at our newer portals, including South Carolina ($1.5 million), which
began to generate DMV revenues in June 2005, and Colorado ($5.0 million), which
began to generate DMV revenues in October 2005.

Excluding
Indiana, same state portal revenues in 2006 increased 11%, or approximately $5.1
million, over 2005, with same state DMV transaction-based revenues increasing
3%, or approximately $0.9 million, and same state non-DMV transaction-based
revenues increasing 27%, or approximately $3.8 million (primarily due to the
addition of several new revenue generating applications in existing portals).
Our same state revenue growth in 2006 was lower than the 17% growth we achieved
in 2005 primarily due to decreases in same state DMV and non-DMV
transaction-based revenue growth. Excluding Indiana, same state DMV revenue
growth in 2006 was 3% compared to 9% in 2005. The higher growth in 2005 was
primarily due to the effect of DMV price increases in two of our larger portal
states in late 2004. Same state non-DMV transaction based revenue growth was 41%
in 2005.

COST OF
PORTAL REVENUES. 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 $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 primarily 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. 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 2006 increased 26%, or approximately $7.8 million, over 2005.
Of this increase, 17%, or approximately $5.1 million, was attributable to an
increase in same state cost of portal revenues, and 9%, or approximately $2.7
million, was primarily attributable to our newer state portal businesses in
South Carolina and Colorado.

The increase
in same state cost of portal revenues in 2006 was partially attributable to
additional personnel in several of our portals due to our continued growth and
reinvestment in our core business, coupled with mid-year 2006 non-executive
salary increases across all portals that were in addition to normal annual
increases, in an effort to better align our employee compensation structure with
the general market. Also contributing to this increase was an increase in bank
fees, as described above.

Our portal
gross profit percentage was 47% in 2007 and 2006, down from 49% in 2005. The
decrease in 2006 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. We currently expect our portal gross profit percentage to range from
45% to 47% in 2008.

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   |  | 2007 |       | from 2006 |            | 2006 |  | from 2005 |       | 2005
|UCC & corporate filings software development |  | $    | 694   |           | 179        | %    |  | $         | (883  | )    |            | 34  | %  |  | $
|Ethics &
      elections                     |  |      | 2,389 |           | 29         | %    |  |           | 1,847 |      |            | (18 | %) |  |  
|Other                                        |  |      | 220   |           | (45        | %)   |  |           | 403   |      |            | (11 | %) |  |  
|Total                                        |  | $    | 3,303 |           | 142        | %    |  | $         | 1,367 |      |            |    |    |  | $

40

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The increase
in revenues in our ethics & elections business in 2007 is primarily due 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. Software & services revenues in 2006 and 2005 primarily reflect
revenue 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. 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 in
2006 and 2005 primarily reflects 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 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. As further discussed in Item
1A, Item 3 and Note 8 in the Notes to the Consolidated Financial Statements
included in this form 10-K, we are currently the subject of an informal SEC
inquiry of expense reporting by certain officers of our Company and certain
potentially related matters. In connection with that 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. In
2007, we have incurred legal fees and other expenses totaling approximately $0.7
million in connection with the informal SEC inquiry and the Audit Committee
review and could incur significant legal fees and other expenses in connection
with the ongoing, informal SEC inquiry.

Selling
& administrative expenses in 2006 increased 21%, or approximately $2.7
million, over 2005. The increase in selling & administrative expenses was
mostly attributable to additional personnel across our corporate level
divisions, coupled with mid-year 2006 non-executive salary increases across all
corporate level divisions that were in addition to normal annual increases, in
an effort to better align our employee compensation structure with the general
market. Our corporate level headcount increased by approximately 30% in 2006, as
we added personnel to support and enhance corporate wide information technology
security and portal operations, in addition to sales and marketing growth
initiatives. In addition, selling & administrative expenses in 2006 include
approximately $1.0 million in stock based compensation expense, as further
discussed in Note 11 in the Notes to Consolidated Financial Statements included
in this Form 10-K.

As a
percentage of portal revenues, selling & administrative expenses were 26% in
2007 and 22% in 2006 and 2005. We currently expect selling & administrative
costs as a percentage of portal revenue to range from 24% to 25% in 2008, which
reflects a return to historical levels of modest expense growth.

DEPRECIATION
& AMORTIZATION  Depreciation & amortization expense in 2007 increased
23%, or approximately $0.5 million, over 2006. 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
the year for our new corporate headquarters, as further discussed below.

As a
percentage of portal revenues, depreciation & amortization was three percent
in 2007, 2006 and 2005. We currently expect depreciation and amortization
expense as a percentage of portal revenues to range from three to four percent
in 2008, as we will continue to make key information technology infrastructure
and security investments to support the long-term expansion of our portal
business.

41

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INTEREST
INCOME. Interest income reflects interest earned on our investable cash and
marketable securities portfolio. In 2005, we began investing our excess cash in
short-term marketable debt securities, consisting primarily of auction-rate
government-backed student loan obligations. Our marketable securities portfolio
totaled $45.0 million at December 31, 2006, up significantly from $20.5 million
at December 31, 2005. Higher short-term interest rates also contributed to the
increase in interest income earned on these investments in 2006. 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 $0.75 per share totaling
approximately $46.7 million in February 2007 out of our available cash and
marketable securities. As a result of this dividend, interest income was lower
in 2007 as compared to 2006. As further discussed in Note 14 to the 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 out
of our available cash and marketable securities. We currently expect interest
income in 2008 to be lower than in 2007, 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 35% in 2007, 42% in 2006 and 42%
in 2005. Our effective tax rate for 2007 was lower than the amount customarily
expected due to the effect of decreases in the liability for uncertain tax
positions totaling approximately $0.4 million in 2007, 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 $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 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.

Net cash provided by operating
activities was $25.7 million in 2006 compared to $21.3 million in 2005. The
increase 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, and the
adjustments under percentage of completion accounting recorded in 2006 and 2005
on our contract with the California SOS, which did not affect operating cash
flow.

The
increases in accounts receivable and accounts payable in 2006 were primarily
attributable to an increase in fourth quarter tax payment processing from tax
filing applications across our portal businesses, most notably in Hawaii ($3.3
million increase in accounts receivable and $7.2 million increase in accounts
payable). The increases in accounts receivable and accounts payable were also
attributable to the general increase in revenues across our portal businesses in
2006.

42

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The decrease
in unbilled revenues in 2006 was primarily due to the first quarter 2006
adjustment under percentage of completion accounting relating to our contract
with the California SOS that reduced unbilled revenues by approximately $2.1
million. Additionally, in June 2006, the California SOS officially accepted the
UCC portion of the project, at which time approximately $1.5 million in
milestone payments under the contract became due to us, thus reducing unbilled
revenues.

The decrease
in accrued expenses in 2006 was primarily due to the first quarter 2006
adjustment under percentage of completion accounting relating to our contract
with the California SOS that reduced accrued liabilities by approximately $1.6
million.

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 expect to fully utilize our federal NOL carryforwards by the end of 2009. For
the years ended December 31, 2007, 2006 and 2005, combined federal and state
income tax payments totaled approximately $0.8 million, $0.4 million and $0.5
million, respectively.

Investing
Activities

Cash
provided by in investing activities in 2007 primarily reflects the liquidation
of our marketable securities 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
include 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.

Cash used in
investing activities in 2005 primarily reflects $20.5 million in net purchases
of marketable debt securities in an effort to increase the investment income
from our growing cash reserves, and $2.3 million of capital expenditures, which
were for our new South Carolina and Colorado portals (approximately $0.9
million), in addition to normal fixed asset additions in our other outsourced
portal business, including Web servers, purchased software and office furniture
and equipment. Investing activities in 2005 also reflect a $3.0 million
reduction in our cash collateral requirements under the financing arrangement
that covered all of the Companys then-outstanding letters of credit.

Financing
Activities

Financing
activities in 2007 reflects the payment of the $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. 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, 2007, approximately 1.0 million employee
stock options were exercisable at a weighted average exercise price of $4.38 per
share. The closing price of our common stock on December 31, 2007 was $8.44 per
share.

43

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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.

Financing activities in 2005
reflects $4.6 million in proceeds from the exercise of employee stock options
for cash and $0.1 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, 2007 and 2006 were approximately $303.8 million and $196.9 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, 2007 and
2006 was 9 and 13, respectively.

We believe
that working capital is an important measure of our short-term liquidity.
Working capital, defined as current assets minus current liabilities, decreased
to $49.8 million at December 31, 2007, from $73.0 million at December 31, 2006.
Our current ratio, defined as current assets divided by current liabilities, at
December 31, 2007 was 2.1 compared to 2.8 at December 31, 2006. The decreases in
our working capital and current ratios were attributable to the $46.7 million
special dividend paid out of the Companys available cash and marketable
securities in February 2007, as further discussed below and in Note 9 in the
Notes to Consolidated Financial Statements included in this Form 10-K. As
further discussed in the paragraph below, if we still hold auction-rate debt
securities at the end of the first quarter of 2008, we may need to reclassify
such securities to long-term investments. Any such reclassification would cause
our working capital and current ratio to decrease. Furthermore, we expect our
working capital and current ratio to decrease during the first quarter of 2008
due to the $15.7 million special dividend paid on February 28, 2008, as further
discussed below and in Note 14 in the Notes to the Consolidated Financial
Statements included in this Form 10-K.

At December
31, 2007, our total cash, cash equivalents and marketable securities balance was
$55.8 million compared to $81.8 million at December 31, 2006. Of this amount at
December 31, 2007, approximately $17.6 million was invested in auction-rate debt
securities. These securities are currently AAA-rated by one or more credit
rating agencies and are secured by pools of student loans guaranteed by the U.S.
Department of Education. The auction process is designed to provide a means by
which these securities can be sold, and historically has provided a highly
liquid market for these securities. During January 2008, we began to liquidate
our marketable securities portfolio in anticipation of paying the $15.7 million
special cash dividend on February 28, 2008. We had successful auctions on our
auction-rate debt securities through mid-February 2008, at which time we had
liquidated approximately $11.6 million of our portfolio. We encountered our
first failed auction in mid-February 2008, as the amount of securities submitted
for sale in those auctions exceeded the amount of bids, and we have not
subsequently had a successful auction related to the remaining $7.0 million of
these securities we currently hold. To date we have collected all interest
payable on all of our auction-rate debt securities when due. The principal
associated with failed auctions will not be accessible until a successful
auction occurs, a buyer is found outside of the auction process, the issuers
redeem the securities, the issuers establish a different form of financing to
replace these securities, or final payments come due according to contractual
maturities ranging from 22 to 50 years. We understand that issuers and financial
markets are working on alternatives that may improve liquidity, although it is
not yet clear when or if such efforts will be successful. We expect that we will
receive the principal associated with these auction-rate securities through one
of the means described above. If we still hold our auction-rate debt securities
at the end of the first quarter of 2008, we may need to reclassify such
securities as long-term investments, which would reduce our working
capital.

On February
28, 2008, we paid a special cash dividend totalling approximately $15.7 million
out of available cash and marketable securities. Due to the illiquidity of all
of the remaining auction-rate debt securities we currently hold, as described
above, we may be required to borrow against our $10 million line of credit in
the future for general working capital purposes. We do not believe that this
dividend will have a significant effect on our future liquidity. While the
recent auction failures will limit our ability to liquidate these investments
for some

44

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period of time, we believe that our
currently available liquid resources, coupled with the unused portion of our
line of credit of approximately $8.7 million and cash generated from operations,
will be sufficient to meet our operating requirements, capital expenditure
requirements and current growth initiatives for at least the next twelve months
without the need of additional capital. 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, marketable securities 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. There can be no assurance that financing will be available in
amounts or on terms acceptable to the Company, if at all. Further, we may draw
on the remaining unused portion of our $10 million line of credit.

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, 2007. We are not currently required
to cash collateralize these letters of credit. However, even though we currently
expect to be profitable in fiscal 2008 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, 2007 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, 2007, 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 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, 2007 (in thousands):

|Contractual Obligations            |  | Total |       | Less than 1 year |   | 1-3 years |  | 3-5 years |   | More than 5 years
|---------------------------------- |  | ----- | ----- | ---------------- | - | --------- |  | --------- | - | -----------------
|Operating lease obligations        |  | $     | 8,453 |                  | $ | 2,021     |  |           | $ | 3,381            
|Income tax
      uncertainties     |  |       | 713   |                  |   |          |  |           |   | 713              
|Long-term debt obligations         |  |       |      |                  |   |          |  |           |   |                 
|Capital lease
      obligations    |  |       |      |                  |   |          |  |           |   |                 
|Purchase obligations               |  |       |      |                  |   |          |  |           |   |                 
|Other long-term
      liabilities  |  |       |      |                  |   |          |  |           |   |                 
|Total contractual cash obligations |  | $     | 9,166 |                  | $ | 2,021     |  |           | $ | 4,094            

45

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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 $0.7 million at December 31, 2007.
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 three years 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.

Recent Accounting
Pronouncements

Quantifying Financial Statement
Errors

In September
2006, the staff of the 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. We applied the provisions of SAB No.
108 to our fiscal year ended December 31, 2006 using the cumulative effect
transition method, as further discussed in Note 2 in the Notes to Consolidated
Financial Statements in this Form 10-K.

Accounting for Uncertainty in Income
Taxes

In June
2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109. FIN 48 provides a comprehensive model
for how a company should recognize, measure, present and disclose in its
financial statements uncertain tax positions that the Company has taken or
expects to take on its income tax returns. FIN 48 defines the threshold for
recognizing a tax return position in the financial statements as more likely
than not that the position is sustainable, based on its technical merits. FIN
48 also provides guidance on the measurement, classification and disclosure of
tax return positions in a companys financial statements. We 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 Notes 2 and 10
in the Notes to Consolidated Financial Statements in this Form 10-K for
additional discussion of our adoption of FIN 48.

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 will be
required to adopt this standard in the first quarter of 2008. We are currently
evaluating the requirements of SFAS No. 157 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 will be required to adopt this
standard in the first quarter of 2008. We are currently evaluating the
requirements of SFAS No. 159 and have not yet determined the impact on our
consolidated financial statements.

46

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ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

INTEREST
RATE RISK. As further discussed above in the Liquidity section of Item 7, our
marketable securities consist entirely of short-term auction-rate debt
securities at December 31, 2007. Our auction-rate debt securities are structured
with short-term interest rates that are reset through an auction process at
28-day intervals, but with contractual debt maturities that can be well in
excess of 22 years. These securities are currently AAA-rated by one or more
credit rating agencies and are secured by pools of student loans guaranteed by
the U.S. Department of Education. In mid-February 2008, liquidity issues in the
global credit markets resulted in the failure of auctions representing all of
the remaining auction-rate debt securities we currently hold (totaling
approximately $7.0 million), as the amount of securities submitted for sale in
those auctions exceeded the amount of bids. For each unsuccessful auction, the
interest rate moves to a maximum rate defined for each security, generally reset
at a level higher than defined short-term interest benchmarks. To date we have
collected all interest payable on all of our auction-rate debt securities. The
principal associated with failed auctions will not be accessible until a
successful auction occurs, a buyer is found outside of the auction process, the
issuers establish a different form of financing to replace these securities, or
final payments come due according to contractual maturities ranging from 22 to
50 years. We understand that issuers and financial markets are working on
alternatives that may improve liquidity, although it is not yet clear when or if
such efforts will be successful.

Our cash
equivalents and our portfolio of marketable securities are subject to market
risk due to changes in interest rates. Floating rate securities may produce less
income than expected if interest rates fall. Furthermore, the market value of
auction-rate debt securities may be adversely impacted due to a maximum interest
rate cap if the spread between short-term rates and long-term rates increases.
Due in part to these factors, our future income may fall short of expectation
due to changes in interest rates or we may suffer losses in principal if we are
forced to sell securities that decline in market value due to either changes in
interest rates or discounts offered by prospective buyers of our auction-rate
debt securities. However, because we classify our debt securities as available
for sale, no gains or losses are recognized in our consolidated statements of
income due to changes in interest rates unless such securities are sold prior to
maturity or declines in fair value are determined to be
other-than-temporary.

All of our
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.

47

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ITEM 8. CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

|NIC
      INC.                                                          
|------------------------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                                             
|                                                                        
|                                                                        
|                                                                        
|ASSETS                                                                  
|Current
      assets:                                                   
|Cash
      and cash equivalents                                         
|Marketable securities                                                   
|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, 8 and 14)           
|Shareholders' equity:                                                   
|Common stock, no par, 200,000,000 shares authorized
      61,573,900 and
|62,031,312 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.

48

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|NIC
      INC.                                          
|--------------------------------------------------------
|CONSOLIDATED STATEMENTS OF INCOME                       
|                                                        
|                                                        
|                                                        
|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.

49

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|NIC
      INC.                                                  
|----------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
      EQUITY
|                                                                
|                                                                
|                                                                
|Balance, January 1, 2005                                        
|Net
      income                                                
|Retirement of treasury stock                                    
|Stock options
      exercised                                   
|Issuance of common stock                                        
|under employee stock                                            
|purchase plan                                                   
|Tax deductions
      relating to                                
|stock options                                                   
|Balance, December 31, 2005                                      
|Cumulative
      effect of SAB No. 108                          
|(Note 2)                                                        
|Net income                                                      
|Sale of treasury
      stock                                    
|Stock options exercised                                         
|Stock-based
      compensation                                  
|Issuance of common stock                                        
|under employee stock                                            
|purchase plan                                                   
|Balance,
      December 31, 2006                                
|Cumulative effect of FIN 48                                     
|(Note 2)                                                        
|Net
      income                                                
|Cash dividends on common                                        
|stock (Note 9)                                                  
|Shares
      surrendered to pay exercise                        
|price of stock options                                          
|Shares surrendered upon exercise                                
|of
      stock options and vesting                              
|of
      restricted stock to satisfy                            
|tax
      withholdings                                          
|Stock options
      exercises and                               
|restricted stock vestings                                       
|Stock-based compensation                                        
|Issuance of
      common stock                                  
|under employee stock                                            
|purchase plan                                                   
|Balance, December 31, 2007                                      

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

50

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|NIC
      INC.                                           
|---------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                    
|                                                         
|                                                         
|                                                         
|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 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            
|Cash and cash equivalents - restricted                   
|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.

51

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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 a provider
of software applications and services for electronic filings and document
management solutions for governments. This business focuses on Secretaries of
State, whose offices are state governments principal agencies for UCC and
corporate filings. Currently, NIC Conquest is primarily engaged in servicing its
contract with the California Secretary of State and is not actively marketing
its applications and services in respect of new engagements. 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,
credit card merchant fees, 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, 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 market
development and public relations.

52

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The
Companys consolidated balance sheet as of December 31, 2006, reflects a
revision of approximately $4.6 million of net deferred tax assets from
noncurrent to current for the amount of tax net operating loss carryforwards the
Company expected to utilize in 2007. A proportionate amount of the Companys
deferred tax asset valuation allowance was also allocated between current and
noncurrent deferred tax assets.

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. 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.

Marketable securities

The Company
accounts for short-term marketable securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accountingfor Certain Investments in
Debt and Equity Securities. The Companys marketable securities at December 31,
2006 and 2007 were classified as available-for-sale at the time of purchase, and
the Company re-evaluates such designation as of each consolidated balance sheet
date.

Auction-rate
debt securities are structured with short-term interest rates that are reset
through the auction process at 28day intervals, but with contractual debt
maturities that can be well in excess of 22 years. Historically, the Company has
had the option to liquidate its auction-rate debt securities whenever the
interest rates on these securities were reset. Accordingly, such securities were
classified as short-term at December 31, 2006 and 2007.

Marketable
securities 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 marketable securities are based on market prices or broker quotes at
the reporting date. See Note 4. Realized gains or losses on the sale of
marketable securities are determined using the specific-identification method
and have not historically been material. The Company assesses
other-than-temporary impairment of marketable debt securities 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 years ended
December 31, 2005, 2006 and 2007, the Company did not recognize any impairment
charge on its marketable securities.

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.

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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 and records 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.

Unbilled
revenues relating to the Companys contract with the California Secretary of
State at December 31, 2006 and 2007 were $0.5 million and $0.2 million. Unbilled
revenues relating to the Companys ethics & election business at December
31, 2006 and 2007 were $0 and $0.3 million. Unbilled revenues relating to the
Companys portal businesses at December 31, 2006 and 2007 were $0.6 million and
$0.2 million.

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 the disposal of 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 2005.

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, 2006 and 2007 was
approximately $301,000 and $730,000 and was included in other long-term assets
in the consolidated balance sheets. At December 31, 2007 and 2006, intangible
assets consisted of capitalized internal use software development costs, and are
being amortized over a three-year period. Accumulated amortization at December
31, 2006 and 2007 totaled approximately $8,000 and $147,000.

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

54

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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.

Revenue recognition

Portal revenues

The 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.

Software & services
revenues

The
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.

55

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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.

The
adjustment in the Companys consolidated statement of income for the year ended
December 31, 2005 resulted in a reduction of software & services revenues of
approximately $3.5 million and an increase in cost of software & services
revenues of approximately $1.5 million. The adjustment in the Companys
consolidated balance sheet was a reduction in unbilled revenues of approximately
$3.5 million and an increase in application development contracts (a current
liability) of approximately $1.5 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, 2007, 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.

56

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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.

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. Prior to January 1, 2006, the
Company accounted for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company also followed the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. 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

The Company
estimates its fair value disclosures for financial instruments using the
following methods and assumptions. The carrying values of cash and marketable
securities, accounts receivable, accounts payable and accrued expenses
approximate their fair value due to their relatively short maturity. Fixed-rate
long-term obligations are estimated using discounted cash flow analyses, based
on the Companys current incremental borrowing rates for similar types of
borrowing arrangements. At December 31, 2006 and 2007, the Company did not have
any such long-term obligations outstanding.

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.

57

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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,
|----------------------------------------------- | -----------------------
|                                                | 2005                   
|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 0.6 million, 0.3 million and 0.2 million common shares
during the years ended December 31, 2005, 2006 and 2007, 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.

Concentration of credit
risk

Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents, marketable
securities and accounts receivable. The Company limits its exposure to credit
loss by depositing its cash with high credit quality financial institutions. The
Company performs ongoing credit evaluations of its customers and generally
requires no collateral to secure accounts receivable.

The Company
is subject to concentrations of credit risk and interest rate risk related to
its marketable securities, which consisted entirely of auction-rate student loan
debt securities at December 31, 2007. These securities are structured with
short-term interest rates that reset through an auction process at 28-day
intervals, but with contractual debt maturities that can be well in excess of 22
years. Liquidity for these securities is typically provided by an auction
process that resets the applicable interest rate every 28 days. However, if
auctions for these securities fail, the Company will not be able to access the
principal until a successful auction occurs, a buyer is found outside of the
auction process, the issuers redeem the securities, the issuers establish a
different form of financing to replace these securities or final payments come
due according to contractual maturities ranging from 22 to 50 years. The Company
attempts to manage its credit risk by limiting the amount of investments placed
with any one issuer, investing primarily in AAA-rated securities that are
secured by pools of student loans guaranteed by the U.S. Department of
Education. This guarantee is based upon a sliding scale of 97% to 98% of the
unpaid principal balance of eligible student loans, plus accrued interest, when
the guarantors claims experience is less than 5% of the original principal
amount of the loans, and decreases to 75% if the guarantors claims experience
is greater than 9% of the original principal amount of the loans. See Note
4.

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.

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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.

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
|                          |  | January 1, 2004                   |  | as of January 1, 2006    
|Deferred income taxes (2) |  | $565,564                          |  | $565,564                 
|Net loss
      (3)        |  | $565,564                          |  |                          
|Accumulated 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.

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Recent Accounting
Pronouncements

In June
2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109. FIN 48 provides a comprehensive model
for how a company should recognize, measure, present and disclose in its
financial statements uncertain tax positions that the Company has taken or
expects to take on its income tax returns. FIN 48 defines the threshold for
recognizing a tax return position in the financial statements as more likely
than not that the position is sustainable, based on its technical merits. FIN
48 also provides guidance on the measurement, classification and disclosure of
tax return positions in a companys financial statements. 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.

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
will be required to adopt this standard in the first quarter of 2008. The
Company is currently evaluating the requirements of SFAS No. 157 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 will be required to adopt
this standard in the first quarter of 2008. The Company is currently evaluating
the requirements of SFAS No. 159 and has not yet determined the impact on its
consolidated financial statements.

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 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, 2007, 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.

60

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The
following is a summary of the Companys twenty-one outsourced state government
portal contracts at December 31, 2007:

|                                      |  |                                   |  | Year
      Services |  | Contract
      Expiration Date
|------------------------------------- |  | --------------------------------- |  | ------------------- |  | ------------------------------
|NIC Subsidiary                        |  | Portal Web Site (State)           |  | Commenced           |  | (Renewal Options Through)     
|NICUSA                                |  | www.WV.gov (West Virginia)        |  | 2007                |  | 6/30/2008(6/30/2010)          
|NICUSA                                |  | www.AZ.gov
      (Arizona)        |  | 2007                |  | 6/26/2010(6/26/2013)          
|Vermont Information Consortium        |  | www.Vermont.gov (Vermont)         |  | 2006                |  | 10/15/2009(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                |  | 7/15/2008(7/15/2009)          
|Kentucky
      Interactive            |  | www.Kentucky.gov
      (Kentucky) |  | 2003                |  | 1/31/2009(1/31/2013)          
|Alabama Interactive                   |  | www.Alabama.gov (Alabama)         |  | 2002                |  | 2/28/09(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                |  | 6/30/2008(6/30/2009)          
|Montana
      Interactive             |  | www.MT.gov
      (Montana)        |  | 2001                |  | 12/31/2010                    
|NICUSA                                |  | www.Tennessee.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                |  | 3/31/2008                     
|Utah
      Interactive                |  | www.Utah.gov
      (Utah)         |  | 1999                |  | 5/6/2009                      
|Maine Information Network             |  | www.Maine.gov (Maine)             |  | 1999                |  | 3/14/2008 (Contract           
|                                      |  |                                   |  |                     |  | has been temporarily          
|                                      |  |                                   |  |                     |  | extended to allow the         
|                                      |  |                                   |  |                     |  | state time to finalize        
|                                      |  |                                   |  |                     |  | contract terms and            
|                                      |  |                                   |  |                     |  | conditions)                   
|Arkansas
      Information Consortium |  | www.Arkansas.gov
      (Arkansas) |  | 1997                |  | 6/30/2008                     
|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                |  | 1/31/2009
      (1/31/2010)   
|Kansas Information Consortium         |  | www.Kansas.gov (Kansas)           |  | 1992                |  | 12/31/2009                    

During the
first quarter of 2007, the Company received a one-year contract extension from
the State of Idaho, which extended the contract expiration date to March 2008,
and signed a new one-year contract with the state of Alabama, which includes
options for the government to extend the contract for four additional one-year
renewal terms.

During the
second quarter of 2007, the Company received a one-year contract extension from
the state of Oklahoma. In addition, the Company received a two-year contract
extension from the state of Kansas, which extended the expiration date to
December 2009.

During the
third quarter of 2007, the Company finalized a three-year contract with the
state of Arizona to operate the states official Web site. The contract includes
renewal options under which the government can extend the contract for an
additional three years. The Company also received a new three-year contract with
the state of Rhode Island, which includes an option for the government to extend
the contract for one additional two-year term. In addition, the Company received
a one-year contract extension from the state of South Carolina.

During the
fourth quarter of 2007, the Company finalized a one-year contract with the state
of West Virginia to operate the states official Web site. The contract includes
renewal options under which the government can extend the contract for an
additional two years.

During the
first quarter of 2008, the Company received a five-year contract extension from the state of Hawaii, which extended
the expiration date to January 3, 2013. The contract includes unlimited renewal
options under which the state of Hawaii can extend the contract for additional
3-year periods.

61

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4. MARKETABLE SECURITIES

The fair value of marketable
securities was as follows at December 31:

2006
    
    2007Auction-rate debt securities
    $
    35,900,000
    
    $
    17,600,000Flex term
      notes
    
    6,000,000
    
    
    Corporate debt securities
    
    3,108,431
    
    
    $
    45,008,431
    
    $
    17,600,000


The
Companys marketable securities at December 31, 2006 and 2007 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.

Auction-rate
debt securities are structured with short-term interest rates that are reset
through the auction process at 28day intervals, but with contractual debt
maturities that can be well in excess of 22 years. Historically, the Company has
had the option to liquidate its auction-rate debt securities whenever the
interest rates on these securities were reset. Accordingly, such securities were
classified as short-term at December 31, 2006 and 2007.

During
January 2008, the Company began to liquidate its auction-rate debt securities 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 14). 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 debt security the Company currently holds. 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. Subsequently, the Company has not had a successful auction
related to the remaining securities it currently holds, which consist of the
following taxable issues:

|                                                           |  |               |  |                          |  | Carrying   
|---------------------------------------------------------- |  | ------------- |  | ------------------------ |  | -----------
|                                                           |  | Current       |  | Next
      Interest Rate |  | Amount     
|Security (Maturity)                                        |  | Interest Rate |  | Reset Date               |  | (Par Value)
|SLM Student Loan Trust 2003-5 A-9 (6/17/2030)              |  | 4.62%         |  | 3/24/2008                |  | $          
|Missouri Higher
      Ed Loan Auth 2001 B (6/1/2031)       |  | 2.77%         |  | 3/25/2008                |  |            
|Missouri Higher Ed Loan Auth 2002D (7/1/2032)              |  | 2.84%         |  | 3/24/2008                |  |            
|NELNET Education
      Loan Funding 2003-1 A-6 (7/25/2043) |  | 4.61%         |  | 3/18/2008                |  |            
|Panhandle Plains Higher Ed Auth 2007 A-4 (8/1/2057)        |  | 4.36%         |  | 4/9/2008                 |  |            
|                                                           |  |               |  |                          |  | $          

The
Companys auction-rate debt securities are currently AAA-rated by one or more
rating agencies and are secured by pools of student loans guaranteed by the U.S.
Department of Education. This guarantee is based upon a sliding scale of 97% to
98% of the unpaid principal balance of eligible student loans, plus accrued
interest, when the guarantors claims experience is less than 5% of the original
principal amount of the loans, and decreases to 75% if the guarantors claims
experience is greater than 9% of the original principal amount of the loans. To
date the Company has collected all interest payable on all of its auction-rate
debt securities when due. For each unsuccessful auction, the interest rate moves
to a maximum rate defined for each security, generally reset at a level higher
than defined short-term interest benchmarks. The principal associated with
failed auctions will not be accessible until a successful auction occurs, a
buyer is found outside of the auction process, the issuers redeem the
securities, the issuers establish a different form of financing to replace these
securities or final payments come due according to contractual maturities
ranging from 22 to 50 years. The Company understands that issuers and financial
markets are working on alternatives that may improve liquidity, although it is
not yet clear when, or if, such efforts will be successful. The Company
currently expects that it will receive the principal associated with these
auction-rate debt securities through one of the means described
above.

62

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At December
31, 2007, all of the Companys auction-rate debt securities were classified as
current investments in its consolidated balance sheet. If such securities are
still held by the Company at the end of the first quarter of 2008, the Company
may need to reclassify such securities as long-term investments, which would
reduce working capital. Long-term 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.

Although the
Company currently believes that any decline in the fair value of these
securities would be temporary, there is a risk that the decline in value may
ultimately be deemed to be other-than-temporary. Should the Company determine
that the decline in value of these securities is other-than-temporary, it would
result in a loss being recognized in its consolidated statements of income,
which could be material.

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of
the following at December 31:

2006
    
    2007Furniture and fixtures
    $
    1,553,015
    
    
    $
    2,090,399Equipment
    
    8,475,076
    
    
    
    8,983,240Purchased software
    
    2,731,689
    
    
    
    3,261,314Leasehold
      improvements
    
    398,862
    
    
    
    685,48713,158,642
    
    
    
    15,020,440Less accumulated
      depreciation
    
    (9,368,152
    )
    
    
    (8,910,365
    )$
    3,790,490
    
    
    $
    6,110,075


Depreciation
expense for the years ended December 31, 2005, 2006 and 2007, was $1,602,879,
$2,032,456 and $2,362,652, respectively.

6. INVESTMENTS IN AFFILIATES AND JOINT
VENTURES

In March
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 May 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.

In October
2000, NIC made an initial $0.5 million cash investment in e-Government Solutions
Limited (eGS), a private joint venture giving NIC initial ownership of 40% of
the ordinary shares of eGS. The purpose of the eGS joint venture, based in
London, England, was to deliver eGovernment services throughout Western Europe,
with initial efforts to focus on the United Kingdom. In September 2001, the
joint venture agreement was modified and reduced NICs obligation to make future
cash contributions to the joint venture and gave NIC ownership of 47% of the
ordinary shares of eGS. In December 2002, the joint venture agreement was again
modified and, among other changes, eliminated NICs obligation to make future
cash contributions to the joint venture, reduced NICs ownership to 20% and
eliminated NICs participation on the board of directors. The investment had
been accounted for under the equity method. As a result of the modification to
the joint venture agreement in December 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 have totaled approximately $1.0 million. At
December 31, 2006, the Companys ownership interest in eGS was approximately
14%. 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.

63

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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, events of default, and limitations on dividends, capital
expenditures and acquisitions. 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, 2007.
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
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, 2006 and 2007. In addition, 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, 2007 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.

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, 2007 are as follows:

**Fiscal Year**2008
    
    $2,021,3102009
    
    1,842,9192010
    
    1,537,5942011
    
    976,7302012
    
    841,576Thereafter
    
    1,233,392


Rent expense
for operating leases for the years ended December 31, 2005, 2006 and 2007 was
approximately $1.5 million, $1.8 million and $2.3 million, respectively.

64

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Informal SEC Inquiry

The Company
is currently 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
Chief Executive Officer, and that the amount of such deficiencies was not
material to the Companys financial condition or results of
operations.

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. The Company did
not receive any of the proceeds from the sale. Under the Voting Trust agreement,
two principal shareholders have the right to vote all of the Voting Trusts
common shares and to sell all or any part of such shares. In 2003, the Voting
Trust distributed 5% of its shares of NIC common stock to its members. In 2005,
the Voting Trust distributed 10% of its shares of NIC common stock to its
members. In 2006, the Voting Trust sold approximately 2.1 million shares of NIC
common stock in the open market. At December 31, 2006 and 2007, the Voting Trust
held approximately 21.4 million shares of NIC common stock.

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.
In 2003, the Voting Trust distributed 5% of its shares of NIC common stock to
its members. This affected 7,474 shares of NIC common stock held by the Company
as treasury stock. The Company retired these shares in 2003, which had an
assigned value of $10,763. In 2005, the Voting Trust distributed 10% of its
shares of NIC common stock to its members. This affected 14,201 shares of NIC
common stock held by the Company as treasury stock. The Company retired these
shares in February 2005, which had an assigned value of $20,449, and had 127,813
shares remaining in treasury stock at December 31, 2005. 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, 2006 and 2007, the Company had 116,441 shares remaining in treasury
stock.

During 2005,
certain employees of the Company exercised non-qualified stock options. As a
result, the Company received federal income tax deductions, or windfall tax
benefits. The tax benefit for the deductions of $1,781,364 for 2005 increased
deferred tax assets and was credited directly to additional paid-in capital. See
Note 11 for additional discussion of 2006 and 2007 income tax deductions
relating to the exercise of non-qualified stock options.

65

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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 marketable
securities.

10. INCOME TAXES

The provision for income taxes
consists of the following:

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2005                   
|Current income taxes:      |                        
|Federal                    | $                      
|State                      |                        
|Total                      |                        
|Deferred income taxes:     |                        
|Federal                    |                        
|State                      |                        
|Total                      |                        
|Total income tax provision | $                      

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

|                                                                          | 2006 |            | 2007
|------------------------------------------------------------------------- | ---- | ---------- | ----
|Deferred tax assets:                                                      |      |            |     
|Net operating loss carryforwards                                          | $    | 15,950,998 |     
|Amortization and
      impairment of purchase accounting goodwill         |      |            |     
|and software intangibles                                                  |      | 6,870,635  |     
|Capital losses on sale
      of affiliates                                |      | 3,830,703  |     
|Investment in
      affiliate                                             |      | 548,780    |     
|Stock-based
      compensation pursuant to SFAS No. 123R                  |      | 519,732    |     
|Accrued
      vacation                                                    |      | 374,888    |     
|Accrued contract
      expenses under percentage of completion accounting |      | 251,343    |     
|Application
      development contract loss                               |      | 199,408    |     
|Other                                                                     |      |           |     
|                                                                          |      | 28,546,487 |     
|Less: Valuation
      allowance                                           |      | (5,040,010 | )   
|Total                                                                     |      | 23,506,477 |     
|Deferred tax liabilities:                                                 |      |            |     
|Depreciation &
      capitalized software development costs               |      | (243,632   | )   
|Other                                                                     |      | (538,582   | )   
|Total                                                                     |      | (782,214   | )   
|Net deferred tax asset                                                    | $    | 22,724,263 |     

For federal
income tax purposes, the Company had available at December 31, 2007, total net
operating loss (NOL) carryforwards of approximately $25.1 million that will
expire in 2021 ($14.8 million) and 2022 ($10.3 million). 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
NOLs could be reduced in the near term if estimates of future taxable income
during the carryforward periods are reduced.

66

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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 that 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 2006 and 2007, the
Company increased its valuation allowance by $177,141 and $17,043, respectively,
for additional state NOL carryforwards that the Company may be unable to use.

A portion of
the Companys total deferred tax valuation allowance at December 31, 2006,
totaling $3,830,703 related to capital losses realized on certain of the
Companys previous equity method investments, and $548,780 related to an
expected capital loss (which was subsequently realized in 2007) 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. In
2007, the Company decreased its deferred tax asset and the corresponding
valuation allowance relating to certain of these investments by $1,949,105 for
the expiration of certain capital loss carryforwards.

As further
discussed in Note 2, the Company did not initially record tax net operating loss
carryforwards acquired upon the acquisition of SDR Technologies in 2000,
resulting in an understatement of deferred tax assets by $565,564. The Company
recorded a $565,564 increase to deferred tax assets with an offsetting decrease
to accumulated deficit as of January 1, 2006 to reflect the initial application
of SAB No. 108. The table above reflects this adjustment in the balance of net
operating loss carryforwards at December 31, 2006.

See Notes 9
and 11 for discussion of the accounting for income tax deductions relating to
the exercise of non-qualified stock options.

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 31,2005
    
    2006
    
    2007Effective federal and state income tax rate
    41.6
    %
    
    41.7
    %
    
    34.9
    %State income
      taxes
    (5.5
    )
    
    (4.8
    )
    
    (4.5
    )Valuation allowance
    
    
    
    (1.0
    )
    
    Uncertain tax
      positions
    
    
    
    
    
    
    2.2Book gain on sale of investment
    
    
    
    
    
    
    1.0Other
    (1.1
    )
    
    (0.9
    )
    
    1.4Statutory federal income tax rate
    35.0
    %
    
    35.0
    %
    
    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. 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 during the year ended December 31, 2007 is as follows:

2007Balance at January 1, 2007
    $
    1,119,104Additions for
      tax positions of prior years
    
    Reductions for tax positions of prior years
    
    (405,608
    )Settlements
    
    Expiration of the statute of limitations
    
    Balance at
      December 31, 2007
    $
    713,496


67

---

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, 2004. 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, accrued
interest and penalty amounts were not material.

11. STOCK-BASED COMPENSATION AND
EMPLOYEE BENEFIT PLANS

Prior to
January 1, 2006, the Company accounted for its stock-based compensation plans
using the intrinsic value method in accordance with Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no compensation expense was recognized if the
exercise price of a stock option equaled or exceeded the market price of the
underlying stock on the date of grant. However, stock-based compensation has
been included in prior period pro-forma disclosures in the financial statement
footnotes as required under SFAS No. 123, Accounting for Stock-Based
Compensation, which was amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.

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 and, accordingly, financial statement
amounts for the year ended December 31, 2005 have not been restated to reflect
the fair value method of expensing stock-based compensation. 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.

The
following table illustrates the effect on net income and net income per share
for the year ended December 31, 2005 had the Company applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation:

|Net income, as reported                                                        | $ | 6,363,076  |  
|------------------------------------------------------------------------------ | - | ---------- | -
|Add: Stock-based
      employee compensation included in                       |   |            |  
|reported net income, net of related tax effects                                |   |           |  
|Deduct: Total stock-based employee compensation expense
      determined       |   |            |  
|under fair value based
      method for all awards, net of related tax effects |   | (1,087,336 | )
|Pro forma net
      income                                                     | $ | 5,275,740  |  
|Basic net income per share, as reported                                        | $ | 0.11       |  
|Diluted net
      income per share, as reported                                | $ | 0.10       |  
|Basic net income per share, pro forma                                          | $ | 0.09       |  
|Diluted net
      income per share, pro forma                                  | $ | 0.09       |  

68

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The fair
value of each option grant was determined using the Black-Scholes option-pricing
model. The following assumptions were applied in determining pro forma
compensation cost for the year ended December 31, 2005:

Risk-free interest rate
    
    3.90
    %Expected
      dividend yield
    
    0.00Expected option life
    
    3.2 yearsExpected stock
      price volatility
    
    53
    %Fair value of options granted
    
    $2.10


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.

For purposes
of this pro forma disclosure, the estimated fair value of options was amortized
to expense over the option vesting periods. Such pro forma impact on net income
and basic and diluted net income per share is not necessarily indicative of
future effects on net income or earnings per share.

In 2005, all
options were granted with exercise prices equal to the market price of the
Companys common stock on the grant dates.

On October
26, 2005, the Board of Directors of the Company approved the accelerated vesting
of all unvested options to purchase common stock of the Company that had an
exercise price that was greater than the market price on that date. The closing
price of the Companys common stock on October 26, 2005, was $5.63 per share. As
a condition of the acceleration and to prevent unintended personal benefit, the
Companys directors, executive officers and employees must refrain from selling
common stock acquired upon the exercise of accelerated options until the
original vesting date or, if earlier, termination of employment with or service
to the Company. All other terms and conditions applicable to such options,
including exercise prices, remain unchanged. This action resulted in the
accelerated vesting of options to purchase 163,873 shares of common stock of the
Company, or approximately six percent of the total of all then outstanding
Company options. Of this amount, 142,500 options had been granted to either
directors or executive officers of the Company.

The Company
accelerated the vesting of these options because it believed it was in the best
interest of its shareholders to reduce future compensation expense that the
Company would otherwise have been required to report in its statement of income
upon adoption of SFAS No. 123R in the first quarter of 2006. Further, because
the options had exercise prices in excess of the then-current market price, they
were viewed to have limited economic value and were not achieving their
objective of incentive compensation and retention. As a result of the vesting
acceleration, approximately $0.5 million in aggregate future expense was
eliminated. The vesting acceleration did not result in compensation expense in
the Companys statement of income, but is reflected as additional stock-based
employee compensation expense in the calculation of 2005 pro forma earnings
above.

The
following table presents stock-based compensation expense included in the
Companys consolidated statements of income for the years ended December 31,
2006 and 2007 pursuant to the provisions of SFAS No. 123R:

|                                                                                       | Year Ended December 31,
|-------------------------------------------------------------------------------------- | -----------------------
|                                                                                       | 2006                   
|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                                             | $                      

69

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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, 2007, a total of 1,388,327 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 or 2007, 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.

Stock options

Summary stock option activity for
the year ended December 31, 2007 is presented below:

|                                   |           |   |       |          |      | Weighted    |       |           
|---------------------------------- | --------- | - | ----- | -------- | ---- | ----------- | ----- | ----------
|                                   |           |   |       | Weighted |      | Average     |       |           
|                                   |           |   |       | Average  |      | Remaining   |       | Aggregate 
|                                   |           |   |       | Exercise |      | Contractual |       | Intrinsic 
|                                   | Shares    |   | Price |          | Term |             | Value
|Outstanding at January 1           | 1,555,633 |   |       | $4.19    |      |             |       |           
|Granted                            |          |   |       |         |      |             |       |           
|Exercised                          | (342,950  | ) |       | $3.28    |      |             |       |           
|Expired                            | (8,250    | ) |       | $4.11    |      |             |       |           
|Canceled                           | (14,250   | ) |       | $3.93    |      |             |       |           
|Outstanding at
      December 31   | 1,190,183 |   |       | $4.46    |      | 1.3         |       | $4,737,000
|Options exercisable at December 31 | 997,683   |   |       | $4.38    |      | 1.1         |       | $4,049,000

The
aggregate intrinsic value of options exercised during the years ended December
31, 2005, 2006 and 2007 was approximately $4.5 million, $1.5 million and $1.1
million, respectively. Cash proceeds from the exercise of employee stock options
for the years ended December 31, 2005, 2006 and 2007 were approximately $4.6
million, $1.2 million and $0.9 million, respectively.

The fair value of shares vested
during the years ended December 31, 2005, 2006 and 2007 was approximately $2.4
million, $0.8 million and $0.9 million, respectively. As of December 31, 2007,
there was approximately $0.3 million of 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 1.2 years.

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.

70

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A summary of restricted stock
activity for the year ended December 31, 2007 is presented below:

WeightedAverageRestricted
    
    Grant
      DateShares
    
    Fair ValueOutstanding at January 1
    595,485
    
    
    $5.70Granted
    99,299
    
    
    $4.96Vested
    (145,490
    )
    
    $5.70Expired
    
    
    
    Canceled
    (59,878
    )
    
    $5.64Outstanding at
      December 31
    489,416
    
    
    $5.55


The fair
value of restricted stock vested during the year ended December 31, 2007 was
approximately $0.8 million. At December 31, 2007, the Company had approximately
$2.1 million of total unrecognized compensation cost, net of estimated
forfeitures, related to nonvested restricted stock awards. The Company expects
to recognize this cost over the next 3.0 years.

Income taxes

During 2005,
certain employees of the Company exercised non-qualified stock options. As a
result, the Company received federal income tax deductions, or windfall tax
benefits. The tax benefit for the deductions of approximately $1.8 million for
2005 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 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 and $0.9 million relating to the exercise of non-qualified stock options
and vesting of restricted stock awards during the years ended December 31, 2006
and 2007.

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.

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.

71

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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, 2004 and ending on March 31, 2005, 30,031
shares were purchased at a price of $4.055 per share, resulting in total cash
proceeds to the Company of approximately $122,000. 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. The next offering period under this plan commenced on
April 1, 2007. The closing fair market value of NIC common stock on the first
day of the current offering period was $5.36 per share.

Included in
the Companys stock-based compensation expense for the year ended December 31,
2007 is a portion of the cost (approximately $77,000) relating to the ESPP
offering period ending on March 31, 2008, and a portion of the cost
(approximately $43,000) relating to the ESPP offering period that ended on March
31, 2007.

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****Offering**
    
    **Offering**Risk-free interest rate
    
    
    4.77
    %
    
    
    4.93
    %Expected
      dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected life
    
    
    1.0 year
    
    
    
    1.0 yearExpected stock
      price volatility
    
    
    30.11
    %
    
    
    34.11
    %Weighted average fair value of ESPP rights
    
    
    $1.60
    
    
    
    $1.52


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 of up to 10% of an employees 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, $0.5 million and $0.6 million for the years ended
December 31, 2005, 2006 and 2007, 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) and ethics & elections filings
business (NIC Technologies). 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.

72

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

|                                  |  | Outsourced  |            | **Software &** |   | **Other Reconciling** |   | **Consolidated**
|--------------------------------- |  | ----------- | ---------- | -------------- | - | --------------------- | - | ----------------
|                                  |  | **Portals** |            | **Services**   |   | Items                 |   | **Total**       
|2005                              |  |             |            |                |   |                       |   |                 
|Revenues                          |  | $           | 57,875,067 |                | $ | 1,367,546             |   |                 
|Costs & expenses                  |  |             | 31,980,570 |                |   | 5,779,628             |   |                 
|Depreciation
      & amortization |  |             | 1,376,673  |                |   | 140,900               |   |                 
|Operating income (loss)           |  | $           | 24,517,824 |                | $ | (4,552,982            | ) |                 
|2006                              |  |             |            |                |   |                       |   |                 
|Revenues                          |  | $           | 70,008,598 |                | $ | 1,367,248             |   |                 
|Costs &
      expenses            |  |             | 40,433,646 |                |   | 1,169,498             |   |                 
|Depreciation & amortization       |  |             | 1,863,437  |                |   | 65,131                |   |                 
|Operating income
      (loss)     |  | $           | 27,711,515 |                | $ | 132,619               |   |                 
|2007                              |  |             |            |                |   |                       |   |                 
|Revenues                          |  | $           | 82,451,763 |                | $ | 3,303,171             |   |                 
|Costs & expenses                  |  |             | 47,580,543 |                |   | 2,160,340             |   |                 
|Depreciation
      & amortization |  |             | 2,310,968  |                |   | 24,371                |   |                 
|Operating income (loss)           |  | $           | 32,560,252 |                | $ | 1,118,460             |   |                 

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

|                                               |  | **2005** |            | **2006** |  | **2007**
|---------------------------------------------- |  | -------- | ---------- | -------- |  | --------
|Total operating income for reportable segments |  | $        | 10,191,257 |          |  | $       
|Interest
      income                          |  |          | 704,614    |          |  |         
|Gain (loss) on affiliate investments           |  |          |           |          |  |         
|Other income
      (expense), net              |  |          | (2,971     | )        |  |         
|Income before income taxes                     |  | $        | 10,892,900 |          |  | $       

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 62%, 59% and 54% of the
Companys portal revenues in 2005, 2006 and 2007, 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, 2005, one of these data resellers
accounted for approximately 46% of the Companys portal revenues and 45% of the
Companys total revenues. 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. At December 31, 2007,
this one data reseller accounted for approximately 29% of the Companys accounts
receivable.

For the year
ended December 31, 2005, the Companys Indiana portal accounted for
approximately 16% of the Companys portal revenues and 15% of the Companys
consolidated revenues. 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
years ended December 31, 2005 and 2006, revenues from the Companys UCC and
corporate filings software development contract with the California Secretary of
State were negative ($1,425,000) and negative ($940,000) as a result of
adjustments under percentage of completion accounting as further discussed in
Note 2.

73

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13. RELATED PARTY
TRANSACTIONS

The Company
rented an aircraft on an hourly basis from a company that is owned by two
shareholders/directors of the Company at costs that the Company believes were
reasonable compared to similar services provided by third parties. One of these
directors was the Chairman and Chief Executive Officer of the Company. In 2005,
payments made to this company totaled approximately $0.1 million. No payments
were made to this company in 2006 or 2007.

14. SUBSEQUENT EVENTS

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 marketable securities.

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 of the Company, computed
on a tax basis, through the end of its 2008 fiscal year.

15. 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,
due to the smaller 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 and 11 in 2006 and
Notes 2, 6 and 10 in 2007.

74

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|**2006**                             |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|------------------------------------ |  | ------------------------ | ---------- | ------------------- |  | ---------------------- | ---------- | ----------------------- | - | ----------------------- | - |  | - | ---------- |  |  | - | ---------- | -
|                                    
|                                     |  | Three
      Months Ended |            | Year Ended         
|                                     |  | March 31,
      2006     |            | June 30,
      2006 |  | **September 30, 2006** |            | December 31,
      2006 |   | December 31,
      2006
|Revenues:                            |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|Portal revenues                      |  | $                        | 16,988,892 |                     |  | $                      | 17,793,833 |                         | $ | 17,214,120              |   |  | $ | 18,011,753 |  |  | $ | 70,008,598 |  
|Software & services revenues         |  |                          | (1,241,425 | )                   |  |                        | 967,731    |                         |   | 821,175                 |   |  |   | 819,767    |  |  |   | 1,367,248  |  
|Total revenues                       |  |                          | 15,747,467 |                     |  |                        | 18,761,564 |                         |   | 18,035,295              |   |  |   | 18,831,520 |  |  |   | 71,375,846 |  
|                                     |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|Operating expenses:                  |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|Cost of portal revenues, exclusive   |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|of depreciation                      |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|& amortization                       |  |                          | 8,276,575  |                     |  |                        | 8,930,990  |                         |   | 9,477,909               |   |  |   | 10,563,884 |  |  |   | 37,249,358 |  
|Cost
      of software & services    |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|revenues, exclusive                  |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|of depreciation                      |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|& amortization                       |  |                          | (1,329,170 | )                   |  |                        | 766,123    |                         |   | 565,448                 |   |  |   | 593,878    |  |  |   | 596,279    |  
|Selling & administrative             |  |                          | 3,428,499  |                     |  |                        | 3,559,951  |                         |   | 3,915,668               |   |  |   | 4,437,659  |  |  |   | 15,341,777 |  
|Depreciation & amortization          |  |                          | 504,590    |                     |  |                        | 525,452    |                         |   | 501,381                 |   |  |   | 508,975    |  |  |   | 2,040,398  |  
|Total operating expenses             |  |                          | 10,880,494 |                     |  |                        | 13,782,516 |                         |   | 14,460,406              |   |  |   | 16,104,396 |  |  |   | 55,227,812 |  
|Operating income                     |  |                          | 4,866,973  |                     |  |                        | 4,979,048  |                         |   | 3,574,889               |   |  |   | 2,727,124  |  |  |   | 16,148,034 |  
|Other income
      (expense):        |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|Interest income                      |  |                          | 379,740    |                     |  |                        | 498,347    |                         |   | 665,655                 |   |  |   | 857,762    |  |  |   | 2,401,504  |  
|Equity in net loss of affiliates     |  |                          | (96,954    | )                   |  |                        |           |                         |   |                        |   |  |   |           |  |  |   | (96,954    | )
|Other income (expense), net          |  |                          | 300        |                     |  |                        |           |                         |   | (49,185                 | ) |  |   | 13,698     |  |  |   | (35,187    | )
|Total other income                   |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|(expense)                            |  |                          | 283,086    |                     |  |                        | 498,347    |                         |   | 616,470                 |   |  |   | 871,460    |  |  |   | 2,269,363  |  
|Income before taxes                  |  |                          | 5,150,059  |                     |  |                        | 5,477,395  |                         |   | 4,191,359               |   |  |   | 3,598,584  |  |  |   | 18,417,397 |  
|Income tax
      provision           |  |                          | 2,231,509  |                     |  |                        | 2,232,378  |                         |   | 1,732,560               |   |  |   | 1,481,949  |  |  |   | 7,678,396  |  
|Net income                           |  | $                        | 2,918,550  |                     |  | $                      | 3,245,017  |                         | $ | 2,458,799               |   |  | $ | 2,116,635  |  |  | $ | 10,739,001 |  
|                                     |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|Basic net income per share:          |  | $                        | 0.05       |                     |  | $                      | 0.05       |                         | $ | 0.04                    |   |  | $ | 0.03       |  |  | $ | 0.17       |  
|Diluted net
      income per share   |  | $                        | 0.05       |                     |  | $                      | 0.05       |                         | $ | 0.04                    |   |  | $ | 0.03       |  |  | $ | 0.17       |  
|                                     |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|Weighted average shares outstanding: |  |                          |            |                     |  |                        |            |                         |   |                         |   |  |   |            |  |  |   |            |  
|Basic                                |  |                          | 61,139,586 |                     |  |                        | 61,380,512 |                         |   | 61,535,607              |   |  |   | 61,572,351 |  |  |   | 61,408,552 |  
|Diluted                              |  |                          | 61,606,781 |                     |  |                        | 61,838,566 |                         |   | 61,798,252              |   |  |   | 61,802,623 |  |  |   | 61,763,093 |  

75

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|**2007**                                 |  |                          |            |                         |   |                        |   |                         |   |                         |  |  |   |            |   |  |   |            |  
|---------------------------------------- |  | ------------------------ | ---------- | ----------------------- | - | ---------------------- | - | ----------------------- | - | ----------------------- |  |  | - | ---------- | - |  | - | ---------- | -
|                                        
|                                         |  | Three
      Months Ended |            | Year Ended             
|Revenues:                                |  | March 31,
      2007     |            | **June 30,
      2007** |   | **September 30, 2007** |   | December 31,
      2007 |   | December 31,
      2007
|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 |  

76

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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, 2007 and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2007 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, 2007,
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, the Company changed the
manner in which it accounts for uncertain tax positions effective January 1,
2007 and share-based compensation effective January 1, 2006.

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 LLP Kansas
City, Missouri March 17, 2008

77

---

|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, 2007.

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, 2007 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 2007 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.

78

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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 proxy statement related to its 2008 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, 2007:

|                                          |  | **A**                             |     | **B**                       |             | **C**                   
|----------------------------------------- |  | --------------------------------- | --- | --------------------------- | ----------- | ------------------------
|                                          |  | **Number of securities to**       |     | **Weighted average**        |             |                         
|                                          |  | **be issued upon exercise of**    |     | **exercise price of**       |             | **Number of**           
|                                          |  | **outstanding options, warrants** |     | **outstanding options,**    |             | **securities available**
|                                          |  | **and rights outstanding as of**  |     | **warrants and rights**     |             | **for issuance as of**  
|**Plan
      Category**                   |  | **December 31, 2007**             |     | **shown
      in Column A** |             | **December 31, 2007**   
|Equity compensation plans approved by     |  |                                   |     |                             |             |                         
|shareholders                              |  |                                   |     |                             |             |                         
|                                         
|·Stock options                            |  | 1,175,500                         |     |                             | $4.49       |                         
|·Restricted stock                         |  | 489,416                           |     |                             |            |                         
|Total                                     |  | 1,664,916                         |     |                             |             |                         
|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, 2007 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, 2007, was $4.556 per share, and the total number of
      shares purchased was 52,622.                                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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.

79

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

The
information under Certain Relationships and Related Transactions 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.

80

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES

(a) The following
documents are filed as part of this report:

|Index To
      Consolidated Financial Statements:                                         | **Page**
|----------------------------------------------------------------------------------------- | --------
|Consolidated Balance Sheets                                                               | 48      
|Consolidated Statements of Income                                                         | 49      
|Consolidated Statements of Changes in Shareholders
      Equity                          | 50      
|Consolidated Statements of Cash Flows                                                     | 51      
|Notes to Consolidated Financial Statements                                                | 52      
|Report of PricewaterhouseCoopers LLP, Independent
      Registered Public Accounting Firm | 77      

All
schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.

|**Exhibit** |  |                                                                                                                                                                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**Number**  |  | **Description**                                                                                                                                                                                                                                                                               
|3.1         |  | Articles of
      Incorporation of the registrant(1)                                                                                                                                                                                                                                          
|3.2         |  | Articles of Amendment to Articles
      of Incorporation of the registrant(7)                                                                                                                                                                                                                 
|3.3         |  | Amended and
      Restated Bylaws of registrant, as restated effective November 5,
      2007(13)                                                                                                                                                                                             
|4.1         |  | Reference is made to Exhibits
      3.1, 3.2 and 3.3                                                                                                                                                                                                                                          
|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)                                                                                                                                                                                                                                         
|9.1         |  | Voting Trust Agreement between
      Jeffery S. Fraser and Ross C. Hartley and certain Holders of Shares of
      National Information Consortium, Inc. dated June 30, 1998 and form of the
      voting trust certificate(1)                                                                 
|9.2         |  | First Amendment
      dated December 15, 1999 to Voting Trust Agreement between Jeffery S.
      Fraser and Ross C. Hartley and certain Holders of Shares of National
      Information Consortium, Inc. dated June 20, 1998(11)                                                              
|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        |  | Contract for Network Manager
      Services between the Information Network of Kansas and Kansas Information
      Consortium, Inc. dated December 18, 1991 with addenda dated October 15,
      1992, August 19, 1993, May 26, 1995 and June 13, 1996 and amendment on
      March 2, 1998(1)
|10.6        |  | Contract for
      Network Manager Services between the State of Indiana by and through the
      Intelenet Commission and Indian@ Interactive, Inc., dated July 18,
      1995(1)                                                                                                            
|10.7        |  | Services Contract by and between
      National Information Consortium, U.S.A. and the GeorgiaNet Authority, an
      agency of the State of Georgia, dated September 15, 1996(1)                                                                                                             
|10.8        |  | Contract for
      Network Manager between Information Network of Arkansas by and through the
      Information Network of Arkansas Board and Arkansas Information Consortium,
      Inc. dated July 2, 1997(1)                                                                               
|10.9        |  | Contract for Network Manager
      Services between the Nebraska State Records Board on behalf of the State
      of Nebraska and Nebrask@ Interactive, Inc. dated December 3, 1997 with
      addendum No. 1 dated as of the same date(1)                                                    
|10.10       |  | Contract for
      Network Manager Services between the Commonwealth of Virginia by and
      through the Virginia Information Providers Network Authority and Virginia
      Interactive, LLC dated January 15, 1998(1)                                                                      

81

---

|**Exhibit** |  |                                                                                                                                                                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**Number**  |  | Description                                                                                                                                                                                                                                                                                            
|10.11       |  | Contract for Network Manager Services between Iowa Interactive,
      Inc. and the State of Iowa by and through Information Technology Services
      dated April 23, 1998 with letter addendum dated August 7,
  1998(1)                                                                              
|10.12       |  | Contract for Network Manager
      Services between the Consolidated City of Indianapolis and Marion County
      by and through the Enhanced Access Board of Marion County and City-County
      Interactive, LLC dated August 31, 1998 with addendum dated as of the same
      date(1)              
|10.13       |  | State
      of Maine Contract for Special Services with New England Interactive, Inc.
      dated April 14, 1999(1)                                                                                                                                                                                    
|10.14       |  | State of Idaho Contract
      for Electronic Business and portal Services with the Idaho Department of
      Administration and other Public Agencies, dated December 7,
    1999(2)                                                                                                                   
|10.15       |  | State
      of Hawaii Contract for Special Services with the State of Hawaii, dated
      December 29, 1999(2)                                                                                                                                                                                         
|10.16       |  | Agreement between
      Equifax Services and Nebrask@ Online dated March 25, 1996(1)                                                                                                                                                                                                                   
|10.17       |  | Agreement between ChoicePoint and the Information Network of Kansas
      dated September 1, 1997(1)                                                                                                                                                                                                   
|10.18       |  | Agreement between
      Equifax/ChoicePoint and the Information Network of Arkansas dated
      September 2, 1997(1)                                                                                                                                                                                   
|10.19       |  | Agreement between Equifax Systems, Inc. and Access Indian@
      Information Network dated November 14, 1995(1)                                                                                                                                                                                        
|10.20       |  | Contract for Network
      Manager Services between the State of Utah and Utah Interactive, Inc.
      dated as of May 7, 1999(1)                                                                                                                                                                      
|10.21       |  | Asset
      Purchase Agreement between the registrant and Electric Press, Inc, for the
      acquisition of eFed, a division of Electric Press, Inc., dated as of
      September 15, 1999(2)                                                                                                          
|10.22       |  | Contribution Agreement
      between the registrant and Conquest Softworks, LLC, dated as of January
      12, 2000 Agreement(2)                                                                                                                                                                       
|10.23       |  | Agreement and Plan of Reorganization and Merger between the
      registrant and SDR Technologies, Inc., dated as of February 16,
      2000(2)                                                                                                                                                        
|10.24       |  | Amended and Restated
      Agreement and Plan of Reorganization and Merger, dated as of May 5, 2000,
      as amended, by and among the registrant, SDR Acquisition Corp., a
      California corporation and a wholly owned subsidiary of the registrant,
      and SDR Technologies, Inc.(3)         
|10.25       |  | Registrants 1999 Stock Option Plan of SDR Technologies,
      Inc.(4)**                                                                                                                                                                                                                               
|10.26       |  | Agreement and Plan of
      Merger, dated as of September 8, 2000, by and among the registrant, Cherry
      Hills Acquisition Sub, Inc., a Colorado corporation and wholly owned
      subsidiary of the registrant, and Intelligent Decision Technologies,
      Ltd.(5)                             
|10.27       |  | Employment agreement between the Registrant and William F. Bradley,
      dated September 1, 2000(5)**                                                                                                                                                                                                 
|10.28       |  | Employment agreement
      between the Registrant and Samuel R. Somerhalder, dated September 1,
      2000(5)**                                                                                                                                                                                        
|10.29       |  | Employment agreement between the Registrant and Harry H. Herington,
      dated September 1, 2000(5)**                                                                                                                                                                                                 
|10.30       |  | Employment agreement
      between the Registrant and Stephen M. Kovzan, dated September 1,
      2000(5)**                                                                                                                                                                                            
|10.31       |  | Contract Between the State of Tennessee, Department of Finance and
      Administration and National Information Consortium USA, Inc., dated August
      28, 2000(5)                                                                                                                                  
|10.32       |  | Self Funded Electronic
      Government Services Term Contract between the Department of Administration
      of the State of Montana and National Information Consortium USA, Inc.,
      doing business in Montana through the subsidiary Montana Interactive,
      Inc., dated December 21, 2000(5)
|10.33       |  | Business Programs Automation Agreement, dated September 6, 2001,
      between National Information USA, Inc. and the State of
      California(6)                                                                                                                                                     
|10.34       |  | Employment agreement
      between the Registrant and Eric J. Bur dated April 1, 2001
  (8)**                                                                                                                                                                                                          
|10.35       |  | 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                                                                                            
|10.36       |  | Registrants 2006
      Amended and Restated Stock Option and Incentive Plan (10)**                                                                                                                                                                                                                    
|10.37       |  | 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(11)                                                                                                                                                            
|10.38       |  | Separation and
      Severance Agreement and Release of Claims, dated June 27, 2007, between
      the Registrant and Eric J. Bur(12)**                                                                                                                                                                

82

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|**Exhibit** |  |                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------
|**Number**  |  | **Description**                                                                                              
|10.39       |  | Restricted Stock Agreement for NIC Inc. 2006 Amended and Restated
      Stock Option and Incentive Plan(13)**
|10.40       |  | Stock Option
      Agreement for NIC Inc. 2006 Amended and Restated Stock Option and
      Incentive Plan(13)
|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                      

|(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 8-K filed with the SEC on May 26, 2000                                                                  
|    
|(4)  |  | Incorporated by
      reference to Registration Statement on Form S-8, File No.
    333-37000                                                   
|    
|(5)  |  | Incorporated by
      reference to Form 10-K filed with the SEC on April 2, 2001                                                                
|    
|(6)  |  | Incorporated by
      reference to Form 10-Q filed with the SEC on November 14,
2001                                                            
|    
|(7)  |  | Incorporated by
      reference to Form 10-Q filed with the SEC on May 14, 2002                                                                 
|    
|(8)  |  | Incorporated by
      reference to Form 10-K filed with the SEC on March 25, 2002                                                               
|    
|(9)  |  | Incorporated by
      reference to Form 10-K filed with the SEC on March 12, 2004                                                               
|    
|(10) |  | Incorporate by
      reference to Registration Statement on Form S-8, File No.
    333-136016                                                   
|    
|(11) |  | Incorporated by
      reference to Form 10-Q filed with SEC on May 7, 2007                                                                      
|    
|(12) |  | Incorporated by
      reference to Form 10-Q file with SEC on August 6, 2007                                                                    
|    
|(13) |  | Incorporated by
      reference to Form 10-Q file with SEC on November 11, 2007                                                                 
|     |  |                                                                                                                                                 
|**   |  | Management
      contracts and compensatory plans and arrangements required to be filed as
      Exhibits pursuant to Item 15(b) of this report.

83

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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 17, 2008.

NIC
      INC.By:
    /s/HARRY H.
      HERINGTONHarry H. Herington, Chief
      Executive Officerand
Director


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    |  | Chief
      Executive Officer and Director       |  | March 17, 2008
|Harry H.
      Herington |  | *(Principal Executive
      Officer)*            |  |               
|                         |  |                                                  |  |               
|/s/STEPHEN M. KOVZAN     |  | Chief
      Financial Officer                    |  | March 17, 2008
|Stephen M.
      Kovzan  |  | (Principal
      Financial Officer and Principal |  |               
|                         |  | Accounting
      Officer)                        |  |               
|                         |  |                                                  |  |               
|/s/JEFFERY S. FRASER     |  | Chairman of
      the Board                      |  | March 17, 2008
|Jeffery S.
      Fraser  |  |                                                  |  |               
|                         |  |                                                  |  |               
|/s/ART N. BURTSCHER      |  | Lead
      Director                              |  | March 17, 2008
|Art N.
      Burtscher   |  |                                                  |  |               
|                         |  |                                                  |  |               
|                         |  | Director                                         |  | March 17, 2008
|John L. Bunce,
      Jr. |  |                                                  |  |               
|                         |  |                                                  |  |               
|/s/DANIEL J. EVANS       |  | Director                                         |  | March 17, 2008
|Daniel J.
      Evans    |  |                                                  |  |               
|                         |  |                                                  |  |               
|/s/ROSS C. HARTLEY       |  | Director                                         |  | March 17, 2008
|Ross C.
      Hartley    |  |                                                  |  |               
|                         |  |                                                  |  |               
|/s/ALEXANDER C. KEMPER   |  | Director                                         |  | March 17, 2008
|Alexander C.
    Kemper  |  |                                                  |  |               
|                         |  |                                                  |  |               
|/s/PETE WILSON           |  | Director                                         |  | March 17, 2008
|Pete Wilson              |  |                                                  |  |               

84

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