** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

# **WASHINGTON, D.C. 20549**

# ** **

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period ended****June 30, 2008**

 

**Commission file number 000-26621**

 

**NIC INC.**

 (Exact name ofregistrant as specified in its charter)

 

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

 

**25501 West Valley Parkway, Suite 300,Olathe, Kansas 66061**

(Address of principalexecutive offices) (Zip Code)

 

Registrant’s telephonenumber, including area code: **(877) 234-3468**

 

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Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x No o

 

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

 
| Large accelerated filer o                     |   | Accelerated filer x         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No  x

 

The number of shares outstanding of the registrant’s common stock as of July 30,2008 was 62,655,130.

 

 

 

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**PART I- FINANCIAL INFORMATION**

**Item1.    Consolidated Financial Statements**

 

**NIC INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

**thousands**

** **
| ** **                                                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                  |       |              |       |                  |       |
| Cash and cash equivalents                                                                        |       | $                 | 41,575     |                  | $          | 38,236 |   |
| Short-term investments                                                                           |       | —            |       | 17,600                |       |
| Trade accounts receivable                                                                        |       | 34,388            |       | 28,149                |       |
| Unbilled revenues                                                                                |       | 591               |       | 720                   |       |
| Deferred income taxes, net                                                                       |       | 7,008             |       | 6,746                 |       |
| Prepaid expenses & other current assets                                                 |       | 1,647             |       | 2,143                 |       |
| Total current assets                                                                             |       | 85,209            |       | 93,594                |       |
| Long-term investments                                                                            |       | 6,545             |       | —                |       |
| Property and equipment, net                                                                      |       | 6,695             |       | 6,110                 |       |
| Deferred income taxes, net                                                                       |       | 6,914             |       | 10,809                |       |
| Other assets                                                                                     |       | 1,149             |       | 863                   |       |
| Total assets                                                                                     |       | $                 | 106,512    |                  | $          | 111,376 |   |
|                                                                                             |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                             |       |              |       |                  |       |
| Accounts payable                                                                                 |       | $                 | 37,964     |                  | $          | 36,498 |   |
| Accrued expenses                                                                                 |       | 6,949             |       | 6,848                 |       |
| Application development contracts                                                                |       | 282               |       | 353                   |       |
| Other current liabilities                                                                        |       | 368               |       | 99                    |       |
| Total current liabilities                                                                        |       | 45,563            |       | 43,798                |       |
|                                                                                             |       |              |       |                  |       |
| Other long-term liabilities                                                                      |       | 714               |       | 714                   |       |
| Total liabilities                                                                                |       | 46,277            |       | 44,512                |       |
|                                                                                             |       |              |       |                  |       |
| Commitments and contingencies (Notes 1, 2 and 5)                                                 |       | —            |       | —                |       |
|                                                                                             |       |              |       |                  |       |
| Shareholders’ equity:                                                                       |       |              |       |                  |       |
| Common stock, no par, 200,000 shares authorized 62,655  and 62,031 shares issued and outstanding |       | —            |       | —                |       |
| Additional paid-in capital                                                                       |       | 153,542           |       | 165,934               |       |
| Accumulated deficit                                                                              |       | (92,734           | )          | (98,902               | )          |
| Accumulated other comprehensive loss                                                             |       | (405              | )          | —                |       |
|                                                                                             |       | 60,403            |       | 67,032                |       |
| Less treasury stock                                                                              |       | (168              | )          | (168                  | )          |
| Total shareholders’ equity                                                                  |       | 60,235            |       | 66,864                |       |
| Total liabilities and shareholders’ equity                                                  |       | $                 | 106,512    |                  | $          | 111,376 |   |

 

*The accompanying Notes toUnaudited Consolidated Financial Statements are an integral part of thesestatements.*

 

2

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**NIC INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(UNAUDITED)**

**thousandsexcept for per share amounts**

 
| ** **                                                                                        | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                        | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Portal revenues                                                                                   |       | $                                | 24,621     |                           | $          | 20,610 |   | $ | 48,417 |   | $ | 40,478 |   |
| Software & services revenues                                                             |       | 1,081                            |       | 866                            |       | 1,964 |   | 1,632 |   |
| Total revenues                                                                                    |       | 25,702                           |       | 21,476                         |       | 50,381 |   | 42,110 |   |
| Operating expenses:                                                                               |       |                             |       |                           |       |   |   |   |   |
| Cost of portal revenues, exclusive of depreciation &  amortization                            |       | 13,006                           |       | 10,419                         |       | 25,711 |   | 20,873 |   |
| Cost of software & services revenues,  exclusive of depreciation & amortization |       | 707                              |       | 493                            |       | 1,140 |   | 964 |   |
| Selling & administrative                                                                 |       | 5,822                            |       | 5,445                          |       | 11,785 |   | 10,565 |   |
| Depreciation & amortization                                                              |       | 899                              |       | 577                            |       | 1,745 |   | 1,112 |   |
| Total operating expenses                                                                          |       | 20,434                           |       | 16,934                         |       | 40,381 |   | 33,514 |   |
| Operating income                                                                                  |       | 5,268                            |       | 4,542                          |       | 10,000 |   | 8,596 |   |
| Other income (expense):                                                                           |       |                             |       |                           |       |   |   |   |   |
| Interest income                                                                                   |       | 110                              |       | 317                            |       | 443 |   | 897 |   |
| Other expense, net                                                                                |       | —                           |       | —                         |       | (20 | ) | — |   |
| Total other income (expense)                                                                      |       | 110                              |       | 317                            |       | 423 |   | 897 |   |
| Income before income taxes                                                                        |       | 5,378                            |       | 4,859                          |       | 10,423 |   | 9,493 |   |
| Income tax provision                                                                              |       | 2,198                            |       | 2,107                          |       | 4,255 |   | 3,995 |   |
| Net income                                                                                        |       | $                                | 3,180      |                           | $          | 2,752 |   | $ | 6,168 |   | $ | 5,498 |   |
|                                                                                              |       |                             |       |                           |       |   |   |   |   |
| Basic net income per share                                                                        |       | $                                | 0.05       |                           | $          | 0.04 |   | $ | 0.10 |   | $ | 0.09 |   |
| Diluted net income per share                                                                      |       | $                                | 0.05       |                           | $          | 0.04 |   | $ | 0.10 |   | $ | 0.09 |   |
|                                                                                              |       |                             |       |                           |       |   |   |   |   |
| Weighted average shares outstanding:                                                              |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                             |       | 62,497                           |       | 61,769                         |       | 62,309 |   | 61,711 |   |
| Diluted                                                                                           |       | 62,956                           |       | 62,256                         |       | 62,795 |   | 62,113 |   |

 

*Theaccompanying Notes to Unaudited Consolidated Financial Statements are an integralpart of these statements.*

 

3

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**NIC INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

**(UNAUDITED)**

**thousands**

** **
| ** **                                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Treasury**    | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Loss**        | ** ** | **Stock**  | ** ** | **Total**  | ** ** |
| **Balance, January 1, 2008**                                                |       | 62,031                |       | $           | —     |            | $          | 165,934           |       | $               | (98,902    | )          | $          | —     |       | $ | (168 | ) | $ | 66,864 |   |
| Net income                                                                       |       | —                |       | —      |       | —          |       | 6,168             |       | —          |       | —     |       | 6,168      |       |
| Unrealized holding loss on investments (Note 1)                                  |       | —                |       | —      |       | —          |       | —            |       | (405            | )          | —     |       | (405       | )          |
| Cash dividends on common stock (Note 3)                                          |       | —                |       | —      |       | (15,709         | )          | —            |       | —          |       | —     |       | (15,709    | )          |
| Shares surrendered upon vesting of restricted stock  to satisfy tax withholdings |       | (6                    | )          | —      |       | (43             | )          | —            |       | —          |       | —     |       | (43        | )          |
| Stock options exercises and restricted stock vestings                            |       | 568                   |       | —      |       | 1,852           |       | —            |       | —          |       | —     |       | 1,852      |       |
| Stock-based compensation                                                         |       | —                |       | —      |       | 1,228           |       | —            |       | —          |       | —     |       | 1,228      |       |
| Issuance of common stock under employee stock  purchase plan                     |       | 62                    |       | —      |       | 280             |       | —            |       | —          |       | —     |       | 280        |       |
| **Balance, June 30, 2008**                                                  |       | 62,655                |       | $           | —     |            | $          | 153,542           |       | $               | (92,734    | )          | $          | (405       | )          | $ | (168 | ) | $ | 60,235 |   |

 

*The accompanying Notes to UnauditedConsolidated Financial Statements are an integral part of these statements.*

 

4

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**NIC INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                         | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                              | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                              | 6,168      |   | $ | 5,498 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                           |       |   |   |
| Depreciation & amortization                                               |       | 1,745                          |       | 1,112 |   |
| Stock-based compensation expense                                                   |       | 1,228                          |       | 864 |   |
| Application development contracts                                                  |       | (71                            | )          | (80 | ) |
| Deferred income taxes                                                              |       | 3,633                          |       | 3,406 |   |
| Loss on disposal of property and equipment                                         |       | 20                             |       | — |   |
| Changes in operating assets and liabilities:                                       |       |                           |       |   |   |
| (Increase) decrease in trade accounts receivable                                   |       | (6,239                         | )          | 417 |   |
| Decrease in unbilled revenues                                                      |       | 129                            |       | 628 |   |
| Decrease in prepaid expenses & other  current assets                      |       | 496                            |       | 168 |   |
| Decrease in other assets                                                           |       | —                         |       | 2 |   |
| Increase (decrease) in accounts payable                                            |       | 1,466                          |       | (4,022 | ) |
| Increase in accrued expenses                                                       |       | 58                             |       | 1,096 |   |
| Increase in other current liabilities                                              |       | 269                            |       | 104 |   |
| Increase in other long-term liabilities                                            |       | —                         |       | 122 |   |
| Net cash provided by operating activities                                          |       | 8,902                          |       | 9,315 |   |
|                                                                               |       |                           |       |   |   |
| Cash flows from investing activities:                                              |       |                           |       |   |   |
| Purchases of property and equipment                                                |       | (2,228                         | )          | (1,658 | ) |
| Capitalized internal use software development costs                                |       | (408                           | )          | (181 | ) |
| Purchases of investments                                                           |       | (1,000                         | )          | (2,000 | ) |
| Sales and maturities of investments                                                |       | 11,650                         |       | 45,008 |   |
| Net cash provided by investing activities                                          |       | 8,014                          |       | 41,169 |   |
|                                                                               |       |                           |       |   |   |
| Cash flows from financing activities:                                              |       |                           |       |   |   |
| Cash dividends on common stock                                                     |       | (15,709                        | )          | (46,730 | ) |
| Proceeds from employee common stock purchases                                      |       | 280                            |       | 239 |   |
| Proceeds from exercise of employee stock options                                   |       | 1,852                          |       | 506 |   |
| Net cash used in financing activities                                              |       | (13,577                        | )          | (45,985 | ) |
|                                                                               |       |                           |       |   |   |
| Net increase in cash and cash equivalents                                          |       | 3,339                          |       | 4,499 |   |
| Cash and cash equivalents, beginning of period                                     |       | 38,236                         |       | 36,745 |   |
| Cash and cash equivalents, end of period                                           |       | $                              | 41,575     |   | $ | 41,244 |   |
| Other cash flow information:                                                       |       |                           |       |   |   |
| Income taxes paid                                                                  |       | $                              | 469        |   | $ | 603 |   |

 

*The accompanying Notes to UnauditedConsolidated Financial Statements are an integral part of these statements.*

 

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**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

The consolidated interim financial statements of NICInc. and its subsidiaries (“NIC” or the “Company”) included herein have beenprepared, without audit, pursuant to the rules and regulations of the Securitiesand Exchange Commission (“SEC”).  Certaininformation and disclosures normally included in financial statements preparedin accordance with generally accepted accounting principles have been condensedor omitted pursuant to such rules and regulations.  In management’s opinion, the unauditedconsolidated interim financial statements reflect all adjustments (whichinclude only normal recurring adjustments, except as disclosed) necessaryto present fairly the consolidated financial position, results of operationsand cash flows of the Company and its subsidiaries as of the dates and for theinterim periods presented.  Theseunaudited consolidated financial statements and notes should be read inconjunction with the audited consolidated financial statements and relatednotes and Management’s Discussion and Analysis of Financial Condition andResults of Operations included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007, filed with the SEC on March 17,2008, and Item 2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations included in this Form 10-Q.  The consolidated balance sheet data includedherein as of December 31, 2007 was derived from audited financialstatements, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America.

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. Actual results could differ fromthose estimates. The results of operations for the three- and six-month periodsended June 30, 2008 are not necessarily indicative of the results to beexpected for the full year ending December 31, 2008.

 

**1. THE COMPANY ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*TheCompany*

 

NIC Inc. is a provider of eGovernment services that helps governmentsuse the Internet to increase internal efficiencies and provide a higher levelof service to businesses and citizens. The Company accomplishes this currently through two divisions: itsprimary portal outsourcing businesses and its software & servicesbusinesses.

 

In its primary portal outsourcing business,the Company designs, builds and operates Internet-based portals on behalf ofstate and local governments desiring to provide access to governmentinformation and to complete government-based transactions online.  These portals consist of Web sites andapplications the Company has built that allow businesses and citizens to accessgovernment information online and complete transactions, including applying fora permit, retrieving driver’s license records or filing a government-mandatedform or report.  Operating undermultiple-year contracts (see Note 2), NIC markets the services andsolicits users to complete government-based transactions and to enter intosubscriber contracts permitting users to access the portal and the governmentinformation contained therein in exchange for transactional and/or subscriptionuser fees. The Company manages operations for each contractual relationshipthrough separate local subsidiaries that operate as decentralized businesseswith a high degree of autonomy.  NIC’sself-funding business model allows the Company to reduce its governmentpartners’ financial and technology risks and generate revenues by sharing inthe fees the Company collects from eGovernment transactions.  The Company’s government partners benefitthrough gaining a centralized, customer-focused presence on the Internet, whilebusinesses and citizens receive a faster, more convenient and morecost-effective means to interact with governments.  The Company is typically responsible for fundingup front investment and ongoing operational costs of the government portals.

 

The Company’s software & servicesbusinesses primarily include its Uniform Commercial Code (“UCC”) and corporatefilings software development business and its ethics & electionsbusiness.  The Company’s UCC andcorporate filings software development business, NIC Conquest, is a provider ofsoftware applications and services for electronic filings and documentmanagement solutions for governments. This business focuses on Secretaries of State, whose offices are stategovernments’ principal agencies for UCC and corporate filings.  Currently, NIC Conquest is primarily engagedin servicing its contract with the California Secretary of State and is notactively marketing its applications and services in respect of newengagements.  The Company’s ethics &elections business, NIC Technologies, designs and develops online campaignexpenditure and ethics compliance systems for federal and state governmentagencies. Currently, NIC 

 

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Technologies is primarily engaged inservicing its contracts with the Federal Election Commission and the State ofMichigan.

 

*Basis of presentation*

 

The Company classifies its revenues and cost ofrevenues into two categories: (1) portal and (2) software &services.  The portal category includesrevenues from the Company’s subsidiaries operating government portals underlong-term contracts on an outsourced basis. The software & services category includes revenues primarilyfrom the Company’s software & services businesses.  The primary categories of operating expensesinclude: cost of portal revenues, cost of software & servicesrevenues, selling & administrative, and depreciation &amortization.  Cost of portal revenuesconsist of all direct costs associated with operating government portals on anoutsourced basis including employee compensation (including stock-basedcompensation), telecommunications, credit card merchant fees, and all othercosts associated with the provision of dedicated client service such asdedicated facilities.  Cost of software &services revenues consist of all direct project costs to provide softwaredevelopment and services such as employee compensation (including stock-basedcompensation), subcontractor labor costs, and all other direct project costsincluding hardware, software, materials, travel and other out-of-pocketexpenses.  Selling &administrative costs consist primarily of corporate-level expenses relating tohuman resource management, administration, information technology, legal andfinance, and all costs of non-customer service personnel from the Company’ssoftware & services businesses, including information systems andoffice rent.  Selling & administrative costs also consistof stock-based compensation and corporate-level expenses for market developmentand public relations.

 

*Investments*

 

The Company accounts forinvestments in debt securities in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 115, “Accounting**forCertain Investments in Debt and Equity Securities*.*”  The Company’s investments at June 30,2008 and December 31, 2007, consisting entirely of student loanauction-rate securities (“SLARS”), were classified as available-for-sale at thetime of purchase.  The Companyre-evaluates such designation at each reporting date.  Investments are reported at fair value withany unrealized holding gains or losses included in accumulated othercomprehensive income or loss, a component of shareholders’ equity, net of tax,until realized.  Realized gains or losseson the sale of investments are determined using the specific-identificationmethod and have not historically been material.

 

The par and fair values of the Company’s investmentsare as follows (in thousands):

 
| **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| **Par Value**          | ** ** | **Unrealized  Loss**            | ** ** | **Fair  Value** | ** ** | **Par Value** | ** ** | **Unrealized  Gain (Loss)** | ** ** | **Fair Value** | ** ** |
| $                           | 6,950      |                            | $          | (405 | ) | $ | 6,545 |   | $ | 17,600 |   | $ | — |   | $ | 17,600 |   |
|                             |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

TheCompany assesses other-than-temporary impairment of its investments inaccordance with Financial Accounting Standards Board Staff Position No. 115-1, “The Meaningof Other-Than-Temporary Impairment and its Application to Certain Investments.”  The Company evaluates its investmentsperiodically for possible other-than-temporary impairment by reviewing factorssuch as the length of time and extent to which fair value has been below costbasis, the financial condition of the issuer and the Company’s ability andintent to hold the investment for a period of time which may be sufficient foranticipated recovery of market value. The Company records an impairment charge to the extent that the carryingvalue of available-for-sale securities exceeds the estimated fair market valueof the securities and the decline in value is determined to beother-than-temporary.  For the three- andsix-month periods ended June 30, 2008 and 2007, the Company did notrecognize any other-than-temporary impairment charges on its investments.

 

The Company’s SLARS are structuredwith short-term interest rates that are reset through an auction process at 28–dayintervals, but with contractual debt maturities that can be well in excess of22 years.  Historically, the Company hashad the option to liquidate its SLARS whenever the interest rates on thesesecurities were reset.  Accordingly, suchsecurities were classified as short-term at December 31, 2007.  During January 2008, the Company beganto liquidate its SLARS at each interest rate reset date in anticipation ofpaying a special cash dividend of $0.25 per share on February 28, 2008,totaling approximately $15.7 million (see Note 3).  The Company had successful auctions on thesesecurities with scheduled 28-day reset dates through mid-February 2008, atwhich time the Company had liquidated approximately $11.6 million of itsportfolio.  Furthermore, there were 

 

7

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successful auctions during January 2008 foreach security the Company currently holds. Accordingly, the Company determined that there was no impairment ofthese investments at December 31, 2007. The Company encountered its first failed auction in mid-February 2008,as theamount of securities submitted for sale in those auctions exceeded the amountof bids. Subsequently, the Company has not had a successful auctionrelated to the remaining SLARS it currently holds.  Given the continued auction failuresassociated with these securities and the uncertainty as to when liquidity willreturn to the SLARS market, the Company classified these securities aslong-term at June 30, 2008.

 

The Company’s SLARSconsist of the following taxable issues (in thousands) at June 30, 2008:

 
| **Security (Maturity)**                          | ** ** | **Current   Interest Rate** | ** ** | **Next Interest  Rate Reset Date** | ** ** | **Par  Value** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------------|------------|----------------|------------|-----------------|------------|
| SLM Student Loan Trust 2003-5 A-9   (6/17/2030)       |       | 3.96%                                 |       | 8/11/08                                           |       | $              | 1,150      |            | $          | 1,100 |   |
|                                                  |       |                                  |       |                                              |       |           |       |            |       |   |   |
| Missouri Higher Ed Loan Auth 2001 B   (6/1/2031)      |       | 2.46%                                 |       | 8/12/08                                           |       | 1,000          |       | 938             |       |
|                                                  |       |                                  |       |                                              |       |           |       |            |       |
| Missouri Higher Ed Loan Auth 2002D   (7/1/2032)       |       | 2.73%                                 |       | 8/11/08                                           |       | 2,800          |       | 2,628           |       |
|                                                  |       |                                  |       |                                              |       |           |       |            |       |
| NELNET Education Loan Funding   2003-1 A-6 (7/1/2043) |       | 2.63%                                 |       | 8/05/08                                           |       | 1,000          |       | 922             |       |
|                                                  |       |                                  |       |                                              |       |           |       |            |       |
| Panhandle Plains Higher Ed Auth   2007 A-4 (8/1/2057) |       | 3.71%                                 |       | 8/06/08                                           |       | 1,000          |       | 957             |       |
|                                                  |       |                                  |       |                                              |       |           |       |            |       |
| Total                                                 |       |                                  |       |                                              |       | $              | 6,950      |            | $          | 6,545 |   |

 

The Company’s SLARS arecurrently AAA-rated by one or more rating agencies and are secured by pools ofstudent loans guaranteed by the U.S. Department of Education under the FederalFamily Education Loan Program.  Thisguarantee is based upon a sliding scale of 97% to 98% of the unpaid principalbalance of eligible student loans, plus accrued interest, when the guarantor’sclaims experience is less than 5% of the original principal amount of theloans, and decreases to 75% if the guarantor’s claims experience is greaterthan 9% of the original principal amount of the loans.

 

At December 31,2007, the fair values of the Company’s SLARS were based on market prices andbroker-dealer quotes at the reporting date. Given the absence of quotes from the Company’s broker-dealer and thelack of readily observable market quotes, the Company used valuation models forthe determination of fair value at June 30, 2008.  Based on management’s assessment, the Companyestimated the fair value of its SLARS to be approximately $6.55 million at June 30,2008.  As a result, the Company hasrecorded unrealized holding losses of approximately $0.1 million and $0.4million in accumulated other comprehensive loss, a component of shareholders’equity, related to the temporary impairment of its SLARS for the three- andsix-month periods ended June 30, 2008. The Company believes this temporary impairment is primarily attributableto the illiquidity of these securities and not to the underlying credit qualityof the issuers of its SLARS, which is further discussed above.  To date the Company has collected allinterest payable on all of its SLARS when due. For each unsuccessful auction, the interest rate moves to a maximum ratedefined for each security.  However, incertain situations, the maximum rate may be lower if historical average auctionrates exceeded defined short-term interest benchmarks. The principalassociated with failed auctions will not be accessible until a successfulauction occurs, a buyer is found outside of the auction process, the issuersredeem the securities, the issuers establish a different form of financing toreplace these securities, or final payments come due according to contractualmaturities ranging from 22 to 50 years. The Company currently expects that it will receive the principalassociated with its SLARS through one of the means described above.

 

The valuation models usedto estimate the fair value of the Company’s SLARS at June 30, 2008 includenumerous assumptions such as assessments of the underlying structure andcollateral of each security, default risk, liquidity risk, expected cash flows,discount rates, issuer credit ratings, workout periods and overall capitalmarket liquidity.  These assumptions andassessments are subject to uncertainties, are difficult to predict 

 

8

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and require significant judgment. The use of different assumptions, applying different judgment toinherently subjective matters and changes in future market conditions couldresult in significantly different estimates of fair value.  Although the Company currently believes thatthe decline in the fair value of these securities is temporary, there is a riskthat the decline in value may ultimately be deemed to beother-than-temporary.  Should the Companydetermine that the decline in value of these securities isother-than-temporary, it would result in a loss being recognized in itsconsolidated statements of income, which could be material.

 

*Fair Value Measurements*

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “FairValue Measurements,” which defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles, and expandsdisclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, butprovides guidance on how to measure fair value by providing a fair valuehierarchy used to classify the source of the information.  Except for the portion of SFAS No. 157that addresses nonfinancial assets and liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis,which has been deferred for one year, the Company adopted the provisions ofSFAS No. 157 on January 1, 2008. The Company is currently evaluating the requirements of SFAS No. 157that address nonfinancial assets and liabilities and has not yet determined theimpact on its consolidated financial statements.

 

SFAS No. 157establishes a three-level hierarchy that prioritizes the inputs to valuationtechniques used to measure the fair value of financial instruments.  The valuation hierarchy is based upon thetransparency of inputs to the valuation of an asset or liability as of the measurementdate.  The three levels are defined asfollows:

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

 

A financialinstrument’s categorization within the valuation hierarchy is based upon thelowest level of input that is significant to the fair value measurement.  The Company’s assets or liabilities requiredto be measured at fair value on a recurring basis within the valuationhierarchy of SFAS No. 157 consist entirely of its student loanauction-rate securities, or SLARS.  TheCompany’s SLARS are classified within Level 3 of the fair value hierarchybecause there is currently limited, or no, trading activity due to continuedfailed auctions and therefore such securities have little, or no, pricetransparency.  A variety of factors arereviewed and monitored to assess fair value of the Company’s SLARS, as furtherdiscussed above under *Investments*.

 

9

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The following table presents a reconciliation for allfinancial instruments measured at fair value on a recurring basis usingsignificant unobservable inputs (Level 3) for the three- and six-month periodsended June 30, 2008 (in thousands):

 
| ** **                                       | ** ** | **Long-term  Investments**                            | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                       | ** ** | **Three months  ended June 30,  2008** | ** ** | **Six months  ended June 30,  2008** | ** ** |
| Balance, December 31, 2007                  |       | $                                                     | —     |   | $ | — |   |
| Impact of adoption of SFAS No. 157          |       | —                                                |       | — |   |
| Beginning Balance                                |       | $                                                     | 6,654      |   | $ | — |   |
| Total losses (realized/unrealized):              |       |                                                  |       |   |   |
| Included in earnings                             |       | —                                                |       | — |   |
| Included in accumulated other comprehensive loss |       | (109                                                  | )          | (405 | ) |
| Purchases, issuances and settlements             |       | —                                                |       | — |   |
| Sales and maturities                             |       | —                                                |       | — |   |
| Transfers in and/or out of Level 3               |       | —                                                |       | 6,950 |   |
| Balance, June 30, 2008                      |       | $                                                     | 6,545      |   | $ | 6,545 |   |

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value.  Unrealized gains and losses onitems for which the fair value option has been elected are reported inearnings.  SFAS No. 159 does not affect any existing accountingliterature that requires certain assets and liabilities to be carried at fairvalue.  The Company did not elect tochoose the fair value option and record unrealized gains and losses in earningsfor any of its financial instruments. Accordingly, the adoption of SFAS No. 159 on January 1, 2008did not have any impact on the unaudited consolidated financial statements ofthe Company.

 

*Concentrationof credit risk*

 

Financial instruments that potentially subject the Companyto significant concentrations of credit risk consist primarily of cash and cashequivalents, investments in student loan auction-rate securities, or SLARS, andaccounts receivable.  The Companymaintains cash balances in various domestic bank accounts above the FederalDeposit Insurance Corporation (“FDIC”) insurance limits.  The Company attempts to limit its exposure tocredit loss by depositing its cash with high credit quality financialinstitutions.  At June 30, 2008, theamount of cash in domestic bank accounts above FDIC limits was approximately$40.3 million.  The Company performsongoing credit evaluations of its customers and generally requires nocollateral to secure accounts receivable.

 

The Company is subject to concentration of credit risk andinterest rate risk related to its long-term investments, which consistedentirely of SLARS at June 30, 2008. See discussion above under *Investments*.

 

10

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#### *Earningsper share*

#### * *

Basic earnings per share arecalculated on the basis of the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share are calculated on the basis of the weighted average numberof common shares outstanding during the period and common stock equivalentsthat would arise from the exercise of stock options or the issuance ofrestricted stock awards to employees and nonemployee directors using thetreasury stock method.  The followingtable sets forth the computation of basic and diluted earnings per share (inthousands, except per share amounts):

 
| ** **                                | ** ** | **Three months   ended June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                         | ** ** | **2007**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Numerator:**                            |       |                                             |       |                                     |       |   |   |   |   |
| Net income                                |       | $                                                | 3,180      |                                     | $          | 2,752 |   | $ | 6,168 |   | $ | 5,498 |   |
| **Denominator:**                          |       |                                             |       |                                     |       |   |   |   |   |
| Weighted average shares – basic      |       | 62,497                                           |       | 61,769                                   |       | 62,309 |   | 61,711 |   |
| Stock options and restricted stock awards |       | 459                                              |       | 487                                      |       | 486 |   | 402 |   |
| Weighted average shares – diluted    |       | 62,956                                           |       | 62,256                                   |       | 62,795 |   | 62,113 |   |
|                                      |       |                                             |       |                                     |       |   |   |   |   |
| **Basic earnings per share:**             |       |                                             |       |                                     |       |   |   |   |   |
| Net Income                                |       | $                                                | 0.05       |                                     | $          | 0.04 |   | $ | 0.10 |   | $ | 0.09 |   |
| **Diluted net income per share:**         |       |                                             |       |                                     |       |   |   |   |   |
| Net Income                                |       | $                                                | 0.05       |                                     | $          | 0.04 |   | $ | 0.10 |   | $ | 0.09 |   |

 

Outstanding stockoptions totaling approximately 20,000 shares for each of the three- and six-monthperiods ended June 30, 2008 were not included in the computation ofdiluted weighted average shares outstanding because their exercise prices werein excess of the average stock price of the Company during the periods, andwould result in the options being anti-dilutive.  Outstanding stock options totalingapproximately 0.3 million shares during the three- and six-month periods ended June 30,2007 were not included in the computation of diluted weighted average sharesoutstanding because their exercise prices were in excess of the average stockprice of the Company during the periods, and would result in the options beinganti-dilutive.

 

*RecentAccounting Pronouncements*

 

In May 2008,the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles.”  SFAS No. 162is intended to improve financial reporting by identifying a consistentframework, or hierarchy, for selecting accounting principles to be used inpreparing financial statements that are presented in conformity with generallyaccepted accounting principles in the United States for non-governmentalentities.  SFAS No. 162 is effective60 days following approval by the Securities and Exchange Commission of thePublic Company Accounting Oversight Board’s amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.”  The Company does not expectSFAS No. 162 to have a material impact on the preparation of itsconsolidated financial statements.

 

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**2. OUTSOURCED GOVERNMENT PORTAL CONTRACTS**

 

The Company’s outsourced government portal contracts generally have aninitial term of three to five years with provisions for renewals for variousperiods at the option of the government. The Company’s primary business obligation under these contracts is todesign, build and operate Internet-based portals on behalf of governmentsdesiring to provide access to government information and to completegovernment-based transactions online. NIC typically markets the services andsolicits users to complete government-based transactions and to enter intosubscriber contracts permitting the user to access the portal and thegovernment information contained therein in exchange for transactional and/orsubscription user fees.  The Companyenters into separate agreements with various agencies and divisions of thegovernment to provide specific services and to conduct specific transactions.These agreements preliminarily establish the pricing of the electronictransactions and data access services the Company provides and the division ofrevenues between the Company and the government agency. The government mustapprove prices and revenue sharing agreements.

 

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

 

At June 30, 2008, the Company was bound by performance bondcommitments totaling approximately $3.3 million on certain portal outsourcingcontracts.  Under a typical portalcontract, the Company is required to fully indemnify its government clientsagainst claims that the Company’s services infringe upon the intellectualproperty rights of others and against claims arising from the Company’sperformance or the performance of the Company’s subcontractors under thecontract.

 

The following is a summary of the Company’s twenty-one outsourced stategovernment portal contracts at June 30, 2008:

 
| **NIC Subsidiary**              | ** ** | **Portal Web Site (State)**   | ** ** | **Year  Services  Commenced** | ** ** | **Contract Expiration Date  (Renewal Options Through)**                                                               |
|---------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
| NICUSA                          |       | www.WV.gov (West Virginia)    |       | 2007                          |       | 6/30/2008 (Contract has been temporarily extended to  allow the state time to finalize contract terms and conditions) |
| 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                          |       | 7/15/2009                                                                                                             |
| 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                          |       | 6/30/2009                                                                                                             |
| 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                          |       | 6/30/2011 (6/30/2015)                                                                                                 |
| Utah Interactive                |       | www.Utah.gov (Utah)           |       | 1999                          |       | 5/6/2009                                                                                                              |
| Maine Information Network       |       | www.Maine.gov (Maine)         |       | 1999                          |       | 3/14/2012 (3/14/18)                                                                                                   |
| Arkansas Information Consortium |       | www.Arkansas.gov (Arkansas)   |       | 1997                          |       | 6/30/2010                                                                                                             |
| Iowa Interactive                |       | www.Iowa.gov (Iowa)           |       | 1997                          |       | 3/31/2011 (3/31/2012)                                                                                                 |
| Virginia Interactive            |       | www.Virginia.gov (Virginia)   |       | 1997                          |       | 8/31/2012                                                                                                             |
| Indiana Interactive             |       | www.IN.gov (Indiana)          |       | 1995                          |       | 6/30/2010 (6/30/2014)                                                                                                 |
| Nebraska Interactive            |       | www.Nebraska.gov (Nebraska)   |       | 1995                          |       | 1/31/2010                                                                                                             |
| Kansas Information Consortium   |       | www.Kansas.gov (Kansas)       |       | 1992                          |       | 12/31/2009                                                                                                            |

 

During the second quarterof 2008, the Company received one-year contract extensions from the states ofSouth Carolina and Oklahoma, and a two-year contract extension from the stateof Arkansas. The Company 

 

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also received a newthree-year contract from the state of Idaho, which includes options for thegovernment to extend the contract for two additional two-year terms.

 

**3. SPECIAL CASH DIVIDEND**

 

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

 

The dividend may resultin a partial return of capital to shareholders, with the balance being taxableto shareholders as a qualified dividend. The exact amount of the return of capital, if any, is dependent on the earningsof the Company, computed on a tax basis, through the end of its 2008 fiscalyear.

 

**4.  SHAREHOLDERS’ EQUITY – TREASURY SHARES**

 

During the second quarterof 2008, the Company was informed that the trustees of the National InformationConsortium Voting Trust (the “Voting Trust”) dissolved the Voting Trust as of June 20,2008.  The Voting Trust, which wasmanaged independently of NIC, was established on June 30, 1998 by theoriginal investors of the Company and consisted of 142 beneficiaries.  The Voting Trust held approximately 21.4 millionshares of NIC common stock, or approximately 34 percent, of total sharesoutstanding.  Of this balance, 116,441shares were held on behalf of the Company by the Voting Trust, and have beenrecorded as treasury stock with an assigned value of $168,000 in theconsolidated balance sheets.  Upon theCompany’s exchange of Voting Trust Units for NIC common stock, which isanticipated to occur during the third quarter of 2008, the Company expects toretire these treasury shares.

 

**5.  COMMITMENTS AND CONTINGENCIES**

 

*SECInvestigation*

 

As furtherdiscussed in Note 8 in the Notes to the Consolidated Financial Statementsincluded in the Company’s Form 10-K for the year ended December 31,2007, filed with the SEC on March 17, 2008, the Company has been thesubject of an informal SEC inquiry of expense reporting by certain officers ofthe Company and certain potentially related matters. In connection with thatinquiry, a review was undertaken by the Audit Committee of the Company’s Boardof Directors, with the assistance of outside, independent counsel, whichfocused on such expense reporting. The review revealed that expensereimbursement deficiencies occurred during the period from January 2004through October 2006 related to Jeffery S. Fraser, who was then the Company’sChief Executive Officer, that these expense reimbursement deficiencies wereisolated to Mr. Fraser and that the amount of such deficiencies was notmaterial to the Company’s financial condition or results of operations.  During the second quarter of 2008, theCompany received notice from the SEC that a formal order of investigation hasbeen issued with respect to these matters. As is frequently the case in such situations, the SEC has taken the stepof obtaining a formal order of investigation to ensure the thoroughness of itsinvestigation.  The Company believes theinvestigation conducted by NIC’s Audit Committee was thorough and independentand it is not anticipated that the SEC investigation will reveal anysignificant additional instances of misreporting of expenses by employees.

 

*Litigation*

 

The Company isinvolved from time to time in legal proceedings and litigation arising in theordinary course of business. However, the Company is not currently involvedwith any legal proceedings.

 

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**6.  REPORTABLE SEGMENTSAND RELATED INFORMATION**

 

The Company’s two reportable segments consist of its Outsourced Portalbusinesses and Software & Services businesses.  The Outsourced Portals segment includes theCompany’s subsidiaries operating outsourced government portals and thecorporate divisions that directly support portal operations.  The Software & Services segmentprimarily includes the Company’s UCC and corporate filings software developmentbusiness (NIC Conquest) and ethics & elections filings business (NICTechnologies).  Each of the Company’sSoftware & Services businesses is an operating segment and has beenaggregated to form the Software & Services reportable segment.Unallocated corporate-level expenses are reported in the reconciliation of thesegment totals to the related consolidated totals as “Other Reconciling Items.”  There have been no significant intersegmenttransactions for the periods reported.

 

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

 

The table below reflectssummarized financial information concerning the Company’s reportable segmentsfor the three months ended June 30 (in thousands):

 
| ** **                            | ** ** | **Outsourced  Portals** | ** ** | **Software &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2008**                              | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                              |       | $                       | 24,621     |                              | $          | 1,081                         |       | $                       | —     |   | $ | 25,702 |   |
|                                  |       |                    |       |                              |       |                          |       |                    |       |
| Costs &  expenses            |       | 14,048                  | ** ** | 952                               |       | 4,535                         |       | 19,535                  |       |
| Depreciation &  amortization |       | 787                     | ** ** | 24                                |       | 88                            |       | 899                     |       |
| Operating income  (loss)              |       | $                       | 9,786      | ** **                        | $          | 105                           |       | $                       | (4,623     | ) | $ | 5,268 |   |
|                                  |       |                    |       |                              |       |                          |       |                    |       |
| **2007**                              | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                              |       | $                       | 20,610     |                              | $          | 866                           |       | $                       | —     |   | $ | 21,476 |   |
|                                  |       |                    |       |                              |       |                          |       |                    |       |
| Costs &  expenses            |       | 11,531                  | ** ** | 556                               |       | 4,270                         |       | 16,357                  |       |
| Depreciation &  amortization |       | 539                     | ** ** | 6                                 |       | 32                            |       | 577                     |       |
| Operating income  (loss)              |       | $                       | 8,540      | ** **                        | $          | 304                           |       | $                       | (4,302     | ) | $ | 4,542 |   |

 

The following is a reconciliation of total segment operating income tototal consolidated income before income taxes for the three months ended June 30(in thousands):

 
| ** **                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating  income for reportable segments |       | $        | 5,268      |     | $          | 4,542 |   |
| Interest income                                 |       | 110      |       | 317      |       |
|                                            |       |     |       |     |       |
| Consolidated  income before income taxes        |       | $        | 5,378      |     | $          | 4,859 |   |

 

14

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The table below reflectssummarized financial information concerning the Company’s reportable segmentsfor the six months ended June 30 (in thousands):

 
| ** **                            | ** ** | **Outsourced  Portals** | ** ** | **Software &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2008**                              | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                              |       | $                       | 48,417     |                              | $          | 1,964                         |       | $                       | —     |   | $ | 50,381 |   |
|                                  |       |                    |       |                              |       |                          |       |                    |       |
| Costs &  expenses            |       | 27,667                  | ** ** | 1,675                             |       | 9,294                         |       | 38,636                  |       |
| Depreciation &  amortization |       | 1,530                   | ** ** | 42                                |       | 173                           |       | 1,745                   |       |
| Operating income  (loss)              |       | $                       | 19,220     | ** **                        | $          | 247                           |       | $                       | (9,467     | ) | $ | 10,000 |   |
|                                  |       |                    |       |                              |       |                          |       |                    |       |
| **2007**                              | ** ** | ** **              | ** ** |                              |       | ** **                    | ** ** | ** **              | ** ** |
| Revenues                              |       | $                       | 40,478     |                              | $          | 1,632                         |       | $                       | —     |   | $ | 42,110 |   |
|                                  |       |                    |       |                              |       |                          |       |                    |       |
| Costs &  expenses            |       | 22,876                  | ** ** | 1,105                             |       | 8,421                         |       | 32,402                  |       |
| Depreciation &  amortization |       | 1,037                   | ** ** | 12                                |       | 63                            |       | 1,112                   |       |
| Operating income  (loss)              |       | $                       | 16,565     | ** **                        | $          | 515                           |       | $                       | (8,484     | ) | $ | 8,596 |   |

 

The following is a reconciliation of total segment operating income tototal consolidated income before income taxes for the six months ended June 30(in thousands):

 
| ** **                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating  income for reportable segments |       | $        | 10,000     |     | $          | 8,596 |   |
| Interest income                                 |       | 443      |       | 897      |       |
| Other expense,  net                             |       | (20      | )          | —   |       |
|                                            |       |     |       |     |       |
| Consolidated  income before income taxes        |       | $        | 10,423     |     | $          | 9,493 |   |

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

***FORWARD-LOOKING STATEMENTS***

 

“Safe Harbor”statement under the Private Securities Litigation Reform Act of 1995:Statements in this Quarterly Report on Form 10-Q regarding NIC and itsbusiness, which are not current or historical facts, are “forward-lookingstatements” that involve risks and uncertainties.   Certain matters discussed in this report mayconstitute forward-looking statements within the meaning of the federalsecurities laws that inherently include certain risks and uncertainties. Forward-lookingstatements include, but are not limited to, statements of plans and objectives,statements of future economic performance or financial projections, statementsof assumptions underlying such statements, and statements of the Company’s ormanagement’s intentions, hopes, beliefs, expectations or predictions of thefuture. For example, statements like we “expect,” we “believe,” we “plan,”we “intend” or we “anticipate” are forward-looking statements. Investors shouldbe aware that our actual operating results and financial performance may differmaterially from our expressed expectations because of risks and uncertaintiesabout the future including those risks discussed in our 2007 Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on March 17, 2008 and inthis Quarterly Report on Form 10-Q. In addition, we will not necessarily update the information in thisQuarterly Report on Form 10-Q if any forward-looking statement later turnsout to be inaccurate.  Managementcontinuously updates and revises these estimates and assumptions based onactual conditions experienced.  However,it is not practicable to publish all revisions and, as a result, no one shouldassume that results projected in or contemplated by the forward-lookingstatements will continue to be accurate in the future.  Investors are cautioned not to put unduereliance on any forward-looking statement.

 

There are a number ofimportant factors that could cause actual results to differ materially fromthose suggested or indicated by such forward-looking statements.  These include, among others, the success ofthe Company in signing contracts with new states and government agencies,including continued favorable government legislation; NIC’s ability to developnew services; existing states and agencies adopting those new services;acceptance of eGovernment services by businesses and citizens; competition; andgeneral economic conditions and the other factors discussed under “CAUTIONSABOUT FORWARD LOOKING STATEMENTS” in Part I,  “RISK FACTORS” in Part I, Item 1A of NIC’s2007 Annual Report on Form 10-K filed on March 17, 2008with the Securities and Exchange Commission (“SEC”), and “RISK FACTORS” in Part II,Item 1A of this Form 10-Q. Investors should read all of these discussions of risks carefully.

 

**WHAT WEDO – AN EXECUTIVE SUMMARY**

 

We area leading provider of eGovernment services that help governments use theInternet to reduce costs and provide a higher level of service to businessesand citizens. We accomplish this currently through two divisions: our coreportal outsourcing businesses and our software & services businesses.

 

In ourcore business, portal outsourcing, we enter into contracts primarily with stategovernments and design, build and operate Web-based portals on their behalf. Weenter into long-term contracts, typically three to five years, and manageoperations for each government partner through separate subsidiaries thatoperate as decentralized businesses with a high degree of autonomy. Our portalsconsist of Web sites and applications that we build, which allow businesses andcitizens to access government information online and complete transactions,including applying for a permit, retrieving driver’s license records or filinga form or report. We help increase our government partners’ revenues byexpanding the distribution of their information assets and increasing thenumber of financial transactions conducted with governments.  We do this by marketing portal services andsoliciting users to complete government-based transactions and to enter intosubscriber contracts that permit users to access the portal and the governmentinformation contained therein in exchange for transactional and/or subscriptionuser fees. We are typically responsible for funding up-front investment and ongoingoperational costs of the government portals. Our unique self-funding business model allows us to reduce ourgovernment partners’ financial and technology risks and obtain revenues bysharing in the fees 

 

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generated from eGovernmentservices. Our partners benefit because they gain a centralized,customer-focused presence on the Internet. Businesses and citizens gain afaster, more convenient and more cost-effective means to interact withgovernments.

 

Onbehalf of our government partners, we enter into separate agreements withvarious agencies and divisions of the government to provide specific servicesand to conduct specific transactions. These agreements preliminarily establishthe pricing of the transaction and data access services we provide and thedivision of revenues between the Company and the government agency. Thegovernment must approve prices and revenue sharing agreements. We generally ownall the applications developed under these contracts. After completion of adefined contract term, the government agency typically receives a perpetual,royalty-free license to the applications for use only. If our contract were notrenewed after a defined term, the government agency would be entitled to takeover the portal in place with no future obligation of the Company. In somecases, we enter into contracts to provide consulting, development and portalmanagement services to governments in exchange for an agreed-upon fee.

 

Currently, we havecontracts to provide portal outsourcing services for 21 states.  Our closest competitor operates one stateportal.

 

# **REVENUERECOGNITION**

# ** **

Weclassify our revenues and cost of revenues into two categories: (1) portaland (2) software & services. The portal category includes revenues and cost of revenues primarilyfrom our subsidiaries operating government portals on an outsourced basis.  The software & services categoryincludes revenues and cost of revenues primarily from our UCC and corporatefilings and ethics & elections businesses.  We currently derive revenue from two mainsources: transaction-based fees and fees for application development.  Each of these revenue types and the correspondingbusiness models are further described below.

 

#### *Our portal outsourcing businesses*

#### * *

                We categorize our portal revenues according to theunderlying source of revenue.  A briefdescription of each category follows:

 

·                  DMVtransaction-based: these are transaction fees from the sale of electronicaccess to driver history records, referred to as DMV records, from our stateportals to data resellers, insurance companies and other pre-authorizedcustomers on behalf of our state partners, and are generally recurring.

 

·                  Non-DMVtransaction-based: these are transaction fees from sources other than thesale of DMV records, for transactions conducted by business users and consumerusers through our portals, and are generally recurring.  For a representative listing of non-DMVservices we currently offer through our portals, refer to Part I, Item 1in our Form 10-K for the year ended December 31, 2007, filed with theSEC on March 17, 2008.

 

·                  Softwaredevelopment & portal management: these are fees from theperformance of software development projects and other time and materials orfixed fee services for our government partners. While we actively market portal software development services, they donot have the same degree of predictability as our transaction-based or portalmanagement revenues.

 

*Oursoftware & services businesses*

 

Ethics &elections

 

Our ethics &elections business derives the majority of its revenues from time and materialsapplication development and maintenance outsourcing contracts and recognizesrevenues as services are 

 

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provided.  At June 30, 2008, our ethics &elections business was primarily engaged in servicing its contracts with theFederal Election Commission and the state of Michigan.

 

# **UCC and corporate filings**

# ** **

OurUCC and corporate filings software development business derives the majority ofits revenues from fixed-price application development contracts and recognizesrevenues on the percentage of completion method.  At June 30, 2008, this business wasprimarily engaged in servicing its contract with the California Secretary ofState and no longer markets its applications and services in respect of newengagements.

 

**CRITICAL ACCOUNTING POLICIES**

 

There have been nomaterial changes to our critical accounting policies and estimates from theinformation provided in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” included in our Form 10-Kfor the year ended December 31, 2007, filed with the SEC on March 17,2008, except as follows:

 

*Valuationof Investments*

 

AtJune 30, 2008, our long-term investments consist entirely of student loanauction-rate securities, or SLARS.  Asfurther discussed in Note 1 in the Notes to the Unaudited ConsolidatedFinancial Statements included in this Form 10-Q, due to the absenceof quotes from our broker-dealer and the lack of readily observable marketquotes, we used valuation models to estimate the fair value of our SLARS at June 30,2008.  These valuation models includenumerous assumptions such as assessments of the underlying structure andcollateral of each security, default risk, liquidity risk, expected cash flows,discount rates, issuer credit ratings, workout periods and overall capitalmarket liquidity.  These assumptions andassessments are subject to uncertainties, are difficult to predict and requiresignificant judgment.  The use of differentassumptions, applying different judgment to inherently subjective matters andchanges in future market conditions could result in significantly differentestimates of fair value.

 

Weassess other-than-temporary impairment of long-term investments in accordancewith FASB Staff Position No. 115-1, “The Meaning of Other-Than-TemporaryImpairment and its Application to Certain Investments.” This assessmentrequires significant judgment.  In makingthis determination, we employ a systematic methodology that considers availablequantitative and qualitative evidence in evaluating potential impairment of ourinvestments.  If the cost of aninvestment exceeds its fair value, we evaluate general market conditions,earnings performance, credit rating, asset quality, and other key measures forour investments.  We also consider theduration and extent to which the fair value has been less than cost, and ourability and intent to hold the investment. Once a decline in fair value is determined to be other-than-temporary,an impairment charge is recorded, a loss is recognized in our consolidatedstatements of income and a new costbasis in the investment is established. We have not recorded any other-than-temporary impairments on ourinvestments.  However, if market,industry and/or investee conditions deteriorate, we may record impairments inthe future, which could be material.

 

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# **RESULTS OF OPERATIONS**

# ** **

The following discussionsummarizes the significant factors affecting operating results for the three-and six-month periods ended June 30, 2008 and 2007.  This discussion and analysis should be readin conjunction with our unaudited consolidated interim financial statements andthe related notes included in this Form 10-Q.

 
| ** **                                                              | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **Key Financial Metrics**                                     | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue growth –  outsourced portals                               |       | 19%                                             |       | 16%                                           |       | 20% |   | 16% |   |
| Same state  revenue growth – outsourced portals                    |       | 13%                                             |       | 14%                                           |       | 13% |   | 15% |   |
| Recurring portal  revenue %                                             |       | 92%                                             |       | 95%                                           |       | 91% |   | 94% |   |
| Gross profit % -  outsourced portals                                    |       | 47%                                             |       | 49%                                           |       | 47% |   | 48% |   |
| Selling &  administrative expenses as % of portal revenues     |       | 24%                                             |       | 26%                                           |       | 24% |   | 26% |   |
| Operating income  margin % (operating income as a % of portal revenues) |       | 21%                                             |       | 22%                                           |       | 21% |   | 21% |   |

 

PORTALREVENUES. In the analysis below, we have categorized our portal revenuesaccording to the underlying source of revenue (in thousands) with thecorresponding percentage change from the prior year period.

 
| ** **                                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                        | ** ** | **%  Change**                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **%  Change** | ** ** | **2007** | ** ** |
| DMV transaction-based                              |       | $                                               | 11,790     |                                          | 5%         |   | $ | 11,275 |   | $ | 23,700 |   | 4% |   | $ | 22,736 |   |
| Non-DMV  transaction-based                         |       | 9,050                                           |       | 25%                                           |       | 7,266 |   | 16,627 |   | 25% |   | 13,281 |   |
| Software  development & portal management |       | 3,781                                           |       | 83%                                           |       | 2,069 |   | 8,090 |   | 81% |   | 4,461 |   |
|                                               |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Total                                              |       | $                                               | 24,621     |                                          | 19%        |   | $ | 20,610 |   | $ | 48,417 |   | 20% |   | $ | 40,478 |   |

 

Portal revenues in thecurrent quarter increased 19%, or approximately $4.0 million, over the prioryear quarter.  This increase was mainlyattributable to a 13% increase, or approximately $2.6 million, in same stateportal revenues (outsourced portals in operation and generating recurringrevenues for two full periods), and a 6% increase, or approximately $1.4million, in revenues from our newer portals, including Arizona ($1.0 million),which began to generate revenues in October 2007, and West Virginia ($0.4million), which began to generate DMV revenues in February 2008.

 

Our Indiana portalsubsidiary signed a new long-term contract with the state of Indiana thatcommenced on July 1, 2006.  Thecontract is based on a funding model that includes recurring fixed monthly feesfor baseline services and primarily project-based pricing for variableservices.  Historically, the majority ofrevenues under this contract were DMV and non-DMV transaction-based.  Under the new contract, the majority ofrevenues are classified as software development & portalmanagement.  Prior to July 1, 2006,we defined same state revenues as those from states in operation and generatingDMV revenues for two full periods. Because the baseline revenues from the new Indiana contract arerecurring, we have continued to include Indiana portal revenues in thecalculation of same state revenue growth even though we no longer earn DMVtransaction-based revenues under the contract. Same state portal revenues in the current quarter increased 13% over theprior year quarter due to increased transaction revenues from our Colorado,Indiana, Montana, Oklahoma, and Virginia portals, among others.

 

Excluding Indiana, samestate portal revenues in the current quarter increased 11% over the prior yearquarter, with same state DMV transaction-based revenues increasing 1% and samestate non-DMV transaction-based revenues increasing 25% (primarily due to theaddition of several new revenue generating applications in existingportals).  Our same state revenue growthin the current quarter was lower than the growth we achieved in the prior 

 

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year quarter primarilydue to decreases in same state DMV and non-DMV transaction-based revenuegrowth.  Same state DMV revenue growth inthe current quarter was 1% compared to 10% in the prior year quarter. Thehigher growth in the prior year quarter was primarily due to the effect of DMVprice increases in three of our portal states that went into effect in late2006.  Absent DMV price increases, samestate DMV revenues have historically grown at a rate of 1% to 3% per year.  Same state non-DMV transaction based revenuegrowth was 37% in the prior year quarter.

 

Portal revenuesfor the six months in the current period increased 20%, or approximately $7.9million, over the prior year period.  Ofthis increase, 13%, or approximately $5.0 million, was attributable to anincrease in same state portal revenues and 7%, or approximately $2.9 million,was attributable to our new portals including Vermont ($0.3 million), whichbegan to generate revenues in March 2007, Arizona ($1.9 million), and WestVirginia ($0.7 million).  Consistent withour results in the current quarter, same state portal revenues in thecurrent-to-date period increased 13% over the prior year period.  Excluding Indiana, same state portal revenuesin the current year-to-date period increased 12% over the prior year period,with same state DMV transaction-based revenues increasing 1% and same statenon-DMV transaction-based revenues increasing 25%.

 

COST OF PORTALREVENUES.  Cost of portal revenues forthe current quarter increased 25%, or approximately $2.6 million, over theprior year quarter.  This increase wasattributable to a 14% increase, or approximately $1.5 million, in same statecost of portal revenues, and an 11% increase, or approximately $1.1 million, incost of portal revenues from our newer state portal businesses in Arizona andWest Virginia.

 

The increase insame state cost of portal revenues in the current quarter was partiallyattributable to additional personnel in several of our portals due to ourcontinued growth and reinvestment in our core business.  Also contributing to this increase was anincrease in bank fees.  A growingpercentage of our non-DMV transaction-based revenues are generated from onlineapplications whereby users pay for information or transactions via creditcards.  We typically earn a percentage ofthe credit card transaction amount, but also must pay an associated fee to thebank that processes the credit card transaction.  We earn a lower gross profit percentage onthese transactions as compared to our other non-DMV applications.  However, we plan to continue to implementthese services as they contribute favorably to our operating income growth.

 

Our portal grossprofit rate was 47% for the current quarter and 49% in the prior year quarter.We carefully monitor our portal gross profit percentage to strike the balance betweengenerating a solid financial return for our shareholders and delivering valueto our government partners through reinvestment in our portals (which webelieve also benefits our shareholders). We currently expect our portal gross profit percentage to range from 45%to 47% in 2008.

 

Cost of portalrevenues for the six months in the current period increased 23%, orapproximately $4.8 million, over the prior period.  Of this increase, 13%, or approximately $2.6million, was attributable to an increase in same state cost of portal revenues,and 10%, or approximately $2.2 million, was primarily attributable to our newArizona and West Virginia portals.  Ourportal gross profit rate for six months in the current year period was 47%compared to 48% in the prior year period, as cost of portal revenues grew at ahigher rate (23%) than portal revenues (20%) in the current period, as furtherdiscussed above.

 

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SOFTWARE &SERVICES REVENUES. In the analysis below, we have categorized our software &services revenues by type of business (in thousands), with the correspondingpercentage change from the prior year period.

 
| ** **                                             | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **2008**                              | ** ** | **%  Change**                       | ** ** | **2007** | ** ** | **2008** | ** ** | **%  Change** | ** ** | **2007** | ** ** |
| Ethics & elections                            |       | $                                     | 683        |                                | 11%        |   | $ | 614 |   | $ | 1,368 |   | 20% |   | $ | 1,142 |   |
| UCC & corporate filings software  development |       | 143                                   |       | (24)%                               |       |   | 189 |   | 294 |   | (19)% |   | 361 |   |
| Other                                                  |       | 255                                   |       | 305%                                |       | 63 |   | 302 |   | 134% |   | 129 |   |
|                                                   |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |
| Total                                                  |       | $                                     | 1,081      |                                | 25%        |   | $ | 866 |   | $ | 1,964 |   | 20% |   | $ | 1,632 |   |

 

Software &services revenues in the current quarter and year-to-date periods increased 25%and 20%, respectively, or approximately $0.2 million and $0.3 million, over theprior year periods.  This increase wasprimarily attributable to revenues generated from a consulting servicesengagement with a private company and to increased revenues from a contractrenewal with the state of Michigan in our ethics and elections business thatenhanced revenues we earn.

 

SELLING &ADMINISTRATIVE.  Selling & administrative expenses in thecurrent quarter and year-to-date periods increased 7% and 12%, respectively, orapproximately $0.4 million and $1.2 million, over the prior year periods.  The increase in selling &administrative expenses in the current quarter is primarily attributable toadditional personnel to support and enhance corporate wide informationtechnology security and portal operations, in addition to sales and marketinggrowth initiatives.  Also, as discussedin Note 5 in the Notes to the Unaudited Consolidated Financial Statements inthis Form 10-Q and in Item 1A, Item 3 and Note 8 in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2007, filed withthe SEC on March 17, 2008, we havebeen the subject of an informal SEC inquiry of expense reporting by certainofficers of our Company and certain potentially related matters.  In connection with the SEC inquiry, a reviewwas undertaken by the Audit Committee of our Board of Directors, with theassistance of outside, independent counsel, which focused on such expensereporting.  The SEC issued a formal orderof investigation in the second quarter of 2008. Selling & administrative expenses for the six-month periodended June 30, 2008 includes approximately $0.5 million of legal fees andother expenses incurred in connection with the ongoing SEC investigation andthe Audit Committee review.  We couldincur significant legal fees and other expenses in connection with the ongoingSEC investigation.  The remainingyear-to-date increase in selling & administrative expenses isprimarily attributable to additional personnel across our corporate-leveldivisions, as further discussed above.

 

As a percentage of portal revenues, selling &administrative expenses were 24% in the current quarter and year-to-dateperiods compared to 26% in the prior year periods.  We currently expect selling & administrative costs as apercentage of portal revenue to range from 24% to 25% in 2008.

 

DEPRECIATION & AMORTIZATION.  Depreciation & amortization expensein the current quarter and year-to-date periods increased 56% and 57%,respectively, or approximately $0.3 million and $0.6 million, over the prioryear periods.  The increase was primarilyattributable to capital expenditures in the current and prior periods fornormal fixed asset additions in our outsourced portal business, including Webservers, purchased software and office furniture and equipment to support andenhance corporate-wide information technology security and portal operations,in addition to capital expenditures for furniture, fixtures and leaseholdimprovements made in the second half of 2007 for our new corporateheadquarters.

 

As a percentage of portal revenues, depreciation &amortization was 4% in the current quarter and year-to-date periods compared to3% in the prior year periods.  Wecurrently expect depreciation & amortization expense as a percentageof portal revenues to range from 3% to 4% in 2008, as we will continue to makekey information technology infrastructure and security investments to supportthe long-term expansion of our portal business.

 

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INTEREST INCOME. Interest income reflects interest earned on our investable cash andinvestment portfolio. We currently expect interest income in 2008 to continueto be lower than in 2007, primarily because of the declining short-terminterest rate environment we are currently experiencing.

 

# **LIQUIDITY AND CAPITAL RESOURCES**

# ** **

*Operating Activities*

 

Net cash provided by operating activities was $8.9 million in thecurrent period as compared to $9.3 million in the prior year period.  The decrease in cash flow from operations inthe current period was primarily the result of a year-over-year increase inoperating income, excluding non-cash charges for depreciation &amortization and stock-based compensation, offset by an increase in accountsreceivable and the timing of payments to certain of our government partners,which affected accounts payable.  Wetypically see an increase in both accounts receivable and accounts payable inthe second quarter of every year due to increases in revenues across our portalbusinesses as compared to the fourth quarter of the previous year, which is ourseasonally lowest quarter due to the smaller number of business days and alower volume of business-to-government and citizen-to-government transactionsduring the holiday periods.  While ageneral increase in revenues in the current period contributed to the overallincrease in our accounts receivable (approximately $6.2 million overall), asubstantial portion of the increase (approximately $2.2 million) wasattributable to an increase in accounts receivable relating to our Indianaportal contract, which was collected during July 2008.

 

Accounts receivable in the prior year period decreased primarily due tothe timing of cash collections related to our Indiana portal contract(approximately $2.8 million) during the second quarter of 2007.  As discussed above, we signed a new contractwith the state of Indiana that commenced on July 1, 2006.  The new contract is based on a funding modelthat includes recurring fixed monthly fees for baseline services and primarilyproject-based pricing for variable services. As part of the transition process from the old contract to the newcontract, we had not yet been paid at the end of 2006 for services performedsince July 2006.

 

Accounts payable in the prior year period decreased by approximately$4.0 million in part due to a $2.5 million payment to the state of Indianafollowing the execution of the new portal contract discussed above.  In addition, accounts payable in the prioryear period decreased in part due to the timing of payments of year-end 2006tax receipts that were remitted to our government partners in early January 2007.

 

We had a history ofunprofitable operations prior to 2003 primarily due to operating lossesincurred in our software & services businesses.  These losses generated significant federaland state tax net operating losses, or NOLs. As a result of our NOL carryforwards, we are not currently payingfederal income taxes, with the exception of amounts relating to alternativeminimum tax, and are paying income taxes in only certain states.  This positively impacts our operating cashflow and will continue to positively impact our operating cash flow during theNOL carryforward periods.  Based on ourcurrent projections, we currently expect to fully utilize our federal NOLcarryforwards by the end of 2009.  Forthe six-month periods ended June 30, 2008 and 2007, combined federal andstate income tax payments totaled approximately $0.5 million and $0.6 million,respectively.

 

*Investing Activities*

 

Investing activities inthe current period primarily reflect the partial liquidation of our investmentportfolio to pay the $15.7 million special cash dividend in February 2008,and $2.2 million of capital expenditures, which were primarily for normal fixed asset additions in our outsourcedportal business, including Web servers, purchased software and officeequipment.  In addition, we capitalizedapproximately $0.4 million of internal use software development costs relatingto the standardization of customer management, billing and payment processingsystems that support our portal operations and accounting systems.  Cash provided by investing activitiesin the prior year period primarily reflects the liquidation of our investmentportfolio to pay the $46.7 million special cash dividend in February 2007,$1.7 million of capital expenditures, whichwere primarily for normal fixed asset additions in our outsourced portalbusiness.

 

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*Financing Activities*

 

Financing activities inthe current period primarily reflect payment of the $15.7 million special cashdividend in February 2008, partially offset by receipt of $1.9 million inproceeds from the exercise of employee stock options and $0.3 million inproceeds from our employee stock purchase program.  Financing activities in the prior year periodprimarily reflect payment of the $46.7 million special cash dividend in February 2007,partially offset by receipt of $0.5 million in proceeds from the exercise ofemployee stock options and $0.2 million in proceeds from our employee stockpurchase program.

 

*Liquidity*

 

We recognize revenueprimarily from providing outsourced government portal services net of thetransaction fees due to the government when the services are provided. The feesthat we must remit to the government are accrued as accounts payable andaccounts receivable at the time services are provided. As a result, tradeaccounts payable and accounts receivable reflect the gross amounts outstandingat the balance sheet dates.  Grossbillings for the three months ended June 30, 2008 and December 31,2007 were approximately $368.6 million and $303.8 million, respectively.  The Company calculates days sales outstandingby dividing trade accounts receivable at the balance sheet date by grossbillings for the period and multiplying the resulting quotient by the number ofdays in that period.  Days sales outstanding for thethree-month periods ended June 30, 2008 and December 31, 2007 was 8and 9, respectively.

 

We believe that workingcapital is an important measure of our short-term liquidity.  Working capital, defined as current assetsminus current liabilities, decreased to $39.6 million at June 30, 2008from $49.8 million at December 31, 2007. Our current ratio, defined as current assets divided by currentliabilities, at June 30, 2008 was 1.9 compared to 2.1 at December 31,2007.  The decrease in our workingcapital and current ratio was primarily attributable to the $15.7 millionspecial dividend paid out of the Company’s available cash andinvestments in thecurrent period as further discussed below and in Note 3 in the Notes toUnaudited Consolidated Financial Statements included in this Form 10-Q.  Furthermore, we classified our investments instudent loan auction rate securities, or SLARS, as long-term investments at June 30,2008, which decreased our working capital by approximately $6.5 million, asfurther discussed in Note 1 in the Notes to the Unaudited ConsolidatedFinancial Statements included in this Form 10-Q.

 

At June 30, 2008, our total cash and short-terminvestment balance was $41.6 million compared to $55.8 million at December 31,2007.  As further discussed in Note1 in the Notes to the Unaudited Consolidated Financial Statements included inthis Form 10-Q, during January 2008,we began to liquidate our short-term investments portfolio in anticipation ofpaying a $15.7 million special cash dividend on February 28, 2008.  These securities consist entirely of SLARS,which are currentlyAAA-rated by one or more credit rating agencies and are secured by poolsof student loans partially guaranteed by the U.S. Department of Education underthe Federal Family Education Loan Program. The auction process is designed toprovide a means by which these securities can be sold, and historically hasprovided a highly liquid market for these securities.  We had successful auctions on our SLARSthrough mid-February 2008, at which time we had liquidated approximately$11.6 million of our portfolio.  Weencountered our first failed auction in mid-February 2008, as the amount ofsecurities 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 par value of these securities we currently hold.  To date we have collected all interestpayable on all of our SLARS when due. The principal associated with failed auctions will not be accessibleuntil a successful auction occurs, a buyer is found outside of the auctionprocess, the issuers redeem the securities, the issuers establish a differentform of financing to replace these securities, or final payments come dueaccording to contractual maturities ranging from 22 to 50 years.  We currently expect that we will receive theprincipal associated with these SLARS through one of the means described above.

 

On February 28,2008, we paid a special cash dividend totalling approximately $15.7 million outof available cash and short-term investments. We do not believe that this dividend will have a significant effect onour future liquidity.  While the recentauction failures could limit our ability to liquidate our SLARS for some periodof time, we believe that our currently available liquid resources, coupled withthe unused portion of our line of credit of

 

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approximately $8.7 million and cashgenerated from operations, will be sufficient to meet our operatingrequirements, capital expenditure requirements and current growth initiativesfor at least the next twelve months without the need of additionalcapital.  However, we may need to raise additional capitalwithin the next twelve months to further:

 

·                  fund operations if unforeseen costs arise;

 

·                  support our expansion into other states andgovernment agencies beyond what is contemplated if unforeseen opportunitiesarise;

 

·                  expand our product and service offerings beyond whatis contemplated if unforeseen opportunities arise;

 

·                  respond to unforeseen competitive pressures; and

 

·                  acquire technologies beyond what is contemplated.

 

Any projections of future earnings andcash flows are subject to substantial uncertainty. If our cash, investments andcash generated from operations are insufficient to satisfy our liquidityrequirements, we may seek to sell additional equity securities or issue debtsecurities.  The sale of additionalequity securities could result in dilution to the Company’s shareholders.  There can be no assurance that financing willbe available in amounts or on terms acceptable to the Company, if at all.  Further, we may draw on the remaining unusedportion of our $10 million line of credit.

 

We issue letters ofcredit as collateral for performance on certain of our outsourced governmentportal contracts, as collateral for certain performance bonds and as collateralfor certain office leases.  Theseirrevocable letters of credit are generally in force for one year, for which wecurrently pay bank fees of 1% of face value per annum.  We had unused outstanding letters of credittotaling approximately $1.3 million at June 30, 2008.  We are not currently required to cashcollateralize these letters of credit. However, even though we currently expect to be profitable in fiscal 2008and beyond, we may not be able to sustain or increase profitability on aquarterly or annual basis.  We will needto generate sufficient revenues while containing costs and operating expensesif we are to achieve sustained profitability. If we are not able to sustain profitability, our cash collateralrequirements may increase.  Had we beenrequired to post 100% cash collateral at June 30, 2008 for the face valueof 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 wouldhave been classified as restricted cash.

 

At June 30, 2008, wewere bound by performance bond commitments totaling approximately $3.3 millionon certain government portal outsourcing contracts.  These performance bonds are collateralized bya $1 million letter of credit.  We havenever had any defaults resulting in draws on performance bonds or letters ofcredit.

 

*Off-Balance Sheet Arrangements,Contractual Obligations and Income Tax Uncertainties*

 

We do not haveoff-balance sheet arrangements that are not recorded or disclosed in ourfinancial statements.  While we havesignificant operating lease commitments for office space, those commitments aregenerally tied to the period of performance under related contracts.  We have income tax uncertainties ofapproximately $0.7 million at June 30, 2008.  These obligations are classified as otherlong-term liabilities in our consolidated balance sheet, as resolution isexpected to take more than a year.  Weestimate that these matters could be resolved in one to three years.  However, the ultimate timing of resolution isuncertain.

 

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**RECENT ACCOUNTING PRONOUNCEMENTS**

 

*Fair Value Measurements*

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” which definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 does notrequire any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy used to classify thesource of the information.  Except forthe portion of SFAS No. 157 that addresses nonfinancial assets andnonfinancial liabilities that are recognized or disclosed at fair value in thefinancial statements on a nonrecurring basis, which has been deferred for oneyear, we adopted this standard effective January 1, 2008.  The partial adoption of SFAS No. 157 didnot have a material impact on our consolidated financial statements.  We are currently evaluating the requirementsof SFAS No. 157 that address nonfinancial assets and liabilities and havenot yet determined the impact on our consolidated financial statements.

 

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

 

In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples.”  SFAS No. 162 isintended to improve financial reporting by identifying a consistent framework,or hierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with generally acceptedaccounting principles in the United States for non-governmental entities.  SFAS No. 162 is effective 60 daysfollowing approval by the Securities and Exchange Commission of the Public CompanyAccounting Oversight Board’s amendments to AU Section 411, “The Meaning ofPresent Fairly in Conformity with Generally Accepted Accounting Principles.”  We do not expect SFAS No. 162 to have amaterial impact on the preparation of our consolidated financial statements.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

INTEREST RATE RISK.  As furtherdiscussed above in the Liquidity section of Item 2, our long-term investmentsconsist entirely of student loan auction-rate securities, or SLARS, at June 30,2008.  Our SLARS are structured with short-terminterest rates that are reset through an auction process at 28-day intervals,but with contractual debt maturities that can be well in excess of 22years.  These securities are currentlyAAA-rated by one or more credit rating agencies and are secured by poolsof student loans partially guaranteed by the U.S. Department of Education underthe Federal Family Education Loan Program. In mid-February 2008, liquidity issues inthe global credit markets resulted in the failure of auctions representing allof the remaining SLARS we currently hold (totaling approximately $7.0 millionat par value), as the amount of securities submitted for sale in those auctionsexceeded the amount of bids. For each unsuccessful auction, the interest ratemoves to a maximum rate defined for each security.  However, in certain situations, the maximumrate may be lower if historical average auction rates exceeded definedshort-term interest benchmarks.  To datewe have collected all interest payable on all of our SLARS.  The principal associated with failed auctionswill not be accessible until a successful auction occurs, a buyer is foundoutside of the auction process, the issuers establish a different form offinancing to replace these securities, or final payments come due according tocontractual maturities ranging from 22 to 50 years.

 

Our cash equivalents and long-term investments portfolio are subject tomarket risk due to changes in interest rates. Floating rate securities may produce less income than expected ifinterest rates fall.  Furthermore, themarket value of SLARS may be adversely impacted due to a maximum interest ratecap if the spread between short-term rates and long-term rates increases.  Due in part to these factors, our futureinterest income may fall short of expectations due to changes in interest ratesor we may suffer losses in principal if we are forced to sell securities thatdecline in market value due to either changes in interest rates or discountsoffered by prospective buyers of our SLARS. However, because we classify our debt securities as “available for sale,”no gains or losses are recognized in our consolidated statements of income dueto changes in interest rates unless such securities are sold prior to maturityor declines in fair value are determined to be other-than-temporary. Should theCompany determine that the decline in value of these securities isother-than-temporary, it would result in a loss being recognized in itsconsolidated statements of income, which could be material.

 

Borrowings under our line of credit bear interest at a floating rate. Interest on amounts borrowed ispayable at a base rate equal to the higher of the Federal Funds Rate plus 0.5%or the bank’s prime rate.  We currentlyhave 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 havea material effect on our financial condition, results of operations or cashflows.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**a) EVALUATION OF DISCLOSURE CONTROLSAND PROCEDURES**

 

The Company maintains disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”))that are designed to ensure that material information required to be disclosedin the reports it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byan issuer in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the issuer’s management, including itsprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure. Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our principalexecutive officer and our principal financial officer concluded that ourdisclosure controls and procedures were effective as of such date.

 

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**b) CHANGES IN INTERNAL CONTROL OVERFINANCIAL REPORTING**

 

# **There have been no changes inour internal control over financial reporting that occurred during our secondfiscal quarter of 2008 that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.**

# ** **

**PART II. OTHER INFORMATION**

 

**ITEM1A. RISK FACTORS**

 

The following risk factor disclosure is in addition to the disclosure ofrisks in “CAUTIONS ABOUT FORWARD LOOKING STATEMENTS” in Part I and “RISKFASTORS” in Part I, Item 1A of NIC’s 2007 Annual Report on Form 10-Kfiled on March 17, 2008 with the Securities and Exchange Commission, andshould be read in conjunction with those disclosures.

 

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

 

The NationalInformation Consortium Voting Trust, which previously owned approximately 34%of our outstanding common stock, was dissolved as of June 20, 2008.  As a result, there will be an increase in thenumber of shares available for resale in the public market at such time as theshares previously held by the Voting Trust may be traded under applicablesecurities laws.  Sales of substantialamounts of shares of our common stock in the public market, or the perceptionthat those sales may occur, could cause the market price of our common stock todecline or make it more difficult for us to sell equity securities in thefuture at a time and a price that we consider appropriate.

 

***We could incur substantial losses if one of the commercial banks we usein our operations would happen to fail.***

 

As cash collection and disbursement cycles vary significantly among ourbusinesses, we frequently maintain cash balances in excess of Federal DepositInsurance Corporation (“FDIC”) insurance limits of $100,000.*** ***AtJune 30, 2008, we held approximately $40.3 million of cash in excess ofFDIC limits among 14 banks.  As thefallout from the credit crisis persists, the financial strength of some bankshas diminished and may continue to deteriorate. If one of the banks we use would happen to fail, the potential for financialloss could be material.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

(c)           Duringthe second quarter of 2008, the Company acquired shares of common stocksurrendered by employees to pay income taxes due upon the vesting of restrictedstock as follows:

 
| ****Period****    | **** **** | ****Total  Number of  Shares  Purchased**** | **** **** | ****Average  Price Paid  per Share**** | **** **** | ****Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs**** | **** **** | ****Maximum Number (or  Approximate Dollar Value) of  Shares that May Yet Be  Purchased Under the Plans or  Programs**** | **** **** |
|-------------------|----------------|---------------------------------------------|----------------|----------------------------------------|----------------|---------------------------------------------------------------------------------------------------|----------------|-------------------------------------------------------------------------------------------------------------------------------|----------------|
| May 1, 2008  |           | 1,829                                       |           | $                                      | 7.09           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| June 1, 2008 |           | 1,830                                       |           | $                                      | 8.07           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |

 

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

 

The Company held its Annual Meeting of Shareholders onMay 6, 2008.  At the meeting, thefollowing matters were voted upon by the shareholders:

 

1.               Theelection of eight (8) Directors to serve for the upcoming year;

 

2.               Aproposal to amend the 2006 Amended and Restated Stock Option and IncentivePlan; and

 

3.               Aproposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’sindependent registered public accountants for the fiscal year ending December 31,2008.

 

The Board of Directors of the Company is composed of eight(8) members.  The following were thenominees of management voted upon and elected by the holders of the Company’scommon stock as of the record date: Jeffery S. Fraser, Harry H. Herington, JohnL. Bunce, Jr., Art N. Burtscher, Daniel J. Evans, Ross C. Hartley,Alexander C. Kemper, and Pete Wilson.  Inthe election of the directors, there were 57,023,695 votes “for” Jeffery S.Fraser and 2,275,085 votes “withheld”; 58,280,164 votes “for” Harry H.Herington and 1,018,616 votes “withheld”; 41,122,614 “for” John L. Bunce, Jr.and 18,176,166 votes “withheld”; 35,782,773 votes “for” Art N. Burtscher and23,516,007 votes “withheld”; 57,841,722 votes “for” Daniel J. Evans and1,457,058 votes “withheld”; 57,450,534 votes “for” Ross C. Hartley and1,848,246 votes “withheld”; 57,816,657 votes “for” Alexander C. Kemper and1,437,123 votes “withheld”; and 57,903,888 votes “for” Pete Wilson and1,394,892 votes “withheld”.

 

The total votes cast pertaining to the proposedamendment to the 2006 Amended and Restated Stock Option and Incentive Plan toincrease the number of shares of Common Stock which may be issued under thePlan from 9,286,754 to 19,286,754 shares were as follows:  12,336,214 votes “for”, 37,056,673 votes “against”and 77,466 abstained.

 

The total votes cast pertaining to the ratification ofthe appointment of PricewaterhouseCoopers LLP as the Company’s independentregistered public accountants for the fiscal year ending December 31, 2008were as follows: 58,672,609 votes “for”, 454,665 votes “against” and 171,506abstained.

 

**ITEM 6.  EXHIBITS**

 

31.1 - Certification of Chief Executive Officer Pursuant to Section 302of the Sarbanes-Oxley Act of 2002

 

31.2 - Certification of Chief Financial Officer Pursuant to Section 302of the Sarbanes-Oxley Act of 2002

 

32.1 - Section 906 Certifications of Chief Executive Officer andChief Financial Officer

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Company has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized.

 
|                       | NIC INC.                 |
|----------------------------|--------------------------|
|                       |                     |
| Dated: August 4, 2008 | /s/Stephen M. Kovzan     |
|                       | Stephen M. Kovzan        |
|                       | Chief  Financial Officer |

 

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**NIC Inc.**

**EXHIBIT INDEX**

 
| **Exhibit****Number** | ** ** | **Description of Exhibit**                                                                               |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **            |       |                                                                                                     |
| 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                  |

 

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