**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

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

# ** **

**FORM 10-Q**

 

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

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

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

 

**Commission file number 000-26621**

 

**NIC INC.**

(Exact name of registrantas specified in its charter)

 

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

 

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

(Address of principalexecutive offices) (Zip Code)

 

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

 

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

 

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

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The number of shares outstanding of the registrant’s common stock as of October 31,2008 was 62,774,595.

 

 

 

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**PART I- FINANCIAL INFORMATION**

**Item 1.    ConsolidatedFinancial Statements**

 

**NIC INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                       | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                  |       |                   |       |                  |       |
| Cash and cash equivalents                                                                        |       | $                      | 55,510     |                  | $          | 38,236 |   |
| Short-term investments                                                                           |       | 6,854                  |       | 17,600                |       |
| Trade accounts receivable                                                                        |       | 33,281                 |       | 28,149                |       |
| Unbilled revenues                                                                                |       | 348                    |       | 720                   |       |
| Deferred income taxes, net                                                                       |       | 7,033                  |       | 6,746                 |       |
| Prepaid expenses & other current assets                                                 |       | 2,289                  |       | 2,143                 |       |
| Total current assets                                                                             |       | 105,315                |       | 93,594                |       |
| Property and equipment, net                                                                      |       | 6,739                  |       | 6,110                 |       |
| Deferred income taxes, net                                                                       |       | 5,190                  |       | 10,809                |       |
| Other assets                                                                                     |       | 1,251                  |       | 863                   |       |
| Total assets                                                                                     |       | $                      | 118,495    |                  | $          | 111,376 |   |
|                                                                                             |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                    | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                             |       |                   |       |                  |       |
| Accounts payable                                                                                 |       | $                      | 44,136     |                  | $          | 36,498 |   |
| Accrued expenses                                                                                 |       | 8,215                  |       | 6,848                 |       |
| Application development contracts                                                                |       | 246                    |       | 353                   |       |
| Other current liabilities                                                                        |       | 1,017                  |       | 99                    |       |
| Total current liabilities                                                                        |       | 53,614                 |       | 43,798                |       |
|                                                                                             |       |                   |       |                  |       |
| Other long-term liabilities                                                                      |       | 1,036                  |       | 714                   |       |
| Total liabilities                                                                                |       | 54,650                 |       | 44,512                |       |
|                                                                                             |       |                   |       |                  |       |
| Commitments and contingencies (Notes 1, 2 and 7)                                                 |       | —                 |       | —                |       |
|                                                                                             |       |                   |       |                  |       |
| Shareholders’ equity:                                                                       |       |                   |       |                  |       |
| Common stock, no par, 200,000 shares authorized 62,760  and 62,031 shares issued and outstanding |       | —                 |       | —                |       |
| Additional paid-in capital                                                                       |       | 153,590                |       | 165,934               |       |
| Accumulated deficit                                                                              |       | (89,674                | )          | (98,902               | )          |
| Accumulated other comprehensive loss                                                             |       | (71                    | )          | —                |       |
|                                                                                             |       | 63,845                 |       | 67,032                |       |
| Less treasury stock                                                                              |       | —                 |       | (168                  | )          |
| Total shareholders’ equity                                                                  |       | 63,845                 |       | 66,864                |       |
| Total liabilities and shareholders’ equity                                                  |       | $                      | 118,495    |                  | $          | 111,376 |   |

 

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

 

2

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**NIC INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(UNAUDITED)**

**thousandsexcept for per share amounts**

 
| ** **                                                                                   | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                   | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Portal revenues                                                                              |       | $                                | 24,147     |                            | $          | 20,699 |   | $ | 72,564 |   | $ | 61,177 |   |
| Software & services revenues                                                        |       | 794                              |       | 859                             |       | 2,758 |   | 2,491 |   |
| Total revenues                                                                               |       | 24,941                           |       | 21,558                          |       | 75,322 |   | 63,668 |   |
| Operating expenses:                                                                          |       |                             |       |                            |       |   |   |   |   |
| Cost of portal revenues, exclusive of depreciation &  amortization                       |       | 13,502                           |       | 10,844                          |       | 39,214 |   | 31,718 |   |
| Cost of software & services revenues,  exclusive of depreciation & amortization |       | 541                              |       | 479                             |       | 1,681 |   | 1,442 |   |
| Selling & administrative                                                            |       | 5,520                            |       | 5,207                           |       | 17,305 |   | 15,772 |   |
| Depreciation & amortization                                                         |       | 903                              |       | 632                             |       | 2,648 |   | 1,744 |   |
| Total operating expenses                                                                     |       | 20,466                           |       | 17,162                          |       | 60,848 |   | 50,676 |   |
| Operating income                                                                             |       | 4,475                            |       | 4,396                           |       | 14,474 |   | 12,992 |   |
| Other income (expense):                                                                      |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                                              |       | 140                              |       | 362                             |       | 583 |   | 1,260 |   |
| Gain on affiliate investments                                                                |       | —                           |       | 508                             |       | — |   | 508 |   |
| Other expense, net                                                                           |       | (5                               | )          | —                          |       | (24 | ) | — |   |
| Total other income (expense)                                                                 |       | 135                              |       | 870                             |       | 559 |   | 1,768 |   |
| Income before income taxes                                                                   |       | 4,610                            |       | 5,266                           |       | 15,033 |   | 14,760 |   |
| Income tax provision                                                                         |       | 1,550                            |       | 1,476                           |       | 5,805 |   | 5,472 |   |
| Net income                                                                                   |       | $                                | 3,060      |                            | $          | 3,790 |   | $ | 9,228 |   | $ | 9,288 |   |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Basic net income per share                                                                   |       | $                                | 0.05       |                            | $          | 0.06 |   | $ | 0.15 |   | $ | 0.15 |   |
| Diluted net income per share                                                                 |       | $                                | 0.05       |                            | $          | 0.06 |   | $ | 0.15 |   | $ | 0.15 |   |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares outstanding:                                                         |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                        |       | 62,724                           |       | 61,905                          |       | 62,449 |   | 61,776 |   |
| Diluted                                                                                      |       | 62,971                           |       | 62,537                          |       | 62,864 |   | 62,255 |   |

 

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

 

3

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**NIC INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Treasury**    | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Loss**        | ** ** | **Stock**  | ** ** | **Total**  | ** ** |
| **Balance, January 1, 2008**                                                |       | 62,031                |       | $           | —     |            | $          | 165,934           |       | $               | (98,902    | )          | $          | —     |       | $ | (168 | ) | $ | 66,864 |   |
| Net income                                                                       |       | —                |       | —      |       | —          |       | 9,228             |       | —          |       | —     |       | 9,228      |       |
| Unrealized holding loss on investments (Note 1)                                  |       | —                |       | —      |       | —          |       | —            |       | (71             | )          | —     |       | (71        | )          |
| Cash dividends on common stock (Note 3)                                          |       | —                |       | —      |       | (15,709         | )          | —            |       | —          |       | —     |       | (15,709    | )          |
| Retirement of treasury stock                                                     |       | —                |       | —      |       | (168            | )          | —            |       | —          |       | 168        |       | —     |       |
| Shares surrendered upon vesting of restricted stock  to satisfy tax withholdings |       | (58                   | )          | —      |       | (438            | )          | —            |       | —          |       | —     |       | (438       | )          |
| Stock options exercises and restricted stock  vestings                           |       | 725                   |       | —      |       | 1,862           |       | —            |       | —          |       | —     |       | 1,862      |       |
| Stock-based compensation                                                         |       | —                |       | —      |       | 1,829           |       | —            |       | —          |       | —     |       | 1,829      |       |
| Issuance of common stock under employee stock  purchase plan                     |       | 62                    |       | —      |       | 280             |       | —            |       | —          |       | —     |       | 280        |       |
| **Balance, September 30, 2008**                                             |       | 62,760                |       | $           | —     |            | $          | 153,590           |       | $               | (89,674    | )          | $          | (71        | )          | $ | — |   | $ | 63,845 |   |

 

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

 

4

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**NIC INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                         | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**          | ** ** |
| ** **                                                                         | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                               | 9,228      |   | $ | 9,288 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                            |       |   |   |
| Depreciation & amortization                                               |       | 2,648                           |       | 1,744 |   |
| Stock-based compensation expense                                                   |       | 1,829                           |       | 1,260 |   |
| Application development contracts                                                  |       | (107                            | )          | (121 | ) |
| Deferred income taxes                                                              |       | 5,332                           |       | 5,193 |   |
| (Gain) on affiliate investments                                                    |       | —                          |       | (508 | ) |
| Loss on disposal of property and equipment                                         |       | 24                              |       | — |   |
| Impairment loss on property and equipment                                          |       | —                          |       | 164 |   |
| Changes in operating assets and liabilities:                                       |       |                            |       |   |   |
| (Increase) in trade accounts receivable                                            |       | (5,132                          | )          | (2,144 | ) |
| Decrease in unbilled revenues                                                      |       | 372                             |       | 724 |   |
| (Increase) in prepaid expenses & other  current assets                    |       | (146                            | )          | (277 | ) |
| (Increase) decrease in other assets                                                |       | (10                             | )          | 2 |   |
| Increase in accounts payable                                                       |       | 7,638                           |       | 2,461 |   |
| Increase in accrued expenses                                                       |       | 929                             |       | 1,480 |   |
| Increase (decrease) in other current liabilities                                   |       | 918                             |       | (65 | ) |
| Increase (decrease) in other long-term liabilities                                 |       | 322                             |       | (389 | ) |
| Net cash provided by operating activities                                          |       | 23,845                          |       | 18,812 |   |
|                                                                               |       |                            |       |   |   |
| Cash flows from investing activities:                                              |       |                            |       |   |   |
| Purchases of property and equipment                                                |       | (3,118                          | )          | (2,618 | ) |
| Capitalized internal use software development costs                                |       | (561                            | )          | (358 | ) |
| Purchases of investments                                                           |       | (1,000                          | )          | (12,000 | ) |
| Sales and maturities of investments                                                |       | 11,675                          |       | 45,008 |   |
| Proceeds from sale of affiliate                                                    |       | —                          |       | 508 |   |
| Net cash provided by investing activities                                          |       | 6,996                           |       | 30,540 |   |
|                                                                               |       |                            |       |   |   |
| Cash flows from financing activities:                                              |       |                            |       |   |   |
| Cash dividends on common stock                                                     |       | (15,709                         | )          | (46,730 | ) |
| Proceeds from employee common stock purchases                                      |       | 280                             |       | 239 |   |
| Proceeds from exercise of employee stock options                                   |       | 1,862                           |       | 806 |   |
| Net cash (used in) financing activities                                            |       | (13,567                         | )          | (45,685 | ) |
|                                                                               |       |                            |       |   |   |
| Net increase in cash and cash equivalents                                          |       | 17,274                          |       | 3,667 |   |
| Cash and cash equivalents, beginning of period                                     |       | 38,236                          |       | 36,745 |   |
| Cash and cash equivalents, end of period                                           |       | $                               | 55,510     |   | $ | 40,412 |   |
| Other cash flow information:                                                       |       |                            |       |   |   |
| Income taxes paid                                                                  |       | $                               | 577        |   | $ | 741 |   |

 

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

 

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**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

The consolidated interim financial statements of NICInc. and its subsidiaries (“NIC” or the “Company”) included herein have beenprepared, without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financialstatements prepared in accordance with generally accepted accounting principleshave been condensed or omitted pursuant to such rules andregulations.  In management’s opinion,the unaudited consolidated interim financial statements reflect all adjustments(which include only normal recurring adjustments, except as disclosed) necessaryto present fairly the consolidated financial position, results of operationsand cash flows of the Company and its subsidiaries as of the dates and for theinterim periods presented.  Theseunaudited consolidated financial statements and notes should be read in conjunctionwith the audited consolidated financial statements and related notes andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2007, filed with the SEC on March 17, 2008, andItem 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations included in this Form 10-Q. The consolidated balance sheet data included herein as of December 31,2007 was 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- and nine-monthperiods ended September 30, 2008 are not necessarily indicative of theresults to be expected for the full year ending December 31, 2008.

 

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

 

*The Company*

 

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

 

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*Basis of presentation*

 

The Company classifies its revenuesand cost of revenues 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 other costsassociated with the provision of dedicated client service such as dedicatedfacilities.  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*

 

TheCompany 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 September 30, 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 investmentswere as follows (in thousands):

** **
| **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| **Par Value**               | ** ** | **Unrealized  Loss**            | ** ** | **Fair  Value** | ** ** | **Par Value** | ** ** | **Unrealized  Gain (Loss)** | ** ** | **Fair Value** | ** ** |
| $                                | 6,925      |                            | $          | (71 | ) | $ | 6,854 |   | $ | 17,600 |   | $ | — |   | $ | 17,600 |   |
|                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company assesses other-than-temporaryimpairment of its investments in accordance with Financial Accounting StandardsBoard Staff Position No. 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 timewhich may 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- and nine-month periods ended September 30, 2008 and2007, the Company did not recognize any other-than-temporary impairment chargeson its investments.

 

TheCompany’s SLARS were structured with short-term interest rates that were resetthrough an auction process at 28—day intervals, but with contractual debtmaturities that could be well in excess of 22 years.  Historically, the Company had the option toliquidate 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 Company had successful auctions on thesesecurities with scheduled 28-day reset dates through mid-February 2008, atwhich time the Company had liquidated approximately $11.6 million of itsportfolio.  Furthermore, there weresuccessful auctions during January 2008 for each security the Company heldat September 30, 2008.  Accordingly,the Company determined that there was no impairment of these investments at December 31,2007.  The Company encountered its firstfailed auction in mid-February 2008, as the amount of securities submitted for salein those auctions exceeded the amount of bids. Subsequently, the Companydid not have a successful auction related to the

 

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remaining SLARS it held at September 30,2008.  In the third quarter of 2008, thebroker-dealer of the Company’s SLARS made a non-binding offer to repurchase, atpar value, all of the Company’s SLARS during the fourth quarter of 2008.  In early October 2008, the broker-dealerrepurchased all of the Company’s SLARS at par value.  Given the Company’s intent at September 30,2008 to have the broker-dealer repurchase its SLARS, and the subsequentrepurchase of these securities in early October 2008, the Companyclassified these securities as short-term at September 30, 2008.

 

The Company’s SLARS consisted of the following taxableissues (in thousands) at September 30, 2008:

 
| **Security (Maturity)**                        | ** ** | **Current  Interest Rate** | ** ** | **Next Interest  Rate Reset Date** | ** ** | **Par  Value** | ** ** | **Fair  Value** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------------|------------|----------------|------------|-----------------|------------|
| SLM Student Loan Trust 2003-5 A-9 (6/17/2030)       |       | 4.74                            | %          | 10/06/08                                          |       | $              | 1,150      |            | $          | 1,138 |   |
|                                                |       |                            |       |                                              |       |           |       |            |       |
| Missouri Higher Ed Loan Auth 2001 B (6/1/2031)      |       | 3.53                            | %          | 10/07/08                                          |       | 1,000          |       | 990             |       |
|                                                |       |                            |       |                                              |       |           |       |            |       |
| Missouri Higher Ed Loan Auth 2002D (7/1/2032)       |       | 2.39                            | %          | 10/06/08                                          |       | 2,800          |       | 2,771           |       |
|                                                |       |                            |       |                                              |       |           |       |            |       |
| NELNET Education Loan Funding 2003-1 A-6 (7/1/2043) |       | 2.68                            | %          | 10/28/08                                          |       | 1,000          |       | 990             |       |
|                                                |       |                            |       |                                              |       |           |       |            |       |
| Panhandle Plains Higher Ed Auth 2007 A-4 (8/1/2057) |       | 3.70                            | %          | 10/01/08                                          |       | 975            |       | 965             |       |
|                                                |       |                            |       |                                              |       |           |       |            |       |
| Total                                               |       |                            |       |                                              |       | $              | 6,925      |            | $          | 6,854 |   |

 

At September 30, 2008, the Company’s SLARS wereAAA-rated by one or more rating agencies and secured by pools of student loansguaranteed by the U.S. Department of Education under the Federal FamilyEducation Loan Program.

 

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 a discounted cash flow valuation model thatprojected the securities to be repurchased by the end of the fourth quarter of2008 for the determination of fair value at September 30, 2008.  Based on management’s assessment, the Companyestimated the fair value of its SLARS to be approximately $6.85 million at September 30,2008.  The Company recorded an unrealizedholding loss of approximately $71,000 in accumulated other comprehensive loss,a component of shareholders’ equity, related to the temporary impairment of itsSLARS for the nine-month period ended September 30, 2008.  Because the Company’s SLARS were repurchasedat par value in early October 2008, the Company will reverse thisunrealized holding loss in the fourth quarter of 2008.  The Company collected all interest payable onall of its SLARS when due.

 

*Fair Value Measurements*

 

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

 

SFAS No. 157establishes a three-level hierarchy that prioritizes the inputs to valuationtechniques used to measure the fair value of financial instruments.  The valuation hierarchy is based upon thetransparency

 

8

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of inputs to thevaluation of an asset or liability as of the measurement date.  The three levels are defined as follows:

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

 

A financialinstrument’s categorization within the valuation hierarchy is based upon thelowest level of input that is significant to the fair value measurement.  The Company’s assets or liabilities requiredto be measured at fair value on a recurring basis within the valuationhierarchy of SFAS No. 157 consist entirely of its student loanauction-rate securities, or SLARS.  At September 30,2008, the Company’s SLARS were classified within Level 3 of the fair valuehierarchy because there was limited, or no, trading activity due to continuedfailed auctions and therefore such securities had 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*.

 

The following tablepresents a reconciliation for all financial instruments measured at fair valueon a recurring basis using significant unobservable inputs (Level 3) for thethree- and nine-month periods ended September 30, 2008 (in thousands):

 
| ** **                                       | ** ** | **Short-term  Investments**                                    | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Three months ended  September 30, 2008** | ** ** | **Nine months ended  September 30, 2008** | ** ** |
| Balance, December 31, 2007                  |       | $                                                              | —     |   | $ | — |   |
| Impact of adoption of SFAS No. 157          |       | —                                                         |       | — |   |
| Beginning Balance                                |       | $                                                              | 6,545      |   | $ | — |   |
| Total gains/(losses) (realized/unrealized):      |       |                                                           |       |   |   |
| Included in earnings                             |       | —                                                         |       | — |   |
| Included in accumulated other comprehensive loss |       | 334                                                            |       | (71 | ) |
| Purchases, issuances and settlements             |       | —                                                         |       | — |   |
| Sales and maturities                             |       | (25                                                            | )          | (25 | ) |
| Transfers in and/or out of Level 3               |       | —                                                         |       | 6,950 |   |
| Balance, September 30, 2008                 |       | $                                                              | 6,854      |   | $ | 6,854 |   |

 

As further discussed above under *Investments*,the broker-dealer of the Company’s SLARS repurchased these securities at parvalue in early October 2008.

 

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 certainother items at fair value that are not currently required to be measured atfair value.  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 financial instruments.  Accordingly, the adoption of SFAS No. 159on January 1, 2008 did not have any impact on the unaudited consolidatedfinancial statements of the Company.

 

*Concentrationof credit risk*

 

Financialinstruments that potentially subject the Company to significant concentrationsof credit risk consist primarily of cash and cash equivalents, investments instudent loan auction-rate securities, or SLARS, and accounts receivable.  During October 2008, the Federal DepositInsurance Corporation (“FDIC”) adopted the Temporary Liquidity GuaranteeProgram to strengthen investor confidence and encourage liquidity in thebanking system by providing full coverage on non-interest bearing deposittransaction accounts, regardless of dollar amount, for participating banksthrough December 31, 2009.  At September 30,2008, the amount of cash in domestic non-interest bearing commercial checkingaccounts was approximately $28.9 million, while the amount of cash held in

 

9

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interest-bearingsweep accounts was approximately $26.6 million. The Company attempts to limit its exposure to credit loss by investingthe cash held in its sweep accounts exclusively in U.S. government money marketaccounts that purchase U.S. agency instruments or direct obligations of theU.S. Treasury.  The Company performsongoing credit evaluations of its customers and generally requires nocollateral to secure accounts receivable.

 

The Company is subject to concentration of credit risk andinterest rate risk related to its short-term investments, which consistedentirely of SLARS at September 30, 2008. As further discussed above under *Investments*, the broker-dealer of the Company’s SLARSrepurchased these securities at par value in early October 2008.

 

#### *Earningsper share*

#### * *

Basicearnings per share are calculated on the basis of the weighted average numberof common shares outstanding during the period. Diluted earnings per share are calculated on the basis of the weightedaverage number of common shares outstanding during the period and common stockequivalents that would arise from the exercise of stock options or the issuanceof restricted stock awards to employees and nonemployee directors using thetreasury stock method.  The followingtable sets forth the computation of basic and diluted earnings per share (inthousands, except per share amounts):

 
| ** **                                | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Numerator:**                            |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                |       | $                                                    | 3,060      |                                                | $          | 3,790 |   | $ | 9,228 |   | $ | 9,288 |   |
| **Denominator:**                          |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average shares – basic      |       | 62,724                                               |       | 61,905                                              |       | 62,449 |   | 61,776 |   |
| Stock options and restricted stock awards |       | 247                                                  |       | 632                                                 |       | 415 |   | 479 |   |
| Weighted average shares – diluted    |       | 62,971                                               |       | 62,537                                              |       | 62,864 |   | 62,255 |   |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Basic earnings per share:**             |       |                                                 |       |                                                |       |   |   |   |   |
| Net Income                                |       | $                                                    | 0.05       |                                                | $          | 0.06 |   | $ | 0.15 |   | $ | 0.15 |   |
| **Diluted net income per share:**         |       |                                                 |       |                                                |       |   |   |   |   |
| Net Income                                |       | $                                                    | 0.05       |                                                | $          | 0.06 |   | $ | 0.15 |   | $ | 0.15 |   |

 

Outstanding stockoptions totaling approximately 20,000 shares for each of the three- andnine-month periods ended September 30, 2008 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.  Outstanding stock options totalingapproximately 0.2 million shares during the three- and nine-month periods endedSeptember 30, 2007 were not included in the computation of dilutedweighted average shares outstanding because their exercise prices were in excessof the average stock price of the Company during the periods, and would resultin the options being anti-dilutive.

 

*RecentAccounting Pronouncements*

 

In May 2008,the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles.”  SFAS No. 162is intended to improve financial reporting by identifying a consistentframework, or hierarchy, for selecting accounting principles to be used inpreparing financial statements that are presented in conformity with generallyaccepted accounting principles in the United States for non-governmentalentities.  SFAS No. 162 is effective60 days following approval by the SEC of the Public Company AccountingOversight Board’s amendments to AU Section 411, “The Meaning of PresentFairly in Conformity with Generally Accepted Accounting Principles.”  The Company does not expect SFAS No. 162to have a material impact on the preparation of its consolidated financialstatements.

 

In June 2008,the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (FSP-EITF 03-6-1). Under FSP-EITF 03-6-1, unvested share-based payment awards that containnon-forfeitable rights to dividends or dividend equivalents (whether paid orunpaid) are participating securities and shall be included in the computationof earnings per share pursuant to the two-class method.  FSP-EITF 03-6-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those

 

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years and requiresretrospective application.  The Companyis currently evaluating the requirements of FSP-EITF 03-6-1 and has not yetdetermined the impact on its consolidated financial statements.

 

**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 September 30, 2008, the Company was bound by performance bondcommitments totaling approximately $3.3 million on certain portal outsourcingcontracts.  Under a typical portalcontract, the Company is required to fully indemnify its government clients againstclaims that the Company’s services infringe upon the intellectual propertyrights of others and against claims arising from the Company’s performance orthe performance of the Company’s subcontractors under the contract.

 

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

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

 

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

 

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**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. SHAREHOLDERS’ EQUITY – TREASURY SHARES**

 

During the second quarter of 2008, the Company wasinformed that the trustees of the National Information Consortium Voting Trust(the “Voting Trust”) dissolved the Voting Trust as of June 20, 2008.  The Voting Trust, which was managedindependently of NIC, was established on June 30, 1998 by the originalinvestors of the Company and consisted of 142 beneficiaries.  The Voting Trust held approximately 21.4million shares of NIC common stock, or approximately 34 percent, of totalshares outstanding.  Of this balance,116,441 shares were held on behalf of the Company by the Voting Trust, and wererecorded as treasury stock with an assigned value of $168,000 in theconsolidated balance sheets.  During thethird quarter of 2008, the Company exchanged its Voting Trust units for the116,441 shares of NIC common stock and retired these shares.

 

**5. UNCERTAIN TAXPOSITIONS**

 

The Company, along with itswholly owned subsidiaries, files a consolidated U.S. federal income tax returnand separate income tax returns in many states throughout the U.S.  The Company’s tax returns are not currentlyunder examination by any of these tax authorities.  The Company remains subject to U.S. federalexamination for the tax years ended on or after December 31, 2005.  State income tax returns are generallysubject to examination for a period of three to five years after filing of therespective return.

 

A reconciliation of thebeginning and ending amount of the consolidated liability for unrecognizedincome tax benefits is as follows (in thousands):

 
| ** **                                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Beginning balance                           |       | $                                                    | 714        |                                                | $          | 1,241 |   | $ | 714 |   | $ | 1,119 |   |
| Additions for tax positions of prior years  |       | 1                                                    |       | —                                              |       | 1 |   | — |   |
| Reductions for tax positions of prior years |       | (247                                                 | )          | (511                                                | )          | (247 | ) | (389 | ) |
| Settlements                                 |       | —                                               |       | —                                              |       | — |   | — |   |
| Expiration of the statute of limitations    |       | —                                               |       | —                                              |       | — |   | — |   |
| Ending balance                              |       | $                                                    | 468        |                                                | $          | 730 |   | $ | 468 |   | $ | 730 |   |

 

All of the Company’sunrecognized income tax benefits would affect the Company’s effective tax rateif recognized.  For the three- andnine-month periods ended September 30, 2008, the liability for unrecognizedincome tax benefits decreased by approximately $0.2 million for tax years thathave closed.  For the three- andnine-month periods ended September 30, 2007, the liability forunrecognized income tax benefits decreased by approximately $0.5 million and $0.4million, respectively, as the Company considered additional informationrelating to its uncertain tax positions. It is expected that the amount of unrecognized tax benefits will changein the next 12 months.  However, theCompany does not expect the change to have a significant impact on its resultsof operations or financial condition.

 

The Company recognizesaccrued interest and penalties associated with uncertain tax positions as partof its income tax provision in the consolidated statements of income.  At September 30, 2008 and 2007, accruedinterest and penalty amounts were not material.

 

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**6.  STOCK-BASED COMPENSATION**

 

Duringthe first and second quarters of 2008, the Board of Directors of the Companygranted certain management-level employees, executive officers and non-employeedirectors service-based restricted stock awards totaling 496,774 shares with agrant-date fair value totaling approximately $3.5 million.  Such restricted stock awards vest incumulative annual installments of 25%. Restricted stock is valued at the date of grant, based on the closingmarket price of the Company’s common stock, and expensed using thestraight-line method over the requisite service period.

 

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 annualgrowth rate) – 25% weighting

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

·                  Cash flow return on invested capital (three-yearaverage) – 50% weighting

 

At the end of thethree-year period, the executive officers will receive a number of shares perthe following schedule of threshold, target or superior Company performance forthe 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.

 

During the third quarter of2008, the Board of Directors of the Company granted certain non-executivemanagement-level employees service-based restricted stock awards totaling231,782 shares with a grant-date fair value totaling approximately $1.8million.  Such restricted stock awardsvest 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.

 

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The following table presents stock-based compensation expense included inthe Company’s consolidated statements of income for the three- and nine-monthperiods ended September 30 (in thousands):

 
| ** **                                                                                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Selling & administrative                                                                 |       | $                                                    | 407        |                                                | $          | 259 |   | $ | 1,212 |   | $ | 916 |   |
| Cost of portal revenues, exclusive of  depreciation & amortization                       |       | 183                                                  |       | 97                                                  |       | 528 |   | 293 |   |
| Cost of software & services revenues,  exclusive of depreciation & amortization |       | 11                                                   |       | 3                                                   |       | 21 |   | 14 |   |
| Stock-based compensation expense before income taxes                                              |       | 601                                                  |       | 359                                                 |       | 1,761 |   | 1,223 |   |
| Income tax benefit                                                                                |       | 235                                                  |       | 140                                                 |       | 688 |   | 477 |   |
| Net stock-based compensation expense                                                              |       | $                                                    | 366        |                                                | $          | 219 |   | $ | 1,073 |   | $ | 746 |   |

 

**7.  COMMITMENTS AND CONTINGENCIES**

 

*SEC Investigation*

 

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 has been the subject of an informal SEC inquiry of expensereporting by certain officers of the Company and certain potentially relatedmatters. In connection with that inquiry, a review was undertaken by the AuditCommittee of the Company’s Board of Directors, with the assistance of outside,independent counsel, which focused on such expense reporting. The reviewrevealed that expense reimbursement deficiencies occurred during the periodfrom 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.  During the secondquarter of 2008, the Company received notice from the SEC that a formal orderof investigation has been issued with respect to these matters.  As is frequently the case in such situations,the SEC has taken the step of obtaining a formal order of investigation toensure the thoroughness of its investigation. The Company believes the investigation conducted by NIC’s AuditCommittee was thorough and independent and it is not anticipated that the SECinvestigation will reveal any significant additional instances of misreportingof expenses by employees.

 

*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.

 

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**8.  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 concerning theCompany’s reportable segments for the three months ended September 30 (inthousands):

 
| ** **                           | ** ** | **Outsourced  Portals** | ** ** | **Software &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2008**                             | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                             |       | $                       | 24,147     |                              | $          | 794                           |       | $                       | —     |   | $ | 24,941 |   |
|                                 |       |                    |       |                              |       |                          |       |                    |       |
| Costs & expenses            |       | 14,319                  | ** ** | 411                               |       | 4,833                         |       | 19,563                  |       |
| Depreciation & amortization |       | 782                     | ** ** | 24                                |       | 97                            |       | 903                     |       |
| Operating income (loss)              |       | $                       | 9,046      | ** **                        | $          | 359                           |       | $                       | (4,930     | ) | $ | 4,475 |   |
|                                 |       |                    |       |                              |       |                          |       |                    |       |
| **2007**                             | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                             |       | $                       | 20,699     |                              | $          | 859                           |       | $                       | —     |   | $ | 21,558 |   |
|                                 |       |                    |       |                              |       |                          |       |                    |       |
| Costs & expenses            |       | 11,743                  | ** ** | 541                               |       | 4,246                         |       | 16,530                  |       |
| Depreciation & amortization |       | 594                     | ** ** | 6                                 |       | 32                            |       | 632                     |       |
| Operating income (loss)              |       | $                       | 8,362      | ** **                        | $          | 312                           |       | $                       | (4,278     | ) | $ | 4,396 |   |

 

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

 
| ** **                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating income for reportable segments |       | $        | 4,475      |     | $          | 4,396 |   |
| Interest income                                |       | 140      |       | 362      |       |
| Gain on affiliate investments                  |       | —   |       | 508      |       |
| Other expense, net                             |       | (5       | )          | —   |       |
|                                           |       |     |       |     |       |
| Consolidated income before income taxes        |       | $        | 4,610      |     | $          | 5,266 |   |

 

15

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The table below reflects summarized financial information concerning theCompany’s reportable segments for the nine months ended September 30 (inthousands):

 
| ** **                           | ** ** | **Outsourced  Portals** | ** ** | **Software &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2008**                             | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                             |       | $                       | 72,564     |                              | $          | 2,758                         |       | $                       | —     |   | $ | 75,322 |   |
|                                 |       |                    |       |                              |       |                          |       |                    |       |
| Costs & expenses            |       | 42,440                  | ** ** | 2,282                             |       | 13,478                        |       | 58,200                  |       |
| Depreciation & amortization |       | 2,314                   | ** ** | 66                                |       | 268                           |       | 2,648                   |       |
| Operating income (loss)              |       | $                       | 27,810     | ** **                        | $          | 410                           |       | $                       | (13,746    | ) | $ | 14,474 |   |
|                                 |       |                    |       |                              |       |                          |       |                    |       |
| **2007**                             | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                             |       | $                       | 61,177     |                              | $          | 2,491                         |       | $                       | —     |   | $ | 63,668 |   |
|                                 |       |                    |       |                              |       |                          |       |                    |       |
| Costs & expenses            |       | 34,619                  | ** ** | 1,646                             |       | 12,667                        |       | 48,932                  |       |
| Depreciation & amortization |       | 1,632                   | ** ** | 17                                |       | 95                            |       | 1,744                   |       |
| Operating income (loss)              |       | $                       | 24,926     | ** **                        | $          | 828                           |       | $                       | (12,762    | ) | $ | 12,992 |   |

 

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

 
| ** **                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating income for reportable segments |       | $        | 14,474     |     | $          | 12,992 |   |
| Interest income                                |       | 583      |       | 1,260    |       |
| Gain on affiliate investments                  |       | —   |       | 508      |       |
| Other expense, net                             |       | (24      | )          | —   |       |
|                                           |       |     |       |     |       |
| Consolidated income before income taxes        |       | $        | 15,033     |     | $          | 14,760 |   |

 

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

 

***FORWARD-LOOKINGSTATEMENTS***

 

“Safe Harbor” statementunder the Private Securities Litigation Reform Act of 1995: Statements in thisQuarterly Report on Form 10-Q regarding NIC and its business, which arenot current or historical facts, are “forward-looking statements” that involverisks and uncertainties.   Certainmatters discussed in this report may constitute forward-looking statementswithin the meaning of the federal securities laws that inherently includecertain risks and uncertainties. Forward-looking statements include, but are notlimited to, statements of plans and objectives, statements of future economicperformance or financial projections, statements of assumptions underlying suchstatements, and statements of the Company’s or management’s intentions, hopes,beliefs, expectations or predictions of the future. For example,statements like we “expect,” we “believe,” we “plan,” we “intend” or we “anticipate”are forward-looking statements. Investors should be aware that our actualoperating results and financial performance may differ materially from ourexpressed expectations because of risks and uncertainties about the futureincluding those risks discussed in our 2007 Annual Report on Form 10-Kfiled with the Securities and Exchange Commission (“SEC”) on March 17,2008 and in this Quarterly Report on Form 10-Q.  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 orcontemplated by the forward-looking statements will continue to be accurate inthe future.  Investors are cautioned notto put undue reliance on any forward-looking statement.

 

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

 

**WHAT WE DO – AN EXECUTIVE SUMMARY**

 

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

 

In ourcore business, portal outsourcing, we enter into contracts primarily with stategovernments and design, build and operate Web-based portals on their behalf. Weenter into long-term contracts, typically three to five years, and manageoperations for each government partner through separate subsidiaries thatoperate as decentralized businesses with a high degree of autonomy. Our portalsconsist of Web sites and applications that we build, which allow businesses andcitizens to access government information online and complete transactions,including applying for a permit, retrieving driver’s license records or filinga form or report. We help increase our government partners’ revenues byexpanding the distribution of their information assets and increasing thenumber of financial transactions conducted with governments.  We do this by marketing portal services andsoliciting users to complete government-based transactions and to enter intosubscriber contracts that permit users to access the portal and the governmentinformation contained therein in exchange for transactional and/or subscriptionuser fees. We are typically responsible for funding up-front investment andongoing operational costs of the government portals.  Our unique self-funding business model allowsus to reduce our government partners’ financial and technology risks and obtainrevenues by sharing in the fees generated from eGovernment services. Ourpartners benefit because they gain a centralized, customer-focused presence onthe Internet. Businesses and citizens gain a faster, more convenient and morecost-effective means 

 

17

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tointeract with governments.

 

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

 

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

 

# **REVENUE RECOGNITION**

# ** **

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

 

#### *Our portal outsourcing businesses*

#### * *

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

 

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

 

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

 

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

 

*Our software & services businesses*

 

Ethics & elections

 

Our ethics &elections business derives the majority of its revenues from time and materialsapplication development and maintenance outsourcing contracts and recognizesrevenues as services are provided.  At September 30,2008, our ethics & elections business was primarily engaged inservicing its contracts with the Federal Election Commission and the state ofMichigan.

 

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# ** **

# **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 September 30, 2008, thisbusiness was primarily engaged in servicing its contract with the CaliforniaSecretary of State and no longer markets its applications and services inrespect of new engagements.

 

**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 September 30, 2008,our short-term investments consisted entirely of student loan auction-ratesecurities, or SLARS.  As furtherdiscussed in Note 1 in the Notes to the Unaudited Consolidated FinancialStatements included in this Form 10-Q, due to the absence of quotes from our broker-dealerand the lack of readily observable market quotes, we used a discounted cashflow valuation model to estimate the fair value of our SLARS at September 30,2008.  This valuation model includesassumptions such as assessments of expected cash flows, discount rates andworkout periods.  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 short-term investments in accordance withFASB Staff Position No. 115-1, “The Meaning of Other-Than-TemporaryImpairment and its Application to Certain Investments.” This assessmentrequires significant judgment.  In makingthis determination, we employ a systematic methodology that considers availablequantitative and qualitative evidence in evaluating potential impairment of ourinvestments.  If the cost of aninvestment exceeds its fair value, we evaluate general market conditions,earnings performance, credit rating, asset quality, and other key measures forour investments.  We also consider theduration and extent to which the fair value has been less than cost, and ourability and intent to hold the investment to recovery.  Once a decline in fair value is determined tobe other-than-temporary, an impairment charge is recorded, a loss is recognized in our consolidatedstatements of income and a new costbasis in the investment is established. We have not recorded any other-than-temporary impairments on ourinvestments.

 

As further discussed inNote 1 in the Notes to the Unaudited Consolidated Financial Statements includedin this Form 10-Q, our SLARS, totaling approximately $6.9 million, wererepurchased by the broker-dealer of our SLARS at par value in early October 2008.

 

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# **RESULTS OF OPERATIONS**

# ** **

The following discussion summarizes the significant factors affectingoperating results for the three- and nine-month periods ended September 30,2008 and 2007.  This discussion andanalysis should be read in conjunction with our unaudited consolidated interimfinancial statements and the related notes included in this Form 10-Q.

 
| ** **                                                              | ** ** | **Three months ended   September 30,** | ** ** | **Nine months ended   September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Key Financial Metrics**                                     | ** ** | **2008**                                                   | ** ** | **2007**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue growth – outsourced portals                                |       | 17                                                         | %          | 20                                                        | %          | 19 | % | 18 | % |
| Same state revenue growth – outsourced portals                     |       | 10                                                         | %          | 19                                                        | %          | 12 | % | 16 | % |
| Recurring portal revenue %                                              |       | 94                                                         | %          | 94                                                        | %          | 92 | % | 94 | % |
| Gross profit % - outsourced portals                                     |       | 44                                                         | %          | 48                                                        | %          | 46 | % | 48 | % |
| Selling & administrative expenses as % of  portal revenues     |       | 23                                                         | %          | 25                                                        | %          | 24 | % | 26 | % |
| Operating income margin % (operating income as a %  of portal revenues) |       | 19                                                         | %          | 21                                                        | %          | 20 | % | 21 | % |

 

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  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                             | ** ** | **%  Change**                                       | ** ** | **2007** | ** ** | **2008** | ** ** | **%  Change** | ** ** | **2007** | ** ** |
| DMV transaction-based                             |       | $                                                    | 11,745     |                                                | 5          | % | $ | 11,171 |   | $ | 35,445 |   | 5 | % | $ | 33,906 |   |
| Non-DMV transaction-based                         |       | 8,800                                                |       | 23                                                  | %          | 7,128 |   | 25,427 |   | 25 | % | 20,409 |   |
| Software development & portal management |       | 3,602                                                |       | 50                                                  | %          | 2,400 |   | 11,692 |   | 70 | % | 6,862 |   |
|                                              |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Total                                             |       | $                                                    | 24,147     |                                                | 17         | % | $ | 20,699 |   | $ | 72,564 |   | 19 | % | $ | 61,177 |   |

 

Portal revenues in the current quarter increased 17%,or approximately $3.4 million, over the prior year quarter.  This increase was mainly attributable to a10% increase, or approximately $1.9 million, in same state portal revenues(outsourced portals in operation and generating recurring revenues for two fullperiods), and a 7% increase, or approximately $1.5 million, in revenues fromour newer portals, including Arizona ($1.1 million), which began to generaterevenues in October 2007, and West Virginia ($0.4 million), which began togenerate DMV revenues in February 2008. Same state portal revenues in the current quarter increased 10% over theprior year quarter due to increased transaction revenues from our Alabama,Colorado, Hawaii, Idaho, and Oklahoma portals, among others.

 

Our Indiana portal subsidiary operates under along-term contract with the state of Indiana that is based on a funding modelthat includes recurring fixed monthly fees for baseline services and primarilyproject-based pricing for variable services, rather than transaction-basedrevenues for DMV and non-DMV services. Excluding Indiana, same state portal revenues in the current quarterincreased 11% over the prior year quarter, with same state DMVtransaction-based revenues increasing 2% 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 2% compared to 11% 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 31% in the prior year quarter.

 

Portal revenues for thenine months in the current period increased 19%, or approximately $11.4million, over the prior year period.  Ofthis increase, 12%, or approximately $7.0 million, was attributable to anincrease in same state 

 

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portal revenues and 7%, or approximately $4.4 million,was attributable to our new portals including Vermont ($0.3 million), whichbegan to generate revenues in March 2007, Arizona ($3.0 million), and WestVirginia ($1.1 million).  Consistent withour results in the current quarter, same state portal revenues in thecurrent-to-date period increased 12% over the prior year period.  Excluding Indiana, same state portal revenuesin the current year-to-date period increased 12% over the prior year period,with same state DMV transaction-based revenues increasing 1% and same state non-DMVtransaction-based revenues increasing 26%.

 

COST OF PORTALREVENUES.  Cost of portal revenues forthe current quarter increased 25%, or approximately $2.7 million, over theprior year quarter.  This increase wasattributable to a 15% increase, or approximately $1.6 million, in same statecost of portal revenues, and a 10% increase, or approximately $1.1 million, incost of portal revenues from our newer state portal businesses in Arizona andWest 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 44% for the current quarter and 48% in the prior year quarter, as costof portal revenues grew at a higher rate (25%) than portal revenues (17%) inthe current quarter. The decrease in our portal gross profit rate in thecurrent quarter was partially attributable to lower startup margins in our twonewest portals, Arizona and West Virginia. We carefully monitor our portal gross profit percentage to strike thebalance between generating a solid financial return for our shareholders anddelivering value to our government partners through reinvestment in our portals(which we believe also benefits our shareholders).

 

Cost of portal revenuesfor the nine months in the current period increased 24%, or approximately $7.5million, over the prior period.  Of thisincrease, 13%, or approximately $4.2 million, was attributable to an increasein same state cost of portal revenues, and 11%, or approximately $3.3 million,was primarily attributable to our new Arizona and West Virginia portals.  Our portal gross profit rate for nine monthsin the current year period was 46% compared to 48% in the prior year period.

 

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  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                             | ** ** | **%  Change**                                       | ** ** | **2007** | ** ** | **2008** | ** ** | **%  Change** | ** ** | **2007** | ** ** |
| Ethics & elections                            |       | $                                                    | 565        |                                                | (11        | )% | $ | 637 |   | $ | 1,933 |   | 9 | % | $ | 1,779 |   |
| UCC & corporate filings software  development |       | 147                                                  |       | (16                                                 | )%         | 174 |   | 441 |   | (18 | )% | 535 |   |
| Other                                                  |       | 82                                                   |       | 70                                                  | %          | 48 |   | 384 |   | 117 | % | 177 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Total                                                  |       | $                                                    | 794        |                                                | (8         | )% | $ | 859 |   | $ | 2,758 |   | 11 | % | $ | 2,491 |   |

 

Software &services revenues in the current quarter decreased 8%, or approximately $0.1million, over the prior year quarter.  Ona year-to-date basis, software & services revenues increased 11%, orapproximately $0.3 million, due primarily to revenues generated from aconsulting services engagement with a private company and to increased revenuesfrom a contract renewal with the state of Michigan in our ethics and electionsbusiness that enhanced revenues we earn.

 

SELLING & ADMINISTRATIVE.  Selling & administrativeexpenses in the current quarter and year-to-date 

 

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periods increased 6% and 10%, respectively, or approximately $0.3 millionand $1.5 million, over the prior year periods. The increase in selling & administrative expenses in thecurrent quarter is primarily attributable to an increase in stock-basedcompensation expense of approximately $0.2 million due to restricted stockawards granted to certain management-level employees, executive officers andnon-employee directors during 2008 and increased salary expense for additionalpersonnel to support and enhance corporate wide information technology securityand portal operations, in addition to sales and marketing growth initiatives.  Also, as discussed in Note 7 in the Notes tothe Unaudited Consolidated Financial Statements in this Form 10-Q and inItem 1A, Item 3 and Note 8 in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007,filed with the SEC on March 17, 2008, we have been the subject of aninformal SEC inquiry of expense reporting by certain officers of our Companyand certain potentially related matters. In connection with the SEC inquiry, a review was undertaken by the AuditCommittee of our Board of Directors, with the assistance of outside,independent counsel, which focused on such expense reporting.  The SEC issued a formal order ofinvestigation in the second quarter of 2008. Selling & administrative expenses for the nine-month periodended September 30, 2008 includes approximately $0.5 million of legal feesand other expenses incurred in connection with the ongoing SEC investigationand the Audit Committee review.  We couldincur significant legal fees and other expenses in connection with the ongoingSEC investigation.  Selling &administrative expenses for the nine-month period ended September 30, 2007includes approximately $0.5 million of legal fees and other expenses incurredin connection with the ongoing SEC investigation and the Audit Committeereview.  The remaining year-to-dateincrease in selling & administrative expenses is primarilyattributable to an increase in stock-based compensation expense ofapproximately $0.3 million and salary expense for additional personnel acrossour corporate-level divisions, as further discussed above.

 

As a percentage of portal revenues, selling &administrative expenses were 23% and 24% in the current quarter andyear-to-date periods, respectively, compared to 25% and 26% in the prior yearquarter and year-to-date periods, respectively.

 

DEPRECIATION & AMORTIZATION.  Depreciation & amortization expensein the current quarter and year-to-date periods increased 43% and 52%,respectively, or approximately $0.3 million and $0.9 million, over the prioryear periods.  The increase was primarilyattributable to capital expenditures in the current and prior periods fornormal fixed asset additions in our outsourced portal business, including Webservers, purchased software and office furniture and equipment to support andenhance corporate-wide information technology security and portal operations,in addition to capital expenditures for furniture, fixtures and leaseholdimprovements made in the second half of 2007 for our new corporateheadquarters.

 

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

 

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

 

GAIN (LOSS) ON AFFILIATE INVESTMENTS. Results ofoperations for the nine months ended September 30, 2007 include a $0.5million gain on the sale of our remaining investment in e-Government SolutionsLimited, a private joint venture based in London, England.

 

INCOME TAXES. Our effective tax rate for the three-and nine-month periods ended September 30, 2008 was lower than the amountcustomarily expected due to the effect of a decrease in the liability foruncertain tax positions totaling approximately $0.2 million, as furtherdiscussed in Note 5 to the Unaudited Consolidated Financial Statements includedin this Form 10-Q.  Our effectivetax rate for the three- and nine-month periods ended September 30, 2007was lower than the amount customarily expected due to the effect of decreasesin the liability for uncertain tax positions totaling approximately $0.5million and $0.4 million, respectively, as further discussed in Note 5 to theUnaudited Consolidated Financial Statements included in this Form 10-Q .

 

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# **LIQUIDITY AND CAPITAL RESOURCES**

# ** **

*Operating Activities*

 

Net cash provided by operating activities was $23.8 million in thecurrent period as compared to $18.8 million in the prior year period.  The increase in cash flow from operations inthe current period was primarily the result of a year-over-year increase inoperating income, excluding non-cash charges for depreciation &amortization and stock-based compensation, and the timing of payments tocertain of our government partners, which affected accounts payable, offset byan increase in accounts receivable.  Wetypically see an increase in both accounts receivable and accounts payable inthe third quarter of every year due to increases in revenues across our portalbusinesses as compared to the fourth quarter of the previous year, which is ourseasonally lowest quarter due to the smaller number of business days and alower volume of business-to-government and citizen-to-government transactionsduring the holiday periods. A general increase in revenues in the current periodcontributed to the overall increase in our accounts receivable (approximately$5.1 million) and our accounts payable ($7.6 million).  The increase in accounts payable in 2008 wasalso attributable to the timing of cash payments associated with excise taxfiling applications, most notably in Hawaii (which increased accounts payable$5.7 million in 2008 versus $0.7 million during 2007).

 

We had a history ofunprofitable operations prior to 2003 primarily due to operating lossesincurred in our software & services businesses.  These losses generated significant federaland state tax net operating losses, or NOLs. As a result of our NOL carryforwards, we are not currently 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 carryforward periods.  Based on ourprojections, we currently expect to fully utilize our federal NOL carryforwardsby the end of 2009.  For the nine-monthperiods ended September 30, 2008 and 2007, combined federal and stateincome tax payments totaled approximately $0.6 million and $0.7 million,respectively.

 

*Investing Activities*

 

Investing activities inthe current period primarily reflect the partial liquidation of our investmentportfolio to pay the $15.7 million special cash dividend in February 2008,and $3.1 million of capital expenditures, which were primarily for normal fixed asset additions in our outsourcedportal business, including Web servers, purchased software and officeequipment.  In addition, we capitalizedapproximately $0.6 million of internal use software development costs relatingto the standardization of customer management, billing and payment processingsystems that support our portal operations and accounting systems.  Cash provided by investing activitiesin the prior year period primarily reflects the liquidation of our investmentportfolio to pay the $46.7 million special cash dividend in February 2007,partially offset by investment purchases of $12.0 million and $2.6 million ofcapital expenditures, which wereprimarily for normal fixed asset additions in our outsourced portal business,including Web servers, purchased software and office equipment, in addition tocorporate-wide spending on information technology security.

 

*Financing Activities*

 

Financing activities inthe current period primarily reflect payment of the $15.7 million special cashdividend in February 2008, partially offset by the receipt of $1.9 millionin proceeds from the exercise of employee stock options and $0.3 million inproceeds from our employee stock purchase program.  Financing activities in the prior year periodprimarily reflect payment of the $46.7 million special cash dividend in February 2007,partially offset by the receipt of $0.8 million in proceeds from the exerciseof employee stock options and $0.2 million in proceeds from our employee stockpurchase program.

 

*Liquidity*

 

We recognize revenueprimarily from providing outsourced government portal services net of thetransaction fees due to the government when the services are provided. The feesthat we must remit to the government are accrued as accounts payable andaccounts receivable at the time services are provided. As a result, tradeaccounts payable and accounts receivable reflect the gross amounts outstandingat the balance sheet dates.  Grossbillings for the three months ended September 30, 2008 and December 31,2007 were approximately $337.3 

 

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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.  Dayssales outstanding for each of the three-month periods ended September 30,2008 and December 31, 2007 was 9 days.

 

We believe that workingcapital is an important measure of our short-term liquidity.  Working capital, defined as current assetsminus current liabilities, increased to $51.7 million at September 30,2008 from $49.8 million at December 31, 2007.  Our current ratio, defined as current assetsdivided by current liabilities, at September 30, 2008 was 2.0 compared to2.1 at December 31, 2007.

 

At September 30,2008, our total cash and short-term investment balance was $62.4 millioncompared to $55.8 million at December 31, 2007.  We believe that ourcurrently available liquid resources, coupled with the unused portion of ourline of credit of approximately $8.7 million and cash generated from operationswill be sufficient to meet our operating requirements, capital expenditurerequirements and current growth initiatives for at least the next twelve monthswithout the need of additional capital.  However, we may need to raise additional capitalwithin the next twelve months to further:

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

 

Any projectionsof future earnings and cash flows are subject to substantial uncertainty. Ifour cash, investments and cash generated from operations and the unused portionof our line of credit are insufficient to satisfy our liquidity requirements,we may seek to sell additional equity securities or issue debt securities.  The sale of additional equity securitiescould result in dilution to the Company’s shareholders.  Recently, credit and capital markets haveexperienced unusual volatility and disruption, and equity and debt financinghave become more expensive and difficult to obtain.  There can be no assurance that any additionalfinancing would be available in amounts or on terms acceptable to the Company,if at all.

 

We issue lettersof credit 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 credit totalingapproximately $1.3 million at September 30, 2008.  We are not currently required to cashcollateralize these letters of credit. However, even though we currently expect to be profitable in fiscal 2008and beyond, we may not be able to sustain or increase profitability on aquarterly or annual basis.  We will needto generate sufficient revenues while containing costs and operating expensesif we are to achieve sustained profitability. If we are not able to sustain profitability, our cash collateralrequirements may increase.  Had we beenrequired to post 100% cash collateral at September 30, 2008 for the facevalue of all performance bonds (which are partially supported by letters ofcredit) and our line of credit in conjunction with a corporate credit cardagreement, unrestricted cash would have decreased by approximately $4.3 millionand would have been classified as restricted cash.

 

At September 30, 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.

 

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

 

We do not haveoff-balance sheet arrangements that are not recorded or disclosed in ourfinancial statements.  While we havesignificant operating lease commitments for office space, those commitments aregenerally tied to the period of performance under related contracts.  We have income tax uncertainties ofapproximately $0.5 million at September 30, 2008.  These obligations are classified as otherlong-term liabilities in our consolidated balance sheet, as resolution isexpected to take more than a year.  Weestimate that these matters could be resolved in one to three years.  However, the ultimate timing of resolution isuncertain.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

*Fair Value Measurements*

 

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

 

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

 

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

 

In June 2008,the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (FSP-EITF 03-6-1). Under FSP-EITF 03-6-1, unvested share-based payment awards that containnon-forfeitable rights to dividends or dividend equivalents (whether paid orunpaid) are participating securities and shall be included in the computationof earnings per share pursuant to the two-class method.  FSP-EITF 03-6-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those years and requires retrospective application.  We are currently evaluating the requirementsof FSP-EITF 03-6-1 and have not yet determined the impact on our consolidatedfinancial statements.

 

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

 

INTEREST RATE RISK.  As furtherdiscussed above under *Investments*,our short-term investments consisted entirely of student loan auction-ratesecurities, or SLARS, at September 30, 2008.  We collected all interest payable on all of ourSLARS.  During early October 2008,the broker-dealer of our SLARS repurchased all 

 

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ofour SLARS at par value, which totaled approximately $6.9 million.

 

Our cash equivalents and short-term investments portfolio are subjectto market risk due to changes in interest rates.  Cash held in sweep accounts are investedexclusively in U.S. government money market accounts that purchase U.S. agencyinstruments or direct obligations of the U.S. Treasury.  Interest rates related to these floating ratesecurities may produce less income than expected if interest rates fall.  Current yields associated with thesesecurities have been decreasing due to the increased demand for moreconservative investments in light of the current credit crisis.  Due in part to these factors, our futureinterest income may fall short of expectations due to changes in interestrates, but is not expected to materially impact results of operations.

 

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

 

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

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**a) EVALUATION OF DISCLOSURE CONTROLSAND PROCEDURES**

 

The Company maintains disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”))that are designed to ensure that material information required to be disclosedin the reports it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the issuer’smanagement, including its principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure. Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and ourprincipal financial officer concluded that our disclosure controls andprocedures were effective as of such date.

 

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

 

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

# ** **

**PART II. OTHER INFORMATION**

 

**ITEM****1A. RISK FACTORS**

 

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

 

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

 

The NationalInformation Consortium Voting Trust, which previously owned approximately 34%of our outstanding common stock, was dissolved as of June 20, 2008.  As a result, there will be an increase 

 

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in the number ofshares available for resale in the public market at such time as the sharespreviously held by the Voting Trust may be traded under applicable securitieslaws.  We have sought interpretive advicefrom the SEC as to whether beneficiaries of the Voting Trust may publiclyresell their shares without restriction prior to the end of the six-monthholding period after dissolution of the Voting Trust.  At such time as we receive favorableinterpretive advice from the SEC or, if we do not receive a favorable responsefrom the SEC, at the end of the six-month period, the shares held bybeneficiaries of the Voting Trust who are not affiliates of the Company shouldbe freely tradable under SEC Rule 144. Sales of substantial amounts of shares of our common stock in the publicmarket, or the perception that those sales may occur, could cause the marketprice of our common stock to decline or make it more difficult for us to sellequity securities in the future at a time and a price that we considerappropriate.

 

***In the event that weneed debt financing in the future, recent uncertainty in the credit marketscould affect our ability to obtain debt financing on reasonable terms.***

 

Although we do not currently need debt financing, in theevent we were to require debt financing in the future, the severe dislocationsand liquidity disruptions in the credit markets could materially impact ourability to obtain debt financing on reasonable terms. The inability to accessdebt financing on reasonable terms could materially impact our ability to makeacquisitions or materially expand our business in the future.

 

***A prolonged economicslowdown or lengthy or severe recession could harm our operations.***

 

A prolongedeconomic downturn or recession could materially impact our operations to theextent it results in reduced demand for Web-based access to governmentalservices.  If current market and economicconditions persist or deteriorate, we may experience adverse impacts on ourbusiness, results of operations and financial condition.

 

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

 

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

 
| ****Period****      | **** **** | ****Total  Number of  Shares  Purchased**** | **** **** | ****Average  Price Paid  per Share**** | **** **** | ****Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs**** | **** **** | ****Maximum Number (or  Approximate Dollar Value) of  Shares that May Yet Be  Purchased Under the Plans or  Programs**** | ** ** |
|---------------------|----------------|--------------------------------------------------|----------------|--------------------------------------------------|----------------|--------------------------------------------------------------------------------------------------------------------------------------|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                |           |                                             |           |                                             |           |                                                                                                                                 |           |                                                                                                                                                                                      |       |
| July 24, 2008  |           | 1,271                                            |           | $                                                | 7.48           |                                                                                                                                 | N/A            |                                                                                                                                                                                      | N/A        |   |
|                |           |                                             |           |                                             |           |                                                                                                                                 |           |                                                                                                                                                                                      |       |
| July 31, 2008  |           | 32,300                                           |           | $                                                | 7.66           |                                                                                                                                 | N/A            |                                                                                                                                                                                      | N/A        |   |
|                |           |                                             |           |                                             |           |                                                                                                                                 |           |                                                                                                                                                                                      |       |
| August 1, 2008 |           | 18,714                                           |           | $                                                | 7.38           |                                                                                                                                 | N/A            |                                                                                                                                                                                      | N/A        |   |

 

**ITEM 6.  EXHIBITS**

 

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

 

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

 

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

 

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**SIGNATURES**

 

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

 
|                         |   | NIC INC.                 |   |
|------------------------------|--------|--------------------------|--------|
|                         |   |                     |
| Dated: November 6, 2008 |   | /s/Stephen M. Kovzan     |
|                         |   | Stephen M. Kovzan        |
|                         |   | Chief  Financial Officer |

 

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**NIC Inc.**

**EXHIBIT INDEX**

 
| **ExhibitNumber** | ** ** | **Description of Exhibit**                                                                     |
|-------------------|------------|----------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                     |
| 31.1              |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|              |       |                                                                                                     |
| 31.2              |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|              |       |                                                                                                     |
| 32.1              |       | Section 906 Certifications of Chief Executive  Officer and Chief Financial Officer                  |

 

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