**UNITEDSTATES SECURITIES AND EXCHANGE 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****March 31, 2008**

 

**Commissionfile number 000-26621**

 

**NIC INC.**

(Exactname of registrant as specified in its charter)

 

| **Colorado**

(State or other jurisdiction  of

incorporation or organization) | ** ** | **52-2077581**

(I.R.S. Employer

Identification No.) |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------------|

 

**25501 WestValley Parkway, Suite 300, Olathe, Kansas 66061**

(Addressof principal executive offices) (Zip Code)

 

Registrant’stelephone number, including area code: **(877) 234-3468**

** **

----

 

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 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 accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange 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) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

Yes o  No x

 

The number ofshares outstanding of the registrant’s common stock as of April 30, 2008was 62,318,139.

 

 

----

 

**PART I- FINANCIAL INFORMATION**

**Item1.  Consolidated Financial Statements**

 

**NIC INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                  |       |               |       |                  |       |
| Cash and cash equivalents                                                                        |       | $                  | 38,429     |                  | $          | 38,236 |   |
| Short-term investments                                                                           |       | —             |       | 17,600                |       |
| Trade accounts receivable                                                                        |       | 32,513             |       | 28,149                |       |
| Unbilled revenues                                                                                |       | 323                |       | 720                   |       |
| Deferred income taxes, net                                                                       |       | 7,328              |       | 6,746                 |       |
| Prepaid expenses & other current assets                                                 |       | 1,654              |       | 2,143                 |       |
| Total current assets                                                                             |       | 80,247             |       | 93,594                |       |
| Long-term investments                                                                            |       | 6,654              |       | —                |       |
| Property and equipment, net                                                                      |       | 6,582              |       | 6,110                 |       |
| Deferred income taxes, net                                                                       |       | 8,465              |       | 10,809                |       |
| Other assets                                                                                     |       | 985                |       | 863                   |       |
| Total assets                                                                                     |       | $                  | 102,933    |                  | $          | 111,376 |   |
|                                                                                             |       |               |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                             |       |               |       |                  |       |
| Accounts payable                                                                                 |       | $                  | 40,678     |                  | $          | 36,498 |   |
| Accrued expenses                                                                                 |       | 5,746              |       | 6,848                 |       |
| Application development contracts                                                                |       | 316                |       | 353                   |       |
| Other current liabilities                                                                        |       | 85                 |       | 99                    |       |
| Total current liabilities                                                                        |       | 46,825             |       | 43,798                |       |
|                                                                                             |       |               |       |                  |       |
| Other long-term liabilities                                                                      |       | 714                |       | 714                   |       |
| Total liabilities                                                                                |       | 47,539             |       | 44,512                |       |
|                                                                                             |       |               |       |                  |       |
| Commitments and contingencies (Notes 1, 4 and 5)                                                 |       | —             |       | —                |       |
|                                                                                             |       |               |       |                  |       |
| Shareholders’ equity:                                                                       |       |               |       |                  |       |
| Common stock, no par, 200,000 shares authorized 62,318  and 62,031 shares issued and outstanding |       | —             |       | —                |       |
| Additional paid-in capital                                                                       |       | 151,772            |       | 165,934               |       |
| Accumulated deficit                                                                              |       | (95,914            | )          | (98,902               | )          |
| Accumulated other comprehensive loss                                                             |       | (296               | )          | —                |       |
|                                                                                             |       | 55,562             |       | 67,032                |       |
| Less treasury stock                                                                              |       | (168               | )          | (168                  | )          |
| Total shareholders’ equity                                                                  |       | 55,394             |       | 66,864                |       |
| Total liabilities and shareholders’ equity                                                  |       | $                  | 102,933    |                  | $          | 111,376 |   |

 

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

 

2

----

 

**NIC INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(UNAUDITED)**

**thousandsexcept for per share amounts**

 
| ** **                                                                                        | ** ** | **Three-months ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**          | ** ** |
| ** **                                                                                        | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Revenues:                                                                                         | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Portal revenues                                                                                   |       | $                           | 23,796     |   | $ | 19,868 |   |
| Software & services revenues                                                             |       | 883                         |       | 766 |   |
| Total revenues                                                                                    |       | 24,679                      |       | 20,634 |   |
| Operating expenses:                                                                               |       |                        |       |   |   |
| Cost of portal revenues, exclusive of depreciation &  amortization                            |       | 12,704                      |       | 10,454 |   |
| Cost of software & services revenues,  exclusive of depreciation & amortization |       | 433                         |       | 470 |   |
| Selling & administrative                                                                 |       | 5,963                       |       | 5,120 |   |
| Depreciation & amortization                                                              |       | 847                         |       | 536 |   |
| Total operating expenses                                                                          |       | 19,947                      |       | 16,580 |   |
| Operating income                                                                                  |       | 4,732                       |       | 4,054 |   |
| Other income (expense):                                                                           |       |                        |       |   |   |
| Interest income                                                                                   |       | 333                         |       | 580 |   |
| Other expense, net                                                                                |       | (19                         | )          | — |   |
| Total other income (expense)                                                                      |       | 314                         |       | 580 |   |
| Income before income taxes                                                                        |       | 5,046                       |       | 4,634 |   |
| Income tax provision                                                                              |       | 2,058                       |       | 1,888 |   |
| Net income                                                                                        |       | $                           | 2,988      |   | $ | 2,746 |   |
|                                                                                              |       |                        |       |   |   |
| Basic net income per share                                                                        |       | $                           | 0.05       |   | $ | 0.04 |   |
| Diluted net income per share                                                                      |       | $                           | 0.05       |   | $ | 0.04 |   |
|                                                                                              |       |                        |       |   |   |
| Weighted average shares outstanding:                                                              |       |                        |       |   |   |
| Basic                                                                                             |       | 62,119                      |       | 61,652 |   |
| Diluted                                                                                           |       | 62,631                      |       | 61,969 |   |

 

*Theaccompanying Notes to Unaudited Consolidated Financial Statements are anintegral part of these statements.*

 

3

----

 

**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                                                                       |       | —                |       | —      |       | —          |       | 2,988             |       | —          |       | —     |       | 2,988      |       |
| Unrealized holding loss on investments (Note 1)                                  |       | —                |       | —      |       | —          |       | —            |       | (296            | )          | —     |       | (296       | )          |
| Cash dividends on common stock (Note 3)                                          |       | —                |       | —      |       | (15,709         | )          | —            |       | —          |       | —     |       | (15,709    | )          |
| Shares surrendered upon vesting of restricted stock  to satisfy tax withholdings |       | (2                    | )          | —      |       | (15             | )          | —            |       | —          |       | —     |       | (15        | )          |
| Stock options exercises and restricted stock  vestings                           |       | 227                   |       | —      |       | 761             |       | —            |       | —          |       | —     |       | 761        |       |
| Stock-based compensation                                                         |       | —                |       | —      |       | 521             |       | —            |       | —          |       | —     |       | 521        |       |
| Issuance of common stock under employee stock  purchase plan                     |       | 62                    |       | —      |       | 280             |       | —            |       | —          |       | —     |       | 280        |       |
| **Balance, March 31, 2008**                                                 |       | 62,318                |       | $           | —     |            | $          | 151,772           |       | $               | (95,914    | )          | $          | (296       | )          | $ | (168 | ) | $ | 55,394 |   |

 

*Theaccompanying Notes to Unaudited Consolidated Financial Statements are anintegral part of these statements.*

 

4

----

 

**NIC INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                                   | ** ** | **Three-months ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**          | ** ** |
| ** **                                                                                   | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                           | 2,988      |   | $ | 2,746 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                        |       |   |   |
| Depreciation & amortization                                                         |       | 847                         |       | 536 |   |
| Stock-based compensation expense                                                             |       | 521                         |       | 411 |   |
| Application development contracts                                                            |       | (37                         | )          | (39 | ) |
| Deferred income taxes                                                                        |       | 1,762                       |       | 1,656 |   |
| Loss on disposal of property and equipment                                                   |       | 19                          |       | — |   |
| Changes in operating assets and liabilities:                                                 |       |                        |       |   |   |
| (Increase) in trade accounts receivable                                                      |       | (4,364                      | )          | (8,708 | ) |
| Decrease in unbilled revenues                                                                |       | 397                         |       | 864 |   |
| Decrease in prepaid expenses & other  current assets                                |       | 489                         |       | 449 |   |
| Increase in accounts payable                                                                 |       | 4,180                       |       | 495 |   |
| Increase (decrease) in accrued expenses                                                      |       | (1,117                      | )          | 59 |   |
| Increase (decrease) in other current liabilities                                             |       | (14                         | )          | 3 |   |
| Net cash provided by (used in) operating activities                                          |       | 5,671                       |       | (1,528 | ) |
|                                                                                         |       |                        |       |   |   |
| Cash flows from investing activities:                                                        |       |                        |       |   |   |
| Purchases of property and equipment                                                          |       | (1,277                      | )          | (1,046 | ) |
| Capitalized internal use software development costs                                          |       | (183                        | )          | (59 | ) |
| Purchases of investments                                                                     |       | (1,000                      | )          | — |   |
| Sales and maturities of investments                                                          |       | 11,650                      |       | 45,008 |   |
| Net cash provided by investing activities                                                    |       | 9,190                       |       | 43,903 |   |
|                                                                                         |       |                        |       |   |   |
| 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                                             |       | 761                         |       | 454 |   |
| Net cash used in financing activities                                                        |       | (14,668                     | )          | (46,037 | ) |
|                                                                                         |       |                        |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                         |       | 193                         |       | (3,662 | ) |
| Cash and cash equivalents, beginning of period                                               |       | 38,236                      |       | 36,745 |   |
| Cash and cash equivalents, end of period                                                     |       | $                           | 38,429     |   | $ | 33,083 |   |
| Other cash flow information:                                                                 |       |                        |       |   |   |
| Income taxes paid                                                                            |       | $                           | 367        |   | $ | 263 |   |

 

*Theaccompanying Notes to Unaudited Consolidated Financial Statements are anintegral part of these statements.*

 

5

----

 

**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) necessary to present fairly theconsolidated financial position, results of operations and cash flows of theCompany and its subsidiaries as of the dates and for the interim periodspresented.  These unaudited consolidatedfinancial statements and notes should be read in conjunction with the auditedconsolidated financial statements and related notes and Management’s Discussionand Analysis of Financial Condition and Results of Operations included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2007, filed with the SEC on March 17, 2008, and Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in this Form 10-Q.  Theconsolidated balance sheet data included herein as of December 31, 2007was derived from audited financial statements, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates 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-month period ended March 31,2008 are not necessarily indicative of the results to be expected for the fullyear ending December 31, 2008.

 

**1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*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 forfunding up front investment and ongoing operational costs of the governmentportals.

 

The Company’s software & servicesbusinesses primarily include its Uniform Commercial Code (“UCC”) and corporatefilings software development business and its ethics & elections business.  The Company’s UCC and corporate filingssoftware development business, NIC Conquest, is a provider of softwareapplications and services for electronic filings and document managementsolutions for governments.  This businessfocuses on Secretaries of State, whose offices are state governments’ principalagencies for UCC and corporate filings. Currently, NIC Conquest is primarily engaged in servicing its contractwith the California Secretary of State and is not actively marketing itsapplications and services in respect of new engagements.  The Company’s ethics & electionsbusiness, NIC Technologies, designs and develops online campaign 

 

6

----

 

expenditure and ethics compliance systems forfederal and state government agencies. Currently, NIC Technologies is primarilyengaged in servicing its contracts with the Federal Election Commission and theState of Michigan.

 

*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 for investments in debt securities in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting**for Certain Investments in Debt and Equity Securities*.*”  The Company’sinvestments at March 31, 2008 and December 31, 2007, consistingentirely of student loan auction-rate securities (“SLARS”), were classified asavailable-for-sale at the time of purchase. The Company re-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):

** **
| **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| **Par Value**           | ** ** | **Unrealized  Loss**            | ** ** | **Fair  Value** | ** ** | **Par Value** | ** ** | **Unrealized  Gain (Loss)** | ** ** | **Fair Value** | ** ** |
| $                            | 6,950      |                            | $          | (296 | ) | $ | 6,654 |   | $ | 17,600 |   | $ | — |   | $ | 17,600 |   |
|                              |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company assesses other-than-temporaryimpairment of its investments in accordance with Financial Accounting Standards Board Staff Position No. FAS 115-1, “TheMeaning of Other-Than-Temporary Impairment and its Application to CertainInvestments.”  The Companyevaluates its investments periodically for possible other-than-temporaryimpairment by reviewing factors such as the length of time and extent to whichfair value has been below cost basis, the financial condition of the issuer andthe Company’s ability and intent to hold the investment for a period of time whichmay be sufficient for anticipated recovery of market value.  The Company records an impairment charge tothe extent that the carrying value of available-for-sale securities exceeds theestimated fair market value of the securities and the decline in value isdetermined to be other-than-temporary. For the three-month periods ended March 31, 2008 and 2007, theCompany did not recognize any other-than-temporary impairment charges on itsinvestments.

 

The Company’s SLARS are structured with short-term interest rates that arereset through an auction process at 28–day intervals, but with contractual debtmaturities that can be well in excess of 22 years.  Historically, the Company has had the optionto liquidate its SLARS whenever the interest rates on these securities werereset.  Accordingly, such securities wereclassified 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 

 

7

----

 

Company had successful auctions on these securities with scheduled 28-dayreset dates through mid-February 2008, at which time the Company hadliquidated approximately $11.6 million of its portfolio.  Furthermore, there were successful auctionsduring January 2008 for each security the Company currently holds.  Accordingly, the Company determined thatthere was no impairment of these investments at December 31, 2007.  The Company encountered its first failedauction in mid-February 2008, as the amount of securities submitted for sale inthose auctions exceeded the amount of bids. Subsequently, the Companyhas not had a successful auction related to the remaining SLARS it currentlyholds.  Given the continued auctionfailures associated with these securities and the uncertainty as to whenliquidity will return to the SLARS market, the Company classified these securitiesas long-term at March 31, 2008.

 

The Company’s SLARS consist of the following taxableissues (in thousands) at March 31, 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)       |       | 4.40                            | %          | 5/19/2008                                         |       | $              | 1,150      |            | $          | 1,105 |   |
|                                                 |       |                            |       |                                              |       |           |       |            |       |
| Missouri Higher  Ed Loan Auth 2001 B (6/1/2031)      |       | 1.92                            | %          | 5/20/2008                                         |       | 1,000          |       | 959             |       |
|                                                 |       |                            |       |                                              |       |           |       |            |       |
| Missouri Higher  Ed Loan Auth 2002D (7/1/2032)       |       | 1.64                            | %          | 5/19/2008                                         |       | 2,800          |       | 2,685           |       |
|                                                 |       |                            |       |                                              |       |           |       |            |       |
| NELNET Education  Loan Funding 2003-1 A-6 (7/1/2043) |       | 2.40                            | %          | 5/13/2008                                         |       | 1,000          |       | 944             |       |
|                                                 |       |                            |       |                                              |       |           |       |            |       |
| Panhandle Plains  Higher Ed Auth 2007 A-4 (8/1/2057) |       | 3.86                            | %          | 5/14/2008                                         |       | 1,000          |       | 961             |       |
|                                                 |       |                            |       |                                              |       |           |       |            |       |
| Total                                                |       |                            |       |                                              |       | $              | 6,950      |            | $          | 6,654 |   |

 

The Company’s SLARS are currently AAA-rated by one ormore rating agencies and are secured by pools of student loans guaranteed bythe U.S. Department of Education under the Federal Family Education LoanProgram.  This guarantee is based upon asliding scale of 97% to 98% of the unpaid principal balance of eligible studentloans, plus accrued interest, when the guarantor’s claims experience is lessthan 5% of the original principal amount of the loans, and decreases to 75% ifthe guarantor’s claims experience is greater than 9% of the original principalamount of the loans.

 

At December 31, 2007, the fair values of theCompany’s SLARS were based on market prices and broker-dealer quotes at thereporting date.  Given the absence ofquotes from the Company’s broker-dealer and the lack of readily observablemarket quotes, the Company used valuation models for the determination of fairvalue at March 31, 2008.  Based onmanagement’s assessment, the Company estimated the fair value of its SLARS tobe approximately $6.65 million at March 31, 2008.  As a result, the Company recorded anunrealized holding loss of approximately $0.3 million in accumulated othercomprehensive loss, a component of shareholders’ equity, related to thetemporary impairment of its SLARS for the three-month period ended March 31,2008.  The Company believes thistemporary impairment is primarily attributable to the illiquidity of thesesecurities and not to the underlying credit quality of the issuers of itsSLARS, which is further discussed above. To date the Company has collected all interest payable on all of itsSLARS when due.  For each unsuccessfulauction, the interest rate moves to a maximum rate defined for eachsecurity.  However, in certain situations, the maximumrate may be lower if historical average auction rates exceeded definedshort-term interest benchmarks. The principal associated with failedauctions will not be accessible until a successful auction occurs, a buyer isfound outside of the auction process, the issuers redeem the securities, theissuers establish a different form of financing to replace these securities, orfinal payments come due according to contractual maturities ranging from 22 to50 years.  The Company currently expectsthat it will receive the principal associated with its SLARS through one of themeans described above.

 

The valuation models used to estimate the fair valueof the Company’s SLARS at March 31, 2008 

 

8

----

 

include numerous assumptions such as assessments of the underlyingstructure and collateral of each security, default risk, liquidity risk,expected cash flows, discount rates, issuer credit ratings, workout periods andoverall capital market liquidity.  Theseassumptions and assessments are subject to uncertainties, are difficult topredict 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 be other-than-temporary.  Should the Company determine that the declinein value of these securities is other-than-temporary, it would result in a lossbeing recognized in its consolidated statements of income, which could bematerial.

 

*Fair Value Measurements*

 

In September 2006, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 157, “Fair Value Measurements,” which defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting 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 and liabilitiesthat are recognized or disclosed at fair value in the financial statements on anonrecurring basis, which has been deferred for one year, the Company adoptedthe provisions of SFAS No. 157 on January 1, 2008.

 

SFAS No. 157 establishes a three-level hierarchy that prioritizes theinputs to valuation techniques used to measure the fair value of financialinstruments.  The valuation hierarchy isbased upon the transparency of inputs to the valuation of an asset or liabilityas of the measurement date.  The threelevels are defined as follows:

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

 

A financial instrument’s categorization within the valuation hierarchy isbased upon the lowest level of input that is significant to the fair valuemeasurement.  The Company’s assets orliabilities required to be measured at fair value on a recurring basis withinthe valuation hierarchy of SFAS No. 157 consist 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

----

 

The following table presents a reconciliation for all financialinstruments measured at fair value on a recurring basis using significantunobservable inputs (Level 3) for the three-month period ended March 31,2008 (in thousands):

 
| ** **                                       | ** ** | **Long-term**   | ** ** |
|--------------------------------------------------|------------|-----------------|------------|
| ** **                                       | ** ** | **Investments** | ** ** |
|                                             |       |            |       |
| Balance,  December 31, 2007                 |       | $               | 17,600     |   |
| Impact of adoption of SFAS No. 157          |       | —          |       |
| Balance,  January 1, 2008                   |       |            | 17,600     |   |
| Total losses (realized/unrealized):              |       |            |       |
| Included in earnings                             |       | —          |       |
| Included in accumulated other comprehensive loss |       | (296            | )          |
| Purchases, issuances and settlements             |       | 1,000           |       |
| Sales and maturities                             |       | (11,650         | )          |
| Transfers in and/or out of Level 3               |       | —          |       |
| Balance,  March 31, 2008                    |       | $               | 6,654      |   |

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities,including an amendment of FASB Statement No. 115.”  SFAS No. 159permits entities to choose to measure many financial instruments and certain otheritems at fair value that are not currently required to be measured at fairvalue.  Unrealized gains and losses on items for which the fair valueoption has been elected are reported in earnings.  SFAS No. 159 doesnot affect any existing accounting literature that requires certain assets andliabilities to be carried at fair value. The Company did not elect to choose the fair value option and recordunrealized gains and losses in earnings for any of its financialinstruments.  Accordingly, the adoptionof SFAS No. 159 on January 1, 2008 did not have any impact on theunaudited consolidated financial statements of the 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 Company limitsits exposure to credit loss by depositing its cash with high credit qualityfinancial institutions.  The Companyperforms ongoing 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 March 31, 2008. These securities are structured withshort-term interest rates that reset through an auction process at 28-dayintervals, but with contractual debt maturities that can be well in excess of22 years.  Liquidity for these securitieswas historically provided by an auction process that resets the applicableinterest rate every 28 days.  However, ifauctions for these securities fail, the Company will not be able to access theprincipal until a successful auction occurs, a buyer is found outside of theauction process, the issuers redeem the securities, the issuers establish adifferent form of financing to replace these securities or final payments comedue according to contractual maturities ranging from 22 to 50 years.  The Company attempts to manage its creditrisk by limiting the amount of investments placed with any one issuer, andpreviously invested primarily in AAA-rated securities that are secured by poolsof student loans guaranteed by the U.S. Department of Education under theFederal Family Education Loan Program. This guarantee is based upon a slidingscale of 97% to 98% of the unpaid principal balance of eligible student loans,plus accrued interest, when the guarantor’s claims experience is less than 5%of the original principal amount of the loans, and decreases to 75% if theguarantor’s claims experience is greater than 9% of the original principalamount of the loans. See discussion above under *Investments*.

 

10

----

#### * *

#### *Earningsper share*

#### * *

Basic earnings per share are calculated on the basis of the weightedaverage number of common shares outstanding during the period.  Diluted earnings per share are calculated onthe basis of the weighted average number of common shares outstanding duringthe period and common stock equivalents that would arise from the exercise ofstock options or the issuance of restricted stock awards to employees andnonemployee directors using the treasury stock method.  The following table sets forth thecomputation of basic and diluted earnings per share (in thousands, except pershare amounts):

 
| ** **                                | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Numerator:**                            |       |                                                 |       |   |   |
| Net income                                |       | $                                                    | 2,988      |   | $ | 2,746 |   |
| **Denominator:**                          |       |                                                 |       |   |   |
| Weighted average shares – basic      |       | 62,119                                               |       | 61,652 |   |
| Stock options and restricted stock awards |       | 512                                                  |       | 317 |   |
| Weighted average shares – diluted    |       | 62,631                                               |       | 61,969 |   |
|                                      |       |                                                 |       |   |   |
| **Basic  earnings per share:**            |       |                                                 |       |   |   |
| Net Income                                |       | $                                                    | 0.05       |   | $ | 0.04 |   |
|                                      |       |                                                 |       |   |   |
| **Diluted  net income per share:**        |       |                                                 |       |   |   |
| Net Income                                |       | $                                                    | 0.05       |   | $ | 0.04 |   |

 

Outstanding stockoptions totaling approximately 20,000 and 359,000 shares for each of thethree-month periods ended March 31, 2008 and 2007 were not included in thecomputation of diluted weighted average shares outstanding because theirexercise prices were in excess of the average stock price of the Company duringthe periods, and would result in the options being anti-dilutive.

 

**2. OUTSOURCEDGOVERNMENT 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 March 31, 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.

 

11

----

 

The following is a summary of theCompany’s twenty-one outsourced state government portal contracts at March 31,2008:

 
| **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  (6/30/2010)                                                                                                 |       |
| NICUSA                           |       | www.AZ.gov  (Arizona)          |       | 2007                          |       | 6/26/2010  (6/26/2013 )                                                                                                |       |
| Vermont  Information Consortium  |       | www.Vermont.gov  (Vermont)     |       | 2006                          |       | 10/15/2009  (10/14/2012)                                                                                               |       |
| Colorado  Interactive            |       | www.Colorado.gov  (Colorado)   |       | 2005                          |       | 5/19/2010  (5/19/2014)                                                                                                 |       |
| South Carolina  Interactive      |       | www.SC.gov  (South Carolina)   |       | 2005                          |       | 7/15/2008 (7/15/2009)                                                                                                  |       |
| Kentucky  Interactive            |       | www.Kentucky.gov  (Kentucky)   |       | 2003                          |       | 1/31/2009  (1/31/2013)                                                                                                 |       |
| Alabama  Interactive             |       | www.Alabama.gov  (Alabama)     |       | 2002                          |       | 2/28/09  (2/28/2012)                                                                                                   |       |
| Rhode Island  Interactive        |       | www.RI.gov  (Rhode Island)     |       | 2001                          |       | 8/7/2010  (8/7/2012)                                                                                                   |       |
| Oklahoma  Interactive            |       | www.OK.gov  (Oklahoma)         |       | 2001                          |       | 6/30/2008  (6/30/2009)                                                                                                 |       |
| Montana  Interactive             |       | www.MT.gov  (Montana)          |       | 2001                          |       | 12/31/2010                                                                                                             |       |
| NICUSA                           |       | www.Tennessee.gov  (Tennessee) |       | 2000                          |       | 8/27/2010                                                                                                              |       |
| Hawaii  Information Consortium   |       | www.Hawaii.gov  (Hawaii)       |       | 2000                          |       | 1/3/2013  (unlimited 3-year renewal options)                                                                           |       |
| Idaho  Information Consortium    |       | www.Idaho.gov  (Idaho)         |       | 2000                          |       | 3/31/2008  (Contract has been temporarily extended to allow the state time to finalize  contract terms and conditions) |       |
| 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                          |       | 6/30/2008                                                                                                              |       |
| Iowa Interactive                 |       | www.Iowa.gov  (Iowa)           |       | 1997                          |       | 3/31/2011  (3/31/2012)                                                                                                 |       |
| Virginia  Interactive            |       | www.Virginia.gov  (Virginia)   |       | 1997                          |       | 8/31/2012                                                                                                              |       |
| Indiana  Interactive             |       | www.IN.gov  (Indiana)          |       | 1995                          |       | 6/30/2010  (6/30/2014)                                                                                                 |       |
| Nebraska  Interactive            |       | www.Nebraska.gov  (Nebraska)   |       | 1995                          |       | 1/31/2010                                                                                                              |       |
| Kansas  Information Consortium   |       | www.Kansas.gov  (Kansas)       |       | 1992                          |       | 12/31/2009                                                                                                             |       |

 

During the first quarter of 2008, the Company receiveda new five-year contract from the state of Hawaii.  This contract includes unlimited renewaloptions under which the state can extend the contract for additional three-yearperiods.  The Company also received a newfour-year contract with the state of Maine, which includes an option for thestate to extend the contract for three additional two-year renewal terms.  In addition, the Company received a one-yearcontract extension with the state of Alabama, which extended the contractexpiration date to February 28, 2009.

 

**3. SPECIAL CASH DIVIDEND**

 

On February 4, 2008, the Company’s Board ofDirectors declared a special cash dividend of $0.25 per share, payable toshareholders 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 result in a partial return of capitalto shareholders, with the balance being taxable to shareholders as a qualifieddividend.  The exact amount of the returnof capital, if any, is dependent on the earnings of the Company, computed on atax basis, through the end of its 2008 fiscal year.

 

**4.  STOCK BASED COMPENSATION**

 

During the first quarter of 2008, the Board ofDirectors of the Company granted certain management-level employees, executiveofficers and non-employee directors service-based restricted stock awardstotaling 417,669 shares with a grant-date fair value totaling approximately$2.9 million.  Such restricted stockawards vest beginning one year from the date of grant in cumulative annualinstallments of 25%.  Restricted stock isvalued at the date of grant, based on the closing market price of the Company’scommon stock, and expensed using the straight-line method over the requisiteservice period.

 

12

----

 

During the first quarter of 2008, the Board ofDirectors of the Company also granted certain executive officersperformance-based restricted stock awards pursuant to the terms of the Company’snew executive compensation program totaling 141,125 shares, with a grant datefair value of $5.86 per share, totaling approximately $0.8 million, whichrepresents the maximum number of shares able to be earned by the executiveofficers at the end of a three-year performance period ending December 31,2010.  The actual number of shares earnedwill be based on the Company’s performance related to the following performancecriteria over the performance period:

 

·                  Operating income growth(three-year compound annual growth rate) – 25% weighting

 

·                  Total revenue growth(three-year compound annual growth rate) – 25% weighting

 

·                  Cash flow return oninvested capital (three-year average) – 50% weighting

 

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

 
| ** **                                                        | ** ** | **Performance Levels** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| **Performance Threshold**                                         | ** ** | **Threshold**               | ** ** | **Target** | ** ** | **Superior** | ** ** |
| Operating income growth (three-year compound annual  growth rate) | ** ** | 15                          | %          | 20 | % | 25 | % |
| Total revenue growth (three-year compound annual  growth rate)    |       | 15                          | %          | 20 | % | 25 | % |
| Cash flow return on invested capital (three-year  average)        |       | 15                          | %          | 20 | % | 25 | % |

 

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

 

13

----

 

**5.  COMMITMENTS AND CONTINGENCIES**

 

*Informal SEC Inquiry*

 

As further discussed in Note 8 in the Notes to theConsolidated Financial Statements included in the Company’s Form 10-K forthe year ended December 31, 2007, filed with the SEC on March 17,2008, the Company is currently the subject of an informal SEC inquiry ofexpense reporting by certain officers of the Company and certain potentiallyrelated matters. In connection with that inquiry, a review was undertaken bythe Audit Committee of the Company’s Board of Directors, with the assistance ofoutside, independent counsel, which focused on such expense reporting. Thereview revealed that expense reimbursement deficiencies occurred during theperiod from January 2004 through October 2006 related to Jeffery S.Fraser, who was then the Company’s Chief Executive Officer, that these expensereimbursement deficiencies were isolated to Mr. Fraser and that the amountof such deficiencies was not material to the Company’s financial condition orresults of operations.

 

*Litigation*

 

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

 

**6.  REPORTABLE SEGMENTS AND 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 reflects summarized financial information concerningthe Company’s reportable segments for the three months ended March 31 (inthousands):

 
| ** **                           | ** ** | **Outsourced  Portals** | ** ** | **Software &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2008**                             | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                             |       | $                       | 23,796     |                              | $          | 883                           |       | $                       | —     |   | $ | 24,679 |   |
|                                 |       |                    |       |                              |       |                          |       |                    |       |
| Costs & expenses            |       | 13,619                  | ** ** | 541                               |       | 4,940                         |       | 19,100                  |       |
| Depreciation & amortization |       | 744                     | ** ** | 9                                 |       | 94                            |       | 847                     |       |
| Operating income (loss)              |       | $                       | 9,433      | ** **                        | $          | 333                           |       | $                       | (5,034     | ) | $ | 4,732 |   |
|                                 |       |                    |       |                              |       |                          |       |                    |       |
| **2007**                             | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                             |       | $                       | 19,868     |                              | $          | 766                           |       | $                       | —     |   | $ | 20,634 |   |
|                                 |       |                    |       |                              |       |                          |       |                    |       |
| Costs & expenses            |       | 11,345                  | ** ** | 549                               |       | 4,150                         |       | 16,044                  |       |
| Depreciation & amortization |       | 498                     | ** ** | 6                                 |       | 32                            |       | 536                     |       |
| Operating income (loss)              |       | $                       | 8,025      | ** **                        | $          | 211                           |       | $                       | (4,182     | ) | $ | 4,054 |   |

 

The following is a reconciliation of total segment operating income tototal consolidated income before

 

14

----

 

income taxes for the three months ended March 31 (in thousands):

 
| ** **                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating income for reportable segments |       | $        | 4,732      |     | $          | 4,054 |   |
| Interest income                                |       | 333      |       | 580      |       |
| Other expense, net                             |       | (19      | )          | —   |       |
|                                           |       |     |       |     |       |
| Consolidated income before income taxes        |       | $        | 5,046      |     | $          | 4,634 |   |

 

15

----

 

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

 

***FORWARD-LOOKING STATEMENTS***

 

“Safe Harbor” statement under the Private Securities Litigation Reform Actof 1995: Statements in this Quarterly Report on Form 10-Q regarding NICand its business, 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.  In addition, we will not necessarily updatethe information in this Quarterly Report on Form 10-Q if anyforward-looking statement later turns out to be inaccurate.  Management continuously updates and revisesthese estimates and assumptions based on actual conditions experienced.  However, it is not practicable to publish allrevisions and, as a result, no one should assume that results projected in or contemplatedby the forward-looking statements will continue to be accurate in thefuture.  Investors are cautioned not toput undue reliance on any forward-looking statement.

 

There are a number of important factors that couldcause actual results to differ materially from those suggested or indicated bysuch forward-looking statements.  Theseinclude, among others, the success of the Company in signing contracts with newstates and government agencies, including continued favorable governmentlegislation; NIC’s ability to develop new services; existing states andagencies adopting those new services; acceptance of eGovernment services bybusinesses and citizens; competition; and general economic conditions and theother factors discussed under “CAUTIONS ABOUT FORWARD LOOKING STATEMENTS” in Part Iand “RISK FACTORS” 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 (“SEC”).  Investors should read all of thesediscussions of risks carefully.

 

**WHAT WE DO – AN EXECUTIVE SUMMARY**

 

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

 

In our core business, portal outsourcing, we enterinto contracts primarily with state governments and design, build and operateWeb-based portals on their behalf. We enter into long-term contracts, typicallythree to five years, and manage operations for each government partner throughseparate subsidiaries that operate as decentralized businesses with a highdegree of autonomy. Our portals consist of Web sites and applications that webuild, which allow businesses and citizens to access government informationonline and complete transactions, including applying for a permit, retrievingdriver’s license records or filing a form or report. We help increase ourgovernment partners’ revenues by expanding the distribution of theirinformation assets and increasing the number of financial transactionsconducted with governments.  We do thisby marketing portal services and soliciting users to complete government-basedtransactions and to enter into subscriber contracts that permit users to accessthe portal and the government information contained therein in exchange fortransactional and/or subscription user fees. We are typically responsible forfunding up-front investment and ongoing operational costs of the governmentportals.  Our unique self-fundingbusiness model allows us to reduce our government partners’ financial andtechnology risks and obtain revenues by sharing in the fees generated fromeGovernment services. Our partners benefit because they gain a centralized,customer-focused 

 

16

----

 

presence on the Internet. Businesses and citizens gain a faster, moreconvenient and more cost-effective means to interact with governments.

 

On behalf of our government partners, we enter intoseparate agreements with various agencies and divisions of the government toprovide specific services and to conduct specific transactions. Theseagreements preliminarily establish the pricing of the transaction and dataaccess services we provide and the division of revenues between the Company andthe government agency. The government must approve prices and revenue sharingagreements. We generally own all the applications developed under thesecontracts. After completion of a defined contract term, the government agencytypically receives a perpetual, royalty-free license to the applications foruse only. If our contract were not renewed after a defined term, the governmentagency would be entitled to take over the portal in place with no futureobligation of the Company. In some cases, we enter into contracts to provideconsulting, development and portal management services to governments inexchange for an agreed-upon fee.

 

Currently, we have contracts to provide portaloutsourcing services for 21 states.  Ourclosest competitor operates one state portal.

 

# **REVENUE RECOGNITION**

# ** **

We classify our revenues and cost of revenues intotwo categories: (1) portal and (2) software & services.  The portal category includes revenues andcost of revenues primarily from our subsidiaries operating government portalson an outsourced basis.  The software &services category includes revenues and cost of revenues primarily from our UCCand corporate filings 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 thecorresponding business models are further described below.

 

#### *Ourportal outsourcing businesses*

#### * *

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

 

·                  DMV transaction-based: these are transaction fees from the sale ofelectronic access to driver history records, referred to as DMV records, fromour state portals to data resellers, insurance companies and otherpre-authorized customers on behalf of our state partners, and are generallyrecurring.

 

·                  Non-DMV transaction-based: these are transaction fees from sourcesother than the sale of DMV records, for transactions conducted by businessusers and consumer users 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.

 

·                  Software development & portal management: these are fees from the performance ofsoftware development projects and other time and materials or fixed feeservices 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.

 

*Our software & servicesbusinesses*

 

# **UCC and corporate filings**

# ** **

Our UCC and corporate filings software developmentbusiness derives the majority of its revenues from fixed-price applicationdevelopment contracts and recognizes revenues on the percentage of completionmethod.  At March 31, 2008, thisbusiness was primarily engaged in servicing its contract with the 

 

17

----

 

California Secretary of State and no longer markets its applications andservices in respect of new engagements.

 

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 provided.  At March 31,2008, our ethics & elections business was primarily engaged inservicing its contracts with the Federal Election Commission and the state ofMichigan.

 

**CRITICAL ACCOUNTING POLICIES**

 

There have been no material changes to our criticalaccounting policies and estimates from the information provided in Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”included in our Form 10-K for the year ended December 31, 2007, filedwith the SEC on March 17, 2008, except as follows:

 

*Valuation of Investments*

 

At March 31, 2008, ourlong-term investments consist entirely of student loan auction-rate securities,or SLARS.  As further discussed in Note 1in the Notes to the Unaudited Consolidated Financial Statements included inthis Form 10-Q, dueto the absence of quotes from the Company’s broker-dealer and the lack ofreadily observable market quotes, the Company used valuation models to estimatethe fair value of the Company’s SLARS at March 31, 2008.  These valuation models include numerousassumptions such as assessments of the underlying structure and collateral ofeach security, default risk, liquidity risk, expected cash flows, discountrates, issuer credit ratings, workout periods and overall capital marketliquidity.  These assumptions andassessments are subject to uncertainties, are difficult to predict and requiresignificant judgment.  The use ofdifferent assumptions, applying different judgment to inherently subjectivematters and changes in future market conditions could result in significantlydifferent estimates of fair value.

 

We assessother-than-temporary impairment of long-term investments in accordance withFASB Staff Position No. FAS 115-1, “*TheMeaning of Other-Than-Temporary Impairment and its Application to CertainInvestments*.” This assessment requires significant judgment.  In making this determination, we employ asystematic methodology that considers available quantitative and qualitativeevidence in evaluating potential impairment of our investments.  If the cost of an investment exceeds its fairvalue, we evaluate general market conditions, earnings performance, creditrating, asset quality, and other key measures for our investments.  We also consider the duration and extent towhich the fair value has been less than cost, and our ability and intent tohold the investment.  Once a decline infair value is determined to be other-than-temporary, an impairment charge isrecorded, a loss isrecognized in our consolidated statements of income and a new cost basis in the investment is established.  We have not recorded any other-than-temporaryimpairments on our investments.  However,if market, industry and/or investee conditions deteriorate, we may recordimpairments in the future, which could be material.

 

# **RESULTS OF OPERATIONS**

# ** **

The following discussion summarizes the significant factors affectingoperating results for the three-month periods ended March 31, 2008 and2007.  This discussion and analysisshould be read in conjunction with our unaudited consolidated interim financialstatements and the related notes included in this Form 10-Q.

 

18

----

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Key Financial Metrics**                                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Revenue growth – outsourced portals                                |       | 20                                               | %          | 17 | % |
| Same state revenue growth – outsourced portals                     |       | 12                                               | %          | 16 | % |
| Recurring portal revenue %                                              |       | 91                                               | %          | 93 | % |
| Gross profit % - outsourced portals                                     |       | 47                                               | %          | 47 | % |
| Selling & administrative expenses as % of  portal revenues     |       | 25                                               | %          | 26 | % |
| Operating income margin % (operating income as a %  of portal revenues) |       | 20                                               | %          | 20 | % |

 

PORTAL REVENUES. In the analysis below, we havecategorized our portal revenues according to the underlying source of revenue(in thousands) with the corresponding percentage change from the prior yearperiod.

 
| ** **                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                             | ** ** | **% Change** | ** ** | **2007** | ** ** |
| DMV transaction-based                             |       | $                                                    | 11,910     |   | 4 | % | $ | 11,460 |   |
| Non-DMV transaction-based                         |       | 7,577                                                |       | 26 | % | 6,015 |   |
| Software development & portal management |       | 4,309                                                |       | 80 | % | 2,393 |   |
|                                              |       |                                                 |       |   |   |   |   |
| Total                                             |       | $                                                    | 23,796     |   | 20 | % | $ | 19,868 |   |

 

Portal revenues in the current quarter increased 20%,or approximately $3.9 million, over the prior year quarter.  This increase was mainly attributable to a12% increase, or approximately $2.4 million, in same state portal revenues(outsourced portals in operation and generating recurring revenues for two fullperiods), and an 8% increase, or approximately $1.5 million, in revenues fromour newer portals, including Vermont ($0.2 million, which began to generate DMVrevenues in March 2007), Arizona ($1.0 million, which began to generaterevenues in October 2007) and West Virginia ($0.3 million, which began togenerate DMV revenues in February 2008).

 

Our Indiana portal subsidiary signed a new long-termcontract with the state of Indiana that commenced on July 1, 2006.  The contract is based on a funding model thatincludes recurring fixed monthly fees for baseline services and primarilyproject-based pricing for variable services. Historically, the majority of revenues under this contract were DMV andnon-DMV transaction-based.  Under the newcontract, the majority of revenues are classified as software development &portal management.  Prior to July 1,2006, we defined same state revenues as those from states in operation andgenerating DMV 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 12% over theprior year quarter due to increased transaction revenues from our Arkansas, Tennessee,Montana, Hawaii and Oklahoma portals, among others.

 

Excluding Indiana, same state portal revenues in thecurrent quarter increased 14% over the prior year quarter, with same state DMVtransaction-based revenues remaining flat and same state non-DMVtransaction-based revenues increasing 26% (primarily due to the addition ofseveral new revenue generating applications in existing portals).  Our same state revenue growth in the currentquarter was lower than the growth we achieved in the prior year quarterprimarily due to decreases in same state DMV and non-DMV transaction-basedrevenue growth.  Same state DMV revenuegrowth in the current quarter was 0% compared to 10% in the prior year quarter.The higher growth in the prior year quarter was primarily due to the effect ofDMV price 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 38% in the prior year quarter.

 

19

----

 

COST OF PORTALREVENUES.  Cost of portal revenues forthe current quarter increased 22%, or approximately $2.3 million, over theprior year quarter.  This increase wasattributable to a 12% increase, orapproximately $1.2 million, in same state cost of portal revenues, and a 10%increase, or approximately $1.1 million, in cost of portal revenues from ournewer state portal businesses in Vermont, Arizona and West Virginia.

 

The increase in samestate cost of portal revenues in the current quarter was partially attributableto additional personnel in several of our portals due to our continued growthand reinvestment in our core business. Also contributing to this increase was an increase in bank fees.  A growing percentage of our non-DMVtransaction-based revenues are generated from online applications whereby userspay for information or transactions via credit cards.  We typically earn a percentage of the creditcard transaction amount, but also must pay an associated fee to the bank thatprocesses the credit card transaction. We earn a lower gross profit percentage on these transactions ascompared to our other non-DMV applications. However, we plan to continue to implement these services as theycontribute favorably to our operating income growth.

 

Our portal gross profitrate was 47% in both the current and prior year quarters. We carefully monitorour portal gross profit percentage to strike the balance between generating asolid financial return for our shareholders and delivering value to our governmentpartners through reinvestment in our portals (which we believe also benefitsour shareholders).  We currently expectour portal gross profit percentage to range from 45% to 47% in 2008.

 

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

 
| ** **                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                             | ** ** | **% Change** | ** ** | **2007** | ** ** |
| UCC & corporate filings software  development |       | $                                                    | 150        |   | (13 | )% | $ | 172 |   |
| Ethics & elections                            |       | 686                                                  |       | 30 | % | 528 |   |
| Other                                                  |       | 47                                                   |       | (29 | )% | 66 |   |
|                                                   |       |                                                 |       |   |   |   |   |
| Total                                                  |       | $                                                    | 883        |   | 15 | % | $ | 766 |   |

 

Software & services revenues in thecurrent year quarter increased 15%, or approximately $0.1 million, over theprior year quarter.  This increase wasprimarily attributable to a contract renewal with the state of Michigan in ourethics & elections business that enhanced the revenues we earn.

 

SELLING & ADMINISTRATIVE.  Selling & administrativeexpenses in the current quarter increased 16%, or approximately $0.8 million,over the prior year quarter.  Asdiscussed in Note 5 in the Notes to the Unaudited Consolidated FinancialStatements in this Form 10-Q and in Item 1A, Item 3 and Note 8 in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007, filed with the SEC on March 17,2008, we are currently the subject of an informal SEC inquiry of expensereporting by certain officers of our Company and certain potentially relatedmatters.  In connection with thatinquiry, a review was undertaken by the Audit Committee of our Board ofDirectors, with the assistance of outside, independent counsel, which focusedon such expense reporting.  The increasein selling & administrative expenses in the current quarter wasprimarily attributable to legal fees and other expenses totaling approximately$0.5 million incurred in connection with the ongoing informal SEC inquiry andthe Audit Committee review.  We couldincur significant legal fees and other expenses in connection with the ongoing,informal SEC inquiry.

 

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

 

DEPRECIATION & AMORTIZATION. Depreciation & amortization expense in the first quarter of2008 increased 58%, or $0.3 million, over the prior year quarter.  The increase was primarily attributable tocapital 

 

20

----

 

expenditures inthe current and prior periods for normal fixed asset additions in ouroutsourced portal business, including Web servers, purchased software andoffice furniture and equipment to support and enhance corporate-wideinformation technology security and portal operations, in addition to capitalexpenditures for furniture, fixtures and leasehold improvements made in thesecond half of 2007 for our new corporate headquarters.

 

As a percentage of portal revenues, depreciation &amortization was 4% in the current quarter compared to 3% in the prior yearquarter.  We currently expectdepreciation & amortization expense as a percentage of portal revenuesto range from 3% to 4% in 2008, as we will continue to make key informationtechnology infrastructure and security investments to support the long-termexpansion of our portal business.

 

INTEREST INCOME.  Interest incomereflects interest earned on our investable cash and investment portfolio. Asfurther discussed in Note 3 in the Notes to Unaudited Consolidated FinancialStatements included in this Form 10-Q, on February 4, 2008, our Boardof Directors declared a special cash dividend of $0.25 per share, payable toshareholders of record as of February 18, 2008.  The dividend, totaling approximately $15.7million, was paid on February 28, 2008 out of our available cash andshort-term investments.  We currentlyexpect interest income in 2008 to be lower than in 2007, partially as a resultof paying this special dividend, but primarily because of the decliningshort-term interest rate environment we are currently experiencing in additionto the lower average investment balance.

 

# **LIQUIDITY ANDCAPITAL RESOURCES**

# ** **

*Operating Activities*

 

Net cash provided by operating activities was $5.7 million in thecurrent quarter as compared to negative operating cash flow of $1.5 million inthe prior year quarter.  Our negativecash flow in the prior year quarter was primarily due to a substantial build inaccounts receivable and the timing of payments to certain of our governmentpartners, which affected accounts payable. We typically see an increase in both accounts receivable and accountspayable in the first quarter of every year due to increases in revenues acrossour portal businesses as compared to the fourth quarter of the previous year,which is our seasonally lowest quarter due to the smaller number of businessdays and a lower volume of business-to-government and citizen-to-governmenttransactions during the holiday periods. While a general increase in revenues in the prior year quartercontributed to an increase in our accounts receivable, a substantial portion ofthe increase (approximately $3.0 million) was attributable to a build inaccounts receivable relating to our Indiana portal contract.  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 the prior year quarter forbaseline and variable services performed since July 2006.

 

In addition, accounts payable in the prior year quarter experienced asmaller increase in comparison to the increase in trade accounts receivable(excluding the impact of Indiana portal receivables discussed above), asaccounts payable at the end of fiscal 2006 were temporarily high due in part toan increase in fourth quarter 2006 tax payment processing from tax filingapplications across our portal businesses. Such tax payments are frequently made via ACH or credit cards at the endof the year, whereby we do not receive payment or remit collected cash untilafter year end.  The majority of theseyear-end tax receipts were remitted to our government partners in early January 2007.

 

The decrease in accrued expenses in the current quarter was primarilyattributable to decreases in accrued payroll and benefit costs relating tobonus payments to management-level employees pursuant to a 2007 incentive planand Company 401(k) matching contributions.

 

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 paying federalincome taxes, with the exception of amounts relating to alternative minimumtax, 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 

 

21

----

 

carryforward periods. Based on our current projections, we currently expect to fully utilizeour federal NOL carryforwards by the end of 2009.  For the three-month periods ended March 31,2008 and 2007, combined federal and state income tax payments totaledapproximately $0.4 million and $0.3 million, respectively.

 

*Investing Activities*

 

Investing activities inthe current quarter primarily reflect the partial liquidation of our investmentportfolio to pay the $15.7 million special cash dividend in February 2008,and $1.2 million of capital expenditures, which were for normal fixed asset additions in ouroutsourced portal business, including Web servers, purchased software andoffice equipment.  Cash providedby investing activities in the prior year quarter primarily reflects theliquidation of our investment portfolio to pay the $46.7 million special cashdividend in February 2007, and $1.0 million of capital expenditures, which were primarilyfor normal fixed asset additions in our outsourced portal business.

 

*Financing Activities*

 

Financing activities inthe current quarter primarily reflect payment of the $15.7 million special cashdividend in February 2008, partially offset by receipt of $0.8 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 yearquarter primarily reflect payment of the $46.7 million special cash dividend inFebruary 2007, partially offset by receipt of $0.5 million in proceedsfrom the exercise of employee stock options and $0.2 million in proceeds fromour employee stock purchase 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 March 31, 2008 and December 31,2007 were approximately $292.8 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 March 31, 2008 and December 31, 2007 was 10and 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 $33.4 million at March 31, 2008from $49.8 million at December 31, 2007. Our current ratio, defined as current assets divided by currentliabilities, at March 31, 2008 was 1.7 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 and short-terminvestments in thecurrent quarter 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 March 31,2008, which decreased our working capital by approximately $6.7 million, asfurther discussed in Note 1 in the Notes to the Unaudited ConsolidatedFinancial Statements included in this Form 10-Q.

 

At March 31, 2008, our total cash and short-term investmentbalance was $38.4 million compared to $55.8 million at December 31,2007.  As further discussed in Note 1 in the Notes tothe Unaudited Consolidated Financial Statements included in this Form 10-Q,during January 2008, we began to liquidate our short-terminvestments portfolio in anticipation of paying a $15.7 million special cashdividend 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 

 

22

----

 

mid-February 2008,as the amount of securities submitted for sale in those auctions exceeded theamount of bids, and we have not subsequently had a successful auction relatedto the remaining $7.0 million par value of these securities we currentlyhold.    To date we have collected allinterest payable 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, wepaid a special cash dividend totalling approximately $15.7 million out ofavailable 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 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 toraise additional capital within the next twelve months to further:

 

·                  fundoperations if unforeseen costs arise;

 

·                  supportour expansion into other states and government agencies beyond what iscontemplated if unforeseen opportunities arise;

 

·                  expandour product and service offerings beyond what is contemplated if unforeseenopportunities arise;

 

·                  respondto unforeseen competitive pressures; and

 

·                  acquiretechnologies 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 March 31, 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 March 31, 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 March 31, 2008, we were bound by performancebond commitments totaling approximately $3.3 million on certain governmentportal outsourcing contracts.  Theseperformance bonds are collateralized by a $1 million letter of credit.  We have never had any defaults resulting indraws on performance bonds or letters of credit.

 

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

 

We do not haveoff-balance sheet arrangements or significant exposures to liabilities that arenot recorded 

 

23

----

 

or disclosed in our financial statements.  While we have significant operating leasecommitments for office space, those commitments are generally tied to theperiod of performance under related contracts. We have income tax uncertainties of approximately $0.7 million at March 31,2008.  These obligations are classifiedas other long-term liabilities in our consolidated balance sheet, as resolutionis expected 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.

 

**RECENT ACCOUNTINGPRONOUNCEMENTS**

 

*Fair Value Measurements*

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements,” which defines fair value, establishes a frameworkfor measuring fair value in generally accepted accounting principles, andexpands disclosures about fair value measurements.  SFAS No. 157 does not require any newfair value measurements, but provides guidance on how to measure fair value byproviding a fair value hierarchy used to classify the source of theinformation.  Except for the portion ofSFAS No. 157 that addresses nonfinancial assets and nonfinancialliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis, which has been deferred for one year, weadopted this standard effective January 1, 2008.  The adoption of SFAS No. 157 did nothave a material 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 onitems for which the fair value option has been elected are reported inearnings.  SFAS No. 159 does not affect any existing accounting literaturethat requires certain assets and liabilities to be carried at fair value. Wedid not elect to choose the fair value option and record unrealized gains andlosses in earnings for any of our financial instruments.  Accordingly, the adoption of SFAS No. 159on January 1, 2008 did not have any impact on our consolidated financialstatements.

 

24

----

 

**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 March 31,2008.  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 its filings under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by anissuer 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.

 

25

----

 

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

 

# **Therehave been no changes in our internal control over financial reporting thatoccurred during our first fiscal quarter of 2008 that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.**

# ** **

**PART II. OTHER INFORMATION**

 

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

 

(c)           During the firstquarter of 2008, the Company acquired shares of common stock surrendered byemployees to pay income taxes due upon the vesting of restricted stock asfollows:

 
| ****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**** | **** **** |
|-----------------------|----------------|--------------------------------------------------|----------------|--------------------------------------------------|----------------|--------------------------------------------------------------------------------------------------------------------------------------|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| January 29, 2008 |           | 2,012                                            |           | $                                                | 7.24           |                                                                                                                                 | N/A            |                                                                                                                                                                                      | N/A            |   |
|                       |                |                                                  |                |                                                  |                |                                                                                                                                      |                |                                                                                                                                                                                           |                |  |

 

**ITEM 5. OTHER INFORMATION**

 

On May 6, 2008, the Board of Directors of theCompany approved an amendment to the Amended and Restated Bylaws of NIC Inc. tochange “President” to “principal executive officer” and clarify that the Boardhas discretion to determine the title of such principal executive officer.

 

On May 6, 2008, the Compensation Committee of theBoard of Directors of the Company approved the form of the Performance-BasedRestricted Stock Agreement to be entered into with executive officers whoreceive performance-based restricted stock awards under the NIC Inc. 2006Amended and Restated Stock Option and Incentive Plan.

 

Jeffery S. Fraser stepped down as Chairman of theBoard of Directors of the Company on May 6, 2008, effective on the samedate.  On May 6, 2008, Mr. Fraserwas voted the honorary title Chairman Emeritus by the Board.  He will continue to serve on the Company’sBoard of Directors.

 

On May 6, 2008, the Board of Directors of theCompany elected Harry H. Herington, who is currently the Chief ExecutiveOfficer of the Company, as Chairman of the Board of Directors, and appointedArt N. Burtscher to serve as Lead Director during 2008.

 

On May 6, 2008, Governor Daniel J. Evans wasappointed to serve as Chairman of the Compensation Committee and Alexander C.Kemper was appointed to serve as Chairman of the Corporate Governance andNominating Committee. The Audit Committee elected Mr. Burtscher to serveas its Chair.

 

**ITEM 6.  EXHIBITS**

 

3.1 - Amended and Restated Bylaws of NIC Inc. (a Colorado corporation),As Amended and Restated Effective May 6, 2008

 

10.1 - NIC Inc. Management Annual Cash Incentive Plan, dated March 4,2008

 

26

----

 

10.2 - Performance-Based Restricted Stock Agreement under the NIC Inc.2006 Amended and Restated Stock Option and Incentive Plan

 

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

 

27

----

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                     | NIC INC.                |
|--------------------------|-------------------------|
|                     |                    |
| Dated: May 12, 2008 | /s/Stephen M. Kovzan    |
|                     | Stephen M. Kovzan       |
|                     | Chief Financial Officer |

 

28

 

**NIC Inc.**

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                 |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                                 |
|        |       |                                                                                                                       |
| 3.1         |       | Amended and Restated Bylaws of NIC Inc. (a Colorado  corporation), As Amended and Restated Effective May 6, 2008      |
|        |       |                                                                                                                       |
| 10.1        |       | NIC Inc. Management Annual Cash Incentive Plan,  dated March 4, 2008                                                  |
|        |       |                                                                                                                       |
| 10.2        |       | Performance-Based Restricted Stock Agreement under  the NIC Inc. 2006 Amended and Restated Stock Option and Incentive Plan |
|        |       |                                                                                                                       |
| 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                                    |

 

29

----