##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(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, 2008

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





Jackson Hewitt Tax Service Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)





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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  | x |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

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

The number of shares outstanding of the registrants common stock was 28,793,958 (net of 10,498,460 shares held in treasury) as of November 30, 2008.











---

##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.

TABLE OF CONTENTS



|                               |  |                                                                                                       |  |     
|------------------------------ |  | ----------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                       |  | Page
|                               | 
|PART 1 - FINANCIAL INFORMATION |  | 1                                                                                                    
|                               |  |                                                                                                      
|Item 1.                        |  | Financial Statements (Unaudited):                                                                     |  | 1   
|                               |  |                                                                                                      
|                               |  | Condensed Consolidated Balance Sheets                                                                 |  | 1   
|                               |  |                                                                                                      
|                               |  | Condensed Consolidated Statements of Operations                                                       |  | 2   
|                               |  |                                                                                                      
|                               |  | Condensed Consolidated Statements of Cash Flows                                                       |  | 3   
|                               |  |                                                                                                      
|                               |  | Notes to Condensed Consolidated Financial Statements                                                  |  | 4   
|                               |  |                                                                                                      
|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    |  | 32                                                                                                   
|                               |  |                                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                                     |  | 32  
|                               |  |                                                                                                      
|Item 1A.                       |  | Risk Factors                                                                                          |  | 32  
|                               |  |                                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity Securities |  | 32  
|                               |  |                                                                                                      
|Item 3.                        |  | Defaults Upon Senior Securities                                                                       |  | 32  
|                               |  |                                                                                                      
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                   |  | 32  
|                               |  |                                                                                                      
|Item 5.                        |  | Other Information                                                                                     |  | 34  
|                               |  |                                                                                                      
|Item 6.                        |  | Exhibits                                                                                              |  | 34  
|                               |  |                                                                                                      
|                               |  | Signatures                                                                                            |  | 35  



---

##### Table of Contents

PART 1  FINANCIAL INFORMATION



|Item 1. | Financial Statements (Unaudited)
|------- | --------------------------------

JACKSON HEWITT TAX SERVICE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)



|                                                                                                                      |  |                 |          |   |               |   |          |  
|--------------------------------------------------------------------------------------------------------------------- |  | --------------- | -------- | - | ------------- | - | -------- | -
|                                                                                                                      |  | As of           |         
|                                                                                                                      |  | October 31,2008 |          |   | April 30,2008 |  
|Assets                                                                                                                |  |                 |          |   |               |   |          |  
|Current assets:                                                                                                       |  |                 |          |   |               |   |          |  
|Cash and cash equivalents                                                                                             |  | $               | 355      |   |               | $ | 4,594    |  
|Accounts receivable, net of allowance for doubtful accounts of $1,093 and $694, respectively                          |  |                 | 6,366    |   |               |   | 17,850   |  
|Notes receivable, net                                                                                                 |  |                 | 7,859    |   |               |   | 6,033    |  
|Prepaid expenses and other                                                                                            |  |                 | 9,181    |   |               |   | 13,241   |  
|Deferred income taxes                                                                                                 |  |                 | 5,527    |   |               |   | 200      |  
|                                                                                                                      |  |                 |          |   |               |   |          |  
|Total current assets                                                                                                  |  |                 | 29,288   |   |               |   | 41,918   |  
|                                                                                                                      |  |                
|Property and equipment, net                                                                                           |  |                 | 28,612   |   |               |   | 32,099   |  
|Goodwill                                                                                                              |  |                 | 416,297  |   |               |   | 414,887  |  
|Other intangible assets, net                                                                                          |  |                 | 86,941   |   |               |   | 86,458   |  
|Notes receivable, net                                                                                                 |  |                 | 6,029    |   |               |   | 6,035    |  
|Other non-current assets, net                                                                                         |  |                 | 16,883   |   |               |   | 18,668   |  
|                                                                                                                      |  |                 |          |   |               |   |          |  
|Total assets                                                                                                          |  | $               | 584,050  |   |               | $ | 600,065  |  
|                                                                                                                      |  |                 |          |   |               |   |          |  
|Liabilities and Stockholders Equity                                                                                  |  |                 |          |   |               |   |          |  
|Current liabilities:                                                                                                  |  |                 |          |   |               |   |          |  
|Accounts payable and accrued liabilities                                                                              |  | $               | 21,003   |   |               | $ | 34,851   |  
|Income taxes payable                                                                                                  |  |                 | 10,843   |   |               |   | 48,531   |  
|Deferred revenues                                                                                                     |  |                 | 6,564    |   |               |   | 8,264    |  
|                                                                                                                      |  |                 |          |   |               |   |          |  
|Total current liabilities                                                                                             |  |                 | 38,410   |   |               |   | 91,646   |  
|                                                                                                                      |  |                
|Long-term debt                                                                                                        |  |                 | 321,000  |   |               |   | 231,000  |  
|Deferred income taxes                                                                                                 |  |                 | 25,522   |   |               |   | 27,298   |  
|Other non-current liabilities                                                                                         |  |                 | 10,195   |   |               |   | 13,604   |  
|                                                                                                                      |  |                 |          |   |               |   |          |  
|Total liabilities                                                                                                     |  |                 | 395,127  |   |               |   | 363,548  |  
|                                                                                                                      |  |                 |          |   |               |   |          |  
|Commitments and Contingencies (Note 11)                                                                               |  |                 |          |   |               |   |          |  
|Stockholders equity:                                                                                                 |  |                 |          |   |               |   |          |  
|Common stock, par value $0.01; Authorized: 200,000,000 shares; Issued: 39,290,418 and 38,867,231 shares, respectively |  |                 | 393      |   |               |   | 389      |  
|Additional paid-in capital                                                                                            |  |                 | 388,488  |   |               |   | 383,084  |  
|Retained earnings                                                                                                     |  |                 | 104,916  |   |               |   | 158,011  |  
|Accumulated other comprehensive loss                                                                                  |  |                 | (2,199   | ) |               |   | (2,306   | )
|Less: Treasury stock, at cost: 10,443,526 and 10,440,491 shares, respectively                                         |  |                 | (302,675 | ) |               |   | (302,661 | )
|                                                                                                                      |  |                 |          |   |               |   |          |  
|Total stockholders equity                                                                                            |  |                 | 188,923  |   |               |   | 236,517  |  
|                                                                                                                      |  |                 |          |   |               |   |          |  
|Total liabilities and stockholders equity                                                                            |  | $               | 584,050  |   |               | $ | 600,065  |  
|                                                                                                                      |  |                 |          |   |               |   |          |  

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



1



---

##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)



|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ----------------------------- | ------- | - | --------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months EndedOctober 31, |         |   | Six Months EndedOctober 31, |  
|                                                      |  | 2008                          |         |   | 2007                        |   |         | 2008 |  |   | 2007    |  
|Revenues                                              |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Franchise operations revenues:                        |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Royalty                                               |  | $                             | 646     |   |                             | $ | 674     |      |  | $ | 1,273   |   |  | $ | 1,332   |  
|Marketing and advertising                             |  |                               | 287     |   |                             |   | 300     |      |  |   | 564     |   |  |   | 575     |  
|Financial product fees                                |  |                               | 2,452   |   |                             |   | 2,580   |      |  |   | 5,074   |   |  |   | 5,326   |  
|Other                                                 |  |                               | 1,248   |   |                             |   | 1,651   |      |  |   | 1,597   |   |  |   | 3,384   |  
|Service revenues from company-owned office operations |  |                               | 436     |   |                             |   | 396     |      |  |   | 848     |   |  |   | 904     |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total revenues                                        |  |                               | 5,069   |   |                             |   | 5,601   |      |  |   | 9,356   |   |  |   | 11,521  |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Expenses                                              |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Cost of franchise operations                          |  |                               | 7,341   |   |                             |   | 8,676   |      |  |   | 15,953  |   |  |   | 18,062  |  
|Marketing and advertising                             |  |                               | 5,440   |   |                             |   | 4,570   |      |  |   | 9,609   |   |  |   | 8,710   |  
|Cost of company-owned office operations               |  |                               | 8,633   |   |                             |   | 6,898   |      |  |   | 17,940  |   |  |   | 12,515  |  
|Selling, general and administrative                   |  |                               | 13,452  |   |                             |   | 17,961  |      |  |   | 23,900  |   |  |   | 31,280  |  
|Depreciation and amortization                         |  |                               | 3,186   |   |                             |   | 3,310   |      |  |   | 6,393   |   |  |   | 6,594   |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total expenses                                        |  |                               | 38,052  |   |                             |   | 41,415  |      |  |   | 73,795  |   |  |   | 77,161  |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                                  |  |                               | (32,983 | ) |                             |   | (35,814 | )    |  |   | (64,439 | ) |  |   | (65,640 | )
|Other income/(expense):                               |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Interest and other income                             |  |                               | 380     |   |                             |   | 508     |      |  |   | 780     |   |  |   | 948     |  
|Interest expense                                      |  |                               | (4,219  | ) |                             |   | (3,631  | )    |  |   | (7,225  | ) |  |   | (6,491  | )
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Loss before income taxes                              |  |                               | (36,822 | ) |                             |   | (38,937 | )    |  |   | (70,884 | ) |  |   | (71,183 | )
|Benefit from income taxes                             |  |                               | 14,616  |   |                             |   | 15,263  |      |  |   | 28,134  |   |  |   | 27,904  |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                              |  | $                             | (22,206 | ) |                             | $ | (23,674 | )    |  | $ | (42,750 | ) |  | $ | (43,279 | )
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Loss per share:                                       |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted                                     |  | $                             | (0.78   | ) |                             | $ | (0.78   | )    |  | $ | (1.50   | ) |  | $ | (1.43   | )
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding:                  |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted                                     |  |                               | 28,476  |   |                             |   | 30,165  |      |  |   | 28,472  |   |  |   | 30,217  |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Cash dividends declared per share (Note 1):           |  | $                             | 0.18    |   |                             | $ |        |      |  | $ | 0.36    |   |  | $ | 0.36    |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  

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



2



---

##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                            |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months EndedOctober 31, |        
|                                                                            |  | 2008                        |         |   | 2007 |  
|Operating activities:                                                       |  |                             |         |   |      |   |         |  
|Net loss                                                                    |  |                             | (42,750 | ) |      | $ | (43,279 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                             | 6,393   |   |      |   | 6,594   |  
|Amortization of development advances                                        |  |                             | 911     |   |      |   | 717     |  
|Share-based compensation                                                    |  |                             | 2,085   |   |      |   | 5,374   |  
|Deferred income taxes                                                       |  |                             | (2,426  | ) |      |   | (1,186  | )
|Excess tax benefit on stock-based awards exercised                          |  |                             |        |   |      |   | (2,532  | )
|Other                                                                       |  |                             | 215     |   |      |   | 98      |  
|Changes in assets and liabilities, excluding the impact of acquisitions:    |  |                             |         |   |      |   |         |  
|Accounts receivable                                                         |  |                             | 11,249  |   |      |   | 11,543  |  
|Notes receivable                                                            |  |                             | (1,182  | ) |      |   | (1,982  | )
|Prepaid expenses and other                                                  |  |                             | 6,695   |   |      |   | 4,178   |  
|Accounts payable, accrued and other liabilities                             |  |                             | (4,313  | ) |      |   | (11,628 | )
|Income taxes payable                                                        |  |                             | (39,148 | ) |      |   | (47,608 | )
|Deferred revenues                                                           |  |                             | (3,961  | ) |      |   | (4,905  | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                             | (66,232 | ) |      |   | (84,616 | )
|                                                                            |  |                             |         |   |      |   |         |  
|Investing activities:                                                       |  |                             |         |   |      |   |         |  
|Capital expenditures                                                        |  |                             | (2,098  | ) |      |   | (2,780  | )
|Funding provided to franchisees                                             |  |                             | (2,089  | ) |      |   | (1,663  | )
|Proceeds from repayment of franchisee notes                                 |  |                             | 248     |   |      |   | 419     |  
|Cash paid for acquisitions                                                  |  |                             | (11,707 | ) |      |   | (11,547 | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                       |  |                             | (15,646 | ) |      |   | (15,571 | )
|                                                                            |  |                             |         |   |      |   |         |  
|Financing activities:                                                       |  |                             |         |   |      |   |         |  
|Common stock repurchases                                                    |  |                             |        |   |      |   | (54,997 | )
|Borrowings under revolving credit facility                                  |  |                             | 113,000 |   |      |   | 254,000 |  
|Repayments of borrowings under revolving credit facility                    |  |                             | (23,000 | ) |      |   | (96,000 | )
|Dividends paid to stockholders                                              |  |                             | (10,228 | ) |      |   | (10,850 | )
|Proceeds from issuance of common stock                                      |  |                             | 10      |   |      |   | 6,413   |  
|Debt issuance costs                                                         |  |                             | (881    | ) |      |   |        |  
|Excess tax benefit on stock-based awards exercised                          |  |                             |        |   |      |   | 2,532   |  
|Change in cash overdrafts                                                   |  |                             | (1,262  | ) |      |   | (806    | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                             | 77,639  |   |      |   | 100,292 |  
|                                                                            |  |                             |         |   |      |   |         |  
|Net (decrease) / increase in cash and cash equivalents                      |  |                             | (4,239  | ) |      |   | 105     |  
|Cash and cash equivalents, beginning of period                              |  |                             | (4,594  | ) |      |   | 1,693   |  
|                                                                            |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                           | 355     |   |      | $ | 1,798   |  
|                                                                            |  |                             |         |   |      |   |         |  

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



3



---

##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BACKGROUND AND BASIS OF PRESENTATION

Description of Business

Jackson Hewitt Tax Service Inc. provides computerized preparation of federal, state and local individual income tax returns in the United States through a nationwide network of franchised and company-owned
offices operating under the brand name Jackson Hewitt Tax Service®. The Company provides its customers with convenient, fast and quality tax return preparation services and electronic
filing. In connection with their tax return preparation experience, the Companys customers may select various financial products to suit their needs, including refund anticipation loans (RALs). Jackson Hewitt and the
Company are used interchangeably in these notes to the Condensed Consolidated Financial Statements to refer to Jackson Hewitt Tax Service Inc. and its subsidiaries, appropriate to the context.

Jackson Hewitt Tax Service Inc. was incorporated in Delaware in February 2004 as the parent corporation in connection with the Companys June 2004
initial public offering (IPO) pursuant to which Cendant Corporation, now known as Avis Budget Group, Inc. (Cendant), divested 100% of its ownership interest in Jackson Hewitt Tax Service Inc. Jackson Hewitt Inc.
(JHI) is a wholly-owned subsidiary of Jackson Hewitt Tax Service Inc. Jackson Hewitt Technology Services LLC is a wholly-owned subsidiary of JHI that supports the technology needs of the Company. 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 Jackson Hewitt and its subsidiaries.

Basis of Presentation

The accompanying
unaudited interim Condensed 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 Condensed 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 June 30, 2008.

In presenting the Condensed
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 Condensed 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 amortization of Gold Guarantee product in the prior periods Condensed Consolidated Statement of Cash Flows has been reclassified within
Operating Activities to conform to the current period presentation with no effect on previously reported net loss or stockholders equity.

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, |  
|                                     |  | (in thousands)                 |         |   | (in thousands)               |  
|                                     |  | 2008                           |         |   | 2007                         |   |         | 2008 |  |   | 2007    |  
|Net loss                             |  | $                              | (22,206 | ) |                              | $ | (23,674 | )    |  | $ | (42,750 | ) |  | $ | (43,279 | )
|Changes in fair value of derivatives |  |                                | (595    | ) |                              |   | (520    | )    |  |   | 107     |   |  |   | (311    | )
|                                     |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total comprehensive loss             |  | $                              | (22,801 | ) |                              | $ | (24,194 | )    |  | $ | (42,643 | ) |  | $ | (43,590 | )
|                                     |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  



4



---

##### Table of Contents

Computation of loss per share

Basic loss per share is calculated as net loss divided by the weighted average number of common shares and vested shares of restricted stock outstanding during the period. Diluted loss per share is calculated by
dividing net loss by an adjusted weighted average number of common shares outstanding during the period assuming conversion of potentially dilutive securities arising from stock options outstanding and shares of unvested restricted stock.



|                              |  |                               |  |                             |  |         |  |          
|----------------------------- |  | ----------------------------- |  | --------------------------- |  | ------- |  | ---------
|                              |  | Three Months EndedOctober 31, |  | Six Months EndedOctober 31,
|                              |  | 2008                          |  | 2007                        |  | 2008    |  | 2007     
|Stock options                 |  | 175,755                       |  | 1,736,275                   |  | 70,518  |  | 1,736,275
|Shares of restricted stock    |  | 194,135                       |  |                            |  | 163,884 |  |         
|                              |  |                               |  |                             |  |         |  |          
|Total antidilutive securities |  | 369,890                       |  | 1,736,275                   |  | 234,402 |  | 1,736,275
|                              |  |                               |  |                             |  |         |  |          

For the three and six months ended October 31, 2008, the above antidilutive securities
exclude all performance vesting awards since the performance conditions had not been met for those periods. See Note 5  Share-Based Payments for additional information on the Companys performance vesting awards.

Dividends declared per share

On June 3, 2008, the Companys Board of Directors declared the fiscal 2009 first quarter cash dividend of $0.18 per share of common stock that was paid on July 15, 2008. On August 1, 2008, the Companys Board of
Directors declared the fiscal 2009 second quarter cash dividend of $0.18 per share of common stock that was paid on October 15, 2008. On December 3, 2008, the Companys Board of Directors declared the fiscal 2009 third quarter cash
dividend of $0.18 per share of common stock, payable on January 15, 2009, to common stockholders of record on December 29, 2008.

On May 30, 2007, the Companys Board of Directors declared the fiscal 2008 first quarter cash dividend of $0.18 per share of common stock that was paid on July 13, 2007. On July 30, 2007, the Companys Board of
Directors declared the fiscal 2008 second quarter cash dividend of $0.18 per share of common stock that was paid on October 15, 2007.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2). FSP FAS 157-2 defers the implementation of SFAS No. 157
for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 beginning May 1,
2008, for financial instruments. Although the adoption of SFAS 157 did not impact the Companys financial condition, results of operations or cash flow, the Company is now required to provide additional disclosures as part of its financial
statements. The additional disclosure can be found in Note 3, Fair Value Measurements to the Condensed Consolidated Financial Statements. The aspects that have been deferred by FSP FAS 157-2 will be effective for the Company beginning
May 1, 2009 and the Company is currently assessing the potential impact of its adoption on its Consolidated Financial Statements.

In
October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP FAS 157-3), which clarifies the application of SFAS 157 and provides an
example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 applies to financial assets within the scope of accounting pronouncements that require
or permit fair value measurements in accordance with SFAS 157. FSP FAS 157-3 was effective for the Company upon issuance on October 10, 2008 and the adoption did not have a material impact on the Companys Consolidated Financial
Statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 was effective for the
Company beginning May 1, 2008. The Company has not elected the fair value measurement option for any financial assets or liabilities that were not previously recorded at fair value.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R establishes
principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interests in the acquiree, and the goodwill



5



---

##### Table of Contents

acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business
combination. SFAS 141R is effective for the Company as of May 1, 2009 and will then be applied prospectively to business combinations that have an acquisition date on or after May 1, 2009. The Company is currently assessing the potential
impact on its Consolidated Financial Statements of adopting SFAS 141R.

In June 2007, the FASB ratified EITF 06-11 Accounting for the
Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 provides that tax benefits associated with dividends on share-based payment awards be recorded as a component of additional paid-in capital.
EITF 06-11 was effective, on a prospective basis, on May 1, 2008. The implementation of this standard did not have a material impact on the Companys Consolidated Financial Statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB
Statement No. 133 (SFAS 161), which modifies and expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in
terms of underlying risk and accounting designation and requires quantitative disclosures about fair value amounts and gains and losses on derivative instruments. It also requires disclosures about credit-related contingent features in
derivative agreements. SFAS 161 is effective for the Company beginning February 1, 2009. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The principal impact of SFAS 161 will be
to require the Company to expand its disclosure regarding its derivative and hedging activities.

In April 2008, the FASB issued Staff
Position FSP 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP. FSP 142-3 is effective for the Company beginning May 1, 2009. The Company is currently assessing the potential
impact on its Consolidated Financial Statements of adopting FSP 142-3.

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive
non-forfeitable dividends before vesting should be considered participating securities. As participating securities, these instruments should be included in the calculation of basic EPS. FSP EITF 03-6-1 is effective for the Company beginning
May 1, 2009. The Company does not grant share-based payment awards that entitle their holders to receive non-forfeitable dividends before vesting therefore this EITF is not expected to have any impact to the Company when adopted.

3. FAIR VALUE MEASUREMENTS

Financial assets and
liabilities subject to fair value measurements on a recurring basis are classified according to a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Level 1 represents observable inputs such as quoted prices
in active markets. Level 2 is defined as inputs other than quoted prices in active markets that are either directly or indirectly observable. Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an
entity to develop its own assumptions. There were no changes to the Companys valuation techniques used to measure asset and liabilities fair values on a recurring basis during the six months ended October 31, 2008.

The Companys investments that are held in trust for payment of non-qualified deferred compensation to certain employees consist primarily of
investments that are either publicly traded or for which market prices are readily available. These funds are held in registered investment funds and common/collateral trusts.

The Companys derivative contracts represent interest rate swap and collar agreements to convert a notional amount of floating-rate borrowings into
fixed rate debt. The fair value of the Companys derivative contracts was derived from third party service providers utilizing proprietary models based on current market indices and estimates about relevant future market conditions.



6



---

##### Table of Contents

The accompanying condensed consolidated balance sheet includes financial instruments that are recorded at
fair value as noted below:



|                                       |  |                                  |       |                                                                |   |                                           |  |                             |       |  |   |  
|-------------------------------------- |  | -------------------------------- | ----- | -------------------------------------------------------------- | - | ----------------------------------------- |  | --------------------------- | ----- |  | - | -
|                                       |  |                                  |       | Fair Value at Reporting Date Using                            
|                                       |  | Fair ValueAs of October 31, 2008 |       | Quoted Prices inActive Marketsfor IdenticalSecurities(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | UnobservableInputs(Level 3)
|Assets                                 |  |                                  |       |                                                                |   |                                           |  |                             |       |  |   |  
|Investments held in trust, current     |  | $                                | 281   |                                                                | $ | 243                                       |  | $                           | 38    |  | $ | 
|Investments held in trust, non-current |  |                                  | 185   |                                                                |   | 103                                       |  |                             | 82    |  |   | 
|                                       |  |                                  |       |                                                                |   |                                           |  |                             |       |  |   |  
|Total                                  |  | $                                | 466   |                                                                | $ | 346                                       |  | $                           | 120   |  | $ | 
|                                       |  |                                  |       |                                                                |   |                                           |  |                             |       |  |   |  
|Liabilities                            |  |                                  |       |                                                                |   |                                           |  |                             |       |  |   |  
|Derivative contracts                   |  | $                                | 3,665 |                                                                | $ |                                          |  | $                           | 3,665 |  | $ | 
|                                       |  |                                  |       |                                                                |   |                                           |  |                             |       |  |   |  
|Total                                  |  | $                                | 3,665 |                                                                | $ |                                          |  | $                           | 3,665 |  | $ | 
|                                       |  |                                  |       |                                                                |   |                                           |  |                             |       |  |   |  



7



---

##### Table of Contents

4. GOODWILL AND OTHER INTANGIBLE ASSETS

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



|                                |  |                     |         |                               |   |        |       |  |   |         |  
|------------------------------- |  | ------------------- | ------- | ----------------------------- | - | ------ | ----- |  | - | ------- | -
|                                |  | FranchiseOperations |         | Company-OwnedOfficeOperations |   |        | Total | 
|                                |  | (In thousands)      |        
|Balance as of April 30, 2008    |  | $                   | 336,767 |                               | $ | 78,120 |       |  | $ | 414,887 |  
|Additions (Note 6 )             |  |                     |        |                               |   | 1,859  |       |  |   | 1,859   |  
|Purchase accounting adjustments |  |                     |        |                               |   | (449   | )     |  |   | (449    | )
|                                |  |                     |         |                               |   |        |       |  |   |         |  
|Balance as of October 31, 2008  |  | $                   | 336,767 |                               | $ | 79,530 |       |  | $ | 416,297 |  
|                                |  |                     |         |                               |   |        |       |  |   |         |  

Other intangible assets consisted of:



|                                            |  |                        |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       
|------------------------------------------- |  | ---------------------- | ------ | ----------------------- | - | ------- | ----------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- | - | ------- | - |  | - | ------
|                                            |  | As of October 31, 2008 |        | As of April 30, 2008   
|                                            |  | GrossCarryingAmount    |        | AccumulatedAmortization |   |         | NetCarryingAmount |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount
|                                            |  | (In thousands)        
|Amortizable other intangible assets:        |  |                        |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       
|Franchise agreements(a)                     |  | $                      | 16,052 |                         | $ | (15,553 | )                 |  | $                   | 499    |                         | $ | 16,052 |                   | $ | (15,500 | ) |  | $ | 552   
|Customer relationships(b)                   |  |                        | 11,338 |                         |   | (8,496  | )                 |  |                     | 2,842  |                         |   | 10,784 |                   |   | (7,903  | ) |  |   | 2,881 
|                                            |  |                        |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       
|Total amortizable other intangible assets   |  | $                      | 27,390 |                         | $ | (24,049 | )                 |  |                     | 3,341  |                         | $ | 26,836 |                   | $ | (23,403 | ) |  |   | 3,433 
|                                            |  |                        |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       
|Unamortizable other intangible assets:      |  |                        |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       
|Jackson Hewitt trademark                    |  |                        |        |                         |   |         |                   |  |                     | 81,000 |                         |   |        |                   |   |         |   |  |   | 81,000
|Reacquired franchise rights (Note 6)        |  |                        |        |                         |   |         |                   |  |                     | 2,600  |                         |   |        |                   |   |         |   |  |   | 2,025 
|                                            |  |                        |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       
|Total unamortizable other intangible assets |  |                        |        |                         |   |         |                   |  |                     | 83,600 |                         |   |        |                   |   |         |   |  |   | 83,025
|                                            |  |                        |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       
|Total other intangible assets, net          |  |                        |        |                         |   |         |                   |  | $                   | 86,941 |                         |   |        |                   |   |         |   |  | $ | 86,458
|                                            |  |                        |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       



|(a) | Amortized using the straight-line method over a period of ten years.
|--- | --------------------------------------------------------------------

|(b) | Consists of customer lists and non-compete agreements. Customer lists are amortized using the double declining method over a period of five years and non-compete agreements are
amortized using the straight-line method over a period of two to six years.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                               |  |                     |        |   |                               |   |       |       |  |   |        |  
|------------------------------ |  | ------------------- | ------ | - | ----------------------------- | - | ----- | ----- |  | - | ------ | -
|                               |  | FranchiseOperations |        |   | Company-OwnedOfficeOperations |   |       | Total | 
|                               |  | (In thousands)      |       
|Balance as of April 30, 2008   |  | $                   | 83,577 |   |                               | $ | 2,881 |       |  | $ | 86,458 |  
|Additions (Note 6)             |  |                     | 575    |   |                               |   | 554   |       |  |   | 1,129  |  
|Amortization                   |  |                     | (53    | ) |                               |   | (593  | )     |  |   | (646   | )
|                               |  |                     |        |   |                               |   |       |       |  |   |        |  
|Balance as of October 31, 2008 |  | $                   | 84,099 |   |                               | $ | 2,842 |       |  | $ | 86,941 |  
|                               |  |                     |        |   |                               |   |       |       |  |   |        |  

Amortization expense relating to other intangible assets was as follows:



|                       |  |                               |     |                             |   |      |  |      |     |  |   |      
|---------------------- |  | ----------------------------- | --- | --------------------------- | - | ---- |  | ---- | --- |  | - | -----
|                       |  | Three Months EndedOctober 31, |     | Six Months EndedOctober 31,
|                       |  | 2008                          |     | 2007                        |   | 2008 |  | 2007
|Franchise agreements   |  | $                             | 27  |                             | $ | 402  |  | $    | 53  |  | $ | 804  
|Customer relationships |  |                               | 305 |                             |   | 227  |  |      | 593 |  |   | 463  
|                       |  |                               |     |                             |   |      |  |      |     |  |   |      
|Total                  |  | $                             | 332 |                             | $ | 629  |  | $    | 646 |  | $ | 1,267
|                       |  |                               |     |                             |   |      |  |      |     |  |   |      



8



---

##### Table of Contents

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



|                                    |  |                |      
|----------------------------------- |  | -------------- | -----
|                                    |  | Amount        
|                                    |  | (In thousands)
|Remaining six months of fiscal 2009 |  | $              | 658  
|2010                                |  |                | 1,038
|2011                                |  |                | 817  
|2012                                |  |                | 515  
|2013                                |  |                | 272  
|2014 and thereafter                 |  |                | 41   
|                                    |  |                |      
|Total                               |  | $              | 3,341
|                                    |  |                |      

5. SHARE-BASED PAYMENTS

The Companys share-based payments through October 31, 2008 under the Jackson Hewitt Tax Service Inc. Amended and Restated 2004 Equity and Incentive Plan (the Amended and Restated Plan) include
the following:



| | (i) | Time-Based Vesting Stock Options (TVOs);
| | --- | ------------------------------------------



| | (ii) | Performance-Based Vesting Stock Options (PVOs);
| | ---- | -------------------------------------------------



| | (iii) | Time-Based Vesting Shares of Restricted Stock (TVRSs);
| | ----- | --------------------------------------------------------



| | (iv) | Performance-Based Vesting Shares of Restricted Stock (PVRSs); and
| | ---- | -------------------------------------------------------------------



| | (v) | Restricted Stock Units (RSUs).
| | --- | --------------------------------

Effective
November 3, 2008, Mark L. Heimbouch, formerly Chief Operating Officer, resigned. In connection with his resignation, Mr. Heimbouch forfeited 210,452 unvested equity awards, which consisted of 122,319 TVOs, 36,182 PVOs, 24,253 TVRSs and
27,698 PVRSs. Mr. Heimbouchs forfeited equity awards, for purposes of this disclosure, were presented as if they were forfeited on October 31, 2008 (one business day prior to the actual forfeiture date) so as to coincide with the
Companys quarter-end reporting date.

(i) Time-Based Vesting Stock Options

TVOs are granted, with the exception of certain TVOs granted at the time of the Companys IPO, with an exercise price equal to the New York Stock
Exchange (NYSE) closing price of a share of common stock on the date of grant and have a contractual term of ten years. TVOs granted through April 30, 2007 become exercisable with respect to 25% of the shares on each of the first
four anniversaries of the date of grant. TVOs granted in fiscal 2008 become exercisable with respect to 20% of the shares on each of the first five anniversaries of the date of grant. TVOs granted after April 30, 2008 become exercisable with
respect to one-third of the shares on each of the first three anniversaries of the date of grant. All TVOs granted are subject to continued employment on the vesting date.

The Company incurred share-based compensation expense of $0.2 million and $4.0 million in the second quarter of fiscal 2009 and fiscal 2008,
respectively, in connection with the vesting of TVOs. The Company incurred share-based compensation expense of $1.3 million and $5.2 million in the six months ended October 31, 2008 and October 31, 2007, respectively, in connection with
the vesting of TVOs. Both prior period amounts include expense of $2.9 million related to the accelerated vesting of 415,894 TVOs attributed to the departure of the Companys former Chief Executive Officer in October 2007.

The weighted average grant date fair value for TVOs granted in the six months ended October 31, 2008 and 2007 was $2.98 and $8.87, respectively. The
fair value of each TVO award was estimated on the date of grant using the Black-Scholes option-pricing model. The Company uses the method permitted under SEC Staff Accounting Bulletin (SAB) No. 110 (SAB 110), which
amends SAB No. 107, Share-Based Payment, to determine the expected holding period and will continue to do so until the Company is able to accumulate a sufficient number of years of employee exercise behavior to make a more refined
estimate of expected term. Expected volatility was based on the Companys historical publicly-traded stock price. The risk-free interest rate assumption was determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds
with maturities similar to those of the expected holding period of the award being valued.



9



---

##### Table of Contents

The following table sets forth the weighted average assumptions used to determine compensation cost for
TVOs granted during the six months ended October 31, 2008 and 2007, respectively:



|                                   |  |                             |   |  |      |  
|---------------------------------- |  | --------------------------- | - |  | ---- | -
|                                   |  | Six Months EndedOctober 31, |  
|                                   |  | 2008                        |   |  | 2007 |  
|Expected holding period (in years) |  | 6.0                         |   |  | 6.5  |  
|Expected volatility                |  | 39.5                        | % |  | 30.7 | %
|Dividend yield                     |  | 5.7                         | % |  | 2.4  | %
|Risk-free interest rate            |  | 3.3                         | % |  | 4.8  | %

The following table summarizes information about TVO activity for the six months ended
October 31, 2008:



|                                   |  |               |   |  |                              |      
|---------------------------------- |  | ------------- | - |  | ---------------------------- | -----
|                                   |  | Number ofTVOs |   |  | WeightedAverageExercisePrice
|Balance as of April 30, 2008       |  | 2,669,161     |   |  | $                            | 23.78
|Granted                            |  | 335,239       |   |  | $                            | 12.72
|Exercised                          |  | (1,000        | ) |  | $                            | 9.22 
|Forfeited                          |  | (219,673      | ) |  | $                            | 26.67
|Expired                            |  | (19,053       | ) |  | $                            | 24.16
|                                   |  |               |   |  |                              |      
|Balance as of October 31, 2008     |  | 2,764,673     |   |  | $                            | 22.21
|                                   |  |               |   |  |                              |      
|Exercisable as of October 31, 2008 |  | 1,742,627     |   |  | $                            | 22.65
|                                   |  |               |   |  |                              |      

Outstanding in-the-money TVOs as of October 31, 2008 had an aggregate intrinsic value of $0.5
million. Outstanding TVOs as of October 31, 2008 had an average remaining contractual life of 7.4 years. Exercisable in-the-money TVOs as of October 31, 2008 had an aggregate intrinsic value of $0.03 million. Exercisable TVOs as of
October 31, 2008 had an average remaining contractual life of 6.4 years.

The following table summarizes information about unvested
TVO activity for the six months ended October 31, 2008:



|                                |  |               |   |  |                                               |     
|------------------------------- |  | ------------- | - |  | --------------------------------------------- | ----
|                                |  | Number ofTVOs |   |  | Weighted AverageGrant DateFair ValuePer Share
|Unvested as of April 30, 2008   |  | 1,316,476     |   |  | $                                             | 7.34
|Granted                         |  | 335,239       |   |  | $                                             | 2.98
|Vested                          |  | (409,996      | ) |  | $                                             | 7.84
|Forfeited                       |  | (219,673      | ) |  | $                                             | 8.27
|                                |  |               |   |  |                                               |     
|Unvested as of October 31, 2008 |  | 1,022,046     |   |  | $                                             | 6.17
|                                |  |               |   |  |                                               |     

As of October 31, 2008, there was $6.2 million of total unrecognized compensation cost
related to unvested TVOs, which is expected to be recognized over a weighted average period of 2.7 years. The total fair value of stock options vested in the six months ended October 31, 2008 and 2007 was $3.2 million and $4.3 million,
respectively.



10



---

##### Table of Contents

(ii) Performance-Based Vesting Stock Options

In July 2008, the Company granted PVOs to certain key employees with an exercise price equal to the NYSE closing price of a share of common stock on the
date of grant. PVOs have a contractual term of ten years. These PVOs only vest if the Company achieves certain pre-established levels of diluted EPS for fiscal 2009. The award is based upon a diluted EPS range with a minimum threshold below which
all PVOs would be forfeited and a maximum of 180% of target diluted EPS at which the maximum number of PVOs would remain eligible for vesting. PVOs are granted at the maximum under the program. If the required level of diluted EPS is achieved within
the range, that portion of the award meeting the criteria would be subject to a three year vesting period commencing from the date of grant. The remainder of the award would be forfeited.

Compensation expense related to these awards is recognized ratably over the three year requisite service period beginning from the date of grant based on
the Companys estimate of achieving target diluted EPS. In the three and six months ended October 31, 2008, the Company incurred share-based compensation expense of $0.03 million and $0.04 million, respectively, in connection with the
vesting of PVOs.

The weighted average grant date fair value for PVOs granted in the six months ended October 31, 2008 was $3.70. The
fair value of each PVO award was estimated on the date of grant using the Black-Scholes option-pricing model. The expected holding period, expected volatility and risk-free interest rate assumptions were determined using the same methodology as the
TVOs discussed earlier.

The following table sets forth the weighted average assumptions used to determine compensation cost for PVOs
granted during the six months ended October 31, 2008:



|                                   |  |      |  
|---------------------------------- |  | ---- | -
|Expected holding period (in years) |  | 6.0  |  
|Expected volatility                |  | 39.5 | %
|Dividend yield                     |  | 5.0  | %
|Risk-free interest rate            |  | 3.5  | %

The following table summarizes information about PVO activity during the six months ended
October 31, 2008:



|                                   |  |               |   |  |                                |      
|---------------------------------- |  | ------------- | - |  | ------------------------------ | -----
|                                   |  | Number ofPVOs |   |  | Weighted AverageExercise Price
|Outstanding as of April 30, 2008   |  |              |   |  | $                              |     
|Granted                            |  | 243,728       |   |  | $                              | 14.50
|Exercised                          |  |              |   |  | $                              |     
|Forfeited                          |  | (36,182       | ) |  | $                              | 14.50
|Expired                            |  |              |   |  | $                              |     
|                                   |  |               |   |  |                                |      
|Outstanding as of October 31, 2008 |  | 207,546       |   |  | $                              | 14.50
|                                   |  |               |   |  |                                |      

There were no outstanding in-the-money PVOs as of October 31, 2008. Outstanding PVOs as of
October 31, 2008 had an average remaining contractual life of 9.7 years.

The following table summarizes information about unvested
PVO activity for the six months ended October 31, 2008:



|                                |  |               |   |  |                                               |     
|------------------------------- |  | ------------- | - |  | --------------------------------------------- | ----
|                                |  | Number ofPVOs |   |  | Weighted AverageGrant DateFair ValuePer Share
|Unvested as of April 30, 2008   |  |              |   |  | $                                             |    
|Granted                         |  | 243,728       |   |  | $                                             | 3.70
|Vested                          |  |              |   |  | $                                             |    
|Forfeited                       |  | (36,182       | ) |  | $                                             | 3.70
|                                |  |               |   |  |                                               |     
|Unvested as of October 31, 2008 |  | 207,546       |   |  | $                                             | 3.70
|                                |  |               |   |  |                                               |     

As of October 31, 2008, there was $0.37 million of total unrecognized compensation cost
related to unvested PVOs, which is expected to be recognized over a weighted average period of 2.7 years.



11



---

##### Table of Contents

(iii) Time-Based Vesting Shares of Restricted Stock

The fair value of each TVRS grant is measured by the NYSE closing price of the Companys common stock on the date of grant. Compensation expense
related to the fair value of TVRSs is recognized on a straight-line basis over the requisite service period based on those restricted stock grants that are expected to ultimately vest. One third of the shares of restricted stock vest on each of the
first three anniversaries of the date of grant, subject to continued employment on the vesting date.

In the three months ended
October 31, 2008 and October 31, 2007, Company incurred share-based compensation expense of $0.2 million and $0.01 million, respectively, in connection with the vesting of TVRSs. In the six months ended October 31, 2008 and
October 31, 2007, Company incurred share-based compensation expense of $0.5 million and $0.01 million, respectively, in connection with the vesting of TVRSs. As of October 31, 2008, there was $2.5 million of total unrecognized compensation
cost related to unvested TVRSs, which is expected to be recognized over a weighted average period of 2.5 years.

The following table
summarizes information about TVRS activity during the six months ended October 31, 2008:



|                                   |  |                |   |  |                                      |      
|---------------------------------- |  | -------------- | - |  | ------------------------------------ | -----
|                                   |  | Number ofTVRSs |   |  | Weighted AverageGrant DateFair Value
|Outstanding as of April 30, 2008   |  | 22,651         |   |  | $                                    | 29.80
|Granted                            |  | 235,608        |   |  | $                                    | 12.72
|Vested                             |  | (7,549         | ) |  | $                                    | 29.80
|Forfeited                          |  | (26,068        | ) |  | $                                    | 17.12
|                                   |  |                |   |  |                                      |      
|Outstanding as of October 31, 2008 |  | 224,642        |   |  | $                                    | 13.36
|                                   |  |                |   |  |                                      |      

As of October 31, 2008, outstanding TVRSs had an aggregate intrinsic value of $3.1 million
with those TVRSs expected to vest having an intrinsic value of $2.9 million.

(iv) Performance-Based Vesting Shares of Restricted
Stock

In July 2008, the Company granted PVRSs to certain key employees. These PVRSs only vest if the Company achieves certain
pre-established levels of diluted EPS for fiscal 2009. The award is based upon a diluted EPS range with a minimum threshold below which all PVRSs would be forfeited and a maximum of 180% of target diluted EPS at which the maximum number of PVRSs
would remain eligible for vesting. PVRSs are granted at the maximum under the program. If the required level of diluted EPS is achieved within the range, that portion of the award meeting the criteria would be subject to a three year vesting period
commencing from the date of grant. The remainder of the award would be forfeited.

Compensation expense related to these awards is
recognized ratably over the three year requisite service period beginning from the date of grant based on the Companys estimate of achieving target diluted EPS. The fair value of these grants is measured by the NYSE closing price of the
Companys common stock on the date of the grant. In the three and six months ended October 31, 2008, the Company incurred share-based compensation expense of $0.08 million and $0.12 million, respectively, in connection with the vesting of
PVRSs. As of October 31, 2008, there was $1.1 million of total unrecognized compensation cost related to unvested PVRSs, which is expected to be recognized over a weighted average period of 2.7 years.

The following table summarizes information about PVRS activity during the six months ended October 31, 2008:



|                                   |  |                |   |  |                                      |      
|---------------------------------- |  | -------------- | - |  | ------------------------------------ | -----
|                                   |  | Number ofPVRSs |   |  | Weighted AverageGrant DateFair Value
|Outstanding as of April 30, 2008   |  |               |   |  | $                                    |     
|Granted                            |  | 186,579        |   |  | $                                    | 14.50
|Vested                             |  |               |   |  | $                                    |     
|Forfeited                          |  | (27,698        | ) |  | $                                    | 14.50
|                                   |  |                |   |  |                                      |      
|Outstanding as of October 31, 2008 |  | 158,881        |   |  | $                                    | 14.50
|                                   |  |                |   |  |                                      |      

As of October 31, 2008, outstanding PVRSs had an aggregate intrinsic value of $2.2 million
with those PVRSs expected to vest having an intrinsic value of $2.1 million.



12



---

##### Table of Contents

(v) Restricted Stock Units

The Company incurred share-based compensation expense of $0.1 million in each of the three months ended October 31, 2008 and 2007, 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 each of the six months
ended October 31, 2008 and 2007, respectively, the Company incurred such share-based compensation expense of $0.2 million. In the six months ended October 31, 2008, the Company granted 13,849 RSUs at a weighted average grant price of
$14.20 resulting in 77,077 RSUs outstanding as of October 31, 2008 with a weighted average grant price of $21.21.

6. ACQUISITIONS

Assets acquired and liabilities assumed in business combinations were recorded on the Condensed Consolidated Balance Sheets as of the respective
acquisition dates based upon their estimated fair values at such dates. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. The results of operations of
businesses acquired by the Company have been included in the Condensed Consolidated Statements of Operations since their respective dates of acquisition.

In the six months ended October 31, 2008, the Company acquired substantially all of the assets of six tax return preparation businesses and will operate these stores as company-owned locations beginning in the
upcoming tax season. Three of these businesses were acquired from franchisees. The total purchase price of all acquisitions during the six months ended October 31, 2008 amounted to $3.1 million, of which $2.1 million was paid at closings, $0.2
million was applied to reduce certain receivables and the remainder due of $0.8 million was included as a current liability as of October 31, 2008. The total purchase price was allocated (i) $0.1 million to furniture, fixtures and
equipment, (ii) $1.1 million to intangible assets including $0.6 million in reacquired franchise rights and (iii) $1.9 million to goodwill.

All goodwill associated with acquisitions in fiscal 2009 was allocated to the company-owned office operations segment and is deductible for tax purposes.

7. CREDIT FACILITY

On May 21, 2008, the Company amended its five-year unsecured credit facility
(the Amended and Restated $450 Million Credit Facility) to provide for additional flexibility in connection with the allowable maximum consolidated leverage ratio under the credit facility covenants. Borrowings under the Amended and
Restated $450 Million Credit Facility are to be used to finance working capital needs, general corporate purposes, potential acquisitions and repurchases of the Companys common stock.

The maximum consolidated leverage ratio was amended from 3.0:1.0 to (i) 3.5:1.0 for the fiscal quarters ending July 31, 2008 through
January 31, 2009; (ii) 3.15:1.0 for the fiscal quarters ending April 30, 2009 through October 31, 2009; and (iii) 3.0:1.0 for the fiscal quarters ending January 31, 2010 through July 31, 2011. Additionally, the
credit facility was amended to include limitations with regard to share repurchases and acquisitions. The Company is restricted from repurchasing shares until it achieves a consolidated leverage ratio of 2.5:1.0 or lower for two consecutive fiscal
quarters. Thereafter, achievement of a consolidated leverage ratio of 3.0:1.0 or below is required for continued share repurchases. The Company is also limited to annual acquisitions of $15.0 million when the consolidated leverage ratio is greater
than 3.0:1.0. Furthermore, Eurodollar borrowings now bear interest at the London Inter-Bank Offer Rate (LIBOR), plus a credit spread ranging from 0.50% to 2.00% per annum; Base Rate borrowings now bear interest at the Prime Rate
plus a credit spread up to 1.00%; and the annual fee now ranges from 0.10% to 0.40% of the unused portion of the credit facility.

The
Amended and Restated $450 Million Credit Facility provides for loans in the form of Eurodollar or Base Rate borrowings. Prior to the May 21, 2008 amendment: (i) Eurodollar borrowings bore interest at LIBOR, as defined in the Amended and
Restated $450 Million Credit Facility, plus a credit spread as defined in the Amended and Restated $450 Million Credit Facility, ranging from 0.50% to 0.75% per annum; (ii) Base Rate borrowings, as defined in the Amended and Restated
$450 Million Credit Facility, bore interest primarily at the Prime Rate, as defined in the Amended and Restated $450 Million Credit Facility; and (iii) the Amended and Restated $450 Million Credit Facility carried an annual fee ranging from
0.10% to 0.15% of the unused portion of the Amended and Restated $450 Million Credit Facility.

As of October 31, 2008, the Company
had $321.0 million in borrowings outstanding under the Amended and Restated $450 Million Credit Facility.

The Amended and Restated $450
Million Credit Facility contains the requirement that the Company meet certain financial covenants, such as the maximum consolidated leverage ratio (discussed above) and a minimum consolidated interest coverage ratio of 4.0:1.0. The consolidated
leverage ratio is the ratio of consolidated debt to consolidated Earnings Before Interest, Taxes, Depreciation



13



---

##### Table of Contents

and Amortization (EBITDA), each as defined in the Amended and Restated $450 Million Credit Facility, with consolidated debt being measured
on a trailing four-quarter basis. The consolidated interest coverage ratio is the ratio of consolidated EBITDA to consolidated interest expense, each as defined in the Amended and Restated $450 Million Credit Facility.

The Amended and Restated $450 Million Credit Facility contains various customary restrictive covenants that limits 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.

As of October 31, 2008, the Company was not
aware of any instances of non-compliance with such financial or restrictive covenants.

8. TERMINATION CHARGES

In the first quarter of fiscal 2009, the Company recorded total terminations charges of $3.0 million related to severance and lease termination and
related expenses. In the second quarter of fiscal 2009, the Company recorded additional termination charges of $0.2 million related to severance.

Severance

As part of an initiative to achieve a lower cost structure in advance of the 2009 tax season, the Companys
overall consolidated workforce was reduced by approximately 10% during the first quarter of fiscal 2009. In connection with this action and certain employee terminations, a $1.4 million severance charge was recorded in selling, general and
administrative expense in the first quarter of fiscal 2009. In the second quarter of fiscal 2009, the Company recorded additional severance charges of $0.2 million. For the six months ended October 31, 2008, the Companys reportable
segments included severance expenses of $0.7 million in Company-Owned Office Operations and $0.3 million in Franchise Operations with $0.6 million in Corporate and Other. As of October 31, 2008, $0.7 million of such expenses remained unpaid and
are included in accounts payable and accrued liabilities in the accompanying Condensed Consolidated Balance Sheet.

Lease Termination
and Related Expenses

As part of an overall effort to optimize company-owned store locations and improve profitability, 200
under-performing store locations were closed during the first quarter of fiscal 2009. In connection with this action, a charge of $1.6 million was recorded in cost of company-owned operations expense related to lease terminations and related
expenses, including a $0.1 million write-down of leasehold improvements, associated with 52 of these store location closures. Costs to terminate these contractual operating leases before the end of their term were measured at fair value and reduced
by an amount of estimated sublease rental income that the Company believes it can reasonably obtain for the properties. In the second quarter of fiscal 2009, the Company recorded in cost of company-owned operations accretion expense of $0.02 million
offset by a credit of $0.09 million to adjust the fair value of this lease termination liability primarily due to favorable negotiations with landlords to buy out certain leases early. The Company expects to continue to adjust the fair value of this
lease termination liability due to the passage of time as an increase in the liability and as an operating expense (accretion) over the remaining terms of the leases. As of October 31, 2008, the remaining lease termination liability consisted
of $0.3 million in accounts payable and accrued liabilities and $0.2 million in other non-current liabilities in the accompanying Condensed Consolidated Balance Sheet.

9. INCOME TAXES

Under the tax sharing and tax indemnification provisions of the transitional
agreement with Cendant, adjustment to the amounts of taxes due in prior periods as a result of temporary differences existing at the date of the Companys IPO are to be recorded as an adjustment to the Special Dividend paid to Cendant
immediately prior to the Companys IPO. In October 2008, the Internal Revenue Service (IRS) completed its audit of the Companys federal income tax returns for the calendar years 2005 and 2006. Upon closing the audit for those
periods, the Company made a payment of $0.3 million in connection with certain accelerated deductions that were disallowed by the IRS as current deductions. In addition, the Company recorded a $3.4 million adjustment increasing additional
paid-in-capital to reflect the reversal of deferred tax liabilities that represented accelerated deductions taken in years prior to the Companys IPO which, in accordance with the transitional agreement, are the responsibility of Cendant.



14



---

##### Table of Contents

10. 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 and other revenues; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Company-owned office operationsThis segment consists of the operations of the company-owned offices for which the Company recognizes service revenues
primarily for the preparation of tax returns.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                                    |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|----------------------------------- |  | ------------------- | ------- | - | ----------------------------- | - | ------- | ---------------------- |  | - | ------- | - |  | - | ------- | -
|                                    |  | FranchiseOperations |         |   | Company-OwnedOfficeOperations |   |         | Corporateand Other (a) |  |   | Total   |  
|                                    |  | (In thousands)      |        
|Three months ended October 31, 2008 |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Revenues                            |  | $                   | 4,633   |   |                               | $ | 436     |                        |  | $ |        |   |  | $ | 5,069   |  
|                                    |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Loss before income taxes            |  | $                   | (10,734 | ) |                               | $ | (10,212 | )                      |  | $ | (15,876 | ) |  | $ | (36,822 | )
|                                    |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Three months ended October 31, 2007 |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Revenues                            |  | $                   | 5,205   |   |                               | $ | 396     |                        |  | $ |        |   |  | $ | 5,601   |  
|                                    |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Loss before income taxes            |  | $                   | (11,255 | ) |                               | $ | (8,569  | )                      |  | $ | (19,113 | ) |  | $ | (38,937 | )
|                                    |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|                                    |  |                     |         |  
|                                    |  | FranchiseOperations |         |   | Company-OwnedOfficeOperations |   |         | Corporateand Other (a) |  |   | Total   |  
|                                    |  | (In thousands)      |        
|Six months ended October 31, 2008   |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Revenues                            |  | $                   | 8,508   |   |                               | $ | 848     |                        |  | $ |        |   |  | $ | 9,356   |  
|                                    |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Loss before income taxes            |  | $                   | (22,463 | ) |                               | $ | (22,076 | )                      |  | $ | (26,345 | ) |  | $ | (70,884 | )
|                                    |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Six months ended October 31, 2007   |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Revenues                            |  | $                   | 10,617  |   |                               | $ | 904     |                        |  | $ |        |   |  | $ | 11,521  |  
|                                    |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  
|Loss before income taxes            |  | $                   | (22,105 | ) |                               | $ | (15,477 | )                      |  | $ | (33,601 | ) |  | $ | (71,183 | )
|                                    |  |                     |         |   |                               |   |         |                        |  |   |         |   |  |   |         |  



|(a) | Corporate and other expenses include unallocated corporate overhead supporting both segments including legal, finance, human resources, real estate facilities and strategic
development activities, as well as share-based compensation and financing costs.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



---

##### Table of Contents

11. COMMITMENTS AND CONTINGENCIES

The Company is required to provide various types of surety bonds, such as tax return 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 to third parties. These bonds vary in duration although most are issued and outstanding from one to two years. If the Company fails to perform under its obligations, the maximum potential payment under
these surety bonds is $1.9 million as of October 31, 2008. Historically, no surety bonds have been drawn upon and there is no future expectation that these surety bonds will be drawn upon.

The Company, through TSA, provides customers of company-owned offices with a guarantee in
connection with the preparation of tax returns that may require in certain circumstances the Company to pay penalties and interest assessed by a taxing authority. The Company has a liability of $0.1 million as of October 31, 2008 and
April 30, 2008, for the fair value of the obligation undertaken in issuing the guarantee. Such liabilities were included in accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets. 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 relating to such potential liability and the Company does not expect to be required to make payment in the future.

The
transitional agreement with Cendant provides that the Company continues 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. Additionally, the transitional agreement provides that the Company is 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 is required to 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 claims against the Company under these arrangements since the Companys IPO, the Company could be obligated to make payments in the future.

The Company routinely enters into contracts that include indemnification provisions that serve to protect the contracting parties from losses such
parties suffer as a result of acts or omissions of the Company and/or its affiliates, including in particular indemnity obligations relating to (a) tax, legal and other risks related to the sale of businesses or the provision of services;
(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. There is no stated maximum payment related to these indemnities, 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 had not been any indemnification claims against the Company
under these arrangements prior to 2008, there can be no assurance that the Company will not be obligated to make payments in the future. Certain of our franchisees have filed purported class action lawsuits against Santa Barbara Bank &
Trust, a division of Pacific Capital Bank, N.A. (SBB&T) and HSBC Taxpayer Financial Service, Inc. (HSBC) relating to the terms of the contracts between the franchisees and the financial product providers and the manner in
which financial products are facilitated. SBB&T and HSBC have submitted indemnification claims to the Company in regards to these lawsuits.



16



---

##### Table of Contents

Legal Proceedings

On March 18, 2003, Canieva Hood and Congress of California Seniors brought a purported class action suit against Santa Barbara Bank & Trust (SBB&T) and the Company in the Superior Court
of California (Santa Barbara, following a transfer from San Francisco) seeking declaratory relief in connection with the provision of RALs, as to the lawfulness of the practice of cross-lender debt collection, as to the validity of SBB&Ts
cross-lender debt collection provision and as to whether the method of disclosure to customers with respect to the provision is unlawful or fraudulent, and seeking injunctive relief, restitution, disgorgement, compensatory damages, statutory
damages, punitive damages, attorneys fees, and expenses. The Company is a party in the action for allegedly collaborating, and aiding and abetting, in the actions of SBB&T. The Congress of California Seniors was subsequently removed, and
Tyree Bowman was added, as a plaintiff. A class certification hearing has been scheduled for January 7, 2009. The case is in its discovery and pretrial stage. The Company believes it has meritorious defenses and has been contesting this matter
vigorously. On December 18, 2003, Ms. Hood also filed a separate suit against the Company in the Ohio Court of Common Pleas (Montgomery County) and is seeking to certify a class in the action. The allegations of negligence, breach of
fiduciary duty, and violation of certain Ohio law relate to the same set of facts as the California action. Plaintiff seeks equitable and declaratory relief, damages, attorneys fees, and expenses. The case is in its discovery and pretrial
stage. The Company believes it has meritorious defenses and has been contesting this matter vigorously.

In order to avoid the costs and
inconvenience of continued litigation, the Company has agreed to a tentative settlement in the Hood California matter in connection with an overall tentative settlement by the other defendant, SBB&T, and the third-party bank cross-defendants.
The tentative settlement is subject to execution of a final settlement, as well as preliminary and final approval by the Court, and would provide for a payment by the Company of $2.8 million as part of an overall settlement amount. In connection
with the settlement of the Hood California matter, the Hood Ohio matter will be dismissed with prejudice. There can be no assurance of reaching a final settlement, or Court preliminary and final approval. In the event a settlement is not reached or
the settlement does not obtain final approval by the Court, the Company will continue to contest these matters vigorously. As of October 31, 2008, the Company has a liability of $2.8 million included in accounts payable and accrued liabilities
for settlement of this matter.

On September 26, 2006, Willie Brown brought a purported class action complaint against the Company in
the Ohio Court of Common Pleas, Cuyahoga County, on behalf of Ohio customers who obtained RALs facilitated by the Company, for an alleged failure to comply with Ohios Credit Services Organization Act, and for alleged unfair and deceptive acts
in violation of Ohios Consumer Sales Practices Act, and seeking damages and injunctive relief. On November 10, 2008, the Company filed a motion to dismiss, or alternatively, to stay proceedings and to compel arbitration. The Company
believes it has meritorious defenses and is contesting this matter vigorously.

On October 30, 2006, Linda Hunter brought a purported
class action complaint against the Company in the United States District Court, Southern District of West Virginia, on behalf of West Virginia customers who obtained RALs facilitated by the Company, seeking damages for an alleged breach of fiduciary
duty, for alleged breach of West Virginias Credit Service Organization Act, for alleged breach of contract, and for alleged unfair or deceptive acts or practices in connection with our RAL facilitation activities. On November 22, 2006,
the Company filed a motion to dismiss. On November 6, 2007, the Court partially granted the Companys motion to dismiss. On November 21, 2007, the Company answered the complaint. On March 13, 2008, the Court granted the
Companys partial motion for summary judgment on plaintiffs breach of contract claim. On June 30, 2008, the Court granted permission for Christian Harper, Elizabeth Harper, and Donna Wright to be substituted in the case as new
proposed class representatives. Upon substitution, the Court dismissed Linda Hunters claims with prejudice. On July 15, 2008, the Company answered the first amended complaint. The case is in its discovery and pretrial stage. The Company
believes it has meritorious defenses and is contesting this matter vigorously.

On April 20, 2007, Brent Wooley brought a purported
class action complaint against the Company and certain unknown franchisees in the United States District Court, Northern District of Illinois. The complaint, which was subsequently amended, was brought on behalf of customers who obtained tax return
preparation services that allegedly included false deductions without support by the customer that resulted in penalties being assessed by the IRS against the taxpayer for violations of the Illinois Consumer Fraud and Deceptive Practices Act, and
the Racketeering and Corrupt Organizations Act, and alleging unjust enrichment and breach of contract, seeking compensatory and punitive damages, restitution, and attorneys fees. The alleged violations of the Illinois Consumer Fraud and
Deceptive Practices Act relate to representations regarding tax return preparation, Basic Guarantee and Gold Guarantee coverage and denial of Gold Guarantee claims. On August 1, 2007, the Company filed a motion to dismiss which, on
September 5, 2007, was denied without prejudice to permit the plaintiff to further amend the complaint. On October 5, 2007, plaintiff filed a second amended complaint to add additional parties. On November 20, 2007, the Company filed
a motion to dismiss the second amended complaint. On March 25, 2008, the Court dismissed all claims. On April 11, 2008, plaintiff filed a motion for leave to file a third



17



---

##### Table of Contents

amended complaint. The Company opposed that motion. On June 19, 2008, the Court denied plaintiffs motion, and permitted the plaintiff to file a
fourth amended complaint consistent with the Courts March 25, 2008 decision. On July 28, 2008, the Company filed a motion to dismiss the fourth amended complaint. The Company believes it has meritorious defenses and is contesting
this matter vigorously.

On January 17, 2008, an attorney with the New York State Division of Human Rights (the Division)
filed with the Division a Division-initiated administrative complaint against the Company for allegedly marketing loan products to individuals in New York based on their race and military status in violation of New York States Human Rights
Law, and seeking injunctive and other relief. On February 19, 2008, the Company filed a response to the complaint with the Division. On June 30, 2008, the Division issued a determination of probable cause on the matter and determined that
it had jurisdiction. The matter will be set for an administrative hearing. The Company believes that no jurisdiction exists, that it has meritorious defenses and is contesting this matter vigorously. On October 15, 2008, the Company filed a
Complaint in the United States District Court, Southern District of New York against the Commissioner of the Division for injunctive and declaratory relief. On October 20, 2008, the Company filed a motion for a preliminary injunction against
the Commissioner of the Division to prevent the Division from proceeding with its administrative complaint.

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 is likely to have a material adverse effect on its financial position, results of operations or cash flows.

12. SUBSEQUENT EVENTS

MetaBank

On November 17, 2008, the Company entered into an Amended and Restated Marketing Agreement (Marketing Agreement) with
MetaBank d/b/a Meta Payment Systems (MetaBank), and a First Addendum (Addendum) to the Marketing Agreement with MetaBank dated the same date. The Marketing Agreement amends and supersedes a prior agreement with MetaBank. The
Marketing Agreement expires on October 31, 2011. The Addendum expires on the later of July 15, 2009 or the date upon which the parties obligations under the Addendum have been fulfilled.

Under the Marketing Agreement, MetaBank is responsible for issuing and managing the Companys prepaid debit card program and providing line of
credit products related to the card. The Company receives payment from MetaBank based on certain levels of revenues and gross profits.

The
Addendum provides that in the event MetaBanks loan losses related to one of the line of credit products provided under the Marketing Agreement significantly exceed MetaBanks projected losses, the Company will make payments to MetaBank to
offset such losses. The Companys payment obligations will not arise unless MetaBanks actual loan losses are in excess of two times the level of MetaBanks projected losses under the program. The Companys maximum payment
obligation is approximately $13 million, which will occur in the event that MetaBanks actual loan losses are in excess of four times MetaBanks projected losses. In the event the Company is required to make such payment to MetaBank, the
Company intends for these payment obligations to be shared among the Company and its franchisees. Based on historical experience with this financial product, the Company currently considers the likelihood to be remote of a material payment having to
be made to MetaBank to offset actual loan losses.

Republic Bank

On December 2, 2008, the Company entered into the First Amendment to Program Agreement (the Republic Program Agreement Amendment) with
Republic Bank & Trust Company (Republic) and the First Amendment to Technology Services Agreement (the Republic Technology Services Agreement Amendment and, together with the Republic Program Agreement Amendment, the
Republic Amendments) with Republic. The primary purposes of the Republic Amendments are to establish the number of Jackson Hewitt Tax Service locations during the 2009 tax season in which Republic will offer, process and administer
certain financial products, including refund anticipation loans, to Jackson Hewitt Tax Service customers (the Republic Program), the fees to be paid by Republic to the Company for the 2009 tax season and certain compliance parameters
regarding the Republic Program. The Republic Program Agreement Amendment provides Republic with the right to retain certain monies otherwise payable to the Company by Republic in the event that Republic fails to attain a minimum level of
profitability or number of financial products or if Republic incurs costs in connection with the Companys failure to maintain a minimum level of compliance with Republics policies and procedures.



18



---

##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion should be read in conjunction with 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 June 30, 2008.

FORWARD-LOOKING STATEMENTS

Certain statements in
this report, including, but not limited to, those contained in Part I. Item 1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 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. 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 timely or effectively respond to customer trends and attract new customers,
develop and make new products available through our offices, improve our distribution system or reduce our cost structure; our ability to successfully attract and retain key personnel; government initiatives that simplify tax return
preparation or reduce the need for a third party tax return preparer, improve the timing and efficiency of processing tax returns or decrease the number of tax returns filed; delays in the passage of tax laws and their implementation; the trend of
tax payers filing their tax returns later in the tax season; the success of our franchised offices; our responsibility to third parties, regulators or courts for the acts of, or failures to act by, our franchisees or their employees; government
legislation and regulation of the tax return preparation industry and related financial products, including refund anticipation loans, and the failure by us, or the financial institutions which provide financial products to our customers, to comply
with such legal and regulatory requirements; the effectiveness of our tax return preparation compliance program; increased regulation of tax return preparers; our exposure to litigation; the failure of our insurance to cover all the risks associated
with our business; our ability to protect our customers personal and financial information; the effectiveness of our marketing and advertising programs and franchisee support of these programs; disruptions in our relationships with our
franchisees; changes in our relationships with financial product providers that could reduce the revenues we derive from our agreements with these financial institutions as well as affect our customers ability to obtain financial products
through our tax return preparation offices; changes in our relationships with retailers and shopping malls that could affect our growth and profitability; the seasonality of our business and its effect on our stock price; competition from tax return
preparation service providers, volunteer organizations and the government; our reliance on technology systems and electronic communications to perform the core functions of our business; our ability to protect our intellectual property rights or
defend against any third party allegations of infringement by us; our reliance on cash flow from subsidiaries; our compliance with credit facility covenants; our exposure to increases in prevailing market interest rates; our quarterly results not
being indicative of our performance as a result of tax season being relatively short and straddling two quarters; our ability to pay dividends in the future; certain provisions that may hinder, delay or prevent third party takeovers; changes in
accounting policies or practices and our ability to maintain an effective system of internal controls; impairment charges related to goodwill; and the effect of market conditions, general conditions in the tax return preparation industry or general
economic conditions.

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. We are under 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.



19



---

##### Table of Contents

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 and other revenues; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Jackson Hewitt Tax Service Inc. is the second largest paid individual tax return preparer in
the United States based upon the number of individual tax returns prepared and filed with the Internal Revenue Service (IRS). In fiscal 2008, our network consisted of 6,763 franchised and company-owned offices and prepared
3.39 million tax returns excluding Economic Stimulus Program (ESP) tax returns (3.46 million total tax returns). We estimate our network prepared approximately 4% of all tax returns prepared in 2008 by a paid tax return preparer.
Our revenues consist of fees paid by our franchisees, service revenues earned at company-owned offices and financial product fees. Jackson Hewitt, the Company, we, our, and us are used
interchangeably in this report to refer to Jackson Hewitt Tax Service Inc. and its subsidiaries, appropriate to the context.

Seasonality of
Operations

The tax return preparation business is highly seasonal, and we historically generate substantially all of our revenues
during the period from January 1 through April 30. In fiscal 2008, we earned 95% of our revenues during this period. We generally operate at a loss during the period from May 1 through December 31, during which we incur costs
associated with preparing for the upcoming tax season.

Amended Bank Agreements

MetaBank

On November 17, 2008,
we entered into an Amended and Restated Marketing Agreement (Marketing Agreement) with MetaBank d/b/a Meta Payment Systems (MetaBank), and a First Addendum (Addendum) to the Marketing Agreement with MetaBank dated
the same date. The Marketing Agreement amends and supersedes a prior agreement with MetaBank. The Marketing Agreement expires on October 31, 2011. The Addendum expires on the later of July 15, 2009 or the date upon which the parties
obligations under the Addendum have been fulfilled.

Under the Marketing Agreement, MetaBank is responsible for issuing and managing our
prepaid debit card program and providing line of credit products related to the card. We receive payment from MetaBank based on certain levels of revenues and gross profits.

The Addendum provides that in the event MetaBanks loan losses related to one of the line of credit products provided under the Marketing Agreement
significantly exceed MetaBanks projected losses, we will make payments to MetaBank to offset such losses. Our payment obligations will not arise unless MetaBanks actual loan losses are in excess of two times the level of MetaBanks
projected losses under the program. Our maximum payment obligation is approximately $13 million, which will occur in the event that MetaBanks actual loan losses are in excess of four times MetaBanks projected losses. In the event we are
required to make such payment to MetaBank, we intend for these payment obligations to be shared among us and our franchisees. Based on historical experience with this financial product, we currently consider the likelihood to be remote of a material
payment having to be made to MetaBank to offset actual loan losses.

Republic

On December 2, 2008, we entered into the First Amendment to Program Agreement (the Republic Program Agreement Amendment) with Republic
Bank & Trust Company (Republic) and the First Amendment to Technology Services Agreement (the Republic Technology Services Agreement Amendment and, together with the Republic Program Agreement Amendment, the
Republic Amendments) with Republic. The primary purposes of the Republic Amendments are to establish the number of Jackson Hewitt Tax Service locations during the 2009 tax season in which Republic will offer, process and administer
certain financial products, including refund anticipation loans, to Jackson Hewitt Tax Service customers (the Republic Program), the fees to be paid by Republic to us for the 2009 tax season and certain compliance parameters regarding
the Republic Program. The Republic Program Agreement Amendment provides Republic with the right to retain certain monies otherwise payable to us by Republic in the event that Republic fails to attain a minimum level of profitability or number of
financial products or if Republic incurs costs in connection with our failure to maintain a minimum level of compliance with Republics policies and procedures.



20



---

##### Table of Contents

During the 2009 tax season, Republic and Santa Barbara Bank & Trust, a division of Pacific
Capital Bank, N.A. (SBBT), will collectively provide financial products to the entire network of Jackson Hewitt Tax Service offices. SBBT will provide a majority of the financial products in Jackson Hewitt Tax Service offices in each of
the 2009 and 2010 tax seasons.

Termination Charges

In the first quarter of fiscal 2009, we recorded total termination charges of $3.0 million related to severance and lease termination and related expenses. In the second quarter of fiscal 2009, we recorded additional
termination charges of $0.2 million related to severance.

Severance

As part of an initiative to achieve a lower cost structure in advance of the 2009 tax season, our overall consolidated workforce was reduced by
approximately 10% during the first quarter of fiscal 2009. In connection with this action and certain employee terminations, a $1.4 million severance charge was recorded in selling, general and administrative expense in the first quarter of fiscal
2009. In the second quarter of fiscal 2009, we recorded additional severance charges of $0.2 million in Corporate and Other. For the six months ended October 31, 2008, our reportable segments included severance expenses of $0.7 million in
Company-Owned Office Operations and $0.3 million in Franchise Operations with $0.6 million in Corporate and Other. As of October 31, 2008, $0.7 million of such expenses remained unpaid and are included in accounts payable and accrued
liabilities in the accompanying Condensed Consolidated Balance Sheet.

Lease Termination and Related Expenses

As part of an overall effort to optimize company-owned store locations and improve profitability, 200 under-performing store locations were closed during
the first quarter of fiscal 2009. In connection with this action, a charge of $1.6 million was recorded in cost of company-owned operations expense related to lease terminations and related expenses, including a $0.1 million write-down of leasehold
improvements, associated with 52 of these store location closures. Costs to terminate these contractual operating leases before the end of their term were measured at fair value and reduced by an amount of estimated sublease rental income that we
believe we can reasonably obtain for the properties. In the second quarter of fiscal 2009, we recorded in cost of company-owned operations accretion expense of $0.02 million offset by a credit of $0.09 million to adjust the fair value of this lease
termination liability primarily due to favorable negotiations with landlords to buy out certain leases early. We expect to adjust the fair value of this lease termination liability due to the passage of time as an increase in the liability and as an
operating expense (accretion) over the remaining term of the leases. As of October 31, 2008, the remaining lease termination liability was $0.3 million included in accounts payable and accrued liabilities and $0.2 million in other non-current
liabilities in the accompanying Condensed Consolidated Balance Sheet.

Management Change

Effective November 3, 2008, Mark Heimbouch, formerly Chief Operating Officer, resigned. There is no plan at this time to fill the Chief Operating
Officer position. All such responsibilities will be absorbed by the current executive management team.



21



---

##### 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 EndedOctober 31, |         |   | Six Months EndedOctober 31, |  
|                                                      |  | 2008                          |         |   | 2007                        |   |         | 2008 |  |   | 2007    |  
|                                                      |  | (in thousands)                |         |   | (in thousands)              |  
|Revenues                                              |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Franchise operations revenues:                        |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Royalty                                               |  | $                             | 646     |   |                             | $ | 674     |      |  | $ | 1,273   |   |  | $ | 1,332   |  
|Marketing and advertising                             |  |                               | 287     |   |                             |   | 300     |      |  |   | 564     |   |  |   | 575     |  
|Financial product fees                                |  |                               | 2,452   |   |                             |   | 2,580   |      |  |   | 5,074   |   |  |   | 5,326   |  
|Other                                                 |  |                               | 1,248   |   |                             |   | 1,651   |      |  |   | 1,597   |   |  |   | 3,384   |  
|Service revenues from company-owned office operations |  |                               | 436     |   |                             |   | 396     |      |  |   | 848     |   |  |   | 904     |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total revenues                                        |  |                               | 5,069   |   |                             |   | 5,601   |      |  |   | 9,356   |   |  |   | 11,521  |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Expenses                                              |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Cost of franchise operations                          |  |                               | 7,341   |   |                             |   | 8,676   |      |  |   | 15,953  |   |  |   | 18,062  |  
|Marketing and advertising                             |  |                               | 5,440   |   |                             |   | 4,570   |      |  |   | 9,609   |   |  |   | 8,710   |  
|Cost of company-owned office operations               |  |                               | 8,633   |   |                             |   | 6,898   |      |  |   | 17,940  |   |  |   | 12,515  |  
|Selling, general and administrative                   |  |                               | 13,452  |   |                             |   | 17,961  |      |  |   | 23,900  |   |  |   | 31,280  |  
|Depreciation and amortization                         |  |                               | 3,186   |   |                             |   | 3,310   |      |  |   | 6,393   |   |  |   | 6,594   |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total expenses                                        |  |                               | 38,052  |   |                             |   | 41,415  |      |  |   | 73,795  |   |  |   | 77,161  |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                                  |  |                               | (32,983 | ) |                             |   | (35,814 | )    |  |   | (64,439 | ) |  |   | (65,640 | )
|Other income/(expense):                               |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Interest and other income                             |  |                               | 380     |   |                             |   | 508     |      |  |   | 780     |   |  |   | 948     |  
|Interest expense                                      |  |                               | (4,219  | ) |                             |   | (3,631  | )    |  |   | (7,225  | ) |  |   | (6,491  | )
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Loss before income taxes                              |  |                               | (36,822 | ) |                             |   | (38,937 | )    |  |   | (70,884 | ) |  |   | (71,183 | )
|Benefit from income taxes                             |  |                               | 14,616  |   |                             |   | 15,263  |      |  |   | 28,134  |   |  |   | 27,904  |  
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                              |  | $                             | (22,206 | ) |                             | $ | (23,674 | )    |  | $ | (42,750 | ) |  | $ | (43,279 | )
|                                                      |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  

Given the seasonal nature of the tax return preparation business, approximately 2% of the total
tax returns prepared by our network in fiscal 2008 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 amendments to previously filed tax returns.

Three Months Ended October 31, 2008 as Compared to Three Months Ended October 31, 2007

Total Revenues

Total revenues decreased $0.5 million, or 10%, primarily due to lower fees of $0.2 million that we earn from franchisees from the sale or transfer of our franchise territories, the elimination of commissions of
$0.15 million earned in connection with preferred vendor programs and lower revenues of $0.1 million related to sales of the Gold Guarantee® product from prior tax seasons. Partially
offsetting the lower overall revenues were higher territory sales which included the sale of 61 territories in the current quarter as compared to 48 in the prior period quarter.

Total Expenses

Total operating expenses decreased $3.4 million, or 8%. Highlights were as follows:

Cost of franchise operations: Cost of franchise operations decreased $1.3 million, or 15%, primarily due to the absence of a $0.4
million charge from the second quarter of fiscal 2008 related to the termination of franchise agreements in connection with the acquisition of a former franchisees businesses in Atlanta, Chicago and Detroit, lower personnel-related expenses of
$0.3 million due primarily to a workforce reduction in the first quarter of fiscal 2009 and lower meetings and conference expenses of $0.3 million in connection with the Companys overall efforts to improve operating efficiencies.



22



---

##### Table of Contents

Marketing and Advertising: Marketing and advertising increased $0.9 million, or 19%, primarily
related to higher advertising agency fees in connection with our new advertising agency engaged to assist us with improving our ability to attract new customers and retain our core customer base in the 2009 tax season.

Cost of company-owned office operations: Cost of company-owned office operations increased $1.7 million, or 25%, primarily due to higher
occupancy costs of $0.9 million and increased personnel-related expenses of $0.9 million associated with maintaining a significantly increased number of storefront locations resulting primarily from acquisitions.

Selling, general and administrative: Selling, general and administrative expenses decreased $4.5 million, or 25%, primarily due to (i) the
absence of a $5.6 million severance charge related to the departure of our former Chief Executive Officer in October 2007; (ii) the absence of $2.2 million in previously disclosed Internal Review expenses in connection with allegations set
forth in the Department of Justice lawsuits against a former franchisee; and (iii) lower share-based compensation of $0.5 million. Partially offsetting the overall decrease in selling, general and administrative were (i) a charge of $2.8
million related to a tentative legal settlement by the Company (California Hood Matter), see Note 11  Commitments and Contingencies  Legal Proceedings for additional information; and (ii) higher external legal fees
(unrelated to the Internal Review) of $1.1 million in connection with increased litigation activity.

Six Months Ended October 31, 2008 as
Compared to Six Months Ended October 31, 2007

Total Revenues

Total revenues decreased $2.2 million, or 19%, primarily due to (i) lower revenues of $0.8
million as a result of the lower number of territories sold (other revenues included the sale of 65 territories in the current period as compared to 93 in the prior year period); (ii) the elimination of commissions and related revenues of $0.4
million earned in connection with preferred vendor programs; (iii) lower revenues of $0.3 million related to sales of the Gold Guarantee® product from prior tax seasons; and
(iv) lower fees of $0.25 million that we earn from franchisees from the sale or transfer of our franchise territories.

Total Expenses

Total operating expenses decreased $3.4 million, or 4%. Highlights were as follows:

Cost of franchise operations: Cost of franchise operations decreased $2.1 million, or 12%, primarily due to (i) lower meeting and
conference expenses of $0.6 million in connection with the Companys overall efforts to improve operating efficiencies; (ii) lower personnel-related expenses of $0.4 million due largely to a workforce reduction in the first quarter of
fiscal 2009; and (iii) the absence of a $0.4 million charge from the second quarter of fiscal 2008 related to the termination of franchise agreements in connection with the acquisition of a former franchisees businesses in Atlanta,
Chicago and Detroit.

Marketing and Advertising: Marketing and advertising increased $0.9 million, or 10%, primarily due to higher
advertising agency fees in connection with our new advertising agency engaged to assist us with improving our ability to attract new customers and retain our core customer base in the 2009 tax season.

Cost of company-owned office operations: Cost of company-owned office operations increased $5.4 million, or 43%, primarily due to higher
occupancy costs of $1.9 million and increased personnel-related expenses of $1.8 million associated with maintaining a significantly increased number of storefront locations resulting primarily from acquisitions in fiscal 2008 as well as a lease
termination charge of $1.5 million in the first quarter of fiscal 2009 related to under-performing stores.

Selling, general and
administrative: Selling, general and administrative expenses decreased $7.4 million, or 24%, primarily due to (i) the absence of a $5.6 million severance charge related to the departure of our former Chief Executive Officer in October 2007;
(ii) the absence of $5.6 million in previously disclosed Internal Review expenses; (iii) the favorable effect of a $1.5 million insurance recovery related to the settlement of the California Attorney General and Pierre Brailsford matters;
and (iv) lower share-based compensation of $0.4 million. Partially offsetting the overall decrease in selling, general and administrative were (i) a charge of $2.8 million related to California Hood Matter; (ii) severance of $1.6
million related to a workforce reduction in the first quarter of fiscal 2009; (iii) higher external legal fees (unrelated to the Internal Review) of $1.2 million; and (iv) higher consulting fees of $0.4 million incurred to support our
strategic initiatives.



23



---

##### Table of Contents

Segment Results and Corporate and Other

Franchise Operations



|                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------- |  | ----------------------------- | ------- | - | --------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                    |  | Three Months EndedOctober 31, |         |   | Six Months EndedOctober 31, |  
|                                    |  | 2008                          |         |   | 2007                        |   |         | 2008 |  |   | 2007    |  
|                                    |  | (in thousands)                |         |   | (in thousands)              |  
|Revenues                            |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Royalty                             |  | $                             | 646     |   |                             | $ | 674     |      |  | $ | 1,273   |   |  | $ | 1,332   |  
|Marketing and advertising           |  |                               | 287     |   |                             |   | 300     |      |  |   | 564     |   |  |   | 575     |  
|Financial product fees              |  |                               | 2,452   |   |                             |   | 2,580   |      |  |   | 5,074   |   |  |   | 5,326   |  
|Other                               |  |                               | 1,248   |   |                             |   | 1,651   |      |  |   | 1,597   |   |  |   | 3,384   |  
|                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total revenues                      |  |                               | 4,633   |   |                             |   | 5,205   |      |  |   | 8,508   |   |  |   | 10,617  |  
|                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|                                    |  |                               |         |  
|Expenses                            |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Cost of operations                  |  |                               | 7,341   |   |                             |   | 8,676   |      |  |   | 15,953  |   |  |   | 18,062  |  
|Marketing and advertising           |  |                               | 5,215   |   |                             |   | 4,276   |      |  |   | 9,323   |   |  |   | 8,201   |  
|Selling, general and administrative |  |                               | 1,009   |   |                             |   | 1,295   |      |  |   | 2,076   |   |  |   | 2,023   |  
|Depreciation and amortization       |  |                               | 2,165   |   |                             |   | 2,588   |      |  |   | 4,358   |   |  |   | 5,176   |  
|                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total expenses                      |  |                               | 15,730  |   |                             |   | 16,835  |      |  |   | 31,710  |   |  |   | 33,462  |  
|                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                |  |                               | (11,097 | ) |                             |   | (11,630 | )    |  |   | (23,202 | ) |  |   | (22,845 | )
|Other income/(expense):             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Interest and other income           |  |                               | 363     |   |                             |   | 375     |      |  |   | 739     |   |  |   | 740     |  
|                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Loss before income taxes            |  | $                             | (10,734 | ) |                             | $ | (11,255 | )    |  | $ | (22,463 | ) |  | $ | (22,105 | )
|                                    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  

Three Months Ended October 31, 2008 as Compared to Three Months Ended October 31, 2007

Total Revenues

Total revenues
decreased $0.6 million, or 11%, as discussed in the Condensed Consolidated Results of Operations.

Total Expenses

Total operating expenses decreased $1.1 million, or 7%. Highlights were as follows:

Cost of operations: Cost of operations decreased as discussed in the Condensed Consolidated Results of Operations.

Marketing and Advertising: Marketing and advertising increased $0.9 million, or 22%, primarily related to higher advertising agency fees in
connection with our new advertising agency engaged to assist us with improving our ability to attract new customers and retain our core customer base in the 2009 tax season.

Selling, general and administrative:Selling, general and administrative expenses decreased $0.3 million, or 22%, primarily due to lower
personnel-related costs.

Depreciation and amortization:Depreciation and amortization decreased $0.4 million, or 16%, primarily due
to certain intangible assets becoming fully amortized in December 2007.

Six Months Ended October 31, 2008 as Compared to Six Months Ended
October 31, 2007

Total Revenues

Total revenues decreased $2.1 million, or 20% as discussed in the Condensed Consolidated Results of Operations.

Total Expenses

Total operating expenses decreased $1.8 million, or 5%. Highlights were as follows:

Cost of operations: Cost of operations increased as discussed in the Condensed Consolidated Results of Operations.



24



---

##### Table of Contents

Marketing and Advertising: Marketing and advertising increased $1.1 million, or 14%, primarily due
to higher advertising agency fees in connection with our new advertising agency engaged to assist us with improving our ability to attract new customers and retain our core customer base in the 2009 tax season.

Depreciation and amortization:Depreciation and amortization decreased $0.8 million, or 16%, primarily due to certain intangible assets becoming
fully amortized in December 2007.

Company-Owned Office Operations



|                                    |  |                               |         |   |                             |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------- |  | ----------------------------- | ------- | - | --------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                    |  | Three Months EndedOctober 31, |         |   | Six Months EndedOctober 31, |  
|                                    |  | 2008                          |         |   | 2007                        |   |        | 2008 |  |   | 2007    |  
|                                    |  | (in thousands)                |         |   | (in thousands)              |  
|Revenues                            |  |                               |         |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Service revenues from operations    |  | $                             | 436     |   |                             | $ | 396    |      |  | $ | 848     |   |  | $ | 904     |  
|                                    |  |                               |         |   |                             |   |        |      |  |   |         |   |  |   |         |  
|                                    |  |                               |         |  
|Expenses                            |  |                               |         |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Cost of operations                  |  |                               | 8,633   |   |                             |   | 6,898  |      |  |   | 17,940  |   |  |   | 12,515  |  
|Marketing and advertising           |  |                               | 225     |   |                             |   | 294    |      |  |   | 286     |   |  |   | 509     |  
|Selling, general and administrative |  |                               | 769     |   |                             |   | 1,051  |      |  |   | 2,663   |   |  |   | 1,939   |  
|Depreciation and amortization       |  |                               | 1,021   |   |                             |   | 722    |      |  |   | 2,035   |   |  |   | 1,418   |  
|                                    |  |                               |         |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Total expenses                      |  |                               | 10,648  |   |                             |   | 8,965  |      |  |   | 22,924  |   |  |   | 16,381  |  
|                                    |  |                               |         |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                |  |                               | (10,212 | ) |                             |   | (8,569 | )    |  |   | (22,076 | ) |  |   | (15,477 | )
|                                    |  |                               |         |   |                             |   |        |      |  |   |         |   |  |   |         |  
|Loss before income taxes            |  | $                             | (10,212 | ) |                             | $ | (8,569 | )    |  | $ | (22,076 | ) |  | $ | (15,477 | )
|                                    |  |                               |         |   |                             |   |        |      |  |   |         |   |  |   |         |  

Three Months Ended October 31, 2008 as Compared to Three Months Ended October 31, 2007

Total Expenses

Total operating
expenses increased $1.7 million, or 19%. Highlights were as follows:

Cost of operations: Cost of operations increased as
discussed in the Condensed Consolidated Results of Operations.

Selling, general and administrative: Selling, general and
administrative decreased $0.3 million, or 27%, primarily due to lower personnel-related expenses.

Depreciation and amortization:Depreciation and amortization increased $0.3 million, or 41%, primarily as a result of incremental depreciation and amortization related to our asset acquisitions over the past 12 months.

Six Months Ended October 31, 2008 as Compared to Six Months Ended October 31, 2007

Total Expenses

Total operating expenses increased $6.5 million, or 40%. Highlights were as
follows:

Cost of operations: Cost of operations increased as discussed in the Condensed Consolidated Results of Operations.

Selling, general and administrative: Selling, general and administrative increased $0.7 million, or 37%, primarily due to severance
of $0.6 million in connection with a workforce reduction and certain employee terminations.

Depreciation and amortization:Depreciation and amortization increased $0.6 million, or 44%, primarily as a result of incremental depreciation and amortization related to our asset acquisitions over the past 12 months



25



---

##### Table of Contents

Corporate and Other

Corporate and other expenses include unallocated corporate overhead supporting both segments, including legal, finance, human resources, real estate facilities and strategic development activities, as well as
share-based compensation and financing costs.



|                           |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|-------------------------- |  | ----------------------------- | ------- | - | --------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                           |  | Three Months EndedOctober 31, |         |   | Six Months EndedOctober 31, |  
|                           |  | 2008                          |         |   | 2007                        |   |         | 2008 |  |   | 2007    |  
|                           |  | (in thousands)                |         |   | (in thousands)              |  
|Expenses (a)               |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|General and administrative |  | $                             | 7,990   |   |                             | $ | 6,499   |      |  | $ | 15,145  |   |  | $ | 13,156  |  
|Insurance settlement       |  |                               |        |   |                             |   |        |      |  |   | (1,500  | ) |  |   |        |  
|Internal Review            |  |                               |        |   |                             |   | 2,174   |      |  |   |        |   |  |   | 5,588   |  
|Litigation matter          |  |                               | 2,833   |   |                             |   |        |      |  |   | 2,833   |   |  |   |        |  
|Severance                  |  |                               | 183     |   |                             |   | 5,734   |      |  |   | 597     |   |  |   | 6,108   |  
|Share-based compensation   |  |                               | 668     |   |                             |   | 1,208   |      |  |   | 2,086   |   |  |   | 2,466   |  
|                           |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total expenses             |  |                               | 11,674  |   |                             |   | 15,615  |      |  |   | 19,161  |   |  |   | 27,318  |  
|                           |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations       |  |                               | (11,674 | ) |                             |   | (15,615 | )    |  |   | (19,161 | ) |  |   | (27,318 | )
|                           |  |                               |         |  
|Other income/(expense):    |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Interest and other income  |  |                               | 17      |   |                             |   | 133     |      |  |   | 41      |   |  |   | 208     |  
|Interest expense           |  |                               | (4,219  | ) |                             |   | (3,631  | )    |  |   | (7,225  | ) |  |   | (6,491  | )
|                           |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|                           |  |                               |         |  
|Loss before income taxes   |  | $                             | (15,876 | ) |                             | $ | (19,113 | )    |  | $ | (26,345 | ) |  | $ | (33,601 | )
|                           |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  



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

Three Months Ended October 31, 2008 as Compared to Three Months Ended October 31, 2007

Loss from
Operations

Loss from operations decreased $3.9 million, or 25%, primarily due to (i) the absence of a $5.6 million severance
charge related to the departure of our former CEO in October 2007; (ii) the absence of $2.2 million in Internal Review expenses; and (iii) lower share-based compensation of $0.5 million. Partially offsetting the overall decrease were
(i) a charge of $2.8 million related to the California Hood Matter; (ii) higher external legal fees (unrelated to the Internal Review) of $1.1 million; and (iii) higher consulting fees of $0.4 million incurred to support our strategic
initiatives.

Six Months Ended October 31, 2008 as Compared to Six Months Ended October 31, 2007

Loss from Operations

Loss from operations decreased
$8.2 million, or 30%, primarily due to the same reasons as noted in the three month comparison. The reduction in loss from operations also benefited from the favorable effect of a $1.5 million insurance recovery related to the settlement of the
California Attorney General and Pierre Brailsford matters.



26



---

##### Table of Contents

Liquidity and Capital Resources

Historical Sources and Uses of Cash from Operations

Seasonality of Cash Flows

The tax return preparation business is highly seasonal resulting in substantially all of our revenues and cash flow being generated during
the period from January 1 through April 30. Following the tax season, from May 1 through December 31, we primarily rely on excess operating cash flow from the previous tax season and our credit facility to fund our operating
expenses and to reinvest in our business to support future growth. Given the nature of the franchise business model, our business is generally not capital intensive and has historically generated strong operating cash flow from operations on an
annual basis.

Credit Facility

Borrowings under our Amended and Restated $450 Million Credit Facility, which expires in October 2011, are to be used to finance working capital needs, general corporate purposes, potential acquisitions and
repurchases of our common stock. We may also use this credit facility to issue letters of credit for general corporate purposes. As of October 31, 2008, we had $321.0 million in borrowings outstanding under our credit facility.

The Amended and Restated $450 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 Amended and Restated $450 Million Credit Facility, plus a credit spread ranging from 0.50% to 2.00% per annum. Base Rate borrowings bear interest at the
Prime Rate plus a credit spread of up to 1.00%. The Amended and Restated $450 Million Credit Facility carries an annual fee ranging from 0.10% to 0.40% of the unused portion of the credit facility.

The Amended and Restated $450 Million Credit Facility contains the requirement that the Company meet certain financial covenants, such as a maximum
consolidated leverage ratio and a minimum consolidated interest coverage ratio. 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 Amended and Restated $450 Million Credit Facility, with consolidated debt being measured on a trailing four-quarter basis. The maximum consolidated leverage ratio is (i) 3.5:1.0 for the fiscal quarters ending
July 31, 2008 through January 31, 2009; (ii) 3.15:1.0 for the fiscal quarters ending April 30, 2009 through October 31, 2009; and (iii) 3.0:1.0 for the fiscal quarters ending January 31, 2010 through July 31,
2011. The consolidated interest coverage ratio is the ratio of consolidated EBITDA to consolidated interest expense, each as defined in the Amended and Restated $450 Million Credit Facility. Under the Amended and Restated $450 Million Credit
Facility, the minimum allowable consolidated interest coverage ratio is 4.0:1.0.

The Amended and Restated $450 Million Credit Facility
contains various customary restrictive covenants that limits our ability to, among other things; (i) incur additional indebtedness or guarantees; (ii) create liens or other encumbrances on our 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. Specifically, the credit facility includes limitations with regard to share repurchases and
acquisitions. We are restricted from repurchasing shares until we achieve a consolidated leverage ratio of 2.5:1.0 or lower for two consecutive fiscal quarters. Thereafter, achievement of a consolidated leverage ratio of 3.0:1.0 or below is required
for continued share repurchases. We are limited to annual acquisitions of $15.0 million when the consolidated leverage ratio is greater than 3.0:1.0.

In the future, we may require additional 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.

Credit Market Crisis

The credit markets have been experiencing unprecedented volatility and disruption causing many lenders and institutional investors to cease
providing funding to even the most credit worthy borrowers or to other financial institutions. The credit crisis could limit the ability of our financial partners to fund, securitize or sell the financial products that are made available
to our customers through our offices and negatively impact the ability of our lending syndicate to make funds available to us under our credit facility. For additional information on how the credit market crisis may adversely affect our business and
financial performance, please see Item 1A - Risk Factors.



27



---

##### Table of Contents

Sources and Uses of Cash

Operating activities

In the six months ended October 31, 2008, we used $18.4 million
less cash for operations as compared to the six months ended October 31, 2007 due to the following:



| |  |  | Lower income tax payments of $6.9 million primarily due to the decrease in operating income between years;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | The absence of $5.6 million of Internal Review expenses;
| | - |  | --------------------------------------------------------



| |  |  | Lower performance bonus payments to full-time and seasonal employees as we paid $4.8 million in the six months ended October 31, 2008 (accrued in fiscal 2008)
as compared to $8.3 million in the six months ended October 31, 2007 (accrued in fiscal 2007); and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The absence of a $3.0 million payment to our former Chief Executive Officer in the second quarter of fiscal 2008.
| | - |  | -----------------------------------------------------------------------------------------------------------------

Investing activities

In the
six months ended October 31, 2008, we used essentially the same amount of cash for investing activities as compared to the six months ended October 31, 2007. Cash used during each period was primarily related to payments made under
the terms of the purchase agreements in connection with the October 2007 acquisition of tax return preparation businesses in the Atlanta, Chicago and Detroit markets from a former franchisee.

Financing activities

In the
six months ended October 31, 2008, we received $22.7 million less cash from financing activities as compared to the six months ended October 31, 2007 primarily due to a reduction of net borrowings under our credit facility of $68.0 million
and the absence of proceeds of $4.3 million from the exercise of stock options by our former Chief Executive Officer in October 2007 partially offset by the absence of $55.0 million used to repurchase shares of our common stock in the prior period.

Future Cash Requirements and Sources of Cash

Future Cash Requirements

Over the next 12 months, our primary cash requirements will be the funding of our operating
activities (including contractual obligations and commitments), capital expenditure requirements, acquisitions, the funding of franchisee office expansion, debt service and quarterly dividends as described more fully below.



| |  |  | Marketing and advertisingWe receive marketing and advertising payments from franchisees to fund our budget for most of these expenses. Marketing and
advertising expenses include national, regional and local campaigns designed to increase brand awareness and attract both early season and late season customers. Such expenses are seasonal in nature and typically increase in our third and fourth
fiscal quarters when most of our revenues are earned.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. We also continue to pursue selective acquisition opportunities for our company-owned office segment in economically attractive, high growth markets adjacent
to our current operations. Expenses 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
return preparation services to our customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Capital expendituresWe anticipate spending on capital expenditures in fiscal 2009 primarily for information technology upgrades to support our growth,
which includes the purchase of computer equipment and the development of internal-use software.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Franchisee fundingWe anticipate providing franchisees with funding for Conversions and to open new storefront offices as we look to build a stronger
distribution system.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Debt serviceAs of October 31 2008, we had $321.0 million outstanding under our Amended and Restated $450 Million Credit Facility, none of which
was scheduled to mature in the next 12 months. We anticipate generating operating cash flow during the tax season to partially repay these outstanding borrowings.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Quarterly dividendDividends paid in the six months ended October 31, 2008 were $10.2 million. On December 3, 2008, our Board of Directors
declared the fiscal 2009 third quarter cash dividend of $0.18 per share, payable on January 15, 2009, to stockholders of record on December 29, 2008. We currently intend to make quarterly cash dividend payments of $0.18 per common share
over the remainder of fiscal 2009.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28



---

##### Table of Contents

Future Sources of Cash

We borrow against our credit facility to fund operations with increases particularly during the first nine months of the fiscal year. Beginning in the fourth fiscal quarter, we expect our primary source of cash to be
cash provided by operating activities, primarily from the collection of accounts receivable from our franchisees and from the providers of financial products to our customers.

Critical Accounting Policies

In presenting our Condensed 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 Condensed Consolidated Financial Statements were the most appropriate at that time. The following critical accounting policies may affect reported financial
performance resulting in variations in such performance both on an interim and fiscal year basis.

Goodwill

We test goodwill for impairment annually in our fourth fiscal quarter, or more frequently if circumstances indicate
impairment may have occurred. We review the carrying value of our goodwill by comparing the carrying value of our reporting units to their fair value. When determining fair value, we utilize various assumptions, including projections of future cash
flows. A change in these underlying assumptions would 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. An adverse change to our business would impact our consolidated results and may result in an impairment of our goodwill. We did not note any impairment indicators as of October 31, 2008. The aggregate carrying value of our
goodwill was $416.3 million as of October 31, 2008. See Part I. Item 1Financial StatementsNotes to Condensed Consolidated Financial StatementsNote 4 Goodwill and Other Intangible Assets for more
information on goodwill.

Other Indefinite-Lived Intangible Assets

We test indefinite-lived intangible assets for impairment annually in our fourth fiscal quarter, or more frequently if circumstances
indicate impairment may have occurred. 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. An adverse change to our business would impact our consolidated results and may result in an impairment of our indefinite-lived intangible assets. We did not note any impairment indicators as of
October 31, 2008. The aggregate carrying value of our indefinite-lived intangible assets was $86.9 million as of October 31, 2008. See Part I. Item 1Financial StatementsNotes to Condensed Consolidated Financial
StatementsNote 4Goodwill and Other Intangible Assets for more information on indefinite-lived intangible assets.

Long-Lived Assets

Definite-lived intangible assets and long-lived assets are reviewed for impairment
whenever events or circumstances indicate that the carrying amount may not be recoverable. We test for impairment based on a comparison of the assets undiscounted cash flows to its carrying value and, if impaired, written down to fair value
based on either discounted cash flows or appraised values. We did not note any impairment indicators as of October 31, 2008.



29



---

##### Table of Contents

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB
Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2). FSP FAS 157-2 defers the implementation of SFAS No. 157 for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We adopted SFAS No. 157 beginning May 1, 2008, for financial instruments. Although the adoption of SFAS 157 did not
impact our financial condition, results of operations or cash flow, we are now required to provide additional disclosures as part of our financial statements. The additional disclosure can be found in Note 3, Fair Value Measurements to
the Condensed Consolidated Financial Statements. The aspects that have been deferred by FSP FAS 157-2 will be effective for us beginning May 1, 2009 and we are currently assessing the potential impact of its adoption on our Consolidated
Financial Statements.

In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active (FSP FAS 157-3), which clarifies the application of SFAS 157 and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP FAS 157-3 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS 157. FSP FAS 157-3 was effective for us upon issuance on
October 10, 2008 and the adoption did not have a material impact on our Consolidated Financial Statements.

In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) which permits entities to choose to measure many financial instruments and certain other items at fair value that are
not currently required to be measured at fair value. SFAS 159 was effective for us beginning May 1, 2008. We have not elected the fair value measurement option for any financial assets or liabilities that were not previously recorded at fair
value.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS
141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interests in the acquiree,
and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for us as of May 1, 2009 and will then be
applied prospectively to business combinations that have an acquisition date on or after May 1, 2009. We are currently assessing the potential impact on our Consolidated Financial Statements of adopting SFAS 141R.

In June 2007, the FASB ratified EITF 06-11 Accounting for the Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF
06-11). EITF 06-11 provides that tax benefits associated with dividends on share-based payment awards be recorded as a component of additional paid-in capital. EITF 06-11 was effective, on a prospective basis, on May 1, 2008. The
implementation of this standard did not have a material impact on our Consolidated Financial Statements.

In March 2008, the FASB issued
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS 161), which modifies and expands the disclosure requirements for derivative instruments
and hedging activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires quantitative disclosures about fair value amounts and gains and losses
on derivative instruments. It also requires disclosures about credit-related contingent features in derivative agreements. SFAS 161 is effective for us beginning February 1, 2009. SFAS 161 encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The principal impact of SFAS 161 will be to require us to expand our disclosure regarding our derivative and hedging activities.

In April 2008, the FASB issued Staff Position FSP 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP
142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets
(SFAS 142). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R)
and other GAAP. FSP 142-3 is effective for us beginning May 1, 2009. We are currently assessing the potential impact on our Consolidated Financial Statements of adopting FSP 142-3.

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive non-forfeitable dividends before vesting should be considered participating securities. As
participating securities, these instruments should be included in the calculation of basic EPS. FSP EITF 03-6-1 is effective for us



30



---

##### Table of Contents

beginning May 1, 2009. We do not grant share-based payment awards that entitle our holders to receive non-forfeitable dividends before vesting therefore
this EITF is not expected to have any impact on our Consolidated Financial Statements when adopted.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We have entered into interest rate swap agreements with financial institutions to convert a notional amount of $100.0 million of floating-rate borrowings
into fixed-rate debt, with the intention of mitigating the economic impact of changing interest rates. Under these interest rate swap agreements, the first $50.0 million of which became effective in October 2005 and the remaining $50.0 million in
November 2007, we receive a floating interest rate based on the three-month LIBOR (in arrears) and pay a fixed interest rate averaging from 4.4% to 4.5%. These interest rate swap agreements 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.

In connection with extending the maturity date under the amended and restated credit facility, in October 2006 we entered into interest rate collar agreements to become effective after the initial interest rate swap
agreements terminate. The interest rate collar agreements were entered into with financial institutions to limit the variability of expense/payments on $50.0 million of floating-rate borrowings during the period from July 2010 to October 2011
to a range of 5.5% (the cap) and 4.6% (the floor). These interest rate collar agreements were determined to be cash flow hedges in accordance with SFAS No. 133, as amended.

We have financial market risk exposure related primarily to changes in interest rates. As discussed above, we attempt to reduce this risk through the
utilization of derivative financial instruments. A hypothetical 1% change in the interest rate on our floating-rate borrowings outstanding as of October 31, 2008, excluding our $100.0 million of hedged borrowings whereby we fixed the interest
rate, at an average ranging from 4.4% to 4.5%, would result in an annual increase or decrease in income before income taxes of $2.2 million. The estimated increase or decrease is based upon the level of variable rate debt as of October 31, 2008
and assumes no changes in the volume or composition of debt.



|Item 4. | Controls and Procedures
|------- | -----------------------

(a) Evaluation of
Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b) Changes in
Internal Control over Financial Reporting.

During the second quarter of fiscal 2009, there were no changes that materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting.



31



---

##### Table of Contents

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

See Part 1 
Item 1 Note 11 - Commitments and Contingencies, to our Condensed Consolidated Financial Statements, which is incorporated by reference herein.



|Item 1A. | Risk Factors.
|-------- | -------------

The information presented below
includes any material changes to the description of the risk factors affecting our business as previously disclosed in Item 1A. to Part 1 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2008.

The credit market crisis may adversely affect our business and financial performance.

The credit markets have been experiencing unprecedented volatility and disruption causing many lenders and institutional investors to cease providing
funding to even the most credit worthy borrowers or to other financial institutions. The credit crisis could limit the ability of our financial partners to fund, securitize or sell the financial products that are made available to our
customers through our offices. The disruptions in the credit markets may also require us to take efforts to support our financial partners as we did in agreeing to make payments to MetaBank to offset loan losses significantly in excess of
MetaBanks projected losses it incurs related to one of the line of credit products it provides. If the credit crisis prevents our financial partners from providing financial products to our customers, limits the financial products offered or
results in us having to incur further financial obligations to support our financial partners, our revenues or profitability could decline. The cost and availability of funds could also adversely impact our franchisees ability to grow and
operate their businesses which could cause our revenues or profitability to decline. In addition, continued disruptions in the credit markets could adversely affect our ability to sell territories to new or existing franchisees, causing our
revenues or profitability to decline. Continued disruptions in the credit market could also negatively impact the ability of our lending syndicate to make funds available to us under our credit facility which could have a material adverse
effect on our business, financial condition and results of operations.



|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:

There were no unregistered sales of equity securities during the six months ended October 31, 2008.

Issuer Purchases of Equity Securities:

There were no issuer purchases of equity securities during the six months
ended October 31, 2008.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

There were no
defaults upon senior securities during the six months ended October 31, 2008.



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

Our 2008 Annual Meeting of Stockholders was held on September 23, 2008. At that Annual Meeting, our stockholders:



| | 1. | Elected Ulysses L. Bridgeman, Jr. and Rodman L. Drake to serve as Class I directors of the Company, to serve until the 2011 Annual Meeting of Stockholders and until their respective
successors shall have been elected and have qualified, or until their earlier resignation or removal;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Approved the amendment to the Companys Amended and Restated Certificate of Incorporation to eliminate the classification of the Board of Directors beginning with the 2009
annual meeting;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Voted for the advisory (non-binding) vote on executive compensation; and
| | -- | ------------------------------------------------------------------------



| | 4. | Ratified the appointment of Deloitte & Touche LLP as our auditors for the fiscal year ending April 30, 2009.
| | -- | ------------------------------------------------------------------------------------------------------------



32



---

##### Table of Contents

On August 5, 2008, the record date of the Annual Meeting, we had 28,849,927 shares of common stock
outstanding. At the Annual Meeting, holders of 27,500,640 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 |  | Votes Against |  | Abstain
|Ulysses L. Bridgeman, Jr. |  | 23,690,007     |  | 3,792,537     |  | 18,093 
|Rodman L. Drake           |  | 23,648,492     |  | 3,833,684     |  | 18,461 

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

Proposal II  With respect to the approval amendment to the
Companys Amended and Restated Certificate of Incorporation to eliminate the classification of the Board of Directors beginning with the 2009 annual meeting.



|               |  |           
|-------------- |  | ----------
|Votes in favor |  | 27,378,289
|Votes against  |  | 104,667   
|Abstentions    |  | 17,677    

Proposal III  With respect to the advisory (non-binding) vote on executive compensation.



|               |  |           
|-------------- |  | ----------
|Votes in favor |  | 14,744,442
|Votes against  |  | 8,854,269 
|Abstentions    |  | 3,901,921 

Proposal IV  Ratification of Appointment of Auditors.



|               |  |           
|-------------- |  | ----------
|Votes in favor |  | 26,345,023
|Votes against  |  | 42,577    
|Abstentions    |  | 1,113,040 



33



---

##### Table of Contents

|Item 5. | Other Information.
|------- | ------------------

There is no other information
to be disclosed.



|Item 6. | Exhibits.
|------- | ---------

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



|             |    |  |                                                                                                                                                                           
|------------ | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1          |    |  | Amended and Restated Certificate of Incorporation.                                                                                                                        
|             |   
|3.2          |    |  | Amended and Restated By-Laws of Jackson Hewitt Tax Service Inc. dated September 23, 2008.                                                                                 
|             |   
|10.1         | *  |  | Amended and Restated Marketing Agreement, dated November 17, 2008, between Jackson Hewitt Inc. and Metabank d/b/a Meta Payment Systems.                                   
|             |   
|10.2         | *  |  | First Addendum to Amended and Restated Marketing Agreement, dated November 17, 2008, between Jackson Hewitt Inc. and Metabank d/b/a Meta Payment Systems.                 
|             |   
|10.3         | *  |  | First Amendment to Program Agreement, dated December 2, 2008, between Jackson Hewitt Inc. and Republic Bank & Trust Company.                                              
|             |   
|10.4         | *  |  | First Amendment to Technology Services Agreement, dated December 2, 2008, between Jackson Hewitt Technology Services LLC and Republic Bank & Trust Company.               
|             |   
|10.5         | ** |  | Form of Non-Performance Based Executive Officer Restricted Stock Award Agreement under the Jackson Hewitt Tax Service Inc. Amended and Restated Equity and Incentive Plan.
|             |   
|10.6         | ** |  | Form of Performance Based Executive Officer Restricted Stock Award Agreement under the Jackson Hewitt Tax Service Inc. Amended and Restated Equity and Incentive Plan.    
|             |   
|10.7         | ** |  | Form of Performance Based Executive Officer Stock Option Agreement under the Jackson Hewitt Tax Service Inc. Amended and Restated Equity and Incentive Plan.              
|             |   
|10.8         | ** |  | Form of Performance Based Stock Option Agreement under the Jackson Hewitt Tax Service Inc. Amended and Restated Equity and Incentive Plan.                                
|             |   
|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.                                                                       
|____________

| | * | Confidential treatment has been requested for the redacted portions of this agreement. A complete copy of the agreement, including the redacted portions, has been filed separately
with the Securities and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | Management contract or compensatory plan.
| | -- | -----------------------------------------



34



---

##### Table of Contents

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 10, 2008.



JACKSON HEWITT TAX SERVICE INC.By:

/s/    MICHAEL C. YERINGTONMichael C. YeringtonPresident and Chief Executive Officer(Principal Executive Officer)/s/    DANIEL P. OBRIENDaniel P. OBrienExecutive Vice President and Chief Financial Officer(Principal Financial Officer and Principal Accounting
Officer)




35