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 current or 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 this Quarterly Report on Form 10-Q and in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 13, 2009. 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. 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; the ability of NIC to successfully integrate into its operations the recently acquired current portal management contracts with government agencies in the state of Texas (the "Texas Contracts"), which are discussed in Note 3 in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q; 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 (including the recent deterioration in 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 2008 Annual Report on Form 10-K filed on March 13, 2009 with the SEC. Investors should read all of these discussions of risks carefully.

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. Currently, we have contracts to provide portal outsourcing services for 23 states. 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 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 partners 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 have limited control over the level of fees we are permitted to retain. Any changes made to the amount or percentage of fees retained by us, or to the amounts charged for the services offered, could adversely affect the profitability of the respective contract to us. 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, application development and portal management services to governments in exchange for an agreed-upon fee.

A government may terminate its contract prior to the expiration date upon specific cause events that are not cured within a specified period and, in certain circumstances, upon passage of legislation. Eight contracts under which we provide portal outsourcing services can be terminated without cause on a specified period of notice; collectively, revenues generated from these contracts represented 36% and 38% of our portal revenues for the three and six-month periods ended June 30, 2009, respectively. In the event that any of these contracts would be terminated without cause, the terms of the respective contract may require the government to pay a fee to us in order to continue to use our software in its portal. In addition, the loss of one or more of our larger state portal partners, such as Alabama, Arkansas, Colorado, Indiana, Kentucky, Tennessee, Texas, Utah or Virginia, as a result of the expiration, termination or failure to renew the respective contract, if such partner is not replaced, could significantly reduce our revenues.

Texas Portal Management Contract Acquisition and New Texas Portal Management Contract

See Note 3 in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q for additional information regarding our second quarter 2009 acquisition of the Texas Contracts.

As discussed in Note 10 in the Notes to the Unaudited Consolidated Financial Statements, on July 31, 2009 we entered into a new seven-year contract with the state of Texas to manage the state's official government portal. The new contract commences on January 1, 2010 and runs through August 31, 2016. We will not begin earning revenues under the new contract until 2010. The new contract will have terms substantially different than the current Texas Contracts we acquired in the second quarter of 2009.

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 business with the California Secretary of State and our ethics & elections business with the Federal Election Commission and the state of Michigan. We currently derive revenues from three main sources: transaction-based fees, time and materials-based fees for application development and fixed fees for portal management services. Each of these revenue types and the corresponding business models are further described below.

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 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, 2008, filed with the SEC on March 13, 2009.

† Portal management: these are revenues from the performance of fixed fee portal management services for

our government partners in the states of Arizona and Indiana, and are generally recurring.

† Portal software development: these are revenues from the performance of application development projects and other time and materials services for our government partners. While we actively market these services, they do not have the same degree of predictability as our transaction-based or portal management revenues. As a result, these revenues are excluded from our recurring portal revenue percentage.

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 June 30, 2009, this business was primarily engaged in servicing its contract with the California Secretary of State, and no longer markets its applications and services for any 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 June 30, 2009, 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 in 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, 2008, filed with the SEC on March 13, 2009, except as follows:

Intangible Assets

As a result of our recent acquisition of the Texas Contracts, as further discussed in Note 3 in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q, we have significant intangible assets on our consolidated balance sheet at June 30, 2009. We used the discounted cash flow method to estimate the fair value of these intangible assets. In order to determine the fair value of these assets, we are required to make assumptions regarding estimated future cash flows, discount rates and other factors. We are currently in the process of finalizing the valuation for certain of these acquired assets; therefore, the fair value measurements as of the acquisition date and the nonrecurring gain (net of tax) we recognized on acquisition are preliminary and subject to change. The allocation of the purchase price to the assets acquired will be finalized as necessary, up to one year after the acquisition closing date, as information becomes available. At each balance sheet date, and whenever events or changes in circumstances warrant, management assesses the carrying value of recorded intangible assets for possible impairment based primarily on the ability to recover the balances from expected future cash flows on an undiscounted basis. If the sum of the expected future cash flows on an undiscounted basis were to be less than the carrying amount of the intangible asset, an impairment loss would be recognized for the amount by which the carrying value of the intangible asset exceeds its estimated fair value. There is considerable judgment necessary to determine future cash flows, and accordingly, actual results could vary significantly from such estimates.

RESULTS OF OPERATIONS

The following discussion summarizes the significant factors affecting operating results for the three- and six-month periods ended June 30, 2009 and 2008. 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.

                                            Three months ended       Six months ended
                                                 June 30,                June 30,
Key Financial Metrics                        2009        2008        2009        2008
Revenue growth - outsourced portals              25 %        19 %        18 %        20 %
Same state revenue growth - outsourced
portals                                          13 %        13 %        12 %        13 %
Recurring portal revenue %                       89 %        92 %        90 %        91 %
Gross profit % - outsourced portals              42 %        47 %        43 %        47 %
Selling & administrative expenses as %
of portal revenues                               23 %        24 %        23 %        24 %
Operating income margin % (operating
income as a % of portal revenues)                23 %        21 %        20 %        21 %

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 increase or decrease from the prior year period.

                                   Three months ended               Six months ended
                                        June 30,                        June 30,
                                           %                               %
                                2009     Change      2008       2009     Change      2008
DMV transaction-based         $ 13,169       12 %  $ 11,790   $ 25,541        8 %  $ 23,700
Non-DMV transaction-based       12,342       36 %     9,050     21,958       32 %    16,627
Portal management                1,853      (10 )%    2,067      3,790       (8 )%    4,134
Portal software development      3,404       99 %     1,714      5,883       49 %     3,956

Total                         $ 30,768       25 %  $ 24,621   $ 57,172       18 %  $ 48,417

Portal revenues in the current quarter increased 25%, or approximately $6.1 million, over the prior year quarter. This increase was mainly attributable to a 13% increase, or approximately $3.2 million, in same state portal revenues (outsourced portals in operation and generating recurring revenues for two full years) and a 12% increase, or approximately $2.9 million, in revenues from our new Texas Contracts, which we acquired in May 2009. See Note 3 in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q for additional information regarding our second quarter 2009 acquisition of the Texas Contracts.

Our Indiana and Arizona portal subsidiaries operate under contracts that are based on a funding model that includes recurring fixed monthly fees for baseline services and primarily project-based pricing for variable services, rather than transaction-based revenues for DMV and non-DMV services. Excluding Indiana and Arizona, same state portal revenues in the current quarter increased 15% over the prior year quarter, with same state DMV transaction-based revenues decreasing 1% and same state non-DMV transaction-based revenues increasing 32% (primarily due to the addition of several new revenue generating applications in existing portals). Same state DMV revenue growth in the current quarter decreased 1% compared to an increase of 1% in the prior year quarter. Absent DMV price increases, same state DMV revenues have historically grown at a rate of 1% to 3% per year. We believe our DMV revenues for over the past year have been adversely affected by negative macroeconomic conditions, which we currently expect may continue throughout 2009. As a result, we currently expect same-state DMV revenue growth to be flat or slightly negative in 2009. Portal same state non-DMV transaction based revenue growth was 25% in the prior year quarter. Same state portal revenues in the second quarter of 2009 increased 13% over 2008 primarily due to increased transaction revenues from our Alabama, Arkansas, Colorado, Idaho and Iowa portals, among others.

Portal revenues for the six months in the current fiscal year increased 18%, or approximately $8.8 million, over the prior year period. Of this increase, 12%, or approximately $5.6 million, was attributable to an increase in same state portal revenues and 6%, or approximately $3.2 million, was attributable to our new portals including West Virginia ($0.3 million), which began to generate DMV revenues in February 2008, and Texas ($2.9 million). Same state portal revenues in the current year-to-date period increased 12% over the prior year period. Excluding Indiana and Arizona, same state portal revenues in the current year-to-date periods increased 13% over the prior

year period, with same state DMV transaction-based revenues remaining flat and same state non-DMV transaction-based revenues increasing 31%.

COST OF PORTAL REVENUES. In the analysis below, we have categorized our cost of portal revenues between fixed and variable costs (in thousands), with the corresponding percentage increase or decrease from the prior year period. Fixed costs include such costs as employee compensation, telecommunication and all other costs associated with the provision of dedicated client service such as dedicated facilities. Variable costs consist of costs that vary with our level of portal revenues and include bank fees required to process credit card and automated clearinghouse transactions and costs associated with revenue share arrangements with our state partners.

                      Three months ended              Six months ended
                           June 30,                       June 30,
                              %                              %
                   2009     Change     2008       2009     Change     2008
Fixed costs      $ 12,931       25 % $ 10,315   $ 24,138       18 % $ 20,432
Variable costs      4,787       78 %    2,691      8,471       60 %    5,279

Total            $ 17,718       36 % $ 13,006   $ 32,609       27 % $ 25,711

Cost of portal revenues for the current quarter increased 36%, or approximately $4.7 million, over the prior year quarter. Of this increase, 20%, or approximately $2.6 million, was attributable to an increase in same state cost of portal revenues, and 16%, or $2.1 million, was attributable to our new state portal businesses in Texas ($2.0 million) and New Mexico ($0.1 million).

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, coupled with increased employee compensation and health insurance expenses. Also contributing to this increase was an increase in variable bank fees, particularly from our portals in Alabama and Idaho. A growing percentage of our non-DMV transaction-based revenues are generated from online applications 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 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 percentage was 42% in the current year quarter, down from 47% in the prior year quarter. The decrease in 2009 was due to the increase in cost of portal revenues, as described above. In addition, the portal gross profit percentage from our newly acquired Texas Contracts is lower than our company-wide average. We carefully monitor our portal gross profit percentage to strike the balance between generating a solid return for our shareholders and delivering value to our government partners through reinvestment in our portal operations (which we believe also benefits our shareholders). We currently expect our portal gross profit percentage to be approximately 40% in 2009.

Cost of portal revenues for the six months in the current fiscal year increased 27%, or approximately $6.9 million, over the prior period. Of this increase, 18%, or approximately $4.7 million, was attributable to an increase in same state cost of portal revenues, and 9%, or approximately $2.2 million, was primarily attributable to our newer Texas, New Mexico and West Virginia portals. Our portal gross profit rate for the six months in the current year period was 43% compared to 47% in the prior year period, for reasons further discussed above.

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

                             Three months ended                 Six months ended
                                  June 30,                          June 30,
                                     %                                 %
                         2009      Change       2008       2009      Change       2008
Ethics & elections     $    778         14 %  $    683   $  1,457          7 %  $  1,368
UCC & corporate
filings software
development                 155          8 %       143        308          5 %       294
Other                       101        (60 )%      255        275         (9 )%      302

Total                  $  1,034         (4 )% $  1,081   $  2,040          4 %  $  1,964

SELLING & ADMINISTRATIVE. Selling & administrative expenses in the current quarter and year-to-date periods increased 23% and 14%, respectively, or approximately $1.3 million and $1.6 million, over the prior year periods. The increase in selling & administrative expenses in the current quarter was primarily attributable to acquisition-related costs of approximately $0.5 million related to the Texas Contracts, increased sales and marketing expenses of approximately $0.3 million associated with active state portal procurement opportunities, higher personnel costs of approximately $0.2 million to support and enhance corporate wide information technology security and portal operations, higher stock-based compensation of approximately $0.1 million for annual grants of restricted stock to certain management-level employees, executive officers and non-employee directors, and higher legal costs of approximately $0.1 million related to the ongoing SEC investigation. As discussed in Note 5 in the Notes to the Unaudited Consolidated Financial Statements in this Form 10-Q and Item 1A, Item 3 and Note 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 13, 2009, we have been the subject of an informal SEC inquiry of expense reporting by certain officers of our Company and certain potentially related matters. In connection with the informal SEC inquiry, a review was undertaken by the Audit Committee of our Board of Directors, with the assistance of outside, independent counsel, which focused on such expense reporting. The SEC issued a formal order of investigation in the second quarter of 2008. Selling & administrative expenses for the three- and six-month periods ended June 30, 2009 include approximately $0.2 million and $0.6 million, respectively, of legal fees and other expenses incurred in connection with the ongoing SEC investigation and the Audit Committee review. Selling & administrative expenses for the three- and six-month periods ended June 30, 2008 include approximately $0.1 million and $0.5 million, respectively, of legal fees and other expenses incurred in connection with the ongoing SEC investigation and the Audit Committee review. We currently expect to continue to incur significant legal fees and other expenses in connection with the ongoing SEC investigation. The remaining year-to-date increase in selling & administrative expenses is primarily attributable to increased sales and marketing expenses associated with active state portal procurement opportunities in addition to higher stock-based compensation for annual grants of restricted stock, as further discussed above.

As a percentage of portal revenues, selling & administrative expenses were 23% in the current quarter and year-to-date periods compared to 25% in the prior year periods. We currently expect selling & administrative costs as a percentage of portal revenues to range from 20% to 21% in 2009.

NONRECURRING GAIN ON ACQUISITION OF BUSINESS (NET OF TAX). We recognized a nonrecurring gain of approximately $2.2 million (net of tax) in the second quarter of 2009 on the acquisition of the Texas Contracts, as further discussed in Note 3 in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q.

DEPRECIATION & AMORTIZATION. Depreciation & amortization expense in the current quarter and year-to date periods increased 82% and 47%, respectively, or approximately $0.7 million and $0.8 million, over the prior year periods. This increase was primarily attributable to intangible asset amortization expense related to the Texas Contracts acquisition in the second quarter of 2009, which totaled approximately $0.6 million in both the current quarter and year-to-date periods. We currently expect to recognize approximately $3.5 million of intangible asset amortization expense related to the Texas Contracts acquisition in the second half of 2009. The remaining increase related to capital expenditures in the current and prior periods for normal fixed asset additions in our outsourced portal business, including Web servers, purchased software and office furniture and equipment to support and enhance corporate-wide information technology security and portal operations.

INTEREST INCOME. Interest income reflects interest earned on our investable . . .