**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON D.C. 20549**

**FORM 10-Q**

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

For the quarterly period ended **June 30, 2007**

Commission file number **000-26621**

| **NIC INC.**                                               |
|------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)    |
|                                                       |
| **Colorado**                                               | ** ** | **52-2077581** |
| (State or other  jurisdiction of                           |   | (I.R.S Employer |
| incorporation or  organization)                            |   | Identification  No.) |
|                                                       |   |   |
| **10540  South Ridgeview Road**                            |   | ** ** |
| **Olathe,  Kansas**                                        |   | **66061** |
| (Address of  principal executive offices)                  |   | (Zip Code) |
|                                                       |   |   |
| **(877)  234-3468**                                        |
| (Registrant’s  telephone number, including area code) |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x  No o

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-acceleratedfiler.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check mark whether the registrantis a shell company (as defined in rule 12b-2 of the Exchange Act).

Yes  o  No x

The number of shares outstanding of the registrant’scommon stock as of July 31, 2007 was 61,860,336.

 

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**PART I –FINANCIAL INFORMATION**

**Item1.     Consolidated Financial Statements**

**NICINC.**

**CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

**thousands**
| ** **                                                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                  |       |              |       |                  |       |
| Cash and cash equivalents                                                                        |       | $                 | 41,244     |                  | $          | 36,745 |   |
| Marketable securities                                                                            |       | 2,000             |       | 45,008                |       |
| Trade accounts receivable                                                                        |       | 28,312            |       | 28,729                |       |
| Unbilled revenues                                                                                |       | 441               |       | 1,069                 |       |
| Deferred income taxes                                                                            |       | 4,934             |       | 5,290                 |       |
| Prepaid expenses & other current assets                                                      |       | 1,477             |       | 1,645                 |       |
| Total current assets                                                                             |       | 78,408            |       | 118,486               |       |
| Property and  equipment, net                                                                     |       | 4,384             |       | 3,790                 |       |
| Deferred income  taxes                                                                           |       | 15,435            |       | 17,434                |       |
| Other assets                                                                                     |       | 555               |       | 424                   |       |
| Total assets                                                                                     |       | $                 | 98,782     |                  | $          | 140,134 |   |
|                                                                                             |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                            |       |              |       |                  |       |
| Accounts payable                                                                                 |       | $                 | 30,180     |                  | $          | 34,202 |   |
| Accrued expenses                                                                                 |       | 7,007             |       | 5,911                 |       |
| Application development contracts                                                                |       | 433               |       | 513                   |       |
| Other current liabilities                                                                        |       | 359               |       | 255                   |       |
| Total current liabilities                                                                        |       | 37,979            |       | 40,881                |       |
|                                                                                             |       |              |       |                  |       |
| Other long-term  liabilities                                                                     |       | 1,241             |       | —                |       |
| Total liabilities                                                                                |       | 39,220            |       | 40,881                |       |
|                                                                                             |       |              |       |                  |       |
| Commitments and  contingencies (Notes 1, 2, 4, 5 and 7)                                          |       | —            |       | —                |       |
|                                                                                             |       |              |       |                  |       |
| Shareholders’  equity:                                                                      |       |              |       |                  |       |
| Common stock, no par, 200,000 shares authorized 61,781  and 61,574 shares issued and outstanding |       | —            |       | —                |       |
| Additional paid-in capital                                                                       |       | 165,089           |       | 210,210               |       |
| Accumulated deficit                                                                              |       | (105,359          | )          | (110,789              | )          |
|                                                                                             |       | 59,730            |       | 99,421                |       |
| Less treasury stock                                                                              |       | (168              | )          | (168                  | )          |
| Total shareholders’ equity                                                                  |       | 59,562            |       | 99,253                |       |
| Total liabilities and shareholders’ equity                                                  |       | $                 | 98,782     |                  | $          | 140,134 |   |

 

# *The accompanying Notes to Unaudited ConsolidatedFinancial Statements are an integral part of these statements.*

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# **NIC INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(UNAUDITED)**

**thousandsexcept for per share amounts**
| ** **                                                                              | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                                               |       |                             |       |                           |       |   |   |   |   |
| Portal revenues                                                                         |       | $                                | 20,610     |                           | $          | 17,794 |   | $ | 40,478 |   | $ | 34,783 |   |
| Software & services revenues                                                        |       | 866                              |       | 968                            |       | 1,632 |   | (274 | ) |
| Total revenues                                                                          |       | 21,476                           |       | 18,762                         |       | 42,110 |   | 34,509 |   |
| Operating  expenses:                                                                    |       |                             |       |                           |       |   |   |   |   |
| Cost of portal revenues, exclusive of depreciation &  amortization                  |       | 10,419                           |       | 8,931                          |       | 20,873 |   | 17,208 |   |
| Cost of software  & services revenues, exclusive of depreciation & amortization |       | 493                              |       | 767                            |       | 964 |   | (563) |   |
| Selling & administrative                                                            |       | 5,445                            |       | 3,560                          |       | 10,565 |   | 6,988 |   |
| Depreciation & amortization                                                         |       | 577                              |       | 525                            |       | 1,112 |   | 1,030 |   |
| Total operating expenses                                                                |       | 16,934                           |       | 13,783                         |       | 33,514 |   | 24,663 |   |
| Operating income                                                                        |       | 4,542                            |       | 4,979                          |       | 8,596 |   | 9,846 |   |
| Other income  (expense):                                                                |       |                             |       |                           |       |   |   |   |   |
| Interest income                                                                         |       | 317                              |       | 498                            |       | 897 |   | 878 |   |
| Equity in net loss of affiliates                                                        |       | —                           |       | —                         |       | — |   | (97 | ) |
| Total other income (expense)                                                            |       | 317                              |       | 498                            |       | 897 |   | 781 |   |
| Income before  income taxes                                                             |       | 4,859                            |       | 5,477                          |       | 9,493 |   | 10,627 |   |
| Income tax  provision                                                                   |       | 2,107                            |       | 2,232                          |       | 3,995 |   | 4,464 |   |
| Net income                                                                              |       | $                                | 2,752      |                           | $          | 3,245 |   | $ | 5,498 |   | $ | 6,163 |   |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Basic net income  per share                                                             |       | $                                | 0.04       |                           | $          | 0.05 |   | $ | 0.09 |   | $ | 0.10 |   |
| Diluted net  income per share                                                           |       | $                                | 0.04       |                           | $          | 0.05 |   | $ | 0.09 |   | $ | 0.10 |   |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares outstanding:                                                   |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                   |       | 61,769                           |       | 61,381                         |       | 61,711 |   | 61,250 |   |
| Diluted                                                                                 |       | 62,256                           |       | 61,839                         |       | 62,113 |   | 61,713 |   |

 

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

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# **NIC INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

**(UNAUDITED)**

**thousands**
| ** **                                                   | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                                   | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**  | ** ** | **Stock**  | ** ** | **Total**  | ** ** |
| **Balance,  January 1, 2007**                                |       | 61,574                |       | $           | —     |            | $          | 210,210      |       | $          | (110,789   | )          | $          | (168 | ) | $ | 99,253 |   |
| Cumulative  effect of FIN 48 (Note 4)                        |       | —                |       | —      |       | —          |       | (68          | )          | —     |       | (68        | )          |
| Net income                                                   |       | —                |       | —      |       | —          |       | 5,498        |       | —     |       | 5,498      |       |
| Cash dividends  on common stock   (Note 3)                   |       | —                |       | —      |       | (46,730         | )          | —       |       | —     |       | (46,730    | )          |
| Stock option  exercises & restricted stock vestings      |       | 154                   |       | —      |       | 506             |       | —       |       | —     |       | 506        |       |
| Stock-based  compensation                                    |       | —                |       | —      |       | 864             |       | —       |       | —     |       | 864        |       |
| Issuance of  common stock under employee stock purchase plan |       | 53                    |       | —      |       | 239             |       | —       |       | —     |       | 239        |       |
| **Balance,  June 30, 2007**                                  |       | 61,781                |       | $           | —     |            | $          | 165,089      |       | $          | (105,359   | )          | $          | (168 | ) | $ | 59,562 |   |

                                                                                                                                                                                                                                                

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

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# **NIC INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**thousands**
| ** **                                                                         | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 5,498      |   | $ | 6,163 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation  & amortization                                                   |       | 1,112                          |       | 1,030 |   |
| Stock-based  compensation expense                                                  |       | 864                            |       | 352 |   |
| Application  development contracts                                                 |       | (80                            | )          | (655 | ) |
| Deferred income  taxes                                                             |       | 3,406                          |       | 4,070 |   |
| Equity in net  loss of affiliates                                                  |       | —                         |       | 97 |   |
| Changes in  operating assets and liabilities:                                      |       |                           |       |   |   |
| (Increase)  decrease in trade accounts receivable                                  |       | 417                            |       | (4,463 | ) |
| Decrease in  unbilled revenues                                                     |       | 628                            |       | 3,099 |   |
| Decrease in  prepaid expenses & other current assets                           |       | 168                            |       | 177 |   |
| Decrease in  other assets                                                          |       | 2                              |       | 9 |   |
| Increase  (decrease) in accounts payable                                           |       | (4,022                         | )          | 3,078 |   |
| Increase  (decrease) in accrued expenses                                           |       | 1,096                          |       | (1,831 | ) |
| Increase  (decrease) in other current liabilities                                  |       | 104                            |       | (63 | ) |
| Increase in  other long-term liabilities                                           |       | 122                            |       | — |   |
| Net cash  provided by operating activities                                         |       | 9,315                          |       | 11,063 |   |
|                                                                               |       |                           |       |   |   |
| Cash flows from investing activities:                                              |       |                           |       |   |   |
| Purchases of  property and equipment                                               |       | (1,658                         | )          | (1,276 | ) |
| Capitalized  internal use software development costs                               |       | (181                           | )          | (83 | ) |
| Purchases of  marketable securities                                                |       | (2,000                         | )          | (13,000 | ) |
| Sales and  maturities of marketable securities                                     |       | 45,008                         |       | — |   |
| Net cash  provided by (used in) investing activities                               |       | 41,169                         |       | (14,359 | ) |
|                                                                               |       |                           |       |   |   |
| Cash flows from financing activities:                                              |       |                           |       |   |   |
| Cash dividends  on common stock                                                    |       | (46,730                        | )          | — |   |
| Proceeds from  sale of treasury stock                                              |       | —                         |       | 65 |   |
| Proceeds from  employee common stock purchases                                     |       | 239                            |       | 157 |   |
| Proceeds from  exercise of employee stock options                                  |       | 506                            |       | 998 |   |
| Net cash  provided by (used in) financing activities                               |       | (45,985                        | )          | 1,220 |   |
|                                                                               |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | 4,499                          |       | (2,076 | ) |
| Cash and cash  equivalents, beginning of period                                    |       | 36,745                         |       | 36,902 |   |
| Cash and cash  equivalents, end of period                                          |       | $                              | 41,244     |   | $ | 34,826 |   |
| Other cash flow  information:                                                      |       |                           |       |   |   |
| Interest paid                                                                      |       | $                              | —     |   | $ | — |   |
| Income taxes  paid                                                                 |       | $                              | 603        |   | $ | 363 |   |

 

*The accompanying Notes to Unaudited ConsolidatedFinancial Statements are an integral part of these statements.*

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# **NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

The consolidated interimfinancial statements of NIC Inc. and its subsidiaries (“NIC” or the “Company”)included herein have been prepared, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  Certain information and disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been omitted pursuant to such rules and regulations.  In management’s opinion, the consolidatedinterim financial statements reflect all adjustments (which include only normalrecurring adjustments, except as disclosed) necessary to present fairly theconsolidated financial position, results of operations and cash flows of theCompany and its subsidiaries as of the dates and for the interim periodspresented.  These consolidated financialstatements and notes should be read in conjunction with the auditedconsolidated financial statements and related notes and the Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006, filed with the SEC on March 15, 2007, and Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in this Form 10-Q.  Theconsolidated balance sheet data included herein as of December 31, 2006 wasderived from audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica.

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the consolidated financial statements and accompanyingnotes. Actual results could differ from those estimates. The results ofoperations for the three- and six-month periods ended June 30, 2007 arenot necessarily indicative of the results to be expected for the full yearending December 31, 2007.

**1. THECOMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*TheCompany*

NIC isa provider of eGovernment services that helps governments use the Internet toreduce costs and provide a higher level of service to businesses andcitizens.  The Company accomplishes thiscurrently through two divisions: its primary portal outsourcing businesses andits software & services businesses.

In itsprimary portal outsourcing business, the Company designs, builds and operatesInternet-based portals on behalf of state and local governments desiringto provide access to government information and to complete government-basedtransactions online.  These portalsconsist of Web sites and applications the Company has built that allowbusinesses and citizens to access government information online and completetransactions, including applying for a permit, retrieving driver’s licenserecords or filing a government-mandated form or report.  Operating under multiple-year contracts (seeNote 2), NIC markets the services and solicits users to completegovernment-based transactions and to enter into subscriber contractspermitting users to access the portal and the government information containedtherein in exchange for transactional and/or subscription user fees. TheCompany manages operations for each contractual relationship through separatelocal subsidiaries that operate as decentralized businesses with a high degreeof autonomy.  NIC’s self-funding businessmodel allows the 

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Companyto reduce its government partners’ financial and technology risks and generaterevenues by sharing in the fees the Company collects from eGovernmenttransactions.  The Company’s governmentpartners benefit through gaining a centralized, customer-focused presence onthe Internet, while businesses and citizens receive a faster, more convenientand more cost-effective means to interact with governments.  The Company is typically responsible forfunding up front investment and ongoing operational costs of the governmentportals.

TheCompany’s software & services businesses primarily include its UniformCommercial Code (“UCC”) and corporate filings software development business andits ethics & elections business.  TheCompany’s UCC and corporate filings software development business, NICConquest, is a provider of software applications and services for electronicfilings and document management solutions for governments.  This business focuses on Secretaries of State,whose offices are state governments’ principal agencies for UCC and corporatefilings.  Currently, NIC Conquest isprimarily engaged in servicing its contract with the California Secretary ofState and is not actively marketing its applications and services in respect ofnew engagements.  The Company’s ethics& elections business, NIC Technologies, designs and develops onlinecampaign expenditure and ethics compliance systems for federal and stategovernment agencies. Currently, NIC Technologies is primarily engaged inservicing its contracts with the Federal Election Commission and the State ofMichigan.

*Basis ofpresentation*

The Company classifies itsrevenues and cost of revenues into two categories: (1) portal and (2) software& services.  The portal categoryincludes revenues from the Company’s subsidiaries operating government portalsunder long-term contracts on an outsourced basis.  The software & services category includesrevenues primarily from the Company’s software & services businesses.  The primary categories of operating expenses include:cost of portal revenues, cost of software & services revenues, selling& administrative, and depreciation & amortization.  Cost of portal revenues consist of all directcosts associated with operating government portals on an outsourced basis includingemployee compensation, telecommunications, credit card merchant fees, and allother costs associated with the provision of dedicated client service such asdedicated office facilities.  Cost ofsoftware & services revenues consist of all direct project costs to providesoftware development and services such as employee compensation, subcontractorlabor costs, and all other direct project costs including hardware, software,materials, travel and other out-of-pocket expenses.  Selling & administrative costs consistprimarily of corporate-level expenses relating to human resource management,administration, information technology, legal, accounting and finance, and allcosts of non-customer service personnel from the Company’s software &services businesses, including information systems and office rent.  Selling & administrative costs alsoconsist of corporate-level expenses for market development and publicrelations.

*Marketablesecurities*

The Company’s marketablesecurities at June 30, 2007 were classified as available-for-sale and consistedprimarily of short-term auction rate government-backed obligations. Theseinvestments are stated at fair value with any unrealized holding gains orlosses included as a component of 

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shareholders’ equity as accumulated other comprehensive income or lossuntil realized. The cost of securities sold is based on the specificidentification method. The fair values of the Company’s marketable securitiesare based on quoted market prices at the reporting date.  Gross realized gains and losses andunrealized holding gains and losses through June 30, 2007 were not significant.

*Earnings per share*

Basic earnings per share arecalculated on the basis of the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share are calculated on the basis of the weighted average numberof common shares outstanding during the period and common stock equivalentsthat would arise from the exercise of stock options or the issuance ofrestricted stock awards to employees and nonemployee directors using thetreasury stock method.  The followingtable sets forth the computation of basic and diluted earnings per share (inthousands, except per share amounts):
| ** **                                 | ** ** | **Three months**        | ** ** | **Six months**          | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **ended June 30,** | ** ** | **ended June 30,** | ** ** |
| ** **                                 | ** ** | **2007**                     | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Numerator:**                             | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                 |       | $                            | 2,752      |                         | $          | 3,245 |   | $ | 5,498 |   | $ | 6,163 |   |
| **Denominator:**                           | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  shares – basic      |       | 61,769                       |       | 61,381                       |       | 61,711 |   | 61,250 |   |
| Stock options  and restricted stock awards |       | 487                          |       | 458                          |       | 402 |   | 463 |   |
| Weighted average  shares – diluted    |       | 62,256                       |       | 61,839                       |       | 62,113 |   | 61,713 |   |
| **Basic  earnings per share:**             | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                 |       | $                            | 0.04       |                         | $          | 0.05 |   | $ | 0.09 |   | $ | 0.10 |   |
| **Diluted  earnings per share:**           | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                 |       | $                            | 0.04       |                         | $          | 0.05 |   | $ | 0.09 |   | $ | 0.10 |   |

 

Outstanding stock optionstotaling approximately 0.3 million shares during each of the three- andsix-month periods ended June 30, 2007 were not included in the computation ofdiluted weighted average shares outstanding because their exercise prices werein excess of the average stock price of the Company during the periods.  Outstanding stock options totalingapproximately 0.2 million and 0.3 million shares during the three- andsix-month periods ended June 30, 2006, respectively, 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.

*Income taxes*

In June 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes –an interpretation of FASB Statement No. 109.” FIN 48 provides a comprehensive model for how a company shouldrecognize, measure, present and disclose in its financial statements uncertaintax positions that the Company has taken or expects to take on its income taxreturns.  FIN 48 defines the thresholdfor recognizing a tax return position in the financial statements as “morelikely than not” that the position is sustainable, based on its technicalmerits.  FIN 48 also provides guidance onthe measurement, classification and disclosure of tax return positions in acompany’s 

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financialstatements.  The Company adopted theprovisions of FIN 48 on January 1, 2007, with the cumulative effect recorded asan adjustment to the opening balance of accumulated deficit.  See Note 4 for additional discussion of the Company’s adoption of FIN48.

The Company’s consolidatedbalance sheet as of December 31, 2006 reflects a revision of approximately $4.6million of net deferred tax assets from noncurrent to current for the amount oftax net operating loss carryforwards the Company expects to utilize in2007.  A proportionate amount of theCompany’s deferred tax asset valuation allowance was also allocated between currentand noncurrent deferred tax assets.

*Recent accounting pronouncements*

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 does notrequire any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy used to classify thesource of the information.  The Companywill be required to adopt this standard in the first quarter of 2008.  The Company is currently evaluating therequirements of SFAS No. 157 and has not yet determined the impact, if any, onits consolidated financial statements.

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value.  Unrealized gains and losses onitems for which the fair value option has been elected are reported inearnings.  SFAS No. 159 does not affect any existing accounting literaturethat requires certain assets and liabilities to be carried at fair value. TheCompany will be required to adopt this standard in the first quarter of2008.  The Company is currentlyevaluating the requirements of SFAS No. 159 and has not yet determined theimpact, if any, on its consolidated financial statements.

**2.OUTSOURCED GOVERNMENT PORTAL CONTRACTS**

The Company’soutsourced government portal contracts generally have an initial term of threeto five years with provisions for renewals for various periods at the option ofthe government.  The Company’s primarybusiness obligation under these contracts is to design, build and operateInternet-based portals on behalf of governments desiring to provideaccess to government information and to complete government-basedtransactions online. NIC typically markets the services and solicits users tocomplete government-based transactions and to enter into subscribercontracts permitting the user to access the portal and the governmentinformation contained therein in exchange for transactional and/or subscriptionuser fees.  The Company enters intoseparate agreements with various agencies and divisions of the government toprovide specific services and to conduct specific transactions. Theseagreements preliminarily establish the pricing of the electronic transactionsand data access services the Company provides and the division of revenuesbetween the Company and the government agency. The government must approveprices and revenue sharing agreements.

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The Company istypically responsible for funding up front investment and ongoing operationalcosts of the government portals, and generally owns all the applicationsdeveloped under these contracts. After completion of a defined contract term,the government agency typically receives a perpetual, royalty-free license tothe applications for use only. If the Company’s contract were not renewed aftera defined term, the government agency would be entitled to take over the portalin place with no future obligation of the Company.

At June 30, 2007,the Company was bound by performance bond commitments totaling approximately$2.3 million on certain portal outsourcing contracts.  Under a typical portal contract, the Companyis required to fully indemnify its government clients against claims that theCompany’s services infringe upon the intellectual property rights of others andagainst claims arising from the Company’s performance or the performance of theCompany’s subcontractors under the contract.

The following is a summary of the Company’s nineteenoutsourced state government portal contracts at June 30, 2007: 
| ** **                       | ** ** | ** **                    | ** ** | **Year**      | ** ** | **Contract Expiration** |
|----------------------------------|------------|-------------------------------|------------|---------------|------------|-------------------------|
| ** **                       | ** ** | ** **                    | ** ** | **Services**  | ** ** | **Date (Renewal**       |
| **NIC  Subsidiary**              | ** ** | **Portal Web Site (State)**   | ** ** | **Commenced** | ** ** | **Options Through)**    |
| Vermont  Information Consortium  |       | www.Vermont.gov (Vermont)     |       | 2006          |       | 10/15/2009 (10/14/2012) |
| Colorado  Interactive            |       | www.Colorado.gov (Colorado)   |       | 2005          |       | 5/19/2010 (5/19/2014)   |
| South Carolina  Interactive      |       | www.SC.gov (South Carolina)   |       | 2005          |       | 7/15/2008 (7/15/2009)   |
| Kentucky  Interactive            |       | www.Kentucky.gov (Kentucky)   |       | 2003          |       | 1/31/2009 (1/31/2013)   |
| Alabama  Interactive             |       | www.Alabama.gov (Alabama)     |       | 2002          |       | 2/28/2008 (2/28/2012)   |
| Maine  Information Network       |       | www.RI.gov (Rhode Island)     |       | 2001          |       | 8/8/2007 (6/18/2011)    |
| NICUSA                           |       | www.OK.gov (Oklahoma)         |       | 2001          |       | 6/30/2008 (6/30/2009)   |
| Montana  Interactive             |       | www.MT.gov (Montana)          |       | 2001          |       | 12/31/2010              |
| NICUSA                           |       | www.Tennessee.gov (Tennessee) |       | 2000          |       | 8/27/2010               |
| Hawaii  Information Consortium   |       | www.Hawaii.gov (Hawaii)       |       | 2000          |       | 1/3/2008                |
| Idaho  Information Consortium    |       | www.Idaho.gov (Idaho)         |       | 2000          |       | 3/31/2008               |
| Utah Interactive                 |       | www.Utah.gov (Utah)           |       | 1999          |       | 5/6/2009                |
| Maine  Information Network       |       | www.Maine.gov (Maine)         |       | 1999          |       | 1/14/2008               |
| Arkansas  Information Consortium |       | www.Arkansas.gov (Arkansas)   |       | 1997          |       | 6/30/2008               |
| Iowa Interactive                 |       | www.Iowa.gov (Iowa)           |       | 1997          |       | 3/31/2011 (3/31/2012)   |
| Virginia  Interactive            |       | www.Virginia.gov (Virginia)   |       | 1997          |       | 8/31/2012               |
| Indiana  Interactive             |       | www.IN.gov (Indiana)          |       | 1995          |       | 6/30/2010 (6/30/2014)   |
| Nebraska  Interactive            |       | www.Nebraska.gov (Nebraska)   |       | 1995          |       | 1/31/2009 (1/31/2010)   |
| Kansas  Information Consortium   |       | www.Kansas.gov (Kansas)       |       | 1992          |       | 12/31/2009              |

 

In the first quarter of 2007, the Company received a one-year contractextension from the state of Idaho, which extended the contract expiration dateto March 2008, and signed a new one-year contract with the state of Alabama,which includes options to extend the contract for four additional one-yearrenewal terms.

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

In July 2007, the Company finalized a three-year contract with the stateof Arizona to operate the state’s official Web site.  The contract includes renewal options thatcan extend the contract for an additional three years. In addition, the Companyreceived a one-year contract extension from the state of South Carolina.

**3. SPECIAL CASH DIVIDEND**

OnJanuary 29, 2007, the Company’s Board of Directors declared a special cashdividend of $0.75 per share, payable to shareholders of record 

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as of February 12,2007.  The dividend, totalingapproximately $46.7 million, was paid on February 20, 2007 on 61,686,425outstanding shares of common stock.  Adividend equivalent of $0.75 per share was also paid simultaneously on 618,038unvested 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 marketable securities.

The Company has made a preliminary determination thatthe dividend will result in a partial return of capital to shareholders, withthe balance being taxable to shareholders as a qualified dividend.  The exact amount of the return of capital isdependent on the earnings of the Company, computed on a tax basis, through theend of its 2007 fiscal year.

**4.UNCERTAIN TAX POSITIONS**

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. federal examination for the tax years ended onor after December 31, 2003.** **State income tax returns aregenerally subject to examination for a period of three to five years afterfiling of the respective return.

Asa result of the implementation of FIN 48 (see Note 1), the Company recognized a$68,000 increase in the liability for unrecognized tax benefits, which resultedin an increase to the January 1, 2007 accumulated deficit balance of $68,000.As of January 1, 2007, after the implementation of FIN 48, the Company’sunrecognized tax benefits were $1,119,000, all of which would affect theCompany’s effective tax rate if recognized. This amount increased by $122,000 during the three- and six-monthperiods ended June 30, 2007.  It isexpected that the amount of unrecognized tax benefits will change in the next12 months.  However, the Company does notexpect the change to have a significant impact on its results of operations orfinancial condition.

TheCompany recognizes accrued interest and penalties associated with uncertain taxpositions as part of its income tax provision in the consolidated statements ofincome.  At June 30, 2007, accruedinterest and penalty amounts were not material.

**5. CALIFORNIA SECRETARY OF STATE APPLICATIONDEVELOPMENT CONTRACT**

In September 2001,NICUSA, Inc. and the Company’s NIC Conquest subsidiary were awarded afive-year, $25 million contract by the California Secretary of State (the “CaliforniaSOS”) to develop and implement a comprehensive information management and filingsystem.  The Company recognizes revenuesfrom this contract on the percentage of completion method, utilizing costsincurred to date as compared to the estimated total cost.  Revenues and profit (loss) from this contractare based on the Company’s cost estimates to complete and are reviewedregularly, with adjustments recorded in the period revisions are made.  Any anticipated contract loss is charged tooperations as soon as determinable.

In March 2006, theCompany and the California SOS entered into an amendment (the “Amendment”) tothe California Business Programs Automation Agreement (the “Agreement”).  Among other changes to the Agreement, theAmendment reduced the aggregate contract value to approximately $19 million andreleased the Company from the obligation to deliver the business filings, 

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or BE, portion ofthe project, except for maintenance of hardware and delivery of BE images asexpressly set forth in the Amendment. The Amendment also set forth the final criteria in order for the CaliforniaSOS to accept the UCC portion of the project and move it into the maintenanceand operations phase.

As a result of theAmendment, the Company recorded an adjustment under percentage of completionaccounting in the first quarter of 2006. The adjustment in the Company’s consolidated statement of income for thesix-month period ended June 30, 2006 resulted in a reduction of software &services revenues of approximately $2.1 million and a reduction of cost ofsoftware & services revenues of approximately $2.1 million.  The adjustment in the Company’s consolidatedbalance sheet was a reduction in unbilled revenues of approximately $2.1million, a reduction of accrued liabilities of approximately $1.6 million, anda reduction of application development contracts of approximately $0.5million.  This adjustment did not affectoperating income, net income or earnings per share.

In June 2006, theCalifornia SOS officially accepted the UCC portion of the project, whichcommenced the 42-month maintenance and operations phase.

The Company regularlyreviews its cost estimates to complete and does not currently believe itsestimated contract loss will exceed the $4.2 million estimate previouslyestablished.  However, it is at leastreasonably possible that the estimate will change in the near term.  Further, it is possible that the Company willsimilarly incur cost overruns in the future as it has in the past as a resultof unforeseen difficulties such as rising development, subcontractor andpersonnel costs or other reasons. If this occurs, the Company’s results ofoperations, financial condition and cash flows could be adversely affected.

For additionaldiscussion of the Company’s contract with the California SOS, refer to Note 2to the Consolidated Financial Statements included in the Company’s Form 10-Kfor the year ended December 31, 2006, filed with the SEC on March 15, 2007.

**6. REPORTABLE SEGMENTS AND RELATED INFORMATION**

The Company’s tworeportable segments consist of its Outsourced Portal businesses and Software& Services businesses.  TheOutsourced Portals segment includes the Company’s subsidiaries operatingoutsourced government portals and the corporate divisions that directly supportportal operations.  The Software &Services segment primarily includes the Company’s UCC and corporate filingssoftware development business (NIC Conquest) and ethics & elections filingsbusiness (NIC Technologies).  Each of theCompany’s Software & Services businesses is an operating segment and hasbeen aggregated to form the Software & Services reportable segment.Unallocated corporate-level expenses are reported in the reconciliationof the segment totals to the related consolidated totals as “Other ReconcilingItems.”  There have been no significantintersegment transactions for the periods reported.

The measure ofprofitability by which management evaluates the performance of its segments andallocates resources to them is operating income (loss).   Segment asset or other segment balance sheetinformation is not presented to the Company’s chief operating decisionmaker.  Accordingly, the Company has notpresented information relating to segment assets.

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The table below reflectssummarized financial information concerning the Company’s reportable segmentsfor the three months ended June 30 (in thousands):
| ** **                       | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2007**                         |       |                    |       |                          |       |                          |       |                    |       |
| Revenues                         |       | $                       | 20,610     |                          | $          | 866                           |       | $                       | —     |   | $ | 21,476 |   |
|                             |       |                    |       |                          |       |                          |       |                    |       |
| Costs &  expenses            |       | 11,531                  | ** ** | 556                           |       | 4,270                         |       | 16,357                  |       |
| Depreciation  & amortization |       | 539                     | ** ** | 6                             |       | 32                            |       | 577                     |       |
| Operating income  (loss)         |       | $                       | 8,540      | ** **                    | $          | 304                           |       | $                       | (4,302     | ) | $ | 4,542 |   |
|                             |       |                    |       |                          |       |                          |       |                    |       |
| **2006**                         | ** ** | ** **              | ** ** |                          | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                         |       | $                       | 17,794     |                          | $          | 968                           |       | $                       | —     |   | $ | 18,762 |   |
|                             |       |                    |       |                          |       |                          |       |                    |       |
| Costs &  expenses            |       | 9,645                   | ** ** | 891                           |       | 2,722                         |       | 13,258                  |       |
| Depreciation  & amortization |       | 482                     | ** ** | 16                            |       | 27                            |       | 525                     |       |
| Operating income (loss)          |       | $                       | 7,667      | ** **                    | $          | 61                            |       | $                       | (2,749     | ) | $ | 4,979 |   |

 

 

The following is areconciliation of total segment operating income to total consolidated incomebefore income taxes for the three months ended June 30 (in thousands):  
|                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating  income for reportable segments |       | $        | 4,542      |     | $          | 4,979 |   |
| Interest income                                 |       | 317      |       | 498      |       |
|                                            |       |     |       |     |       |
| Consolidated income  before income taxes        |       | $        | 4,859      |     | $          | 5,477 |   |

 

The table below reflectssummarized financial information concerning the Company’s reportable segmentsfor the six months ended June 30 (in thousands): 
| ** **                       | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2007**                         |       |                    |       |                          |       |                          |       |                    |       |
| Revenues                         |       | $                       | 40,478     |                          | $          | 1,632                         |       | $                       | —     |   | $ | 42,110 |   |
|                             |       |                    |       |                          |       |                          |       |                    |       |
| Costs &  expenses            |       | 22,876                  | ** ** | 1,105                         |       | 8,421                         |       | 32,402                  |       |
| Depreciation  & amortization |       | 1,037                   | ** ** | 12                            |       | 63                            |       | 1,112                   |       |
| Operating income  (loss)         |       | $                       | 16,565     | ** **                    | $          | 515                           |       | $                       | (8,484     | ) | $ | 8,596 |   |
|                             |       |                    |       |                          |       |                          |       |                    |       |
| **2006**                         | ** ** | ** **              | ** ** |                          | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                         |       | $                       | 34,783     |                          | $          | (274                          | )          | $                       | —     |   | $ | 34,509 |   |
|                             |       |                    |       |                          |       |                          |       |                    |       |
| Costs &  expenses            |       | 18,591                  | ** ** | (113                          | **)**      | 5,155                         |       | 23,633                  |       |
| Depreciation  & amortization |       | 940                     | ** ** | 36                            |       | 54                            |       | 1,030                   |       |
| Operating income (loss)          |       | $                       | 15,252     | ** **                    | $          | (197                          | **)**      | $                       | (5,209     | ) | $ | 9,846 |   |

 

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The following is areconciliation of total segment operating income to total consolidated incomebefore income taxes for the six months ended June 30 (in thousands):  
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating  income for reportable segments |       | $        | 8,596      |     | $          | 9,846 |   |
| Interest income                                 |       | 897      |       | 878      |       |
| Equity in net  loss of affiliates               |       | —   |       | (97      | )          |
|                                            |       |     |       |     |       |
| Consolidated income  before income taxes        |       | $        | 9,493      |     | $          | 10,627 |   |

 

**7.REVOLVING CREDIT FACILITY**

In May 2007, the Company entered into a $10 million unsecured creditagreement with a bank.  This revolvingcredit facility is available to finance working capital, issue letters ofcredit and finance general corporate purposes. The Company can obtain letters of credit in an aggregate amountof $5 million, which reduces the maximum amount available for borrowing underthe facility. Interest on amountsborrowed is payable at a base rate or a Eurodollar rate, in each case asdefined in the agreement.  The base rateis equal to the higher of the Federal Funds Rate plus 0.5% or the bank’s primerate.  Fees on outstanding letters ofcredit are either 1% (if the Company’s consolidated leverage ratio is less thanor equal to 1.25:1) or 1.25% (if the Company’s consolidated leverage ratio isgreater than 1.25:1) of face value per annum. The Company also pays a quarterlycommitment fee on the unused portion of the facility, which is either 0.1% (ifthe Company’s consolidated leverage ratio is less than or equal to 1.25:1) or0.15% (if the Company’s consolidated leverage ratio is greater than 1.25:1).

The terms of the agreement provide for customary representations andwarranties, affirmative and negative covenants, events of default, andlimitations on dividends, capital expenditures and acquisitions.  The Company also is required to maintaincompliance with the following financial covenants (in each case, as defined inthe agreement):

·                  Consolidated minimum annual EBITDA of atleast $12 million, computed quarterly on a rolling 12-month basis

·                  Consolidated tangible net worth of at least$36 million

·                  Consolidated maximum leverage ratio of 1.5:1

The creditagreement expires in May 2009.  However,letters of credit may have an expiration date of up to one year beyond theexpiration date of the credit agreement.

The Company has aseparate credit agreement with another bank for the issuance of letters ofcredit.  The Company issues letters ofcredit as collateral for performance on certain of its outsourced governmentportal contracts, as collateral for certain performance bonds and as collateralfor certain office leases.  In total, theCompany and its subsidiaries had unused outstanding letters of credit ofapproximately $1.3 million at June 30, 2007. It is the Company’s intention to cancel these letters of creditthroughout 2007 and reissue them under the new revolving credit facility.

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

***FORWARD-LOOKING STATEMENTS***

# *“Safe Harbor” statement under thePrivate Securities Litigation Reform Act of 1995: Statements in this QuarterlyReport on Form 10-Q regarding NIC and its business, which are nothistorical facts, are “forward-looking statements” that involve risks anduncertainties.   Certain mattersdiscussed in this report may constitute forward-looking statements within themeaning of the federal securities laws that inherently include certain risksand uncertainties. Forward-looking statements include, but are not limited to,statements of plans and objectives, statements of future economic performanceor financial projections, statements of assumptions underlying such statements,and statements of the Company’s or management’s intentions, hopes, beliefs,expectations or predictions of the future. For example, statements like we “expect,” we “believe,” we “plan,” we “intend”or we “anticipate” are forward-looking statements. Investors should beaware that our actual operating results and financial performance may differmaterially from our expressed expectations because of risks and uncertaintiesabout the future including those risks discussed in our 2006 Annual Report onForm 10-K filed with the Securities and Exchange Commission on March 15,2007.  In addition, we will notnecessarily update the information in this Quarterly Report on Form 10-Qif any forward-looking statement later turns out to be inaccurate.Management continuously updates and revises these estimates and assumptions basedon actual conditions experienced. However, it is not practicable to publish all revisions and, as aresult, no one should assume that results projected in or contemplated by theforward-looking statements will continue to be accurate in the future.  Investors are cautioned not to put unduereliance on any forward-looking statement.*

*There area number of important factors that could cause actual results to differmaterially from those suggested or indicated by such forward-lookingstatements.  These include, among others,the success of the Company in signing contracts with new states and governmentagencies, including continued favorable government legislation; NIC’s abilityto develop new services; existing states and agencies adopting those new services;acceptance of eGovernment services by businesses and citizens; competition; andgeneral economic conditions and the other important cautionary statements andrisk factors described in NIC’s 2006 Annual Report on Form 10-K filedon March 15, 2007, with the Securities and Exchange Commission.*

**WHAT WE DO – AN EXECUTIVE SUMMARY**

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

In our core business, portal outsourcing, we enterinto contracts primarily with state governments and design, build and operateWeb-based portals on their behalf. We enter into long-term contracts,typically three to five years, and manage operations for each governmentpartner through separate subsidiaries that operate as decentralized businesseswith a high degree of autonomy. Our portals consist of Web sites andapplications that we build, which allow businesses and citizens to accessgovernment information 

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online and complete transactions, including applying for a permit,retrieving driver’s license records or filing a form or report. We helpincrease our government partners’ revenues by expanding the distribution oftheir information assets and increasing the number of financial transactionsconducted with governments.  We do thisby marketing portal services and soliciting users to complete government-basedtransactions and to enter into subscriber contracts that permit users to accessthe portal and the government information contained therein in exchange fortransactional and/or subscription user fees. We are typically responsible forfunding up-front investment and ongoing operational costs of the governmentportals.  Our unique self-fundingbusiness model allows us to reduce our government partners’ financial andtechnology risks and obtain revenues by sharing in the fees generated fromeGovernment services. Our clients benefit because they gain a centralized,customer-focused presence on the Internet. Businesses and citizens gain afaster, more convenient and more cost-effective means to interact withgovernments.

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

AtJune 30, 3007, we had contracts to provide portal outsourcing services fornineteen states, eighteen of which operate under our self-funding businessmodel (see Note 2 to the Consolidated Financial Statements included in thisForm 10-Q).  Our closest competitorsoperate no more than one state portal each. We also provide portal outsourcingservices to three local governments.

# **REVENUE RECOGNITION**

We classify our revenues and cost of revenues into twocategories: (1) portal and (2) software & services.  The portal category includes revenues andcost of revenues primarily from our subsidiaries operating government portalson an outsourced basis.  The software& services category includes revenues and cost of revenues primarily fromour UCC and corporate filings and ethics & elections businesses.

#### *Our portal outsourcing businesses*

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

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

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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 1 in ourForm 10-K for the year ended December 31, 2006, filed with the SEC on March 15,2007.

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

*Our software & services businesses*

# UCC and corporate filings

Our UCC and corporate filings software developmentbusiness derives the majority of its revenues from fixed-priceapplication development contracts and recognizes revenues on the percentage ofcompletion method.  At June 30, 2007,this business was primarily engaged in servicing its contract with theCalifornia Secretary of State and no longer markets its applications andservices in respect of new engagements.

Ethics & elections

Our ethics & elections business derives themajority of its revenues from time and materials application development andmaintenance outsourcing contracts and recognizes revenues as services areprovided.  At June 30, 2007, our ethics& elections business was primarily engaged in servicing its contracts withthe Federal Election Commission and the state of Michigan.

**CRITICALACCOUNTING POLICIES**

Therehave been no material changes to our critical accounting policies and estimatesfrom the information provided in Item 7, “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” included in our Form 10-Kfor the year ended December 31, 2006, filed with the SEC on March 15, 2007,except as follows:

*UncertainTax Positions*

Weaccount for uncertain tax positions in accordance with FASB Interpretation No.(“FIN”) 48, “Accounting forUncertainty in Income Taxes” – an interpretation of FASB Statement No. 109.”  The application of income tax law isinherently complex. Laws and regulations in this area are voluminous and areoften ambiguous. As such, we are required to make many subjective assumptionsand judgments regarding our income tax exposures.  Interpretations of and guidance surroundingincome tax laws and regulations change over time. As such, changes in our subjectiveassumptions and judgments can materially affect amounts recognized in theconsolidated balance sheets and statements of income. See Notes 1 and 4 to theConsolidated Financial Statements included in this Form 10-Q for additional

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detail on our adoption ofFIN 48 in the first quarter of 2007 and our uncertain tax positions.

# **RESULTS OF OPERATIONS**

Thefollowing discussion summarizes the significant factors affecting operatingresults for the three- and six-month periods ended June 30, 2007 and 2006.  This discussion and analysis should be readin conjunction with our unaudited consolidated interim financial statements andthe related notes included in this Form 10-Q. 
| ** **                                                              | ** ** | **Three months   ended** | ** ** | **Six months   ended** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **June 30,**                  | ** ** | **June 30,**                | ** ** |
| **Key Financial Metrics**                                     | ** ** | **2007**                           | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue growth –  outsourced portals                               |       | 16                                 | %          | 24                               | %          | 16 | % | 24 | % |
| Same state revenue  growth – outsourced portals                    |       | 14                                 | %          | 9                                | %          | 15 | % | 9 | % |
| Recurring portal  revenue %                                             |       | 95                                 | %          | 96                               | %          | 94 | % | 97 | % |
| Gross profit % -  outsourced portals                                    |       | 49                                 | %          | 50                               | %          | 48 | % | 51 | % |
| Selling &  administrative expenses as % of portal revenues          |       | 26                                 | %          | 20                               | %          | 26 | % | 20 | % |
| Operating income margin % (operating income as a % of portal  revenues) |       | 22                                 | %          | 28                               | %          | 21 | % | 28 | % |

 

PORTAL REVENUES. In theanalysis below, we have categorized our portal revenues according to theunderlying source of revenue (in thousands) with the corresponding percentagechange from the prior year period.
| ** **                                    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                    | ** ** | **2007**                         | ** ** | **%Change**                    | ** ** | **2006** | ** ** | **2007** | ** ** | **%Change** | ** ** | **2006** | ** ** |
| DMV transaction-based                         |       | $                                | 11,275     |                           | 4          | % | $ | 10,837 |   | $ | 22,736 |   | 3 | % | $ | 22,014 |   |
| Non-DMV  transaction-based                    |       | 7,266                            |       | 15                             | %          | 6,297 |   | 13,281 |   | 15 | % | 11,559 |   |
| Software development  & portal management |       | 2,069                            |       | 213                            | %          | 660 |   | 4,461 |   | 269 | % | 1,210 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Total                                         |       | $                                | 20,610     |                           | 16         | % | $ | 17,794 |   | $ | 40,478 |   | 16 | % | $ | 34,783 |   |

 

Portal revenues in the current quarter increased 16%, or approximately$2.8 million, over the prior year quarter. Of this increase, 14%, or approximately $2.4 million, wasattributable to an increase in same state portal revenues (outsourced portalsin operation and generating recurring revenues for two full years), and 2%, orapproximately $0.4 million, was attributable to our new Vermont portal, whichbegan generating DMV revenues in March 2007.

Our Indiana portalsubsidiary signed a new long-term contract with the state of Indiana thatcommenced on July 1, 2006.  The newcontract is based on a funding model that includes recurring fixed monthly feesfor baseline services and primarily time and materials project-based pricingfor variable services.  Historically, themajority of revenues under this contract were DMV and non-DMVtransaction-based.  Under the newcontract, the majority of revenues are classified as software development &portal management.  Prior to July 1,2006, we defined same state revenues as those from states in operation andgenerating DMV revenues for two full years. Because the baseline revenues from the new Indiana contract arerecurring, we have continued to include Indiana portal revenues in thecalculation of same state 

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revenue growth eventhough we no longer earn DMV transaction-based revenues under thecontract.  Same state portal revenues inthe current quarter increased 14% over the prior year quarter due to increasedtransaction revenues from our Arkansas, Alabama, Kentucky, Montana and Idahoportals, among others.

Excluding Indiana,same state portal revenues in the current quarter increased 19% over the prioryear quarter, with same state DMV transaction-based revenues increasing 10% andsame state non-DMV transaction-based revenues increasing 37% (primarily due tothe addition of several new revenue generating applications in existingportals).  Our same state revenue growth in the currentquarter was higher than the 9% growth we achieved in the prior year quarterprimarily due to increases in same state DMV and non-DMV transaction-basedrevenue growth.  Excluding Indiana, samestate DMV revenue growth in the current quarter was 10% compared to 2% in theprior year quarter. The higher growth in the current quarter was primarily dueto the effect of modest DMV price increases in three of our portal states thatwent into effect in late 2006.  AbsentDMV price increases, same state DMV revenues have historically grown at a rateof 1% to 3% per year.  Same state non-DMVtransaction based revenue growth was 18% in the prior year quarter.

Portal revenues for the six months in the current period increased 16%,or approximately $5.7 million, over the prior year period.  Of this increase, 15%, or approximately $5.2 million, wasattributable to an increase in same state portal revenues and 1%, orapproximately $0.5 million, was attributable to our new Vermont portal.  Consistent with our results in the currentquarter, same state portal revenues in the current year-to-date periodincreased 15% over the prior year period. Excluding Indiana, same state portal revenues in the currentyear-to-date period increased 19% over the prior year period, with same stateDMV transaction-based revenues increasing 10% and same state non-DMVtransaction-based revenues increasing 38%. Same state revenues in the prior year-to-date period increased 9%.

COST OF PORTAL REVENUES.  Cost of portal revenues for the currentquarter increased 17%, or approximately $1.5 million, over the prior yearquarter.  Of this increase, 14%, or approximately $1.3 million, wasattributable to an increase in same state cost of portal revenues, and 3%, orapproximately $0.2 million, was primarily attributable to our new Vermontportal.

The increase in same state cost of portal revenues inthe current quarter was partially attributable to additional personnel inseveral of our portals due to our continued growth and reinvestment in our corebusiness, coupled with mid-year 2006 non-executive salary increases across allportals that were in addition to normal annual increases, in an effort tobetter align our employee compensation structure with the general market.  Also contributing to this increase was anincrease in bank fees.  A growing percentageof our non-DMV transaction-based revenues are generated from online serviceswhereby users pay 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.

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Our portal gross profit rate in the current quarterwas 49% compared to 50% in the prior year quarter, with cost of portal revenuesgrowing at a higher rate (17%) than portal revenues (16%) in the currentquarter, as further discussed above.  Wecarefully monitor our portal gross profit percentage in an effort to balancegenerating a solid financial return and delivering value to our governmentpartners through reinvestment in our portals. We currently expect our portal gross profit percentage to range from 45%to 47% in 2007.

Consistent with our results in the current quarter,cost of portal revenues for the six months in the current period increased 21%,or approximately $3.7 million, over the prior year period.  Of thisincrease, 19%, or approximately $3.3 million, was attributable to anincrease in same state cost of portal revenues, and 2%, or approximately $0.4million, was primarily attributable to our new Vermont portal.  Our portal gross profit rate for the six monthsin the current year period was 48% compared to 51% in the prior year period,with cost of portal revenues growing at a higher rate (21%) than portalrevenues (16%) in the current period, as further discussed above.

SOFTWARE & SERVICES REVENUES. In the analysisbelow, we have categorized our software & services revenues by type ofbusiness (in thousands), with the corresponding percentage change from theprior year period.       
| ** **              | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **              | ** ** | **2007**                         | ** ** | **%Change**                    | ** ** | **2006** | ** ** | **2007** | ** ** | **%Change** | ** ** | **2006** | ** ** |
| Corporate  filings      |       | $                                | 189        |                           | (56        | )% | $ | 433 |   | $ | 361 |   | 127 | % | $ | (1,349 | ) |
| Ethics &  elections |       | 614                              |       | 40                             | %          | 440 |   | 1,142 |   | 28 | % | 892 |   |
| Other                   |       | 63                               |       | (34                            | )%         | 95 |   | 129 |   | (30 | )% | 183 |   |
|                    |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Total                   |       | $                                | 866        |                           | (11        | )% | $ | 968 |   | $ | 1,632 |   | 695 | % | $ | (274 | ) |

In our corporatefilings business, we recognized approximately $0.2 million in revenue from ourcontract with the California SOS in the current quarter compared to $0.4million in the prior year quarter.  Werecognize revenue on our contract with the California SOS using the percentageof completion method as we make progress, utilizing costs incurred to date ascompared to the estimated total cost for the contract.  The increase in revenues in our ethics &elections business in the current quarter and year-to-date periods is primarilydue to our contract with the Federal Election Commission, which experiencedbudget reductions in the prior year periods in light of federal spending on theHurricane Katrina relief effort.  Software & services revenues for thesix-month period ended June 30, 2006 primarily reflect a revenue adjustmentunder percentage of completion accounting relating to our contract with theCalifornia SOS, as further discussed in Note 5 to the Consolidated FinancialStatements included in this Form 10-Q.

COST OF SOFTWARE& SERVICES REVENUES.  Cost ofsoftware & services revenues in the prior year-to-date period primarilyreflects an expense adjustment under percentage of completion accountingrelating to our contract with the California Secretary of State as furtherdiscussed in Note 5 to the Consolidated Financial Statements included in thisForm 10-Q.

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SELLING & ADMINISTRATIVE.  Selling& administrative expenses in the current quarter and year-to-date periodsincreased 53% and 51%, respectively, or approximately $1.9 million and $3.6million, over the prior year periods. The increase was mostly attributable to additional personnel across ourcorporate-level divisions, coupled with mid-year 2006 non-executive salaryincreases across all corporate-level divisions that were in addition to normalannual increases, in an effort to better align our employee compensationstructure with the general market.  Ourcorporate-level headcount has increased by approximately 38% since the secondquarter of 2006, as we have added personnel to support and enhancecorporate-wide information technology security and portal operations, inaddition to sales & marketing and growth initiatives.  Finally, stock-based compensation included inselling & administrative expenses in the current quarter and year-to-dateperiods increased approximately $0.2 million and $0.4 million, respectively,over the prior year periods due mainly to restricted stock awards that weregranted to employees and non-employee directors in the second and thirdquarters of 2006.  As a percentage ofportal revenue, selling & administrative expenses were 26% in the currentquarter and year-to-date periods compared to 20% in the prior year periods.  We expectselling & administrative costs as a percentage of portal revenue to behigher throughout 2007 as compared to 2006, as we plan to spend an additional $4 million to $6 million (in addition tonormal annual increases in selling & administrative costs) on businessdevelopment, marketing and operations in an effort to accelerate newstate portal contract wins and non-DMV revenue growth.

INTEREST INCOME.  Interest incomereflects interest earned on our investable cash and marketable securitiesportfolio. As further discussed in Note 3 to the Consolidated FinancialStatements included in this Form 10-Q, on January 29, 2007, our Board ofDirectors declared a special cash dividend of $0.75 per share, payable toshareholders of record as of February 12, 2007. The dividend, totaling approximately $46.7 million, was paid on February20, 2007 out of our available cash and marketable securities.  As a result of this dividend, we expectinterest income to decrease for the remainder of 2007, as our averageinvestable cash and marketable securities balance will be significantly lowerin 2007 as compared to 2006.

INCOME TAXPROVISION.  Our effective tax rate forthe three- and six-month periods ended June 30, 2007 was higher than the amountcustomarily expected due to the effect of a $122,000 increase in the liabilityfor unrecognized tax benefits, asfurther discussed in Note 4 to the Consolidated Financial Statements.  Prospectively, we currently expect oureffective tax rate to be between 40% and 42%.

# **LIQUIDITYAND CAPITAL RESOURCES**

*Operating Activities*

Thedecrease in cash flow from operations in the current period was partially theresult of a year-over-year decrease in operating income, excluding non-cashcharges for depreciation & amortization and stock-based compensation, andthe adjustment under percentage of completion accounting recorded in the prioryear period on our contract with the California SOS, which did not affectoperating cash flow.  Additionally, inJune 2006, the California SOS officially accepted the UCC portion of theproject, at which time we received approximately $1.5 million in milestonepayments under the contract.

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We had a history of unprofitable operations prior to2003 primarily due to operating losses incurred in our software & servicesbusinesses.  These losses generatedsignificant federal and state tax net operating losses, or NOLs.  As a result of our NOL carryforwards, we arenot currently paying federal income taxes, with the exception of amountsrelating to alternative minimum tax, and are only paying minimal amounts ofstate income taxes in certain states. This positively impacts our operating cash flow and will continue topositively impact our operating cash flow during the NOL carryforwardperiods.  Based on our currentprojections, we currently expect to fully utilize our federal NOL carryforwardsby the end of 2009.  For the six-monthperiods ended June 30, 2007 and 2006, combined federal and state income taxpayments totaled approximately $0.6 million and $0.4 million, respectively.

*Investing Activities*

Investing activities in the current period primarilyreflect the liquidation of our marketable securities portfolio to pay the $46.7million special cash dividend in February 2007, and $1.7 million of capitalexpenditures, whichwere for normal fixed asset additions in our outsourced portal business,including Web servers and purchased software to support and enhancecorporate-wide information technology security and portal operations. Cash used ininvesting activities in the prior year period primarily reflects $13.0 millionin purchases of marketable debt securities in an effort to increase investmentincome, and $1.3 million of capital expenditures, which were primarily for normal fixed assetadditions in our outsourced portal business, including Web servers, purchased softwareand office furniture and equipment.

*Financing Activities*

Financing activities in the current period primarilyreflect payment of the $46.7 million special cash dividend, in addition to $0.5million in proceeds from the exercise of employee stock options and $0.2million in proceeds from our employee stock purchase program.  Financing activities in the prior year periodprimarily reflect $1.0 million in proceeds from the exercise of employee stockoptions and $0.2 million in proceeds from our employee stock purchase program.

*Liquidity*

We recognize revenue primarily from providingoutsourced government portal services net of the transaction fees due to thegovernment when the services are provided. The fees that we must remit to thegovernment are accrued as accounts payable and accounts receivable at the timeservices are provided. As a result, trade accounts payable and accountsreceivable reflect the gross amounts outstanding at the balance sheetdates.  Gross billings for the threemonths ended June 30, 2007 and December 31, 2006 were approximately $277.7million and $196.9 million, respectively. The Company calculates days sales outstanding by dividing trade accountsreceivable at the balance sheet date by gross billings for the period andmultiplying the resulting quotient by the number of days in that period.  Days sales outstanding for the three-monthperiods ended June 30, 2007 and December 31, 2006 was 9 and 13, respectively.

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Webelieve that working capital is an important measure of our short-termliquidity.  Working capital, defined ascurrent assets minus current liabilities, decreased to $40.4 million at June30, 2007 from $77.6 million at December 31, 2006.  Our current ratio, defined as current assetsdivided by current liabilities, at June 30, 2007 was 2.1 compared to 2.9 atDecember 31, 2006.  The decrease in ourworking capital and current ratio was attributable to the $46.7 million specialdividend paid out of the Company’s available cash and marketable securities inthe current period as further discussed below and in Note 3 to the ConsolidatedFinancial Statements included in this Form 10-Q.

At June 30, 2007, our total cash and marketable securities balance was$43.2 million compared to $81.8 million at December 31, 2006.  As further discussed above, we paid a specialcash dividend totaling $46.7 million in the current period out of the Company’savailable cash and marketable securities. We do not believe this dividend will have a significant effect on ourfuture liquidity. We believe that our currently available liquid resources andcash generated from operations will be sufficient to meet our operatingrequirements, capital expenditure requirements and current growth initiativesfor at least the next twelve months without the need of additionalcapital.  However, we may need to raiseadditional capital within the next twelve months to further:

·                  fundoperations if unforeseen costs arise;

·                  collateralizeletters of credit, which we are required to post as collateral for performanceon certain of our outsourced government portal contracts, as collateral forcertain performance bonds, and as collateral for certain office leases;

·                  support ourexpansion into other states and government agencies beyond what is contemplatedif unforeseen opportunities arise;

·                  expand ourproduct and service offerings beyond what is contemplated if unforeseenopportunities arise;

·                  respond tounforeseen competitive pressures; and

·                  acquiretechnologies beyond what is contemplated.

Any projections of future earnings and cash flows aresubject to substantial uncertainty. If our available cash, marketablesecurities and cash generated from operations are insufficient to satisfy ourliquidity requirements, we may seek to sell additional equity securities orissue debt securities.  The sale ofadditional equity securities could result in dilution to the Company’sshareholders.  There can be no assurancethat financing will be available in amounts or on terms acceptable to theCompany, if at all.  Further, we may alsodraw on the unused portion of the $10 million unsecured line of credit weobtained in May 2007, as further discussed in Note 7 to the ConsolidatedFinancial Statements included in this Form 10-Q.

We issue letters of credit as collateral forperformance on certain of our outsourced government portal contracts, ascollateral for certain performance bonds and as collateral for certain officeleases.  These irrevocable letters ofcredit are generally in force for one year, for which 

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we pay bank fees of approximately 1.00% to 1.25% offace value per annum.  We had unusedoutstanding letters of credit totaling approximately $1.3 million at June 30,2007 and December 31, 2006.  We are notcurrently required to cash collateralize these letters of credit.  Our collateral requirements have eased overtime as we have continued to operate profitably and grow our earnings.  However, even though we currently expect tobe profitable in fiscal 2007 and beyond, we may not be able to sustain orincrease profitability on a quarterly or annual basis.  We will need to generate sufficient revenueswhile containing costs and operating expenses if we are to achieve sustainedprofitability.  If we are not able tosustain profitability, our cash collateral requirements may increase.  Had we been required to post 100% cashcollateral at June 30, 2007 for the face value of all performance bonds (whichare partially supported by letters of credit) and our line of credit inconjunction with a corporate credit card agreement, unrestricted cash wouldhave decreased and restricted cash would have increased by approximately $3.3million.

At June 30, 2007, we were bound by performance bondcommitments totaling approximately $2.3 million on certain government portaloutsourcing contracts.  These performancebonds are collateralized by a $1 million letter of credit.  We have never had any defaults resulting indraws on performance bonds or letters of credit.

*Off-Balance Sheet Arrangements*

We do not have off-balance sheet arrangements orsignificant exposures to liabilities that are not recorded or disclosed in ourfinancial statements.

*Contractual Obligations*

While we have significant operating lease commitmentsfor office space, those commitments are generally tied to the period ofperformance under related contracts.

**RECENT ACCOUNTING PRONOUNCEMENTS**

*FairValue Measurements*

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 does notrequire any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy used to classify thesource of the information.  We will berequired to adopt this standard in the first quarter of 2008.  We are currently evaluating the requirementsof SFAS No. 157 and have not yet determined the impact, if any, on ourconsolidated financial statements.

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial 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 

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earnings. SFAS No. 159 does not affect any existing accounting literature thatrequires certain assets and liabilities to be carried at fair value. We will berequired to adopt this standard in the first quarter of 2008.  We are currently evaluating the requirementsof SFAS No. 159 and have not yet determined the impact, if any, on ourconsolidated financial statements.

**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

INTERESTRATE RISK.  Our exposure to market riskfor changes in interest rates relates to the increase or decrease in the amountof interest income we can earn on our short-term investments in marketable debtsecurities and cash balances.  Becauseour investments are in short-term, investment-grade, interest-bearingmarketable securities, we are exposed to minimal risk on the principal of thoseinvestments. We limit our exposure to credit loss by depositing our cash withhigh credit quality financial institutions. We enhance the safety and preservation of our invested principal fundsby attempting to limit default risk, market risk and investment risk. We do notuse derivative financial instruments. A 10% change in interest rates would nothave a material effect on our financial condition, results of operations orcash flows.

**ITEM4.  CONTROLS AND PROCEDURES**

**a)  EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES**

The Companymaintains disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) that are designed to ensure that material informationrequired to be disclosed in its filings under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by an issuer in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the issuer’s management, including its principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure. Under the supervision andwith the participation of our management, including our principal executive andprincipal financial officers, or persons performing similar functions, weconducted an evaluation of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this Quarterly Report on Form10-Q.  Based on this evaluation, ourprincipal executive officer and our principal financial officer, or personsperforming similar functions, concluded that our disclosure controls andprocedures were effective as of such date.

**b)   CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING**

# There have been no changes in our internal control over financialreporting that occurred during our second fiscal quarter of 2007 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II.OTHER INFORMATION**

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

(c)           During the second quarter of 2007, the Companyacquired shares of common stock surrendered by employees to pay income taxesdue upon the vesting of restricted stock, as follows (all of the transactionsoccurred during the month of June 2007): 
| **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** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                               |       |                                                           |       |                                                       |       |                                                                                                                                                       |       |                                                                                                                                                                                                            |       |
| June 1, 2007 –  June 30, 2007 |       | 1,182                                                          |       | $                                                          | 5.70       |                                                                                                                                                       | N/A        |                                                                                                                                                                                                            | N/A        |   |
|                                    |            |                                                                |            |                                                            |            |                                                                                                                                                            |            |                                                                                                                                                                                                                 |            |  |

 

# **ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

The Company heldits Annual Meeting of Shareholders on May 1, 2007.  At the meeting, the following matters werevoted upon by the shareholders:

1.               The election ofseven (7) Directors to serve for the upcoming year; and

2.               A proposal toratify the appointment of PricewaterhouseCoopers LLP as the Company’sindependent registered public accountants for the fiscal year ending December31, 2007.

The Board ofDirectors of the Company is composed of seven (7) members.  The following were the nominees of managementvoted upon and elected by the holders of the Company’s common stock as of therecord date: Jeffery S. Fraser, Harry H. Herington, John L. Bunce, Jr., Art N.Burtscher, Daniel J. Evans, Ross C. Hartley and Pete Wilson.  In the election of directors, there were58,897,519 votes “for” Jeffery S. Fraser and 316,556 votes “withheld”;56,866,374 votes “for” Harry H. Herington and 2,347,701 votes “withheld”;51,354,314 votes “for” John L. Bunce, Jr. and 7,859,761 votes “withheld”;54,955,639 votes “for” Art N. Burtscher and 4,258,436 votes “withheld”;55,233,098 votes “for” Daniel J. Evans and 3,980,976 votes “withheld”;56,592,319 votes “for” Ross C. Hartley and 2,621,756 votes “withheld”; and55,232,458 votes “for” Pete Wilson and 3,981,616 votes “withheld”.

The total votescast pertaining to the ratification of the appointment ofPricewaterhouseCoopers LLP as the Company’s independent registered publicaccountants for the fiscal year ending December 31, 2007 were as follows:59,125,898 voted “for”, 64,347 voted “against” and 23,830 “abstentions”.

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**ITEM6.  EXHIBITS**

10.53 – Separation andSeverance Agreement and Release of Claims, dated June 27, 2007, between theRegistrant and Eric J. Bur

31.1 – Certification ofChairman of the Board and Chief Executive Officer Pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002

31.2 – Certification ofChief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002

32.1 – Section 906Certifications of Chairman of the Board and Chief Executive Officer and ChiefAccounting Officer

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the Company has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                             |   | NIC INC.                         |
|-----------------------------|--------|----------------------------------|
|                        |   |                             |
| Dated:  August 6, 2007 |   | /s/ Stephen M. Kovzan            |   |   |
|                        |   | Stephen M.  Kovzan               |
|                        |   | Vice President,  Financial       |
|                        |   | Operations and  Chief Accounting |
|                        |   | Officer                          |

 

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