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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended October 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from              to



Commission file number 1-32215



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Jackson Hewitt Tax Service Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-0779692                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



3 Sylvan Way

Parsippany, New Jersey 07054

(Address of principal executive offices including zip code)



(973) 630-1040

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange
Act).    Yes ̈No  x



The number of shares outstanding of the registrants common stock was 35,237,793 (net of
2,538,197 shares held in treasury) as of November 30, 2005.



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##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.



TABLE
OF CONTENTS



|        |  |                                                                                                        |  |     
|------- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|        |  |                                                                                                        |  | Page
|        |  | PART 1 - FINANCIAL INFORMATION                                                                         |  |     
|        |  |                                                                                                       
|Item 1. |  | Consolidated Financial Statements (Unaudited):                                                         |  | 3   
|        |  |                                                                                                       
|        |  | Consolidated Balance Sheets.                                                                           |  | 3   
|        |  |                                                                                                       
|        |  | Consolidated Statements of Operations.                                                                 |  | 4   
|        |  |                                                                                                       
|        |  | Consolidated Statements of Cash Flows.                                                                 |  | 5   
|        |  |                                                                                                       
|        |  | Notes to Consolidated Financial Statements.                                                            |  | 6   
|        |  |                                                                                                       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                 |  | 19  
|        |  |                                                                                                       
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk.                                            |  | 31  
|        |  |                                                                                                       
|Item 4. |  | Controls and Procedures.                                                                               |  | 31  
|        |  |                                                                                                       
|        |  | PART II - OTHER INFORMATION                                                                            |  |     
|        |  |                                                                                                       
|Item 1. |  | Legal Proceedings.                                                                                     |  | 33  
|        |  |                                                                                                       
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity Securities. |  | 33  
|        |  |                                                                                                       
|Item 3. |  | Defaults Upon Senior Securities.                                                                       |  | 33  
|        |  |                                                                                                       
|Item 4. |  | Submission of Matters to a Vote of Security Holders.                                                   |  | 33  
|        |  |                                                                                                       
|Item 5. |  | Other Information.                                                                                     |  | 34  
|        |  |                                                                                                       
|Item 6. |  | Exhibits.                                                                                              |  | 34  
|        |  |                                                                                                       
|        |  | Signatures.                                                                                            |  | 34  



2



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##### Table of Contents

PART 1  FINANCIAL INFORMATION



Item 1. Consolidated Financial Statements (Unaudited)



JACKSON HEWITT TAX SERVICE INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands,
except per share amounts)



|                                                                                                                     |  |                  |         |   |                |   |        
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | -------------- | - | -------
|                                                                                                                     |  | As of           
|                                                                                                                     |  | October 31, 2005 |         |   | April 30, 2005
|Assets                                                                                                               |  |                  |         |   |                |   |        
|Current assets:                                                                                                      |  |                  |         |   |                |   |        
|Cash and cash equivalents                                                                                            |  | $                | 687     |   |                | $ | 113,264
|Accounts receivable, net of allowance for doubtful accounts of $1,687 and $1,840, respectively                       |  |                  | 4,986   |   |                |   | 15,187 
|Notes receivable, net                                                                                                |  |                  | 3,921   |   |                |   | 3,156  
|Prepaid expenses and other                                                                                           |  |                  | 11,163  |   |                |   | 7,542  
|Deferred income taxes                                                                                                |  |                  | 4,581   |   |                |   | 3,446  
|                                                                                                                     |  |                  |         |   |                |   |        
|Total current assets                                                                                                 |  |                  | 25,338  |   |                |   | 142,595
|                                                                                                                     |  |                 
|Property and equipment, net                                                                                          |  |                  | 34,900  |   |                |   | 33,942 
|Goodwill                                                                                                             |  |                  | 391,384 |   |                |   | 392,691
|Other intangible assets, net                                                                                         |  |                  | 86,315  |   |                |   | 87,634 
|Notes receivable, net                                                                                                |  |                  | 4,503   |   |                |   | 2,765  
|Other non-current assets, net                                                                                        |  |                  | 12,934  |   |                |   | 15,462 
|                                                                                                                     |  |                  |         |   |                |   |        
|Total assets                                                                                                         |  | $                | 555,374 |   |                | $ | 675,089
|                                                                                                                     |  |                  |         |   |                |   |        
|Liabilities and Stockholders Equity                                                                                 |  |                  |         |   |                |   |        
|Current liabilities:                                                                                                 |  |                  |         |   |                |   |        
|Accounts payable and accrued liabilities                                                                             |  | $                | 18,225  |   |                | $ | 27,581 
|Income taxes payable                                                                                                 |  |                  |        |   |                |   | 21,339 
|Deferred revenues                                                                                                    |  |                  | 7,110   |   |                |   | 7,834  
|                                                                                                                     |  |                  |         |   |                |   |        
|Total current liabilities                                                                                            |  |                  | 25,335  |   |                |   | 56,754 
|                                                                                                                     |  |                 
|Long-term debt                                                                                                       |  |                  | 173,000 |   |                |   | 175,000
|Deferred income taxes                                                                                                |  |                  | 37,650  |   |                |   | 36,005 
|Other non-current liabilities                                                                                        |  |                  | 7,809   |   |                |   | 11,093 
|                                                                                                                     |  |                  |         |   |                |   |        
|Total liabilities                                                                                                    |  |                  | 243,794 |   |                |   | 278,852
|                                                                                                                     |  |                  |         |   |                |   |        
|Commitments and Contingencies (Note 15)                                                                              |  |                  |         |   |                |   |        
|                                                                                                                     |  |                 
|Stockholders equity:                                                                                                |  |                  |         |   |                |   |        
|Common stock, par value $0.01; Authorized: 200,000,000 shares;Issued: 37,769,006 and 37,634,327 shares, respectively |  |                  | 378     |   |                |   | 376    
|Additional paid-in capital                                                                                           |  |                  | 348,627 |   |                |   | 344,908
|Retained earnings                                                                                                    |  |                  | 20,605  |   |                |   | 50,953 
|Accumulated other comprehensive income                                                                               |  |                  | 482     |   |                |   |       
|Less: Treasury stock, at cost: 2,422,900 and zero shares, respectively                                               |  |                  | (58,512 | ) |                |   |       
|                                                                                                                     |  |                  |         |   |                |   |        
|Total stockholders equity                                                                                           |  |                  | 311,580 |   |                |   | 396,237
|                                                                                                                     |  |                  |         |   |                |   |        
|Total liabilities and stockholders equity                                                                           |  | $                | 555,374 |   |                | $ | 675,089
|                                                                                                                     |  |                  |         |   |                |   |        



The accompanying notes
are an integral part of these Consolidated Financial Statements.



3



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##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except
per share amounts)



|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months Ended October 31, |         |   | Six Months Ended October 31, |  
|                                                      |  | 2005                           |         |   | 2004                         |   |         | 2005 |  |   | 2004    |  
|Revenues                                              |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Franchise operations revenues:                        |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Royalty                                               |  | $                              | 872     |   |                              | $ | 389     |      |  | $ | 1,327   |   |  | $ | 989     |  
|Marketing and advertising                             |  |                                | 402     |   |                              |   | 180     |      |  |   | 612     |   |  |   | 455     |  
|Financial product fees                                |  |                                | 2,136   |   |                              |   | 1,488   |      |  |   | 3,982   |   |  |   | 3,190   |  
|Other financial product revenues                      |  |                                | 2,799   |   |                              |   | 2,344   |      |  |   | 4,109   |   |  |   | 5,840   |  
|Other                                                 |  |                                | 2,279   |   |                              |   | 2,402   |      |  |   | 4,261   |   |  |   | 4,661   |  
|Service revenues from company-owned office operations |  |                                | 538     |   |                              |   | 612     |      |  |   | 842     |   |  |   | 1,063   |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total revenues                                        |  |                                | 9,026   |   |                              |   | 7,415   |      |  |   | 15,133  |   |  |   | 16,198  |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Expenses                                              |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Cost of franchise operations                          |  |                                | 6,991   |   |                              |   | 6,444   |      |  |   | 14,503  |   |  |   | 13,298  |  
|Marketing and advertising                             |  |                                | 3,172   |   |                              |   | 2,986   |      |  |   | 5,855   |   |  |   | 5,198   |  
|Cost of company-owned office operations               |  |                                | 4,964   |   |                              |   | 4,922   |      |  |   | 9,143   |   |  |   | 9,539   |  
|Selling, general and administrative                   |  |                                | 8,283   |   |                              |   | 6,207   |      |  |   | 15,120  |   |  |   | 16,687  |  
|Depreciation and amortization                         |  |                                | 2,724   |   |                              |   | 2,958   |      |  |   | 5,383   |   |  |   | 5,797   |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total expenses                                        |  |                                | 26,134  |   |                              |   | 23,517  |      |  |   | 50,004  |   |  |   | 50,519  |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                                  |  |                                | (17,108 | ) |                              |   | (16,102 | )    |  |   | (34,871 | ) |  |   | (34,321 | )
|Other income/(expense):                               |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                       |  |                                | 195     |   |                              |   | 232     |      |  |   | 925     |   |  |   | 384     |  
|Interest expense                                      |  |                                | (1,883  | ) |                              |   | (1,760  | )    |  |   | (3,917  | ) |  |   | (2,517  | )
|Write-off of deferred financing costs                 |  |                                |        |   |                              |   |        |      |  |   | (2,677  | ) |  |   |        |  
|Gain on sale of assets, net                           |  |                                | 216     |   |                              |   |        |      |  |   | 216     |   |  |   |        |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Loss before income taxes                              |  |                                | (18,580 | ) |                              |   | (17,630 | )    |  |   | (40,324 | ) |  |   | (36,454 | )
|Benefit from income taxes                             |  |                                | (7,292  | ) |                              |   | (6,906  | )    |  |   | (15,829 | ) |  |   | (14,284 | )
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                              |  | $                              | (11,288 | ) |                              | $ | (10,724 | )    |  | $ | (24,495 | ) |  | $ | (22,170 | )
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Loss per share:                                       |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted                                     |  | $                              | (0.31   | ) |                              | $ | (0.29   | )    |  | $ | (0.67   | ) |  | $ | (0.59   | )
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Dividends declared per share:                         |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted                                     |  | $                              | 0.08    |   |                              | $ | 0.07    |      |  | $ | 0.16    |   |  | $ | 0.07    |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding:                  |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted                                     |  |                                | 36,218  |   |                              |   | 37,621  |      |  |   | 36,818  |   |  |   | 37,584  |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  



The accompanying notes
are an integral part of these Consolidated Financial Statements.



4



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##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                          |  |                              |          |   |      |   |          |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                          |  | Six Months Ended October 31, |         
|                                                                                          |  | 2005                         |          |   | 2004 |  
|Operating activities:                                                                     |  |                              |          |   |      |   |          |  
|Net loss                                                                                  |  | $                            | (24,495  | ) |      | $ | (22,170  | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                              |          |   |      |   |          |  
|Depreciation and amortization                                                             |  |                              | 5,383    |   |      |   | 5,797    |  
|Gain on sale of assets, net                                                               |  |                              | (216     | ) |      |   |         |  
|Amortization of Gold Guarantee product                                                    |  |                              | (1,098   | ) |      |   | (788     | )
|Amortization of development advances                                                      |  |                              | 583      |   |      |   | 507      |  
|Amortization of deferred financing costs                                                  |  |                              | 157      |   |      |   | 217      |  
|Write-off of deferred financing costs                                                     |  |                              | 2,677    |   |      |   |         |  
|Provision for uncollectible receivables                                                   |  |                              | 8        |   |      |   | 450      |  
|Stock-based compensation                                                                  |  |                              | 1,276    |   |      |   | 5,484    |  
|Deferred income taxes                                                                     |  |                              | 189      |   |      |   | (11,678  | )
|Other                                                                                     |  |                              | 10       |   |      |   |         |  
|Changes in assets and liabilities, excluding the impact of acquisitions:                  |  |                              |          |   |      |   |          |  
|Accounts receivable                                                                       |  |                              | 10,150   |   |      |   | 28,626   |  
|Notes receivable                                                                          |  |                              | (2,437   | ) |      |   | (1,702   | )
|Prepaid expenses and other                                                                |  |                              | (1,934   | ) |      |   | (186     | )
|Other non-current assets                                                                  |  |                              | (1,165   | ) |      |   | (300     | )
|Accounts payable and accrued liabilities                                                  |  |                              | (8,953   | ) |      |   | (2,266   | )
|Income taxes payable                                                                      |  |                              | (21,339  | ) |      |   |         |  
|Deferred revenues                                                                         |  |                              | 324      |   |      |   |         |  
|Other non-current liabilities                                                             |  |                              | (490     | ) |      |   | (1,941   | )
|                                                                                          |  |                              |          |   |      |   |          |  
|Net cash (used in) provided by operating activities                                       |  |                              | (41,370  | ) |      |   | 50       |  
|                                                                                          |  |                              |          |   |      |   |          |  
|Investing activities:                                                                     |  |                              |          |   |      |   |          |  
|Capital expenditures                                                                      |  |                              | (4,668   | ) |      |   | (1,564   | )
|Funding of development advances                                                           |  |                              | (1,007   | ) |      |   | (1,897   | )
|Cash paid for acquisitions                                                                |  |                              | (156     | ) |      |   | (657     | )
|                                                                                          |  |                              |          |   |      |   |          |  
|Net cash used in investing activities                                                     |  |                              | (5,831   | ) |      |   | (4,118   | )
|                                                                                          |  |                              |          |   |      |   |          |  
|Financing activities:                                                                     |  |                              |          |   |      |   |          |  
|Common stock repurchases                                                                  |  |                              | (58,512  | ) |      |   |         |  
|Proceeds from issuance of Notes                                                           |  |                              |         |   |      |   | 175,000  |  
|Cash portion of Special Dividend to Cendant                                               |  |                              |         |   |      |   | (175,000 | )
|Repayment of Notes                                                                        |  |                              | (175,000 | ) |      |   |         |  
|Borrowings under revolving credit facility                                                |  |                              | 173,000  |   |      |   |         |  
|Proceeds from issuance of common stock                                                    |  |                              | 1,785    |   |      |   | 186      |  
|Dividends paid to stockholders                                                            |  |                              | (5,849   | ) |      |   | (2,632   | )
|Debt issuance costs                                                                       |  |                              | (681     | ) |      |   | (3,296   | )
|Payments on capitalized lease obligation                                                  |  |                              | (119     | ) |      |   |         |  
|Decrease in Due from Cendant                                                              |  |                              |         |   |      |   | 12,133   |  
|                                                                                          |  |                              |          |   |      |   |          |  
|Net cash (used in) provided by financing activities                                       |  |                              | (65,376  | ) |      |   | 6,391    |  
|                                                                                          |  |                              |          |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents                                      |  |                              | (112,577 | ) |      |   | 2,323    |  
|Cash and cash equivalents, beginning of period                                            |  |                              | 113,264  |   |      |   | 5,266    |  
|                                                                                          |  |                              |          |   |      |   |          |  
|Cash and cash equivalents, end of period                                                  |  | $                            | 687      |   |      | $ | 7,589    |  
|                                                                                          |  |                              |          |   |      |   |          |  
|Supplemental disclosure for non-cash investing and financing transactions:                |  |                              |          |   |      |   |          |  
|Special Dividend  Distribution of Due from Cendant                                       |  | $                            |         |   |      | $ | 131,852  |  
|                                                                                          |  |                              |          |   |      |   |          |  
|Tax benefit from exercise of stock options                                                |  | $                            | 340      |   |      | $ |         |  
|                                                                                          |  |                              |          |   |      |   |          |  
|Common stock grant                                                                        |  | $                            | 525      |   |      | $ |         |  
|                                                                                          |  |                              |          |   |      |   |          |  
|Change in fair value of derivatives, net of tax of $321                                   |  | $                            | 482      |   |      | $ |         |  
|                                                                                          |  |                              |          |   |      |   |          |  



The accompanying notes
are an integral part of these Consolidated Financial Statements.



5



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##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. BACKGROUND AND BASIS OF PRESENTATION



Description of Business



Jackson Hewitt Tax Service Inc. (JHTS or the Company), through its subsidiaries, provides computerized preparation of federal
and state personal income tax returns through a network of franchised and company-owned offices under the brand name Jackson Hewitt Tax Service®. Jackson Hewitt Inc. (JHI) is a 100% owned subsidiary of JHTS. Company-owned office operations are conducted by Tax Services of
America, Inc. (TSA), which is a wholly-owned subsidiary of JHI. The Consolidated Financial Statements include the accounts and transactions of JHTS and its subsidiaries.



Initial Public Offering



On June 25, 2004, Cendant Corporation (Cendant) divested 100% of its ownership interest in JHTS through an initial public offering
(IPO). JHTS did not receive any proceeds from the sale of the Companys common stock by Cendant.



JHTS was incorporated in Delaware on February 20, 2004. Simultaneous with the incorporation, Cendant contributed all outstanding shares of JHI, a
Virginia corporation, to JHTS. JHTS accounted for the contribution of outstanding shares as a change in reporting entities under common control and has recognized the outstanding shares at their carrying amounts at the date of transfer. Accordingly,
the accompanying Consolidated Financial Statements have been prepared as though JHTS existed throughout the periods presented.



Basis of Presentation



The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the
United States for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. These interim Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and other financial information included in the Companys Annual Report on Form 10-K which was filed with the SEC on July 29, 2005.



In presenting the Consolidated Financial Statements, management makes
estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In the opinion of
management, the accompanying interim Consolidated Financial Statements contain all normal and recurring adjustments necessary for a fair presentation of the Companys financial position, results of operations and cash flows. The results of
operations for the interim periods reported are not necessarily indicative of the results of operations that may be expected for any future interim periods or for the full fiscal year.



The Companys results of operations and cash flows for the period from May 1, 2004 through the Companys IPO
date, which is included in the six months ended October 31, 2004, reflect the historical results of operations and cash flows of the business divested by Cendant in the Companys IPO. As a result, the accompanying Consolidated Financial
Statements may not necessarily reflect the Companys results of operations and cash flows in the future or what the Companys results of operations and cash flows would have been had JHTS been a stand-alone public company during this
period. See Note 8 - Related Party Transactions for a more detailed description of the Companys transactions with Cendant.



Comprehensive Loss



The Companys comprehensive loss is comprised of net loss from the Companys results of operations and changes in the fair value of derivatives.
The components of comprehensive loss, net of tax, are as follows:



|                                     |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------ |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                     |  | Three Months Ended October 31, |         |   | Six Months Ended October 31, |  
|                                     |  | 2005                           |         |   | 2004                         |   |         | 2005 |  |   | 2004    |  
|                                     |  | (in thousands)                 |         |   | (in thousands)               |  
|Net loss                             |  | $                              | (11,288 | ) |                              | $ | (10,724 | )    |  | $ | (24,495 | ) |  | $ | (22,170 | )
|Changes in fair value of derivatives |  |                                | 482     |   |                              |   |        |      |  |   | 482     |   |  |   |        |  
|                                     |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total comprehensive loss             |  | $                              | (10,806 | ) |                              | $ | (10,724 | )    |  | $ | (24,013 | ) |  | $ | (22,170 | )
|                                     |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  



6



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##### Table of Contents

Reclassifications



Certain amounts presented in the prior periods consolidated financial statements have been reclassified to conform to the current periods
presentation.



2. RECENT ACCOUNTING PRONOUNCEMENT AND SIGNIFICANT
ACCOUNTING POLICIES



Recent Accounting Pronouncement



In December 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS No. 123R), which eliminates the alternative to measure stock-based
compensation awards using the intrinsic value approach permitted by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and by SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). The Company is required to adopt the provisions of SFAS No. 123R by May 1, 2006. On January 1, 2003, the Company adopted the fair value method of accounting for stock-based
compensation provisions of SFAS No. 123 and the transitional provisions of SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. As a result, the Company has been recording stock-based
compensation expense since January 1, 2003 for employee stock awards that were granted or modified subsequent to December 31, 2002. In addition, the Companys current practice with respect to forfeitures is to recognize the related
benefit upon forfeiture of the award. Upon adoption of SFAS No. 123R, the Company will be required to recognize compensation expense net of estimated forfeitures upon the issuance of the award. The Company is currently evaluating the remaining
provisions of SFAS No. 123R to determine the effect, if any, it may have on the Companys financial position, results of operations or cash flows.



Derivatives and Hedging Activities



The Company has entered into interest rate swap agreements for the purpose of mitigating the Companys exposure to floating interest rates on certain
portions of the Companys debt. The use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for trading purposes is strictly prohibited.



The Companys interest rate swap agreements have been designated as cash
flow hedges and are recorded on the Consolidated Balance Sheet at their fair value. Changes in the fair value of the interest rate swap agreements, to the extent that they remain highly effective, are recorded in other comprehensive income (loss).
The Company formally assesses (both at inception of the hedge and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. Any hedge ineffectiveness is recorded in current period results. See Note 10  Interest Rate Swap Agreements for a more detailed discussion of the
Companys derivative transactions.



Rent Expense



Total rent payments in an operating lease are recognized straight-line
over the lease term, including any rent holiday period(s). Reimbursements for leasehold improvements are accounted for as a deferred rental liability and recognized as a reduction to rent expense over the term of the lease.



3. COMPUTATION OF LOSS PER SHARE



The computation of basic loss per share is calculated by dividing net loss
available to the Companys common stockholders by the weighted average number of common shares outstanding for the period. Diluted loss per share is calculated by dividing net loss available to the Companys common stockholders by an
adjusted weighted average number of common shares outstanding assuming conversion of potentially dilutive securities arising from stock options outstanding. Common shares repurchased by the Company are excluded from the calculation of loss per
share.



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The following table presents the computation of basic and diluted loss per share:



|                                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------- |  | ----------------------------- | ------- | - | --------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                    |  | Three Months EndedOctober 31, |         |   | Six Months EndedOctober 31, |  
|                                                    |  | 2005                          |         |   | 2004                        |   |         | 2005 |  |   | 2004    |  
|Net loss, basic and diluted (in thousands)          |  | $                             | (11,288 | ) |                             | $ | (10,724 | )    |  | $ | (24,495 | ) |  | $ | (22,170 | )
|                                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|                                                    |  |                               |         |  
|Weighted average shares outstanding (in thousands): |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted                                   |  |                               | 36,218  |   |                             |   | 37,621  |      |  |   | 36,818  |   |  |   | 37,584  |  
|                                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|                                                    |  |                               |         |  
|Loss per share:                                     |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted                                   |  | $                             | (0.31   | ) |                             | $ | (0.29   | )    |  | $ | (0.67   | ) |  | $ | (0.59   | )
|                                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  



Stock options to
purchase 2,361,527 and 2,011,140 shares of common stock were not included in the computation of diluted net loss per share for the three and six months ended October 31, 2005 and 2004, respectively, because the effect would have been
antidilutive.



4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET



The changes in the carrying amount of goodwill by segment
were as follows:



|                               |  |                      |         |                                 |   |        |       |  |   |         |  
|------------------------------ |  | -------------------- | ------- | ------------------------------- | - | ------ | ----- |  | - | ------- | -
|                               |  | Franchise Operations |         | Company-Owned Office Operations |   |        | Total | 
|                               |  | (In thousands)       |        
|Balance as of April 30, 2005   |  | $                    | 336,767 |                                 | $ | 55,924 |       |  | $ | 392,691 |  
|Additions                      |  |                      |        |                                 |   | 186    |       |  |   | 186     |  
|Dispositions                   |  |                      |        |                                 |   | (1,493 | )     |  |   | (1,493  | )
|                               |  |                      |         |                                 |   |        |       |  |   |         |  
|Balance as of October 31, 2005 |  | $                    | 336,767 |                                 | $ | 54,617 |       |  | $ | 391,384 |  
|                               |  |                      |         |                                 |   |        |       |  |   |         |  



Other intangible
assets consist of:



|                                          |  |                        |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|----------------------------------------- |  | ---------------------- | ------ | ------------------------ | - | ------- | ------------------- |  | --------------------- | ------ | ------------------------ | - | ------ | ------------------- | - | ------- | - |  | - | ------
|                                          |  | As of October 31, 2005 |        | As of April 30, 2005    
|                                          |  | Gross Carrying Amount  |        | Accumulated Amortization |   |         | Net Carrying Amount |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net Carrying Amount
|                                          |  | (In thousands)        
|Amortizable other intangible assets:      |  |                        |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Franchise agreements(a)                   |  | $                      | 16,052 |                          | $ | (11,987 | )                   |  | $                     | 4,065  |                          | $ | 16,052 |                     | $ | (11,184 | ) |  | $ | 4,868 
|Customer relationships(b)                 |  |                        | 6,487  |                          |   | (5,237  | )                   |  |                       | 1,250  |                          |   | 7,143  |                     |   | (5,377  | ) |  |   | 1,766 
|                                          |  |                        |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Total amortizable other intangible assets |  | $                      | 22,539 |                          | $ | (17,224 | )                   |  |                       | 5,315  |                          | $ | 23,195 |                     | $ | (16,561 | ) |  |   | 6,634 
|                                          |  |                        |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Unamortizable other intangible assets:    |  |                        |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Jackson Hewitt trademark                  |  |                        |        |                          |   |         |                     |  |                       | 81,000 |                          |   |        |                     |   |         |   |  |   | 81,000
|                                          |  |                        |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Total other intangible assets             |  |                        |        |                          |   |         |                     |  | $                     | 86,315 |                          |   |        |                     |   |         |   |  | $ | 87,634
|                                          |  |                        |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       

---

|(a) | Amortized over a period of 10 years.
|--- | ------------------------------------

|(b) | Amortized over a period of, on average, five years.
|--- | ---------------------------------------------------



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The changes in the carrying amount of other intangible assets, net, by segment were as follows:



|                               |  |                      |        |   |                                  |   |       |       |  |   |        |  
|------------------------------ |  | -------------------- | ------ | - | -------------------------------- | - | ----- | ----- |  | - | ------ | -
|                               |  | Franchise Operations |        |   | Company- Owned Office Operations |   |       | Total | 
|                               |  | (In thousands)       |       
|Balance as of April 30, 2005   |  | $                    | 85,868 |   |                                  | $ | 1,766 |       |  | $ | 87,634 |  
|Amortization                   |  |                      | (803   | ) |                                  |   | (456  | )     |  |   | (1,259 | )
|Dispositions                   |  |                      |       |   |                                  |   | (60   | )     |  |   | (60    | )
|                               |  |                      |        |   |                                  |   |       |       |  |   |        |  
|Balance as of October 31, 2005 |  | $                    | 85,065 |   |                                  | $ | 1,250 |       |  | $ | 86,315 |  
|                               |  |                      |        |   |                                  |   |       |       |  |   |        |  



Amortization expense
relating to other intangible assets was as follows:



|                       |  |                                |     |                              |   |      |  |      |       |  |   |      
|---------------------- |  | ------------------------------ | --- | ---------------------------- | - | ---- |  | ---- | ----- |  | - | -----
|                       |  | Three Months Ended October 31, |     | Six Months Ended October 31,
|                       |  | 2005                           |     | 2004                         |   | 2005 |  | 2004
|                       |  | (In thousands)                
|Franchise agreements   |  | $                              | 402 |                              | $ | 401  |  | $    | 803   |  | $ | 802  
|Customer relationships |  |                                | 224 |                              |   | 371  |  |      | 456   |  |   | 642  
|                       |  |                                |     |                              |   |      |  |      |       |  |   |      
|Total                  |  | $                              | 626 |                              | $ | 772  |  | $    | 1,259 |  | $ | 1,444
|                       |  |                                |     |                              |   |      |  |      |       |  |   |      



Estimated amortization
expense related to other intangible assets for each of the respective periods in the fiscal years ended April 30 is as follows:



|                                    |  |                |      
|----------------------------------- |  | -------------- | -----
|                                    |  | Amount        
|                                    |  | (In thousands)
|Remaining six months in fiscal 2006 |  | $              | 1,150
|2007                                |  |                | 2,171
|2008                                |  |                | 1,297
|2009                                |  |                | 217  
|2010                                |  |                | 138  
|2011 and thereafter                 |  |                | 342  
|                                    |  |                |      
|Total                               |  | $              | 5,315
|                                    |  |                |      



5. NOTES RECEIVABLE, NET



Notes receivable, net consists of the following:



|                                         |  |                  |        |   |               |   |        |  
|---------------------------------------- |  | ---------------- | ------ | - | ------------- | - | ------ | -
|                                         |  | As of            |       
|                                         |  | October 31, 2005 |        |   | April 30,2005 |  
|                                         |  | (In thousands)   |       
|Notes receivable                         |  | $                | 10,007 |   |               | $ | 7,570  |  
|Less allowance for uncollectible amounts |  |                  | (1,583 | ) |               |   | (1,649 | )
|                                         |  |                  |        |   |               |   |        |  
|Notes receivable, net                    |  |                  | 8,424  |   |               |   | 5,921  |  
|Less current portion, net                |  |                  | (3,921 | ) |               |   | (3,156 | )
|                                         |  |                  |        |   |               |   |        |  
|Notes receivable, netnon-current        |  | $                | 4,503  |   |               | $ | 2,765  |  
|                                         |  |                  |        |   |               |   |        |  



In the second quarter
the Company provided financing to franchisees for 27 storefront locations in loan amounts of up to $25,000 each. These notes are typically due over a period of less than 30 months.



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6. DEVELOPMENT ADVANCES, NET



Development advances, net are included in other non-current assets, net and consist of the following:



|                                 |  |                  |        |   |                |   |        |  
|-------------------------------- |  | ---------------- | ------ | - | -------------- | - | ------ | -
|                                 |  | As of            |       
|                                 |  | October 31, 2005 |        |   | April 30, 2005 |  
|                                 |  | (In thousands)   |       
|Unamortized development advances |  | $                | 8,086  |   |                | $ | 7,662  |  
|Less allowance                   |  |                  | (1,249 | ) |                |   | (1,226 | )
|                                 |  |                  |        |   |                |   |        |  
|Development advances, net        |  | $                | 6,837  |   |                | $ | 6,436  |  
|                                 |  |                  |        |   |                |   |        |  



7. ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES



Accounts payable and accrued
liabilities consist of the following:



|                                                 |  |                  |        |                |   |       
|------------------------------------------------ |  | ---------------- | ------ | -------------- | - | ------
|                                                 |  | As of           
|                                                 |  | October 31, 2005 |        | April 30, 2005
|                                                 |  | (In thousands)  
|Accounts payable                                 |  | $                | 1,864  |                | $ | 2,089 
|Accrued payroll and related liabilities          |  |                  | 4,880  |                |   | 10,385
|Accrued litigation settlement                    |  |                  | 2,692  |                |   | 3,107 
|Accrued marketing and advertising                |  |                  | 4,027  |                |   | 6,479 
|Accrued purchase price obligations               |  |                  |       |                |   | 120   
|Outstanding checks in excess of funds on deposit |  |                  | 135    |                |   | 1,304 
|Other accrued liabilities                        |  |                  | 4,627  |                |   | 4,097 
|                                                 |  |                  |        |                |   |       
|Total accounts payable and accrued liabilities   |  | $                | 18,225 |                | $ | 27,581
|                                                 |  |                  |        |                |   |       



8. RELATED PARTY TRANSACTIONS



Special Dividend Paid to Cendant



Upon completion of the Companys IPO in June 2004, the Company
declared a special dividend to Cendant in the amount of $306.9 million (the Special Dividend). The $175.0 million cash portion of this Special Dividend was funded entirely from the net proceeds of five-year floating rate senior
unsecured notes, as discussed more fully in Note 9Long-Term Debt and Credit Facilities. The remaining $131.9 million represented the distribution of a receivable from Cendant.



The Company recorded the Special Dividend as a reduction to retained earnings
of $175.3 million and a reduction to additional paid-in capital of $131.6 million. The amount by which retained earnings was reduced represented the accumulation of all earnings by the Company up to the Companys IPO date at which
time the Company began operating as a separate public company.



Allocation and Funding of Expenses



Through the Companys IPO date, the Company was allocated general corporate overhead expenses from Cendant for corporate-related functions as well as other expenses directly attributable to the Company. Cendant allocated corporate
overhead to the Company based on a percentage of the Companys forecasted revenues and allocated other expenses that directly benefited the Company based on the Companys actual utilization of the services. Corporate expense allocations
included executive management, finance, human resources, information technology, legal and real estate facility usage and were $0.8 million during the period from May 1, 2004 to the Companys IPO date. This amount is included in selling,
general and administrative expenses in the Consolidated Statement of Operations. The Company believes the assumptions and methodologies underlying the allocations of general corporate overhead and direct expenses from Cendant to the Company were
reasonable and are consistent with the amounts that would have been incurred if the Company had performed these functions as a stand-alone company.



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All allocated overhead expenses as well as direct charges were included in Due from Cendant on the
Consolidated Balance Sheet. No interest was charged by Cendant or received by the Company in any period presented with respect to intercompany balances. Prior to the Companys IPO, Cendant used cash swept from the Companys bank accounts
to fund these disbursements.



The major categories of
intercompany activity between the Company and Cendant were as follows:



|                                                    |  |                                                   |          |  
|--------------------------------------------------- |  | ------------------------------------------------- | -------- | -
|                                                    |  | Period from May 1, 2004 to the Companys IPO Date |         
|                                                    |  | (In thousands)                                    |         
|Due from Cendant as of April 30, 2004               |  | $                                                 | 143,985  |  
|                                                    |  |                                                   |          |  
|Corporate allocations                               |  |                                                   | (750     | )
|Payroll and related                                 |  |                                                   | (5,461   | )
|Accounts payable funding                            |  |                                                   | (12,878  | )
|Income taxes                                        |  |                                                   | 2,509    |  
|Cash sweeps                                         |  |                                                   | 4,447    |  
|                                                    |  |                                                   |          |  
|Subtotal                                            |  |                                                   | (12,133  | )
|Special Dividend - distribution of Due from Cendant |  |                                                   | (131,852 | )
|                                                    |  |                                                   |          |  
|Due from Cendant as of the Companys IPO date       |  | $                                                 |         |  
|                                                    |  |                                                   |          |  



Transitional Agreement and Other
Related Agreements



Upon completion of the
Companys IPO, the Company entered into a transitional agreement with Cendant to provide for an orderly transition to being an independent company and to govern the continuing arrangements between the Company and Cendant. The Company also
entered into a sublease agreement for its corporate headquarters in Parsippany, New Jersey which expired in September 2005, and a sublease assignment and assumption agreement for its technology facility in Sarasota, Florida. The Company pays rent
directly to the landlord of the Sarasota facility as a sublessee under Cendants lease, which expires in May 2006. The Companys rental expense under these agreements was $0.4 million in each of the three month periods ended
October 31, 2005 and 2004, respectively. For the six months ended October 31, 2005 and 2004 such rental expense was $0.8 million and $0.7 million, respectively.



On May 1, 2005, the Company entered into a new lease with a different lessor for office space located in Parsippany and
in September 2005 the Company relocated its corporate headquarters to this office space. The lease expires in October 2012. Annual base rental expense is $1.2 million.



On November 17, 2005, the Company entered into a new lease with a different lessor for office space located in
Sarasota. The Company plans to relocate its current technology facility to this office space in the first quarter of fiscal 2007. The lease expires in June 2014. Annual base rental expense will be $0.7 million.



Under the transitional agreement, Cendant provided the Company with various
services, including services relating to facilities, human resources and employee benefits, payroll, financial systems management, treasury and cash management, accounts payable services, tax support, event marketing, revenue audit services, public
and regulatory affairs, telecommunications services, information technology services and call support services. The transitional agreement also contains provisions relating to indemnification, tax sharing and tax indemnification, access to
information and non-solicitation of employees.



The Company
incurred an aggregate of $0.5 million and $0.7 million of expenses related to such transitional and other related agreements with Cendant for the three months ended October 31, 2005 and 2004, respectively, which is included in cost of franchise
operations and selling, general and administrative. For the six months ended October 31, 2005 and 2004, the Company incurred an aggregate of $1.2 million and $1.0 million of such expenses, respectively.



Under the transitional agreement, the cost of each transitional service
generally reflects the same payment terms and is calculated using the same cost allocation methodologies for the particular service as those associated with the costs reported in the Companys historical Consolidated Financial Statements prior
to the Companys IPO. The transitional agreement was negotiated in the context of a parent-subsidiary relationship. The provisions of many of the services were transitioned at similar costs to those allocated by Cendant historically. There are
no fixed or minimum contractual purchase obligations under the transitional agreement and other related agreements.



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The Company has completed most transition arrangements with Cendant and is now predominantly operational
on its own financial systems and infrastructure. The Company has completed the implementation of its own back office systems including human resources and employee benefits, payroll, financial systems management, treasury and cash management,
accounts payable, tax support and public and regulatory affairs. On June 30, 2005, the Company entered into a five-year agreement with a service provider at a cost of $0.7 million annually to provide information technology support
services. Such services provided by Cendant under the transitional agreement were terminated as of September 30, 2005. As a result, the Company is required to pay Cendant an early-termination penalty of $0.1 million representing the
unamortized lease costs of computer hardware specific to the Companys mainframe environment and unpaid actual costs incurred by Cendant with respect to these services. Also, on September 30, 2005, Cendant discontinued providing revenue audit
services to the Company. The Company is currently evaluating various alternatives to replace the revenue audit services.



Remaining transitional services from Cendant are as follows:



| |  |  | Telecommunications services:Cendant will continue to provide the Company with telecommunications services under the transitional agreement until June 30, 2007. Both
Cendant and the Company may terminate the provision of these services, without penalty, upon 180 days written notice by the terminating party.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Call support services:The Company is currently negotiating with Cendant for Cendant to continue to provide the Company with call support services.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Event marketing services: The Company is currently negotiating with Cendant for Cendant to continue to provide the Company with event marketing services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



9. LONG-TERM DEBT AND CREDIT FACILITIES



$250 Million Credit Facility



On June 29, 2005, the Company established a $250.0 million
five-year unsecured credit facility (the $250 Million Credit Facility) that made many of the covenants less restrictive than the covenants in the Companys prior debt agreements and reduced the cost of debt. Borrowings under the
$250 Million Credit Facility are to be used to finance working capital needs, potential acquisitions and other general corporate purposes including repurchases of the Companys common stock. The $250 Million Credit Facility provides for loans
in the form of Eurodollar or Base Rate borrowings. Eurodollar borrowings bear interest at the London Inter-Bank Offer Rate, (LIBOR) as defined in the $250 Million Credit Facility, plus a credit spread as defined in the $250 Million
Credit Facility, currently 0.95% per annum. Base Rate borrowings bear interest primarily at the Prime Rate, as defined in the $250 Million Credit Facility. The $250 Million Credit Facility carries an annual fee currently at 0.175% of the unused
portion of the $250 Million Credit Facility, which is payable quarterly. The Company may also use the $250 Million Credit Facility to issue letters of credit for general corporate purposes. There was a $1.0 million letter of credit outstanding under
the $250 Million Credit Facility as of October 31, 2005.



In connection with entering into the $250 Million Credit Facility, the Company incurred $0.7 million of financing fees, which were deferred and are being amortized to interest expense over the five-year term of the $250 Million Credit
Facility. Amortization of financing fees under the $250 Million Credit Facility amounted to $34,000 and $45,000 for the three and six months ended October 31, 2005, respectively.



Interest expense associated with borrowings under the $250 Million Credit Facility was $1.8 million and $2.3 million for the
three and six months ended October 31, 2005, respectively.



The $250 Million Credit Facility agreement contains covenants, including the requirement that the Company maintain certain financial covenants, such as a maximum consolidated leverage ratio of 2.5 to 1.0 and a minimum consolidated interest
coverage ratio of 4.0 to 1.0. The consolidated leverage ratio is the ratio of consolidated debt to consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), each as defined in the $250 Million Credit Facility.
The consolidated interest coverage ratio is the ratio of consolidated EBITDA to consolidated interest expense, each as defined in the $250 Million Credit Facility. The maximum leverage ratio and minimum interest coverage ratio remains fixed through
the five-year term of the $250 Million Credit Facility. As of October 31, 2005, the Company was in compliance with these covenants.



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The $250 Million Credit Facility contains various customary restrictive covenants that limit the
Companys ability to, among other things, (i) incur additional indebtedness or guarantees, (ii) create liens or other encumbrances on the Companys property, (iii) enter into a merger or similar transaction, (iv) sell
or transfer property except in the ordinary course of business, and (v) make dividend and other restricted payments.



Floating Rate Senior Unsecured Notes



On June 27, 2005, the Company repaid in full $175.0 million of five-year floating-rate senior unsecured notes (Notes) that were
outstanding as of April 30, 2005. To repay the Notes, the Company used cash provided by operations from the prior tax season of $76.0 million and borrowed $99.0 million under the $100.0 million five-year revolving credit facility (the
$100 Million Credit Facility), discussed below.



The Company had issued the $175.0 million of five-year floating rate senior unsecured notes through a private placement on June 25, 2004 in connection with the Companys IPO. The purpose of the Notes issuance was to fund the
cash portion of the Special Dividend paid to Cendant upon Cendants divestiture of its entire ownership in the Company. The Notes bore interest based on the three-month LIBOR plus 1.5%.



In connection with the issuance of the Notes, the Company incurred
$1.7 million of financing fees which were deferred and were being amortized to interest expense over the life of the Notes. Amortization of such fees amounted to $0.1 million for the three months ended October 31, 2004. For the six
months ended October 31, 2005 and 2004, such amortization was $0.1 million in both periods. The Company incurred a non-cash charge of $1.4 million for the six months ended October 31, 2005 related to the write-off of deferred
financing costs associated with the repayment of the Notes in June 2005.



The agreement governing the Notes contained substantially similar provisions and covenants to those contained in the $100 Million Credit Facility, as well as customary event of default provisions and other terms and
conditions that were consistent with those contained in similar debt obligations of issuers with a credit quality similar to JHTS. The agreements that governed the Notes and $100 Million Credit Facility were amended on January 7, 2005 to permit
the Company to repurchase additional shares of common stock.



Interest expense under the Notes amounted to $1.4 million for the three months ended October 31, 2004. For the six months ended October 31, 2005 and 2004, such expense was $1.3 million and $2.0 million, respectively.



$100 Million Credit Facility



On June 29, 2005, the Company repaid and then immediately terminated
the $100 Million Credit Facility, which the Company had established on June 25, 2004. Borrowings under the $100 Million Credit Facility were available to finance working capital needs, acquisitions and other general corporate purposes. The $100
Million Credit Facility provided for loans in the form of Eurodollar or Alternate Base Rate borrowings. Eurodollar borrowings bore interest at the adjusted LIBOR, as defined in the $100 Million Credit Facility, plus 1.25% per annum. Alternate
Base Rate borrowings bore interest primarily at the Prime Rate, as defined in the $100 Million Credit Facility, plus 0.25% per annum. The Company also was permitted to use the $100 Million Credit Facility to issue letters of credit for general
corporate purposes. The $100 Million Credit Facility carried an annual facility fee of 0.25% of the total commitment amount which was payable quarterly.



In connection with entering into the $100 Million Credit Facility, the Company incurred $1.6 million of financing fees, which were deferred and were
being amortized to interest expense over the five-year term of the $100 Million Credit Facility. Amortization of financing fees amounted to $0.1 million for the three months ended October 31, 2004. For the six months ended October 31,
2005 and 2004, such amortization was $0.1 million for both periods. The Company incurred a non-cash charge of $1.3 million for the six months ended October 31, 2005 related to the write-off of deferred financing costs associated with the
termination of the $100 Million Credit Facility in June 2005.



As discussed above, on June 27, 2005, the Company borrowed $99.0 million from the $100 Million Credit Facility and two days later repaid this amount in full. Interest expense associated with borrowings under the $100 Million
Credit Facility was $35,000 for the six months ended October 31, 2005.



Bridge Agreement



On May 26, 2005,
the Company and a financial institution entered into a bridge credit agreement (the Bridge Agreement), pursuant to which the financial institution agreed to establish a revolving line of credit in favor of the Company



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in the aggregate principal amount of up to $50.0 million to temporarily supplement the Companys $100 Million
Credit Facility after repaying the Notes. The interest payable on the unpaid principal amount of any amount borrowed under the Bridge Agreement was calculated at a rate equal to the LIBOR, as defined in the Bridge Agreement, plus 1.25%. The Bridge
Agreement incorporated by reference certain terms and conditions set forth in the $100 Million Credit Facility. The Bridge Agreement was scheduled to expire by no later than January 31, 2006, but was terminated upon the execution of the $250
Million Credit Facility on June 29, 2005. The Company did not borrow against the Bridge Agreement.



Average Cost of Debt



For the three months ended October 31, 2005 and 2004, the Companys average cost of debt was 5.1% and 3.8%, respectively. For the six months ended October 31, 2005 and 2004, the Companys average cost of debt was 5.2%
and 3.8%, respectively.



10. INTEREST RATE SWAP AGREEMENTS



In August 2005, the Company entered into interest rate
swap agreements with third parties to convert a notional amount of $50.0 million of floating-rate borrowings under the $250 Million Credit Facility into fixed-rate debt, with the intention of mitigating the economic impact of changing interest
rates. Under these interest rate swap agreements, which became effective in October 2005, the Company receives a floating interest rate based on the three-month LIBOR (in arrears) and pays a fixed interest rate averaging 4.44%. These agreements
mature in June 2010 and were determined to be cash flow hedges in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities as amended by SFAS No. 137, No. 138 and No. 149 (SFAS
No. 133). At October 31, 2005, the fair value of the interest rate swap agreements was an asset of $0.8 million which is recorded in other non-current assets on the Consolidated Balance Sheet. The change in fair value since inception
to October 31, 2005 was $0.5 million, net of tax, and is recorded as a component of accumulated other comprehensive income. Since inception, no amounts have been recognized in the Consolidated Results of Operations due to ineffectiveness.



11. STOCK-BASED COMPENSATION



Exchange Transaction



Prior to the Companys IPO, certain employees of the Company were
granted stock options and restricted stock units (RSUs) under Cendants stock-based compensation plans. In connection with the Companys IPO and pursuant to the consent of each holder, the Company issued to employees 903,935
vested stock options and 100,880 shares of common stock in exchange for their Cendant stock options and RSUs. The exchange transaction was structured to provide the same relative value to employees as the Cendant awards held by such employees prior
to the Companys IPO. As a result of the exchange transaction, the Company incurred stock-based compensation expense of $4.5 million for the six months ended October 31, 2004 which is included in selling, general and administrative
expenses in the Consolidated Statement of Operations. Included in the $4.5 million charge was a $1.9 million charge related to the issuance to employees of vested stock options to purchase shares of common stock in exchange for their Cendant
stock options. Additionally, Cendant RSUs held by the Companys employees were cancelled and converted into JHTS awards. As a result, the Company issued to employees shares of the Companys common stock in exchange for the unvested Cendant
RSUs that were held by such employees prior to the Companys IPO and incurred $2.6 million of stock-based compensation expense of which approximately $1.0 million represents the value of shares withheld to satisfy the employees
income and payroll tax obligation.



Stock Options



In addition to the exchange transaction, the Company incurred stock-based
compensation expense of $0.7 million and $0.4 million in the three months ended October 31, 2005 and 2004, respectively, in connection with stock options granted to employees. For the six months ended October 31, 2005 and 2004, the Company
incurred such stock-based compensation expense of $1.1 million and $0.6 million, respectively.



Restricted Stock Units



In addition to the exchange transaction, the Company incurred stock-based compensation expense of $0.1 million in each of the three month periods ended October 31, 2005 and 2004, respectively, in connection with the issuance of
fully vested and non-forfeitable RSUs to certain non-employee directors that are payable in shares of the Companys common stock as a one-time distribution upon termination of services. For the six months ended October 31, 2005 and 2004,
the Company incurred such stock-based compensation expense of $0.1 million and $0.3 million, respectively.



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12. SHARE REPURCHASE PROGRAMS



During the three months ended October 31, 2005, the Company paid $38.2 million, including commissions, to repurchase
1,562,300 shares of its common stock under a $50.0 million share repurchase program that was approved by the Companys Board of Directors on July 5, 2005. For the six months ended October 31, 2005, the Company paid $58.5 million,
including commissions, to repurchase 2,422,900 shares of its common stock of which 500,000 shares were acquired under a previously authorized repurchase program. No repurchased shares have been retired as of October 31, 2005.



In November 2005, the Company paid $2.8 million, including commissions, to
repurchase 115,297 shares of its common stock, which completed the Companys $50.0 million share repurchase program.



13. DISPOSITIONS



In October 2005, the Company sold selected company-owned office operations in Texas and Massachusetts to existing franchisees for total consideration of
$2.2 million of which $0.3 million represented initial franchise fees for territory sales and $1.9 million was for the sale of the assets. As a result of the two sales, the Company recognized a $0.2 million net gain on sale of assets.



In November 2005, the Company sold additional selected company-owned office
operations in Texas to an existing franchisee for consideration of $0.9 million of which $0.1 million represented initial franchise fees for territory sales and $0.8 million was for the sale of the assets.



14. SEGMENT INFORMATION



The Company manages and evaluates the operating results of the business in
two segments:



| |  |  | Franchise Operations  This segment consists of the operations of the Companys franchise business, including royalty and marketing and advertising revenues, financial
product fees, other financial product revenues and other revenues;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Company-Owned Office Operations  This segment consists of the operations of the Companys owned offices for which the Company recognizes service revenues for the
preparation of tax returns and related services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management evaluates the operating results of each of its reportable segments based upon revenues and income (loss) before income taxes. Intersegment transactions approximate fair market value and are not significant.



|                                    |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|----------------------------------- |  | -------------------- | ------ | - | -------------------------------- | - | ------ | ----------------------- |  | - | ------ | - |  | - | ------- | -
|(In thousands)                      |  | Franchise Operations |        |   | Company- Owned Office Operations |   |        | Corporate and Other (a) |  |   | Total  |  
|Three months ended October 31, 2005 |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Revenues                            |  | $                    | 8,488  |   |                                  | $ | 538    |                         |  | $ |       |   |  | $ | 9,026   |  
|                                    |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Loss before income taxes            |  | $                    | (4,116 | ) |                                  | $ | (6,142 | )                       |  | $ | (8,322 | ) |  | $ | (18,580 | )
|                                    |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Three months ended October 31, 2004 |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Revenues                            |  | $                    | 6,803  |   |                                  | $ | 612    |                         |  | $ |       |   |  | $ | 7,415   |  
|                                    |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Loss before income taxes            |  | $                    | (4,876 | ) |                                  | $ | (6,560 | )                       |  | $ | (6,194 | ) |  | $ | (17,630 | )
|                                    |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  



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|                                  |  |                      |         |   |                                  |   |         |                         |  |   |         |   |  |   |         |  
|--------------------------------- |  | -------------------- | ------- | - | -------------------------------- | - | ------- | ----------------------- |  | - | ------- | - |  | - | ------- | -
|(In thousands)                    |  | Franchise Operations |         |   | Company- Owned Office Operations |   |         | Corporate and Other (a) |  |   | Total   |  
|Six months ended October 31, 2005 |  |                      |         |   |                                  |   |         |                         |  |   |         |   |  |   |         |  
|Revenues                          |  | $                    | 14,291  |   |                                  | $ | 842     |                         |  | $ |        |   |  | $ | 15,133  |  
|                                  |  |                      |         |   |                                  |   |         |                         |  |   |         |   |  |   |         |  
|Loss before income taxes          |  | $                    | (10,916 | ) |                                  | $ | (11,489 | )                       |  | $ | (17,919 | ) |  | $ | (40,324 | )
|                                  |  |                      |         |   |                                  |   |         |                         |  |   |         |   |  |   |         |  
|Six months ended October 31, 2004 |  |                      |         |   |                                  |   |         |                         |  |   |         |   |  |   |         |  
|Revenues                          |  | $                    | 15,135  |   |                                  | $ | 1,063   |                         |  | $ |        |   |  | $ | 16,198  |  
|                                  |  |                      |         |   |                                  |   |         |                         |  |   |         |   |  |   |         |  
|Loss before income taxes          |  | $                    | (8,129  | ) |                                  | $ | (12,828 | )                       |  | $ | (15,497 | ) |  | $ | (36,454 | )
|                                  |  |                      |         |   |                                  |   |         |                         |  |   |         |   |  |   |         |  

---

|(a) | Amounts included in loss before income taxes consist of unallocated corporate overhead supporting both segments including legal, finance, human resources, real estate facilities and
strategic development activities, as well as stock-based compensation, interest income and interest expense.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15. COMMITMENTS AND CONTINGENCIES



Guarantees



The Company is required to provide various types of surety bonds, such as tax preparer bonds and performance bonds, which are irrevocable undertakings by
the Company to make payment in the event the Company fails to perform certain of its obligations. These bonds vary in duration although most are issued and outstanding from one to two years. As of October 31, 2005, the maximum potential payment
under the aggregate outstanding surety bonds is approximately $1.9 million. Historically, no surety bonds have been drawn upon and there is no future expectation that these surety bonds will be drawn upon.



The Company provides a guarantee that could require it to make future minimum
rental payments under a three-year leasing arrangement, which expires after the upcoming tax season, in the event that the primary obligor does not meet its required payments. The Company has not recorded a liability on the Consolidated Balance
Sheet with respect to this guarantee. As of October 31, 2005, the maximum potential payment under this arrangement totals $0.5 million. There have been no amounts paid by the Company under this arrangement in the past and there is no
expectation that the Company will be required to make payment in the future.



The Company, through Tax Services of America, Inc., provides customers of company-owned offices with a guarantee in connection with the preparation of tax returns that may require it in certain circumstances to pay
penalties and interest assessed by a taxing authority. The Company has recognized a liability of $0.1 million as of October 31, 2005 for the fair value of the obligation undertaken in issuing the guarantee. Such liability is included in
accounts payable and accrued liabilities on the Consolidated Balance Sheet. In addition, the Company may be required to pay additional tax (or refund shortfall) assessed by a taxing authority for all customers that purchase the Companys Gold
Guarantee product. The Company may incur a liability to the extent that the total customer Gold Guarantee claims exceed maximum thresholds pursuant to the contract between the Company and the third party program provider. There have been no amounts
paid by the Company under this arrangement in the past and the Company does not expect to be required to make payment in the future.



The transitional agreement with Cendant provides that the Company continue to indemnify Cendant and its affiliates against potential losses based on,
arising out of or resulting from, among other things, claims by third parties relating to the ownership or the operation of the Companys assets or properties and the operation or conduct of the Companys business, whether in the past or
future, including any currently pending litigation against Cendant and any claims arising out of or relating to the Companys IPO. The only currently pending litigation against the Company and Cendant are the suits brought by Canieva Hood in
Ohio and California, which is discussed below in Legal Proceedings. Additionally, the transitional agreement provides that the Company will be responsible for the respective tax liabilities imposed on or attributable to the Company and
any of the Companys subsidiaries relating to all taxable periods. Accordingly, the Company will indemnify Cendant and its subsidiaries against any such tax liabilities imposed on or attributable to the Company and any of the Companys
subsidiaries. While there have not been any indemnification payments by the Company under these arrangements since the Companys IPO, there can be no assurance that the Company will not be obligated to make such payments in the future.



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There was a $1.0 million letter of credit outstanding under the $250 Million Credit Facility as of
October 31, 2005 as required under the Companys rental agreement for the new corporate headquarters.



The Company routinely enters into contracts that include embedded indemnifications that have characteristics similar to guarantees, including obligations
to protect counter parties from losses arising from the following: (a) tax, legal and other risks related to the purchase of businesses; (b) indemnification of the Companys directors and officers; (c) indemnities of various
lessors in connection with facility leases for certain claims arising from such facility or lease; and (d) third-party claims, including those from franchisees, relating to various arrangements in the normal course of business. Typically, there
is no stated maximum payment related to these indemnifications, and the term of indemnities may vary and in many cases is limited only by the applicable statute of limitations. The likelihood of any claims being asserted against the Company and the
ultimate liability related to any such claims, if any, is difficult to predict. While there have not been any indemnification payments by JHTS under these arrangements in the past, there can be no assurance that the Company will not be obligated to
make such payments in the future.



Legal Proceedings



On August 27, 2002, a plaintiff group comprising of 154 franchisees
filed an action against SBB&T and the Company in the Superior Court of New Jersey, Morris County. The suit alleged, among other things, that the Company breached an agreement with the plaintiffs by not paying them a portion of surpluses in RAL
loss reserves. The plaintiffs sought a declaratory judgment, an accounting, payment of an incentive rebate, unspecified compensatory and punitive damages, treble damages and attorneys fees. By an order dated December 6, 2002, the court
dismissed the conversion and fraud counts of the complaint with prejudice. The plaintiffs filed an amended complaint on March 17, 2003. The parties submitted the matter to mediation in July 2003, which resulted in a settlement in which the
Company agreed, among other things, to make a $2.0 million cash payment, spend an additional $2.0 million on regional advertising from 2004 through 2006, pay additional rebates to franchisees of up to $3.00 per RAL processed during the
2004 through 2006 tax seasons, subject to performance criteria, and implement a temporary royalty fee reduction program for certain new franchise offices. On December 19, 2003, the court issued a ruling enforcing the settlement and dismissed
the action with prejudice. Accordingly, a $10.4 million charge was recognized in fiscal 2004. As of October 31, 2005 the Company has made cash payments of $5.2 million towards the litigation settlement. As of October 31, 2005,
the Companys litigation settlement accrual of $2.7 million is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet.



As of October 31, 2005, 152 plaintiffs in the action have executed the settlement agreement. One plaintiff has appealed the enforcement order of
December 19, 2003. On May 17, 2005, the Superior Court of New Jersey Appellate Division reversed the trial courts December 19, 2003 ruling as to the one who appealed, and remanded for further proceedings. The Company has filed a
petition for certification with the New Jersey Supreme Court, which was granted on July 20, 2005. The decision of the New Jersey Supreme Court is currently pending.



On or about April 4, 2003, Canieva Hood and Congress of California Seniors brought a purported class action suit
against SBB&T and the Company in the Superior Court of California (San Francisco), subsequently adding Cendant, in the Superior Court of California (Santa Barbara, following a transfer from San Francisco) in connection with the provision of
RALs, seeking declaratory relief as to the lawfulness of the practice of cross-lender debt collection, the validity of SBB&Ts cross-lender debt collection provision and whether the method of disclosure to customers with respect to the
provision is unlawful or fraudulent. The Company was joined in the action for allegedly collaborating, and aiding and abetting, in the actions of SBB&T. The Company filed a demurrer and subsequently answered the amended complaint, denying any
liability. The Court has granted a motion to dismiss SBB&T and other banks who are third-party defendants on the ground that the claims are preempted by federal law. Plaintiffs have appealed that decision. The Court has stayed all other
proceedings, pending appeal. The Company believes it has meritorious defenses to the claims and is defending against them vigorously. Ms. Hood has also filed a separate suit against the Company and Cendant on December 18, 2003 in the Ohio
Court of Common Pleas (Montgomery County) and is seeking to certify a class in the action. The allegations relate to the same set of facts as the California action. The Company filed a motion to stay or dismiss, which was denied, and subsequently
answered the Complaint, denying any liability. The case is in its discovery and pretrial stage. The Company has filed a motion to stay the action, or in the alternative to add SBB&T as a third-party defendant, pending a decision in the
California appeal. A decision by the Court is currently pending. The Company believes it has meritorious defenses to the claims and is defending against the case vigorously.



On June 18, 2004, Myron Benton brought a purported class action against SBB&T and the Company in the Supreme Court
of the State of New York (County of New York) in connection with disclosures made in connection with the provision of RALs, alleging that the disclosures and related practices are fraudulent and otherwise unlawful, and seeking equitable and monetary
relief. The Company filed a motion to dismiss that complaint. In response, Benton withdrew his original complaint



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and filed an amended complaint on January 3, 2005. The Company filed a motion for summary judgment, which is
currently pending. While this matter is at a preliminary stage, the Company believes it has meritorious defenses to the claims and intends to defend them vigorously.



The Company is from time to time subject to other legal proceedings and claims in the ordinary course of business, none of
which the Company believes are likely to have a material adverse effect on the Companys financial position, results of operations or cash flows. However, there can be no assurance that such litigation, or any future litigation, will not have a
material adverse effect on the Companys financial position, results of operations or cash flows.



16. SUBSEQUENT EVENT



Declaration of Dividend



On
December 7, 2005, the Companys Board of Directors declared a quarterly cash dividend of $0.08 per share of common stock, payable on January 13, 2006, to common stockholders of record on December 28, 2005.



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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion may be understood more fully by reference to the Consolidated Financial Statements, Notes to the Consolidated Financial
Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on July 29, 2005.



FORWARD-LOOKING STATEMENTS



Certain statements in this report, including but not limited to those
contained in Part I. Item 1Consolidated Financial Statements and notes thereto, Part I. Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations and
Part II. Item 1Legal Proceedings and included in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition,
results of operations, cash flows, plans, objectives, future performance and business of Jackson Hewitt Tax Service Inc, including the Companys ability to meet estimates regarding the opening of new offices and the sale of new
territories. All statements in this report, other than statements that are purely historical, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that otherwise include the words
believes, expects, anticipates, intends, projects, estimates, plans, may increase, may fluctuate and similar expressions or future or
conditional verbs such as will, should, would, may and could. These forward-looking statements involve risks and uncertainties.



Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements,
because of, among other things, the following potential risks and uncertainties: our ability to achieve the same level of growth in revenues and profits that we have in the past; government initiatives that simplify tax return preparation, improve
the timing and efficiency of processing tax returns or decrease the number of tax returns filed or the size of the refunds; government legislation and regulation of the tax preparation industry and related products and services offered or
facilitated, including refund anticipation loans (RALs); our exposure to litigation; our ability to protect our customers personal information; the success of our franchised offices; our responsibility to third parties for the acts
of our franchisees; disruptions in our relationships with our franchisees; changes in our relationships with financial product providers that could affect our ability to facilitate the sale of financial products; changes in our relationships with
retailers that could affect our growth and profitability; seasonality of our business and its effect on our stock price; competition from other tax return preparation service providers; our ability to offer innovative new products and services; our
reliance on electronic communications to perform the core functions of our business; our reliance on cash flow from subsidiaries; our compliance with revolving credit facility covenants; our exposure to increases in prevailing market interest rates;
the effect of market conditions, general conditions in the tax return preparation industry or general economic conditions; and changes in accounting policies or practices.



Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements,
and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our
control. As a result of these factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events
or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. Readers should also consult the cautionary statements and risk factors listed in our Annual Report
on Form 10-K for the year ended April 30, 2005 and our other public filings with the SEC. Copies are available from the SEC or Jackson Hewitt website. We assume no obligation, and we expressly disclaim any obligation, to update or alter any
forward-looking statements, whether as a result of new information, future events or otherwise.



OVERVIEW



We manage and
evaluate the operating results of our business in two segments:



| |  |  | Franchise operations: This segment consists of the operations of our franchise business, including royalty and marketing and advertising revenues, financial product fees, other
financial product revenues and other revenues.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Company-owned office operations: This segment consists of the operations of our company-owned offices for which we recognize service revenues for the preparation of tax returns and
related services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Jackson Hewitt is the second
largest paid tax return preparer in the United States based on the number of individual tax returns filed by paid preparers. In fiscal 2005, we operated a nationwide network comprised of 4,871 franchised offices and



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613 company-owned offices under the Jackson Hewitt Tax Service® brand. In fiscal 2005, our network filed 3.3 million tax returns, which we
estimate represented less than 5% of the total individual paid tax return preparer industry in the United States. We generate revenues from fees paid by our franchisees, service revenues earned at company-owned offices and revenues earned in
connection with our facilitation of the sale of financial products. Jackson Hewitt, we, our, and us, are used interchangeably to refer to Jackson Hewitt Tax Service Inc. and its subsidiaries,
appropriate to the context.



Separation from Cendant Corporation and Related
Party Transactions



On June 25, 2004, Cendant
Corporation (Cendant) divested 100% of its ownership interest in us through an initial public offering (IPO). Upon completion of our IPO, we entered into a transitional agreement with Cendant to provide for an orderly
transition to being an independent company and to govern the continuing arrangements between us and Cendant. We also entered into a sublease agreement for our corporate headquarters in Parsippany, New Jersey, which expired in September 2005, and a
sublease assignment and assumption agreement for our technology facility in Sarasota, Florida. We pay rent directly to the landlord of the Sarasota facility as a sublessee under Cendants lease, which expires in May 2006. Our rental expense
under these agreements was $0.4 million in each of the three month periods ended October 31, 2005 and 2004, respectively. For the six months ended October 31, 2005 and 2004 such rental expense was $0.8 million and $0.7 million,
respectively.



On May 1, 2005, we entered into a new lease
with a different lessor for office space located in Parsippany and in September 2005 we relocated our corporate headquarters to this office space. The lease expires in October 2012. Annual base rental expense is $1.2 million.



On November 17, 2005, we entered into a new lease with a different
lessor for office space located in Sarasota. We plan to relocate our current technology facility to this office space in the first quarter of fiscal 2007. The lease expires in June 2014. Annual base rental expense is $0.7 million.



Under the transitional agreement, Cendant provided us with various
services, including services relating to facilities, human resources and employee benefits, payroll, financial systems management, treasury and cash management, accounts payable services, tax support, event marketing, revenue audit services, public
and regulatory affairs, telecommunications services, information technology services and call support services. The transitional agreement also contains provisions relating to indemnification, tax sharing and tax indemnification, access to
information and non-solicitation of employees.



We incurred an
aggregate of $0.5 million and $0.7 million of expenses related to such transitional and other related agreements with Cendant for the three months ended October 31, 2005 and 2004, respectively. For the six months ended October 31, 2005 and
2004, such costs were $1.2 million and $1.0 million, respectively.



Under the transitional agreement, the cost of each transitional service generally reflects the same payment terms and is calculated using the same cost allocation methodologies for the particular service as those associated with the costs
reported in our historical Consolidated Financial Statements prior to our IPO. The transitional agreement was negotiated in the context of a parent-subsidiary relationship. The provisions of many of the services were transitioned at similar costs to
those allocated by Cendant historically. There are no fixed or minimum contractual purchase obligations under the transitional agreement and other related agreements.



We have completed most transition arrangements with Cendant and are now predominantly operational on our own financial
systems and infrastructure. We have completed the implementation of our own back office systems including human resources and employee benefits, payroll, financial systems management, treasury and cash management, accounts payable, tax support and
public and regulatory affairs. On June 30, 2005, we entered into a five-year agreement with a service provider at a cost of $0.7 million annually to provide information technology support services. Such services provided by Cendant under
the transitional agreement were terminated as of September 30, 2005. As a result, we are required to pay Cendant an early-termination penalty of $0.1 million representing the unamortized lease costs of computer hardware specific to our
mainframe environment and unpaid actual costs incurred by Cendant with respect to these services. Also, on September 30, 2005, Cendant discontinued providing revenue audit services to us. We are currently looking at various alternatives to replace
the revenue audit services.



Remaining transitional services
from Cendant are as follows:



| |  |  | Telecommunications services: Cendant will continue to provide us with telecommunications services under the transitional agreement until June 30, 2007. Both Cendant and
we may terminate the provision of these services, without penalty, upon 180 days written notice by the terminating party.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Call support services: We are currently negotiating with Cendant for Cendant to continue to provide us with call support services under the transitional agreement.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Event marketing services: We are currently negotiating with Cendant for Cendant to continue to provide us with event marketing services under the transitional agreement.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Prior Period Financial Statements



Our unaudited consolidated statements of operations and cash flows for the six months ended October 31, 2004 reflect
the historical results of operations and cash flows of our business divested by Cendant in our IPO. As a result, the accompanying Consolidated Financial Statements may not necessarily reflect our results of operations and cash flows in the future or
what our results of operations and cash flows would have been had we been a stand-alone public company during the entire period in fiscal 2005.



Key Trends Affecting Our Results



The following is a summary of the key trends that affected our financial results up through the period ended October 31, 2005. Please also see
Forward-Looking Statements for a discussion of uncertainties facing our business.



Our revenues have grown significantly over the past three fiscal years achieved, in part, through rapidly establishing offices in areas with large markets for our services. The following are the key factors currently
affecting our results:



| |  |  | Seasonality of Revenues and Results of Operations Given the seasonal nature of the tax preparation business, we have historically generated and expect to generate
substantially all of our revenues during the tax season period from January through April of each year, which overlaps our third and fourth fiscal quarters. During fiscal 2005, we generated approximately 91% of our revenues during this four-month
period. We historically operate at a loss through the first eight months of each fiscal year, during which we incur costs primarily associated with preparing for the upcoming tax season.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Franchise Business Model A majority of our revenues are derived from our franchise system, which has increased significantly over the past three fiscal years. Our
franchise business model enables us to grow more quickly with less capital investment and lower operating expenses than if we directly operated all of the offices in our network. The franchise business model has an inherently higher profit margin
than our company-owned offices, as our existing infrastructure permits additional franchise growth without significant additional fixed cost investment.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other Financial Product RevenuesOther financial product revenues represent a portion of the revenues we earn from the facilitation of RALs. Santa Barbara
Bank & Trust, a division of Pacific Capital Bank, N.A. (SBB&T) provided approximately 80% of the RALs facilitated by us in fiscal 2005, with the remainder provided by HSBC Taxpayer Financial Services, a division of HSBC
North America Holdings Inc. (HSBC). Our current agreement with SBB&T became effective with RALs facilitated by our network beginning in January 2005. In lieu of earning revenues based upon the amount of finance fees and
uncollected loans, our current agreement with SBB&T provides for the following:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A fee of $19.00 for each RAL facilitated by our network. If the amount of uncollected loans exceeds the net finance fees received by SBB&T, then we have agreed to reimburse
SBB&T in an amount equal to 50% of such difference.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An additional fee of $2.00 for each RAL facilitated by our network subject to a threshold by which net finance fees received by SBB&T must exceed uncollected loans by an amount
ranging from 0.5% to 0.6% of the aggregate principal amount of RALs facilitated by our network. Revenues will be recognized when, and if, this threshold is exceeded.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A variable fee equal to 50% of the amount by which the net finance fees received by SBB&T exceeds uncollected loans by a threshold amount of at least 1.0% of the aggregate
principal amount of RALs facilitated by our network. Revenues will be recognized when, and if, this threshold is exceeded. In the six months ended October 31, 2005, we recognized $1.1 million of other financial product revenues in accordance
with this provision of the agreement.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We will continue to receive a portion of the collections with respect to RALs facilitated by SBB&T prior to the 2005 tax season, although we expect such amounts from such loans facilitated by SBB&T to diminish. It is expected that
other financial product revenues will continue to decline in the first two quarters of each fiscal period, on a year over year basis.



21



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##### Table of Contents

RESULTS OF OPERATIONS



Our consolidated results of operations are set forth below and are followed by a more detailed discussion of each of our business segments, as well as a
detailed discussion of certain corporate and other expenses.



Consolidated
Results of Operations



|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months Ended October 31, |         |   | Six Months Ended October 31, |  
|                                                      |  | 2005                           |         |   | 2004                         |   |         | 2005 |  |   | 2004    |  
|                                                      |  | (in thousands)                 |         |   | (in thousands)               |  
|Revenues                                              |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Franchise operations revenues:                        |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Royalty                                               |  | $                              | 872     |   |                              | $ | 389     |      |  | $ | 1,327   |   |  | $ | 989     |  
|Marketing and advertising                             |  |                                | 402     |   |                              |   | 180     |      |  |   | 612     |   |  |   | 455     |  
|Financial product fees                                |  |                                | 2,136   |   |                              |   | 1,488   |      |  |   | 3,982   |   |  |   | 3,190   |  
|Other financial product revenues                      |  |                                | 2,799   |   |                              |   | 2,344   |      |  |   | 4,109   |   |  |   | 5,840   |  
|Other                                                 |  |                                | 2,279   |   |                              |   | 2,402   |      |  |   | 4,261   |   |  |   | 4,661   |  
|Service revenues from company-owned office operations |  |                                | 538     |   |                              |   | 612     |      |  |   | 842     |   |  |   | 1,063   |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total revenues                                        |  |                                | 9,026   |   |                              |   | 7,415   |      |  |   | 15,133  |   |  |   | 16,198  |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Expenses                                              |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Cost of franchise operations                          |  |                                | 6,991   |   |                              |   | 6,444   |      |  |   | 14,503  |   |  |   | 13,298  |  
|Marketing and advertising                             |  |                                | 3,172   |   |                              |   | 2,986   |      |  |   | 5,855   |   |  |   | 5,198   |  
|                                                      |  |                                |         |  
|Cost of company-owned office operations               |  |                                | 4,964   |   |                              |   | 4,922   |      |  |   | 9,143   |   |  |   | 9,539   |  
|Selling, general and administrative                   |  |                                | 8,283   |   |                              |   | 6,207   |      |  |   | 15,120  |   |  |   | 16,687  |  
|Depreciation and amortization                         |  |                                | 2,724   |   |                              |   | 2,958   |      |  |   | 5,383   |   |  |   | 5,797   |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total expenses                                        |  |                                | 26,134  |   |                              |   | 23,517  |      |  |   | 50,004  |   |  |   | 50,519  |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                                  |  |                                | (17,108 | ) |                              |   | (16,102 | )    |  |   | (34,871 | ) |  |   | (34,321 | )
|Other income/(expense):                               |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                       |  |                                | 195     |   |                              |   | 232     |      |  |   | 925     |   |  |   | 384     |  
|Interest expense                                      |  |                                | (1,883  | ) |                              |   | (1,760  | )    |  |   | (3,917  | ) |  |   | (2,517  | )
|Write-off of deferred financing costs                 |  |                                |        |   |                              |   |        |      |  |   | (2,677  | ) |  |   |        |  
|Gain on sale of assets, net                           |  |                                | 216     |   |                              |   |        |      |  |   | 216     |   |  |   |        |  
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Loss before income taxes                              |  |                                | (18,580 | ) |                              |   | (17,630 | )    |  |   | (40,324 | ) |  |   | (36,454 | )
|Benefit from income taxes                             |  |                                | (7,292  | ) |                              |   | (6,906  | )    |  |   | (15,829 | ) |  |   | (14,284 | )
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                              |  | $                              | (11,288 | ) |                              | $ | (10,724 | )    |  | $ | (24,495 | ) |  | $ | (22,170 | )
|                                                      |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  



Given the seasonality
of our business, approximately 2% of the total tax returns prepared by our network in fiscal 2005 were prepared in the first two fiscal quarters. Consequently, the number of tax returns prepared during the first two fiscal quarters and the
corresponding revenues are not indicative of the overall trends of our business for the fiscal year. Most tax returns prepared in the first two fiscal quarters are related to either tax returns for which filing extensions had been applied for by the
customer or amended tax returns.



Three Months Ended October 31,
2005 as Compared to Three Months Ended October 31, 2004



Total
Revenues



Total revenues increased $1.6 million, or
22%, primarily due to increases of $0.7 million in royalty and marketing, $0.6 million in financial product fees and $0.5 million in other financial product revenues. Please see Franchise Results of Operations and Company-Owned Office Results of
Operations for additional highlights.



22



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##### Table of Contents

Total Expenses



Total expenses increased $2.6 million, or 11%. The more notable highlights with respect to expenses incurred were as follows:



Cost of franchise operations: Cost of franchise operations increased
$0.5 million, or 8%, primarily due to the growth in our Gold Guarantee program during the 2005 tax season as expense from the Gold Guarantee product is charged ratably over the products 36-month life.



Marketing and advertising: Marketing and advertising expenses
increased $0.2 million, or 6%, in anticipation of growth in the business in the upcoming tax season.



Selling, general and administrative: Selling, general and administrative increased $2.1 million, or 33%. In the three months ended October 31,
2005 we incurred costs of $0.5 million related to Sarbanes-Oxley. Stock-based compensation increased $0.3 million due to additional stock options granted in the beginning of fiscal 2006. Rental expense increased $0.2 million primarily due to
duplicate rental costs for our corporate headquarters as rental expense was recorded beginning at inception of our new corporate headquarters lease which was several months prior to our occupancy. We incurred costs of $0.2 million in connection with
our technology data center move from Colorado to Georgia. Other miscellaneous costs increased by $0.9 million primarily due to increased insurance, public and regulatory affairs, legal and compensation related costs.



Depreciation and amortization:Depreciation and amortization decreased
$0.2 million, or 8%, primarily due to certain equipment becoming fully depreciated since the first half of fiscal 2005 partially offset by depreciation from capital expenditures made since the first half of fiscal 2005.



Other Income/(Expense)



Please see Corporate and Other for the highlights regarding interest income, interest expense and write-off of deferred
financing costs. Additionally, we recognized a $0.2 million net gain on sale of assets relating to the sale of company-owned operations in Texas and Massachusetts to existing franchisees. We expect these transactions to be accretive in fiscal 2006
and beyond as royalty and marketing and advertising revenues for the sold operations will be reflected in franchise operations.



Six Months Ended October 31, 2005 as Compared to Six Months Ended October 31, 2004



Total Revenues



Total revenues decreased $1.1 million, or 7%, primarily due to a change in the agreement with SBB&T which resulted in lower other financial
product revenues earned. Beginning in January 2005, we earned primarily a fixed fee during tax season at the time RALs are facilitated with SBB&T. Total revenues included $1.7 million this year and $4.6 million last year from RALs facilitated
with SBB&T prior to the 2005 tax season. In addition, in the current period, we earned $1.1 million of additional revenues under the current agreement with SBB&T. Partially offsetting this decrease was an increase in financial product fees
of $0.8 million primarily due to the growth in our Gold Guarantee program during the 2005 tax season as revenues from our Gold Guarantee product are recognized ratably over the products 36-month life. Please see Franchise Results of Operations
and Company-Owned Office Results of Operations for additional highlights.



Total Expenses



Total expenses decreased
$0.5 million, or 1%. The more notable highlights with respect to expenses incurred were as follows:



Cost of franchise operations: Cost of franchise operations increased $1.2 million, or 9%, primarily due to the growth in our Gold Guarantee
program.



Marketing and advertising: Marketing and
advertising expenses increased $0.7 million, or 13%, in anticipation of growth in the business in the upcoming tax season.



Cost of company-owned office operations: Costs of company-owned office operations decreased $0.4 million, or 4%, primarily due to a $0.6
million recovery of previously written-off receivables.



Selling, general and administrative: Selling, general and administrative decreased $1.6 million, or 9%. Included in the six months ended October 31, 2005 were $1.3 million related to a full quarter of on-going stock-based
compensation



23



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##### Table of Contents

expenses as compared to $0.9 million in the just over four months subsequent to our IPO in June 2004. Stock-based
compensation also increased due to additional stock options granted in the beginning of fiscal 2006. In addition, in the six months ended October 31, 2005 we incurred costs of $0.7 million related to Sarbanes-Oxley. Rental expense increased
$0.6 million primarily due to duplicate rental costs for our corporate headquarters. We incurred costs of $0.2 million in connection with our technology data center move and other miscellaneous costs increased $1.0 million primarily due to increased
insurance, public and regulatory affairs, legal and compensation related costs. Included in the six months ended October 31, 2004 was a stock-based compensation charge of $4.5 million related to the issuance to our employees of vested
stock options and shares of common stock in exchange for Cendant stock options and unvested restricted stock units that were held by our employees prior to our IPO.



Depreciation and amortization:Depreciation and amortization decreased $0.4 million, or 7%, primarily due to certain
equipment becoming fully depreciated since the first half of fiscal 2005 partially offset by depreciation from capital expenditures made since the first half of fiscal 2005.



Other Income/(Expense)



Please see Corporate and Other for the highlights regarding interest income, interest expense and the write-off of deferred financing costs. Additionally,
we recognized a $0.2 million net gain on sale of assets relating to the sale of company-owned operations in Texas and Massachusetts to existing franchisees.



Segment Results and Corporate and Other



Franchise Operations



Results of Operations



|                                    |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  
|----------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                    |  | Three Months Ended October 31, |        |   | Six Months Ended October 31, |  
|                                    |  | 2005                           |        |   | 2004                         |   |        | 2005 |  |   | 2004    |  
|                                    |  | (in thousands)                 |        |   | (in thousands)               |  
|Revenues                            |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  
|Royalty                             |  | $                              | 872    |   |                              | $ | 389    |      |  | $ | 1,327   |   |  | $ | 989    |  
|Marketing and advertising           |  |                                | 402    |   |                              |   | 180    |      |  |   | 612     |   |  |   | 455    |  
|Financial product fees              |  |                                | 2,136  |   |                              |   | 1,488  |      |  |   | 3,982   |   |  |   | 3,190  |  
|Other financial product revenues    |  |                                | 2,799  |   |                              |   | 2,344  |      |  |   | 4,109   |   |  |   | 5,840  |  
|Other                               |  |                                | 2,279  |   |                              |   | 2,402  |      |  |   | 4,261   |   |  |   | 4,661  |  
|                                    |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  
|Total revenues                      |  |                                | 8,488  |   |                              |   | 6,803  |      |  |   | 14,291  |   |  |   | 15,135 |  
|                                    |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  
|Expenses                            |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  
|Cost of operations                  |  |                                | 6,991  |   |                              |   | 6,444  |      |  |   | 14,503  |   |  |   | 13,298 |  
|Marketing and advertising           |  |                                | 2,774  |   |                              |   | 2,667  |      |  |   | 5,273   |   |  |   | 4,638  |  
|Selling, general and administrative |  |                                | 958    |   |                              |   | 934    |      |  |   | 1,839   |   |  |   | 1,948  |  
|Depreciation and amortization       |  |                                | 2,064  |   |                              |   | 1,859  |      |  |   | 4,047   |   |  |   | 3,751  |  
|                                    |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  
|Total expenses                      |  |                                | 12,787 |   |                              |   | 11,904 |      |  |   | 25,662  |   |  |   | 23,635 |  
|                                    |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  
|Loss from operations                |  |                                | (4,299 | ) |                              |   | (5,101 | )    |  |   | (11,371 | ) |  |   | (8,500 | )
|Other income/(expense):             |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  
|Interest income                     |  |                                | 183    |   |                              |   | 225    |      |  |   | 455     |   |  |   | 371    |  
|                                    |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  
|Loss before income taxes            |  | $                              | (4,116 | ) |                              | $ | (4,876 | )    |  | $ | (10,916 | ) |  | $ | (8,129 | )
|                                    |  |                                |        |   |                              |   |        |      |  |   |         |   |  |   |        |  



Three Months Ended
October 31, 2005 as Compared to Three Months Ended October 31, 2004



Total Revenues



Total revenues increased
$1.7 million, or 25%. The more notable highlights with respect to revenues earned were as follows:



Royalty and marketing and advertising:Royalty revenues increased $0.5 million, or 124%, and marketing and advertising revenues increased $0.2
million, or 123%, both primarily due to an increase in tax returns prepared by our franchisees.



Financial product fees:Financial product fees increased $0.6 million, or 44%, primarily due to the growth in our Gold Guarantee program during the
2005 tax season.



24



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##### Table of Contents

Other financial product revenues: Other financial product revenues increased $0.5 million, or 19%.
Other financial product revenues in connection with SBB&T increased $0.3 million. We earned $0.9 million in the second quarter of fiscal 2006 with respect to pre-2005 tax season RALs as compared to $0.3 million in the second quarter of fiscal
2005 with respect to pre-2004 tax season RALs. In addition, we earned $1.1 million in the second quarter of fiscal 2006 with respect to RALs facilitated in the 2005 tax season as compared to $1.4 million in the second quarter of fiscal 2005 with
respect to RALs facilitated in the 2004 tax season.



Other
financial product revenues related to our agreement with HSBC increased $0.2 million due to the increase in RALs facilitated with HSBC in tax season 2005.



Other revenues: Other revenues decreased $0.1 million, or 5%, primarily due to a decrease in commissions earned from our vendors with respect
to goods and services purchased by our franchisees. For the quarter we sold 81 territories as compared to 75. We expect to sell approximately 200 territories in fiscal 2006. We also earned $0.3 million related to initial franchisee fees for
territory sales to existing franchisees of selected company-owned office operations in Texas and Massachusetts.



Total Expenses



Total expenses increased $0.9 million, or 7%. The more notable highlights with respect to expenses incurred were as follows:



Cost of operations: Cost of operations increased $0.5 million,
or 8%, partially due to the growth in our Gold Guarantee program during the 2005 tax season.



Marketing and advertising: Marketing and advertising expenses increased $0.1 million, or 4%, in anticipation of growth in the business in the upcoming tax season.



Depreciation and amortization:Depreciation and amortization increased
$0.2 million, or 11%, primarily due to depreciation from capital expenditures made since the first half of fiscal 2005.



Six Months Ended October 31, 2005 as Compared to Six Months Ended October 31, 2004



Total Revenues



Total revenues decreased $0.8 million, or 6%. The more notable highlights with respect to revenues earned were as follows:



Royalty and marketing and advertising:Royalty revenues increased
$0.3 million, or 34%, and marketing and advertising revenues increased $0.2 million, or 35%, both primarily due to an increase in tax returns prepared by our franchisees.



Financial product fees:Financial product fees increased $0.8 million, or 25%, primarily due to the growth in our
Gold Guarantee program during the 2005 tax season.



Other
financial product revenues: A change in the agreement with SBB&T resulted in lower other financial product revenues earned. Beginning in January 2005, we earned primarily a fixed fee during tax season at the time RALs were facilitated with
SBB&T. Other financial product revenues included $1.7 million this year and $4.6 million last year from RALs facilitated with SBB&T prior to the 2005 tax season. In addition, in the current period, we earned $1.1 million of additional
revenues under the current agreement with SBB&T.



Other
revenues: Other revenues decreased $0.4 million, or 9%, primarily due to a decrease in commissions earned from our vendors with respect to goods and services purchased by our franchisees. For the period we sold 133 territories as compared
to 140. We expect to sell approximately 200 territories in fiscal 2006. We also earned $0.3 million related to initial franchisee fees for territory sales to existing franchisees of selected company-owned office operations in Texas and
Massachusetts.



25



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##### Table of Contents

Total Expenses



Total expenses increased $2.0 million, or 9%. The more notable highlights with respect to expenses incurred were as follows:



Cost of operations: Cost of operations increased $1.2 million,
or 9%, partially due to the growth in our Gold Guarantee program during the 2005 tax season.



Marketing and advertising: Marketing and advertising expenses increased $0.6 million, or 14%, in anticipation of growth in the business in the upcoming tax season.



Company-Owned Office Operations



Results of Operations



|                                    |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------- |  | ----------------------------- | ------ | - | --------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                    |  | Three MonthsEnded October 31, |        |   | Six Months EndedOctober 31, |  
|                                    |  | 2005                          |        |   | 2004                        |   |        | 2005 |  |   | 2004    |  
|                                    |  | (in thousands)                |        |   | (in thousands)              |  
|Revenues                            |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Service revenues from operations    |  | $                             | 538    |   |                             | $ | 612    |      |  | $ | 842     |   |  | $ | 1,063   |  
|                                    |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Expenses                            |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Cost of operations                  |  |                               | 4,964  |   |                             |   | 4,922  |      |  |   | 9,143   |   |  |   | 9,539   |  
|Marketing and advertising           |  |                               | 398    |   |                             |   | 319    |      |  |   | 582     |   |  |   | 560     |  
|Selling, general and administrative |  |                               | 874    |   |                             |   | 839    |      |  |   | 1,486   |   |  |   | 1,759   |  
|Depreciation and amortization       |  |                               | 660    |   |                             |   | 1,099  |      |  |   | 1,336   |   |  |   | 2,046   |  
|                                    |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Total expenses                      |  |                               | 6,896  |   |                             |   | 7,179  |      |  |   | 12,547  |   |  |   | 13,904  |  
|                                    |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                |  |                               | (6,358 | ) |                             |   | (6,567 | )    |  |   | (11,705 | ) |  |   | (12,841 | )
|Other income/(expense):             |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Interest income                     |  |                               |       |   |                             |   | 7      |      |  |   |        |   |  |   | 13      |  
|Gain on sale of assets, net         |  |                               | 216    |   |                             |   |       |      |  |   | 216     |   |  |   |        |  
|                                    |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Loss before income taxes            |  | $                             | (6,142 | ) |                             | $ | (6,560 | )    |  | $ | (11,489 | ) |  | $ | (12,828 | )
|                                    |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  



Three Months Ended
October 31, 2005 as Compared to Three Months Ended October 31, 2004



Loss before income taxes



Loss before income
taxes decreased $0.4 million, or 6%. This reduction is largely due to a decrease in depreciation and amortization of $0.4 million due to certain equipment becoming fully depreciated since the first half of fiscal 2005. Additionally, we recognized a
$0.2 million net gain on sale of assets relating to the sale of operations in Texas and Massachusetts to existing franchisees.



Six Months Ended October 31, 2005 as Compared to Six Months Ended October 31, 2004



Loss before income taxes



Loss before income taxes decreased $1.3 million, or 10%, due to $0.6 million recovery of previously written-off receivables and the favorable impact
from the same factors noted above in the three month comparison.



26



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##### Table of Contents

Corporate and Other



Corporate and other expenses consist of unallocated corporate overhead supporting both segments, including legal, finance, human resources, real estate
facilities and strategic development activities, as well as stock-based compensation, interest income and interest expense.



|                                                      |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ----------------------------- | ------ | - | --------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three MonthsEnded October 31, |        |   | Six Months EndedOctober 31, |  
|                                                      |  | 2005                          |        |   | 2004                        |   |        | 2005 |  |   | 2004    |  
|                                                      |  | (in thousands)                |        |   | (in thousands)              |  
|Expenses (a)                                          |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|General and administrative                            |  | $                             | 6,451  |   |                             | $ | 4,434  |      |  | $ | 11,795  |   |  | $ | 8,472   |  
|Stock-based compensation related to the Companys IPO |  |                               |       |   |                             |   |       |      |  |   |        |   |  |   | 4,508   |  
|                                                      |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Total expenses                                        |  |                               | 6,451  |   |                             |   | 4,434  |      |  |   | 11,795  |   |  |   | 12,980  |  
|                                                      |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Other income/(expense):                               |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Interest income                                       |  |                               | 12     |   |                             |   |       |      |  |   | 470     |   |  |   |        |  
|Interest expense                                      |  |                               | (1,883 | ) |                             |   | (1,760 | )    |  |   | (3,917  | ) |  |   | (2,517  | )
|Write-off of deferred financing costs                 |  |                               |       |   |                             |   |       |      |  |   | (2,677  | ) |  |   |        |  
|                                                      |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Loss before income taxes                              |  | $                             | (8,322 | ) |                             | $ | (6,194 | )    |  | $ | (17,919 | ) |  | $ | (15,497 | )
|                                                      |  |                               |        |   |                             |   |        |      |  |   |         |   |  |   |         |  

---

|(a) | Included in selling, general and administrative in the Consolidated Statements of Operations.
|--- | ---------------------------------------------------------------------------------------------



Three Months Ended October 31, 2005 as Compared to Three Months Ended October 31, 2004



Corporate and other total expenses, excluding other income/(expense),
increased $2.0 million, or 45%. Stock-based compensation increased $0.3 million due to additional stock options granted in the beginning of fiscal 2006. We incurred costs of $0.5 million related to Sarbanes-Oxley. Rental expense increased
$0.2 million primarily due to duplicate rental costs for our corporate headquarters. We incurred costs of $0.2 million in connection with our technology data center move. Other miscellaneous costs increased by $0.8 million primarily due to increased
insurance, public and regulatory affairs, legal and compensation related costs.



Other income/(expense)



Interest
expense: Interest expense increased $0.1 million, or 6%, primarily due to the affect of rising market interest rates on our outstanding floating-rate debt. This increase was partially offset by a lower average debt balance period over period and
a decrease in the amortization of deferred financing costs primarily due to the write-off in the first quarter of fiscal 2006 of deferred financing costs associated with the repayment of five-year floating-rate senior unsecured notes
(Notes) and the termination of our $100.0 million five-year revolving credit facility (the $100 Million Credit Facility). In an effort to mitigate the economic impact of changing interest rates, in the second quarter of
fiscal 2006 we entered into interest rate swap agreements to fix the interest rate on $50.0 million of our floating rate borrowings under the $250 Million Credit Facility.



Six Months Ended October 31, 2005 as Compared to Six Months Ended October 31, 2004



Corporate and other total expenses, excluding other income/(expense),
decreased $1.2 million, or 9%. We incurred higher expenses of $0.4 million related to on-going stock-based compensation as compared to the same period last year primarily because of only just over four months of such costs subsequent to
our IPO in June 2004. On-going stock-based compensation also increased due to additional stock options granted in the beginning of fiscal 2006. We incurred costs of $0.7 million related to Sarbanes-Oxley. Rental expense increased $0.6 million
primarily due to duplicate rental costs for our corporate headquarters. We incurred costs of $0.2 million in connection with our technology data center move. Other miscellaneous costs increased $1.4 million primarily due to increased insurance,
public and regulatory affairs, legal and compensation related costs. In the six months ended October 31, 2004, we incurred a stock-based compensation charge of $4.5 million related to our IPO.



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Other income/(expense)



Interest income: We earned interest income of $0.5 million related to investment earnings on cash equivalents.



Interest expense: Interest expense increased $1.4 million, or 56%,
primarily due to the effect of rising market interest rates on our outstanding floating-rate debt in addition to a higher average debt balance period over period.



Write-off of deferred financing costs:We incurred a non-cash charge of $2.7 million related to the write-off of
deferred financing costs associated with the repayment of the Notes and termination of our $100 Million Credit Facility.



Liquidity and Capital Resources



Historical Sources and Uses of Cash from Operations



Seasonality of our Cash Flows



Our revenues have been and are expected to continue to be highly seasonal. As a result, we generate most of our operating funds during the tax season that
consists of the period from January through April. Certain of our expenses are also highly seasonal in nature including our marketing and advertising expenses as well as the costs to operate our company-owned offices, both of which increase shortly
before and continue through the tax filing season. During the off-peak season, we require funds to cover our operating expenses as well as to reinvest in our business for future growth. We expect to fund our operations through our operating cash
flow and through our credit facility, as required.



Repayment of Long-Term Debt and the Establishment of a $250 Million Credit Facility



On June 27, 2005, we repaid in full $175.0 million of Notes that were outstanding as of April 30, 2005. To repay the Notes, we used cash
provided by operations from the prior tax season of $76.0 million and borrowed $99.0 million under our $100 Million Credit Facility that was established in June 2004. We incurred a non-cash charge of $2.7 million related to the
write-off of deferred financing costs associated with the repayment of the Notes and termination of our $100 Million Credit Facility.



On June 29, 2005, we established a $250.0 million five-year unsecured credit facility (the $250 Million Credit Facility) that made
many of the covenants less restrictive than the covenants in our prior debt agreements and reduced the cost of debt. We repaid in full $99.0 million that was outstanding under our $100 Million Credit Facility with borrowings under our $250
Million Credit Facility and then terminated the $100 Million Credit Facility. Borrowings under the $250 Million Credit Facility are to be used to finance working capital needs, potential acquisitions and other general corporate purposes including
repurchases of our common stock. The $250 Million Credit Facility provides for loans in the form of Eurodollar or Base Rate borrowings. Eurodollar borrowings bear interest at LIBOR, as defined in the $250 Million Credit Facility, plus a credit
spread as defined, currently 0.95% per annum. Base Rate borrowings bear interest primarily at the Prime Rate, as defined in the agreement. The $250 Million Credit Facility carries an annual fee currently at 0.175% of the unused portion of the
$250 Million Credit Facility, which is payable quarterly. We may also use the $250 Million Credit Facility to issue letters of credit for general corporate purposes. There was a $1.0 million letter of credit outstanding under the $250 Million Credit
Facility as of October 31, 2005.



To the extent we
complete any acquisitions, we may require additional debt or equity financing to meet our capital needs. Our liquidity position may be negatively affected by unfavorable conditions in the market in which we operate. In addition, our inability to
generate sufficient profits during tax season may unfavorably impact our funding requirements.



For a more detailed discussion of our $250 Million Credit Facility, including a description of financial covenants which we are required to maintain, please refer to Part 1Item 1-Note 9-Long-Term Debt
and Credit Facilities to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.



Sources and Uses of Cash



Operating activities: In the six months ended October 31, 2005, net cash used in operating activities was $41.4 million. Described
below are some of the more significant items that contributed to, or partially offset, our net cash used in operating activities in the six months ended October 31, 2005:



| |  |  | Collection of accounts receivable We collected from financial institutions amounts recorded as receivables as of April 30, 2005. In addition, we collected cash of
$0.6 million from customers in our Company-Owned Offices segment for receivables that were previously written-off.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Litigation settlement payments We made payments of $2.2 million related to the litigation settlement reserve established in fiscal 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest payments  We made a final interest payment of $2.1 million related to our $175.0 million Notes, which were repaid in full in June 2005. In
addition, we made interest payments of $1.5 million related to borrowings under the $250 Million Credit Facility.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Marketing and advertising payments We made marketing and advertising payments of $8.3 million relating to increasing awareness of our brand to drive customer growth.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Bonus payments and deferred compensation  We made payments of $9.1 million, including related employer payroll tax obligations, for amounts earned during the period
from January 2004 to April 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net cash
provided by operating activities was negligible in the six months ended October 31, 2004. Described below are some of the more significant items that contributed to, or partially offset, our net cash provided by operating activities in the six
months ended October 31, 2004:



| |  |  | Collection of accounts receivable -We collected from financial institutions amounts recorded as receivables as of April 30, 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Litigation settlement paymentsWe made payments of $2.4 million related to the litigation settlement reserve established in fiscal 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Marketing and advertising paymentsWe made marketing and advertising payments of $8.5 million relating to increasing awareness of our brand to drive customer growth.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest payments  In October 2004, we made a quarterly interest payment of $1.4 million on the Notes.
| | - |  | -------------------------------------------------------------------------------------------------------



Investing activities: Net cash used in investing activities was
$5.8 million in the six months ended October 31, 2005. Capital expenditures included the build-out costs associated with our new corporate headquarters. Our investing activities included the funding of development advances by which we
provide funds to independent tax practices for the conversion of such operations to the Jackson Hewitt brand as franchisees and/or to provide funds to existing franchisees to assist in their business expansion through the acquisition of independent
tax practices. We expect to continue to make such funding in the future. Cash paid for acquisitions included primarily the settlement of accrued purchase price obligations.



Net cash used in investing activities was $4.1 million in the six months ended October 31, 2004. Our investing
activities included capital expenditures primarily related to upgrades of our information technology systems, funding of development advances and payments related to acquisitions of third party tax return preparation businesses.



Financing activities:Net cash used in financing activities was
$65.4 million in the six months ended October 31, 2005. We repaid the entire $175.0 million of Notes that were outstanding as of April 30, 2005 with cash provided by operations from the prior tax season of $76.0 million and
borrowings of $99.0 million under our $100 Million Credit Facility. We then repaid in full the $99.0 million that was outstanding under the $100 Million Credit Facility with borrowings under the newly established $250 Million Credit
Facility. We also borrowed an additional $74.0 million under the $250 Million Credit Facility during the period. We paid $58.5 million, including commissions, to repurchase 2,422,900 shares of our common stock. We made dividend payments to
stockholders of $0.08 per share of common stock to common stockholders of record on September 28, 2005 and June 28, 2005. We also paid fees to establish the $250 Million Credit Facility. Partially offsetting the above were the proceeds we
received upon the exercise of stock options by employees.



Net
cash provided by financing activities was $6.4 million in the six months ended October 31, 2004 which included the cash settlement of our remaining intercompany balance with Cendant. In connection with our IPO, we issued
$175.0 million of Notes and used the entire proceeds to fund the cash portion of the Special Dividend to Cendant. We paid fees to issue the Notes as well as to establish the $100 Million Credit Facility. We made dividend payments to
stockholders of $0.07 per share of common stock to common stockholders of record on September 27, 2004.



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Future Cash Requirements and Sources of Cash



Future Cash Requirements



Our primary future cash requirements will be to fund operating activities, repay credit facility borrowings, fund
development advances, fund capital expenditures, fund acquisitions and pay quarterly dividends. For the remainder of fiscal 2006 our primary cash requirements are as follows:



Credit facility repaymentsWe anticipate generating operating cash flow beginning in January 2006 to partially
repay outstanding borrowings under the $250 Million Credit Facility.



Debt serviceWe expect to make periodic interest payments on our debt outstanding.



Quarterly dividends On December 7, 2005, our Board of Directors declared a quarterly cash dividend of $0.08 per share of common stock,
payable on January 13, 2006, to common stockholders of record on December 28, 2005. In addition, we currently intend to make quarterly cash dividend payments over the remainder of fiscal 2006.



Marketing and advertisingCash outlays for marketing and
advertising expenses are seasonal in nature and typically increase in our third and fourth fiscal quarters consistent with the tax season. Marketing and advertising expenses include national, regional and local campaigns designed to increase brand
awareness and attract both early-season and late-season tax filers. Cash collections from marketing and advertising royalties from our franchise operations segment largely fund our budget for these types of expenses. We intend to increase spending
in fiscal 2006 as we continue to increase awareness of our brand to drive customer growth.



Costs to operate company-owned officesOur company-owned offices complement our franchise system and are focused primarily on organic growth through the opening of new company-owned offices within existing
territories as well as increasing office productivity. Costs to operate our company-owned offices begin to increase during the third fiscal quarter and peak during the fourth fiscal quarter primarily due to the labor costs related to the seasonal
employees who provide tax preparation services to our customers.



Acquisitions In connection with our growth strategy, we may continue to add established third party tax return preparation businesses to our company-owned office network through acquisitions.



Storefront financing We expect to provide financing to
franchisees for between 100-150 new storefront locations this year in loan amounts of up to $25,000 each. Such loans will be due from franchisees over a period of less than 30 months.



Future Sources of Cash



We expect our primary sources of cash to be positive net cash provided by operating activities beginning in January and our
$250 Million Credit Facility, which will both be used to fund future cash requirements for the remainder of fiscal 2006.



Interest Rate Swap Agreements



In August 2005, we entered into interest rate swap agreements with third parties to convert a notional amount of $50.0 million of floating-rate borrowings
under the $250 Million Credit Facility into fixed-rate debt, with the intention of mitigating the economic impact of changing interest rates. Under these interest rate swap agreements, which became effective in October 2005, we receive a floating
interest rate based on the three-month LIBOR (in arrears) and pay a fixed interest rate averaging 4.44%. These agreements mature in June 2010 and were determined to be cash flow hedges in accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities as amended by SFAS No. 137, No. 138 and No. 149 (SFAS No. 133). At October 31, 2005, the fair
value of the interest rate swap agreements was an asset of $0.8 million which is recorded in other non-current assets on the Consolidated Balance Sheet. The change in fair value since inception, which is $0.5 million, net of tax, is recorded as a
component of accumulated other comprehensive income. Since inception, no amounts have been recognized in the Consolidated Results of Operations due to ineffectiveness.



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Critical Accounting Policies



In presenting our Consolidated Financial Statements in conformity with accounting principles generally accepted in the
United States, we are required to make estimates and assumptions that affect the amounts reported therein. Events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and
assumptions. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions
we used when preparing our consolidated financial statements were the most appropriate at that time. The following critical accounting policies may affect reported results resulting in variations in our financial results both on an interim and
fiscal year-end basis.



Goodwill



We review the carrying value of our goodwill, as required by SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), by comparing the carrying value of our reporting units to their fair value. When determining fair value, we utilized various assumptions, including
projections of future cash flows. A change in these underlying assumptions will cause a change in the results of the tests and, as such, could cause fair value to be less than the respective carrying amount. In such event, we would then be required
to record a charge, which would impact results. We review the carrying value of goodwill for impairment annually, or more frequently if circumstances indicate impairment may have occurred. An adverse change to our business would impact our
consolidated results and may result in an impairment of our goodwill. The aggregate carrying value of our goodwill was $391.4 million as of October 31, 2005. See Item 1Note 4Goodwill and Other Intangible Assets,
Net to our Consolidated Financial Statements for more information on goodwill.



Other Intangible Assets



In accordance with the provisions of SFAS No. 142, indefinite-lived intangible assets are carried at the lower of cost or fair value. If the fair value of the indefinite-lived intangible asset is less than the carrying amount, an
impairment loss would be recognized in an amount equal to the difference. We review the carrying value of indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. An
adverse change to our business would impact our consolidated results and may result in an impairment of our indefinite-lived intangible assets. The aggregate carrying value of our indefinite-lived intangible assets was $81.0 million as of
October 31, 2005. See Item 1Note 4Goodwill and Other Intangible Assets, Net to our Consolidated Financial Statements for more information on indefinite-lived intangible assets.



Recent Accounting Pronouncement



In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R), which eliminates the alternative to measure stock-based compensation awards using the intrinsic value approach permitted by Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). We are required to adopt the
provisions of SFAS No. 123R by May 1, 2006. On January 1, 2003, we adopted the fair value method of accounting for stock-based compensation provisions of SFAS No. 123 and the transitional provisions of SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure. As a result, we have been recording stock-based compensation expense since January 1, 2003 for employee stock awards that were granted or modified subsequent to
December 31, 2002. In addition, our current practice with respect to forfeitures is to recognize the related benefit upon forfeiture of the award. Upon adoption of SFAS No. 123R, we will be required to recognize compensation expense net of
estimated forfeitures upon the issuance of the award. We are currently evaluating the remaining provisions of SFAS No. 123R to determine the effect, if any, it may have on our financial position, results of operations or cash flows.



Item 3.Quantitative and Qualitative Disclosures About Market Risk



A 1% change in the interest rate on our floating-rate borrowings outstanding as of October 31, 2005, excluding our $50.0 million of hedged borrowings
whereby we fixed the interest rate, would result in an increase or decrease in interest expense of $1.2 million annually.



Item 4.Controls and Procedures



(a) Disclosure Controls and Procedures.Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the



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end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.



(b) Internal Controls Over Financial Reporting. There have not been any changes in our internal controls over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION



Item 1. Legal Proceedings.



See Part
1-Item 1-Note 15-Commitments and Contingencies to our Consolidated Financial Statements, which is incorporated by reference herein.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity Securities.



Unregistered Sales of Equity Securities and Use of Proceeds: None.



Issuer Purchases of Equity Securities:



|                          |  |                                    |  |                                                      |       |                                                                            |           |                                                                            |   |            
|------------------------- |  | ---------------------------------- |  | ---------------------------------------------------- | ----- | -------------------------------------------------------------------------- | --------- | -------------------------------------------------------------------------- | - | -----------
|Period of settlement date |  | Total Number of Shares Repurchased |  | Average Price Paid per Share (including Commissions) |       | Total Number of Shares Purchased as Part of Publicly Announced Program (a) |           | Approximate Dollar Value of Shares that May Yet Be Purchased Under Program
|August 1-31, 2005         |  | 248,400                            |  | $                                                    | 25.22 |                                                                            | 248,400   |                                                                            |   | N/A        
|September 1-30, 2005      |  | 862,300                            |  |                                                      | 24.70 |                                                                            | 862,300   |                                                                            |   | N/A        
|October 1-31, 2005        |  | 451,600                            |  |                                                      | 23.63 |                                                                            | 451,600   |                                                                            |   | N/A        
|                          |  |                                    |  |                                                      |       |                                                                            |           |                                                                            |   |            
|Total                     |  | 1,562,300                          |  | $                                                    | 24.48 |                                                                            | 1,562,300 |                                                                            | $ | 2.8 million
|                          |  |                                    |  |                                                      |       |                                                                            |           |                                                                            |   |            

---

|(a) | On July 5, 2005, we announced a $50.0 million share repurchase program of which as of July 31, 2005 we had $41.1 million of authorization remaining.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------



Item 3. Defaults Upon Senior Securities.



None.



Item 4. Submission of Matters to a Vote of Security Holders.



Our 2005 Annual Meeting of Stockholders was held on September 20, 2005. At that Annual Meeting, our stockholders:



| | 1. | elected Ulysses L. Bridgeman, Jr. and Rodman L. Drake to serve as Class I directors for a three-year term until the 2008 Annual Meeting of Stockholders and until their successors
are duly elected and qualified;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | approved the 2004 Equity and Incentive Plan; and
| | -- | ------------------------------------------------



| | 3. | ratified the selection of Deloitte & Touche LLP as our auditors for the fiscal year ending April 30, 2006.
| | -- | ----------------------------------------------------------------------------------------------------------



On August 3, 2005, the record date of the Annual Meeting, we had 36,869,312 shares of
common stock outstanding. At the Annual Meeting, holders of 33,813,414 shares of common stock were present in person or represented by proxy. The following sets forth information regarding the results of the voting at the Annual Meeting.



Proposal I  Election of Directors



|                          |  |                |  |          
|------------------------- |  | -------------- |  | ---------
|                          |  | Votes in Favor |  | Withheld 
|Ulysses L. Bridgeman, Jr. |  | 32,473,471     |  | 1,339,943
|Rodman L. Drake           |  | 32,472,830     |  | 1,340,584



The following
directors also have terms in office that continue after the Annual Meeting: Mark L. Heimbouch, Michael D. Lister, Margaret Milner Richardson, Louis P. Salvatore and James C. Spira.



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Proposal II  Approval of the 2004 Equity and Incentive Plan



|                |  |           
|--------------- |  | ----------
|Votes in favor  |  | 26,831,022
|Votes against   |  | 1,013,603 
|Abstentions     |  | 115,820   
|Broker no votes |  | 5,852,969 



Proposal III  Ratification of Selection of Auditors



|               |  |           
|-------------- |  | ----------
|Votes in favor |  | 33,754,093
|Votes against  |  | 17,604    
|Abstentions    |  | 41,717    



Item 5. Other Information.



We make available free of charge, through the investor relations section of our website, www.jacksonhewitt.com, our reports on file with the SEC, including our Form 10-K, Form 10-Q and Form 8-K reports and all amendments to those
reports as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.



Item 6. Exhibits.



Exhibits:We have filed the following exhibits in connection with this report.



|      |  |                                                                                                                                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------
|10.30 |  | Gateway Building D Office Lease, made as of November 17, 2005, between Sarasota Gateway Building D, LLLP and Jackson Hewitt Inc.
|      | 
|31.1  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                             
|      | 
|31.2  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                             
|      | 
|32.1  |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                             
|      | 
|32.2  |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                             



SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 13, 2005.



JACKSON HEWITT TAX SERVICE INC.By:/s/ MICHAEL D. LISTERMichael D. ListerPresident and Chief Executive Officer(Principal Executive Officer)/s/ MARK L. HEIMBOUCHMark L. HeimbouchExecutive Vice President and Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)




34