ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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

There are a number of important factors that could cause actual results to differ materially from those suggested or indicated by such forward-looking statements. These include, among others, the success of the Company in signing contracts with new states and government agencies, including continued favorable government legislation; NIC’s ability to develop new services; existing states and agencies adopting those new services; acceptance of eGovernment services by businesses and citizens; competition; and general economic conditions and the other factors discussed under “CAUTIONS ABOUT FORWARD LOOKING STATEMENTS” in Part I and “RISK FACTORS” in Part I, Item 1A of NIC’s 2006 Annual Report on Form 10-K filed on March 15, 2007, with the Securities and Exchange Commission.

WHAT WE DO – AN EXECUTIVE SUMMARY

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

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

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build, which allow businesses and citizens to access government information online and complete transactions, including applying for a permit, retrieving driver’s license records or filing a form or report. We help increase our government partners’ revenues by expanding the distribution of their information assets and increasing the number of financial transactions conducted with governments. We do this by marketing portal services and soliciting users to complete government-based transactions and to enter into subscriber contracts that permit users to access the portal and the government information contained therein in exchange for transactional and/or subscription user fees. We are typically responsible for funding up-front investment and ongoing operational costs of the government portals. Our unique self-funding business model allows us to reduce our government partners’ financial and technology risks and obtain revenues by sharing in the fees generated from eGovernment services. Our clients benefit because they gain a centralized, customer-focused presence on the Internet. Businesses and citizens gain a faster, more convenient and more cost-effective means to interact with governments.

On behalf of our government partners, we enter into separate agreements with various agencies and divisions of the government to provide specific services and to conduct specific transactions. These agreements preliminarily establish the pricing of the transaction and data access services we provide and the division of revenues between the Company and the government agency. The government must approve prices and revenue sharing agreements. We generally own all the applications developed under these contracts. After completion of a defined contract term, the government agency typically receives a perpetual, royalty-free license to the applications for use only. If our contract were not renewed after a defined term, the government agency would be entitled to take over the portal in place with no future obligation of the Company. In some cases, we enter into contracts to provide consulting, development and management services to government portals in exchange for an agreed-upon fee.

At September 30, 2007, we had contracts to provide portal outsourcing services for 20 states, eighteen of which operate under our self-funding business model (see Note 2 to the Unaudited Consolidated Financial Statements included in this Form 10-Q). Our closest competitor operates one state portal. We also provide portal outsourcing services to three local governments.

REVENUE RECOGNITION

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

Our portal outsourcing businesses

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

•                   DMV transaction-based :  these are transaction fees from the sale of electronic access to driver history records, referred to as DMV records, from our state portals to data resellers, insurance companies

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and other pre-authorized customers on behalf of our state partners, and are generally recurring.

•                   Non-DMV transaction-based :  these are transaction fees from sources other than the sale of DMV records, for transactions conducted by business users and consumer users through our portals, and are generally recurring. For a representative listing of non-DMV services we currently offer through our portals, refer to Part I, Item 1 in our Form 10-K for the year ended December 31, 2006, filed with the SEC on March 15, 2007.

•                   Software development & portal management :  these are fees from the performance of software development projects and other time and materials or fixed fee services for our government partners. While we actively market portal software development services, they do not have the same degree of predictability as our transaction-based revenues.

Our software & services businesses

UCC and corporate filings

Our UCC and corporate filings software development business derives the majority of its revenues from fixed-price application development contracts and recognizes revenues on the percentage of completion method. At September 30, 2007, this business was primarily engaged in servicing its contract with the California Secretary of State and no longer markets its applications and services in respect of new engagements.

Ethics & elections

Our ethics & elections business derives the majority of its revenues from time and materials application development and maintenance outsourcing contracts and recognizes revenues as services are provided. At September 30, 2007, our ethics & elections business was primarily engaged in servicing its contracts with the Federal Election Commission and the state of Michigan.

CRITICAL ACCOUNTING POLICIES

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

Uncertain Tax Positions

We account for uncertain tax positions in accordance with FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.”  The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Notes 1 and 4 to the Unaudited Consolidated Financial Statements included in this Form 10-Q for additional

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

RESULTS OF OPERATIONS

The following discussion summarizes the significant factors affecting operating results for the three- and nine-month periods ended September 30, 2007 and 2006. This discussion and analysis should be read in conjunction with our unaudited consolidated interim financial statements and the related notes included in this Form 10-Q.

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

Portal revenues in the current quarter increased 20%, or approximately $3.5 million, over the prior year quarter. Of this increase, 18%, or approximately $3.2 million, was attributable to an increase in same state portal revenues (outsourced portals in operation and generating recurring revenues for two full years), and 2%, or approximately $0.3 million, was attributable to our new Vermont portal, which began generating DMV revenues in March 2007.

Our Indiana portal subsidiary signed a new long-term contract with the state of Indiana that commenced on July 1, 2006. The new contract is based on a funding model that includes recurring fixed monthly fees for baseline services and primarily time and materials project-based pricing for variable services. Historically, the majority of revenues under this contract were DMV and non-DMV transaction-based. Under the new contract, the majority of revenues are classified as software development & portal management. Prior to July 1, 2006, we defined same state revenues as those from states in operation and generating DMV revenues for two full years. Because the baseline revenues from the new Indiana contract are recurring, we have continued to include Indiana portal revenues in the calculation of same state revenue growth even though we no longer earn DMV transaction-based revenues

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under the contract. Same state portal revenues in the current quarter increased 19% over the prior year quarter due to increased transaction revenues from our Arkansas, Colorado, Kentucky, Montana and South Carolina portals, among others, in addition to increased time and materials software development revenues from our Indiana portal.

Excluding Indiana, same state portal revenues in the current quarter increased 18% over the prior year quarter, with same state DMV transaction-based revenues increasing 11% and same state non-DMV transaction-based revenues increasing 31% (primarily due to the addition of several new revenue generating applications in existing portals). Our same state revenue growth in the current quarter was higher than the 8% growth we achieved in the prior year quarter primarily due to increases in same state DMV and non-DMV transaction-based revenue growth. Excluding Indiana, same state DMV revenue growth in the current quarter was 11% compared to 1% in the prior year quarter. The higher growth in the current quarter was primarily due to the effect of DMV price increases in three of our portal states that went into effect in late 2006 and in one portal state that went into effect in the current quarter. Absent DMV price increases, same state DMV revenues have historically grown at a rate of 1% to 3% per year. Same state non-DMV transaction based revenue growth was 26% in the prior year quarter.

Portal revenues for the nine months in the current period increased 18%, or approximately $9.2 million, over the prior year period. Of this increase, 16%, or approximately $8.5 million, was attributable to an increase in same state portal revenues and 2%, or approximately $0.7 million, was attributable to our new Vermont portal. Consistent with our results in the current quarter, same state portal revenues in the current year-to-date period increased 16% over the prior year period. Excluding Indiana, same state portal revenues in the current year-to-date period increased 19% over the prior year period, with same state DMV transaction-based revenues increasing 10% and same state non-DMV transaction-based revenues increasing 35%. Same state revenues in the prior year-to-date period increased 8%.

COST OF PORTAL REVENUES.  Cost of portal revenues for the current quarter increased 14%, or approximately $1.4 million, over the prior year quarter. Of this increase, 10%, or approximately $0.9 million, was attributable to an increase in same state cost of portal revenues, and 2%, or approximately $0.2 million, was primarily attributable to our new Vermont portal. Additionally, we incurred approximately $0.2 million in start-up costs relating to our new Arizona portal contract, which had not yet begun generating revenues as of September 30, 2007. New portal contract wins have a short-term negative effect on our gross profit percentage during the start-up phase of a portal as we incur costs to open offices, hire employees and develop the portal infrastructure prior to the time we begin to generate revenues. We expect portal gross profit will be similarly affected in the future if we are successful in winning new portal contracts.

The increase in same state cost of portal revenues in the current quarter was partially attributable to additional personnel in several of our portals due to our continued growth and reinvestment in our core business. Also contributing to this increase was an increase in bank fees. A growing percentage of our non-DMV transaction-based revenues are generated from online services whereby users pay for information or transactions via credit cards. We typically earn a percentage of the credit card transaction amount, but also must pay an associated fee to the bank that processes the credit card transaction. We earn a lower gross profit percentage on these

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transactions as compared to our other non-DMV applications. However, we plan to continue to implement these services as they contribute favorably to our operating income growth.

Our portal gross profit rate in the current quarter was 48% compared to 45% in the prior year quarter, with revenues (20%) growing at a higher rate than cost of portal revenues (14%) in the current quarter, as further discussed above. We carefully monitor our portal gross profit percentage in an effort to balance generating a solid financial return and delivering value to our government partners through reinvestment in our portals.

Cost of portal revenues for the nine months in the current period increased 19%, or approximately $5.0 million, over the prior year period. Of this increase, 16%, or approximately $4.3 million, was attributable to an increase in same state cost of portal revenues, 2%, or approximately $0.5 million, was primarily attributable to our new Vermont portal, and 1%, or approximately $0.2 million, was attributable to our new Arizona portal. Our portal gross profit rate for the nine months in the current year period was 48% compared to 49% in the prior year period.

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

The increase in revenues in our ethics & elections business in the current quarter and year-to-date periods is primarily due to our contract with the Federal Election Commission, which experienced budget reductions in the prior year periods in light of federal spending on the Hurricane Katrina relief effort. Software & services revenues for the nine-month period ended September 30, 2006 primarily reflect a revenue adjustment under percentage of completion accounting relating to our contract with the California SOS, as further discussed in Note 5 to the Unaudited Consolidated Financial Statements included in this Form 10-Q.

COST OF SOFTWARE & SERVICES REVENUES. Cost of software & services revenues in the prior year-to-date period primarily reflects an expense adjustment under percentage of completion accounting relating to our contract with the California Secretary of State as further discussed in Note 5 to the Unaudited Consolidated Financial Statements included in this Form 10-Q.

SELLING & ADMINISTRATIVE. Selling & administrative expenses in the current quarter and year-to-date periods increased 33% and 45%, respectively, or approximately $1.3 million and $4.9 million, over the prior year periods. The increases were mostly attributable to additional personnel across our corporate-level divisions (which affected both quarterly and year-to-date comparisons), coupled with mid-year 2006 non-executive salary increases (mainly affecting year-to-date comparisons) across all corporate-level

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divisions that were in addition to normal annual increases, in an effort to better align our employee compensation structure with the general market. Our corporate-level headcount has increased by approximately 20% since the third quarter of 2006, as we have added personnel to support and enhance corporate-wide information technology security and portal operations, in addition to sales & marketing and growth initiatives. As a percentage of portal revenue, selling & administrative expenses were 25% and 26% in the current quarter and year-to-date periods, respectively, compared to 23% and 21% in the prior year quarter and year-to-date periods, respectively . We expect selling & administrative costs as a percentage of portal revenue to be higher throughout 2007 as compared to 2006, as we plan to spend an additional $4 million to $5 million (in addition to normal annual increases in selling & administrative costs) on business development, marketing and operations in an effort to accelerate new state portal contract wins and non-DMV revenue growth.

INTEREST INCOME.  Interest income reflects interest earned on our investable cash and marketable securities portfolio. As further discussed in Note 3 to the Unaudited Consolidated Financial Statements included in this Form 10-Q, on January 29, 2007, our Board of Directors declared a special cash dividend of $0.75 per share, payable to shareholders of record as of February 12, 2007. The dividend, totaling approximately $46.7 million, was paid on February 20, 2007 out of our available cash and marketable securities. As a result of this dividend, we expect interest income for the remainder of 2007 to be lower than the prior year periods, as our average investable cash and marketable securities balance will be significantly lower in 2007 as compared to 2006.

GAIN (LOSS) ON AFFILIATE INVESTMENTS.  Results of operations for the three- and nine-month periods ended September 30, 2007 include a $0.5 million gain on the sale of our remaining investment in eGS, a private joint venture based in London, England, as further discussed in Note 8 to the Unaudited Consolidated Financial Statements included in this Form 10-Q.

INCOME TAX PROVISION.  Our effective tax rate for the three- and nine-month periods ended September 30, 2007 was lower than the amount customarily expected due to the effect of decreases in the liability for uncertain tax positions totaling $511,000 and $389,000, respectively, as further discussed in Note 4 to the Unaudited Consolidated Financial Statements included in this Form 10-Q. Our income tax provision for the nine-month period ended September 30, 2006 includes the establishment of a valuation allowance totaling approximately $101,000 for a state income tax loss carryforward that we may be unable to fully utilize. Prospectively, we currently expect our effective tax rate to be between 40% and 42%.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

We had a history of unprofitable operations prior to 2003 primarily due to operating losses incurred in our software & services businesses. These losses generated significant federal and state tax net operating losses, or NOLs. As a result of our NOL carryforwards, we are not currently paying federal income taxes, with the exception of amounts relating to alternative minimum tax, and are only paying minimal amounts of state income taxes in certain states. This positively impacts our operating cash flow and will continue to positively impact our operating cash flow during the NOL

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carryforward periods. Based on our current projections, we currently expect to fully utilize our federal NOL carryforwards by the end of 2009. For the nine-month periods ended September 30, 2007 and 2006, combined federal and state income tax payments totaled approximately $0.7 million and $0.4 million, respectively.

Investing Activities

Investing activities in the current period reflect the liquidation of our marketable securities portfolio to pay the $46.7 million special cash dividend in February 2007, the purchase of $12.0 million in marketable debt securities in an effort to increase investment income from our excess cash, and $2.6 million of capital expenditures, which were for normal fixed asset additions in our outsourced portal business, including Web servers and purchased software to support and enhance corporate-wide information technology security and portal operations. Investing activities in the current period also include $0.5 million in proceeds from the sale of our remaining investment in the eGS joint venture, as further discussed above. Cash used in investing activities in the prior year period primarily reflects $21.5 million in purchases of marketable debt securities in an effort to increase investment income, and $1.9 million of capital expenditures, which were primarily for normal fixed asset additions in our outsourced portal business, including Web servers, purchased software and office furniture and equipment, in addition to corporate-wide spending on information technology security.

Financing Activities

Financing activities in the current period primarily reflect payment of the $46.7 million special cash dividend, in addition to $0.8 million in proceeds from the exercise of employee stock options and $0.2 million in proceeds from our employee stock purchase program. Financing activities in the prior year period primarily reflect $1.2 million in proceeds from the exercise of employee stock options and $0.2 million in proceeds from our employee stock purchase program.

Liquidity

We recognize revenue primarily from providing outsourced government portal services net of the transaction fees due to the government when the services are provided. The fees that we must remit to the government are accrued as accounts payable and accounts receivable at the time services are provided. As a result, trade accounts payable and accounts receivable reflect the gross amounts outstanding at the balance sheet dates. Gross billings for the three months ended September 30, 2007 and December 31, 2006 were approximately $319.5 million and $196.9 million, respectively. The Company calculates days sales outstanding by dividing trade accounts receivable at the balance sheet date by gross billings for the period and multiplying the resulting quotient by the number of days in that period. D ays sales outstanding for the three-month periods ended September 30, 2007 and December 31, 2006 was 9 and 13, respectively.

We believe that working capital is an important measure of our short-term liquidity. Working capital, defined as current assets minus current liabilities, decreased to $46.5 million at September 30, 2007 from $77.6 million at December 31, 2006. Our current ratio, defined as current assets divided by current liabilities, at September 30, 2007 was 2.0 compared to 2.9

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at December 31, 2006. The decrease in our working capital and current ratio was attributable to the $46.7 million special dividend paid out of the Company’s available cash and marketable securities in the current period as further discussed below and in Note 3 to the Unaudited Consolidated Financial Statements included in this Form 10-Q.

At September 30, 2007, our total cash and marketable securities balance was $52.4 million compared to $81.8 million at December 31, 2006. As further discussed above, we paid a special cash dividend totaling $46.7 million in the current period out of the Company’s available cash and marketable securities. We do not believe this dividend will have a significant effect on our future liquidity. We believe that our currently available liquid resources and cash generated from operations will be sufficient to meet our operating requirements, capital expenditure requirements and current growth initiatives for at least the next twelve months without the need of additional capital. However, we may need to raise additional capital within the next twelve months to further:

•                   fund operations if unforeseen costs arise;

•                   support our expansion into other states and government agencies beyond what is contemplated if unforeseen opportunities arise;

•                   expand our product and service offerings beyond what is contemplated if unforeseen opportunities arise;

•                   respond to unforeseen competitive pressures; and

•                   acquire technologies beyond what is contemplated.

Any projections of future earnings and cash flows are subject to substantial uncertainty. If our available cash, marketable securities and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or issue debt securities. The sale of additional equity securities could result in dilution to the Company’s shareholders. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. Further, we may also draw on the unused portion of the $10 million unsecured line of credit we obtained in May 2007, as further discussed in Note 7 to the Unaudited Consolidated Financial Statements included in this Form 10-Q.

We issue letters of credit as collateral for performance on certain of our outsourced government portal contracts, as collateral for certain performance bonds and as collateral for certain office leases. These irrevocable letters of credit are generally in force for one year, for which we pay bank fees of approximately 1.00% to 1.25% of face value per annum. We had unused outstanding letters of credit totaling approximately $1.3 million at September 30, 2007 and December 31, 2006. We are not currently required to cash collateralize these letters of credit. Our collateral requirements have eased over time as we have continued to operate profitably and grow our earnings. However, even though we currently expect to be profitable in fiscal 2007 and beyond, we may not be able to sustain or increase profitability on a quarterly or annual basis. We will need to generate sufficient revenues while containing costs and operating expenses if we are to achieve sustained profitability. If we are not able to sustain profitability, our cash collateral requirements may increase. Had we been

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required to post 100% cash collateral at September 30, 2007 for the face value of all performance bonds (which are partially supported by letters of credit) and our line of credit in conjunction with a corporate credit card agreement, unrestricted cash would have decreased and restricted cash would have increased by approximately $3.8 million.

At September 30, 2007, we were bound by performance bond commitments totaling approximately $2.8 million on certain government portal outsourcing contracts. These performance bonds are collateralized by a $1 million letter of credit. We have never had any defaults resulting in draws on performance bonds or letters of credit.

Off-Balance Sheet Arrangements

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

Contractual Obligations

While we have significant operating lease commitments for office space, those commitments are generally tied to the period of performance under related contracts. In addition, as discussed above and in Notes 1 and 4 to the Unaudited Consolidated Financial Statements included in this Form 10-Q, we adopted FIN 48 on January 1, 2007. At September 30, 2007 we had approximately $0.7 million of unrecognized tax benefits. We expect that the amount of unrecognized tax benefits will change in the next 12 months, but, at this time, cannot estimate a range of the reasonably possible change that may occur. However, we do not expect that such a change would have a significant impact in our results of operations or financial condition.

RECENT ACCOUNTING PRONOUNCEMENTS

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. We will be required to adopt this standard in the first quarter of 2008. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact, if any, on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.”  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.  SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. We will be required to adopt this standard in the first quarter of 2008. We are currently evaluating the requirements of SFAS No. 159 and have not yet determined the impact, if any, on our consolidated financial statements.

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