##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

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(Mark one)

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

For the quarterly period ended July 31, 2006

OR



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

For the transition period from  to

Commission file number 1-32215



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Jackson Hewitt Tax Service Inc.

(Exact name of registrant as specified in its charter)



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

3 Sylvan Way

Parsippany, New Jersey 07054

(Address of principal executive offices including zip code)

(973) 630-1040

(Registrants telephone number, including area code)



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

Indicate by check mark whether the registrant is an large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer  x    Accelerated filer ̈Non-accelerated filer ̈

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 34,096,574 (net of 3,818,297 shares held in treasury) as of August 31,
2006.



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##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.

TABLE OF CONTENTS



|         |  |                                                                                                        |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                        |  | Page
|         |  | PART 1 - FINANCIAL INFORMATION                                                                         |  |     
|         |  |                                                                                                       
|Item 1.  |  | Consolidated Financial Statements (Unaudited):                                                         |  | 3   
|         |  |                                                                                                       
|         |  | Consolidated Balance Sheets.                                                                           |  | 3   
|         |  |                                                                                                       
|         |  | Consolidated Statements of Operations.                                                                 |  | 4   
|         |  |                                                                                                       
|         |  | Consolidated Statements of Cash Flows.                                                                 |  | 5   
|         |  |                                                                                                       
|         |  | Notes to Consolidated Financial Statements.                                                            |  | 6   
|         |  |                                                                                                       
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                 |  | 16  
|         |  |                                                                                                       
|Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk.                                            |  | 26  
|         |  |                                                                                                       
|Item 4.  |  | Controls and Procedures.                                                                               |  | 27  
|         |  |                                                                                                       
|         |  | PART II - OTHER INFORMATION                                                                            |  |     
|         |  |                                                                                                       
|Item 1.  |  | Legal Proceedings.                                                                                     |  | 28  
|         |  |                                                                                                       
|Item 1A. |  | Risk Factors.                                                                                          |  | 28  
|         |  |                                                                                                       
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity Securities. |  | 28  
|         |  |                                                                                                       
|Item 3.  |  | Defaults Upon Senior Securities.                                                                       |  | 28  
|         |  |                                                                                                       
|Item 4.  |  | Submission of Matters to a Vote of Security Holders.                                                   |  | 28  
|         |  |                                                                                                       
|Item 5.  |  | Other Information.                                                                                     |  | 28  
|         |  |                                                                                                       
|Item 6.  |  | Exhibits.                                                                                              |  | 29  
|         |  |                                                                                                       
|         |  | Signatures.                                                                                            |  | 30  



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##### Table of Contents

PART 1  FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

JACKSON HEWITT TAX SERVICE INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands,
except per share amounts)



|                                                                                               |  |               |         |   |                |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | -------------- | - | ------- | -
|                                                                                               |  | As of         |        
|                                                                                               |  | July 31, 2006 |         |   | April 30, 2006 |  
|Assets                                                                                         |  |               |         |   |                |   |         |  
|Current assets:                                                                                |  |               |         |   |                |   |         |  
|Cash and cash equivalents                                                                      |  | $             | 450     |   |                | $ | 15,150  |  
|Accounts receivable, net of allowance for doubtful accounts of $1,569 and $1,168, respectively |  |               | 3,995   |   |                |   | 20,184  |  
|Notes receivable, net                                                                          |  |               | 5,023   |   |                |   | 4,830   |  
|Prepaid expenses and other                                                                     |  |               | 8,512   |   |                |   | 8,755   |  
|Deferred income taxes                                                                          |  |               | 4,915   |   |                |   | 4,583   |  
|                                                                                               |  |               |         |   |                |   |         |  
|Total current assets                                                                           |  |               | 22,895  |   |                |   | 53,502  |  
|                                                                                               |  |              
|Property and equipment, net                                                                    |  |               | 36,176  |   |                |   | 35,808  |  
|Goodwill                                                                                       |  |               | 392,737 |   |                |   | 392,700 |  
|Other intangible assets, net                                                                   |  |               | 85,401  |   |                |   | 86,085  |  
|Notes receivable, net                                                                          |  |               | 4,707   |   |                |   | 3,453   |  
|Other non-current assets, net                                                                  |  |               | 16,827  |   |                |   | 16,534  |  
|                                                                                               |  |               |         |   |                |   |         |  
|Total assets                                                                                   |  | $             | 558,743 |   |                | $ | 588,082 |  
|                                                                                               |  |               |         |   |                |   |         |  
|Liabilities and Stockholders Equity                                                           |  |               |         |   |                |   |         |  
|Current liabilities:                                                                           |  |               |         |   |                |   |         |  
|Accounts payable and accrued liabilities                                                       |  | $             | 17,058  |   |                | $ | 44,001  |  
|Income taxes payable                                                                           |  |               | 30,507  |   |                |   | 47,974  |  
|Deferred revenues                                                                              |  |               | 8,785   |   |                |   | 9,304   |  
|                                                                                               |  |               |         |   |                |   |         |  
|Total current liabilities                                                                      |  |               | 56,350  |   |                |   | 101,279 |  
|                                                                                               |  |              
|Long-term debt                                                                                 |  |               | 115,000 |   |                |   | 50,000  |  
|Deferred income taxes                                                                          |  |               | 37,706  |   |                |   | 36,526  |  
|Other non-current liabilities                                                                  |  |               | 10,414  |   |                |   | 12,354  |  
|                                                                                               |  |               |         |   |                |   |         |  
|Total liabilities                                                                              |  |               | 219,470 |   |                |   | 200,159 |  
|                                                                                               |  |               |         |   |                |   |         |  
|Commitments and Contingencies (Note 8)                                                         |  |               |         |   |                |   |         |  
|Stockholders equity:                                                                          |  |               |         |   |                |   |         |  
|Common stock, par value $0.01; Authorized: 200,000,000 shares;                                 |  |               |         |   |                |   |         |  
|Issued: 37,907,562 and 37,843,898 shares, respectively                                         |  |               | 379     |   |                |   | 378     |  
|Additional paid-in capital                                                                     |  |               | 352,814 |   |                |   | 350,526 |  
|Retained earnings                                                                              |  |               | 80,594  |   |                |   | 97,413  |  
|Accumulated other comprehensive income                                                         |  |               | 927     |   |                |   | 933     |  
|Less: Treasury stock, at cost: 3,628,497 and 2,538,197 shares, respectively                    |  |               | (95,441 | ) |                |   | (61,327 | )
|                                                                                               |  |               |         |   |                |   |         |  
|Total stockholders equity                                                                     |  |               | 339,273 |   |                |   | 387,923 |  
|                                                                                               |  |               |         |   |                |   |         |  
|Total liabilities and stockholders equity                                                     |  | $             | 558,743 |   |                | $ | 588,082 |  
|                                                                                               |  |               |         |   |                |   |         |  

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



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##### Table of Contents

JACKSON HEWITT TAX SERVICE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except
per share amounts)



|                                                      |  |                             |         |   |      |   |         |  
|----------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                      |  | Three Months Ended July 31, |        
|                                                      |  | 2006                        |         |   | 2005 |  
|Revenues                                              |  |                             |         |   |      |   |         |  
|Franchise operations revenues:                        |  |                             |         |   |      |   |         |  
|Royalty                                               |  | $                           | 623     |   |      | $ | 455     |  
|Marketing and advertising                             |  |                             | 280     |   |      |   | 210     |  
|Financial product fees                                |  |                             | 2,218   |   |      |   | 1,846   |  
|Other financial product revenues                      |  |                             |        |   |      |   | 1,310   |  
|Other                                                 |  |                             | 2,335   |   |      |   | 1,982   |  
|Service revenues from company-owned office operations |  |                             | 405     |   |      |   | 304     |  
|                                                      |  |                             |         |   |      |   |         |  
|Total revenues                                        |  |                             | 5,861   |   |      |   | 6,107   |  
|                                                      |  |                             |         |   |      |   |         |  
|Expenses                                              |  |                             |         |   |      |   |         |  
|Cost of franchise operations                          |  |                             | 7,960   |   |      |   | 7,512   |  
|Marketing and advertising                             |  |                             | 2,834   |   |      |   | 2,683   |  
|Cost of company-owned office operations               |  |                             | 4,792   |   |      |   | 4,179   |  
|Selling, general and administrative                   |  |                             | 7,571   |   |      |   | 6,837   |  
|Depreciation and amortization                         |  |                             | 2,972   |   |      |   | 2,659   |  
|                                                      |  |                             |         |   |      |   |         |  
|Total expenses                                        |  |                             | 26,129  |   |      |   | 23,870  |  
|                                                      |  |                             |         |   |      |   |         |  
|Loss from operations                                  |  |                             | (20,268 | ) |      |   | (17,763 | )
|Other income/(expense):                               |  |                             |         |   |      |   |         |  
|Interest income                                       |  |                             | 413     |   |      |   | 730     |  
|Interest expense                                      |  |                             | (1,237  | ) |      |   | (2,034  | )
|Write-off of deferred financing costs                 |  |                             |        |   |      |   | (2,677  | )
|                                                      |  |                             |         |   |      |   |         |  
|Loss before income taxes                              |  |                             | (21,092 | ) |      |   | (21,744 | )
|Benefit from income taxes                             |  |                             | 8,422   |   |      |   | 8,537   |  
|                                                      |  |                             |         |   |      |   |         |  
|Net loss                                              |  | $                           | (12,670 | ) |      | $ | (13,207 | )
|                                                      |  |                             |         |   |      |   |         |  
|Loss per share:                                       |  |                             |         |   |      |   |         |  
|Basic and diluted                                     |  | $                           | (0.36   | ) |      | $ | (0.35   | )
|                                                      |  |                             |         |   |      |   |         |  
|Dividends declared per share:                         |  |                             |         |   |      |   |         |  
|Basic and diluted                                     |  | $                           | 0.12    |   |      | $ | 0.08    |  
|                                                      |  |                             |         |   |      |   |         |  
|Weighted average shares outstanding:                  |  |                             |         |   |      |   |         |  
|Basic and diluted                                     |  |                             | 34,888  |   |      |   | 37,418  |  
|                                                      |  |                             |         |   |      |   |         |  

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



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JACKSON HEWITT TAX SERVICE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                            |  |                            |         |   |      |   |          |  
|--------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | -------- | -
|                                                                            |  | Three Months EndedJuly 31, |        
|                                                                            |  | 2006                       |         |   | 2005 |  
|Operating activities:                                                       |  |                            |         |   |      |   |          |  
|Net loss                                                                    |  | $                          | (12,670 | ) |      | $ | (13,207  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                            |         |   |      |   |          |  
|Depreciation and amortization                                               |  |                            | 2,972   |   |      |   | 2,659    |  
|Amortization of Gold Guarantee product                                      |  |                            | (536    | ) |      |   | (549     | )
|Amortization of development advances                                        |  |                            | 317     |   |      |   | 287      |  
|Amortization of deferred financing costs                                    |  |                            | 33      |   |      |   | 126      |  
|Write-off of deferred financing costs                                       |  |                            |        |   |      |   | 2,677    |  
|Decrease in allowance for uncollectible accounts                            |  |                            | (270    | ) |      |   | (527     | )
|Stock-based compensation                                                    |  |                            | 923     |   |      |   | 506      |  
|Deferred income taxes                                                       |  |                            | 842     |   |      |   | (36      | )
|Other                                                                       |  |                            |        |   |      |   | 11       |  
|Changes in assets and liabilities, excluding the impact of acquisitions:    |  |                            |         |   |      |   |          |  
|Accounts receivable                                                         |  |                            | 15,037  |   |      |   | 13,231   |  
|Notes receivable                                                            |  |                            | (712    | ) |      |   | (904     | )
|Prepaid expenses and other                                                  |  |                            | 243     |   |      |   | 344      |  
|Other non-current assets                                                    |  |                            | (1,256  | ) |      |   | (797     | )
|Accounts payable and accrued liabilities                                    |  |                            | (26,131 | ) |      |   | (13,638  | )
|Income taxes payable                                                        |  |                            | (17,148 | ) |      |   | (12,380  | )
|Excess tax benefits from share-based payment arrangements                   |  |                            | (319    | ) |      |   | (70      | )
|Deferred revenues                                                           |  |                            | 130     |   |      |   | 839      |  
|Other non-current liabilities                                               |  |                            | (325    | ) |      |   | (1,323   | )
|                                                                            |  |                            |         |   |      |   |          |  
|Net cash used in operating activities                                       |  |                            | (38,870 | ) |      |   | (22,751  | )
|                                                                            |  |                            |         |   |      |   |          |  
|Investing activities:                                                       |  |                            |         |   |      |   |          |  
|Capital expenditures                                                        |  |                            | (2,300  | ) |      |   | (593     | )
|Funding provided to franchisees                                             |  |                            | (428    | ) |      |   | (945     | )
|Cash paid for acquisitions                                                  |  |                            | (1,205  | ) |      |   | (156     | )
|                                                                            |  |                            |         |   |      |   |          |  
|Net cash used in investing activities                                       |  |                            | (3,933  | ) |      |   | (1,694   | )
|                                                                            |  |                            |         |   |      |   |          |  
|Financing activities:                                                       |  |                            |         |   |      |   |          |  
|Common stock repurchases                                                    |  |                            | (34,114 | ) |      |   | (20,273  | )
|Repayment of Notes                                                          |  |                            |        |   |      |   | (175,000 | )
|Borrowings under revolving credit facilities                                |  |                            | 74,000  |   |      |   | 209,000  |  
|Repayment of borrowings under revolving credit facilities                   |  |                            | (9,000  | ) |      |   | (99,000  | )
|Proceeds from issuance of common stock                                      |  |                            | 1,043   |   |      |   | 1,688    |  
|Dividends paid to stockholders                                              |  |                            | (4,145  | ) |      |   | (2,982   | )
|Debt issuance costs                                                         |  |                            |        |   |      |   | (667     | )
|Payments on capitalized lease obligation                                    |  |                            |        |   |      |   | (90      | )
|Excess tax benefits from share-based payment arrangements                   |  |                            | 319     |   |      |   | 70       |  
|                                                                            |  |                            |         |   |      |   |          |  
|Net cash provided by (used) in financing activities                         |  |                            | 28,103  |   |      |   | (87,254  | )
|                                                                            |  |                            |         |   |      |   |          |  
|Net decrease in cash and cash equivalents                                   |  |                            | (14,700 | ) |      |   | (111,699 | )
|Cash and cash equivalents, beginning of period                              |  |                            | 15,150  |   |      |   | 113,264  |  
|                                                                            |  |                            |         |   |      |   |          |  
|Cash and cash equivalents, end of period                                    |  | $                          | 450     |   |      | $ | 1,565    |  
|                                                                            |  |                            |         |   |      |   |          |  

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



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JACKSON HEWITT TAX SERVICE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BACKGROUND AND BASIS OF
PRESENTATION

Description of Business

Jackson Hewitt Tax Service Inc. 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 tax offices operating under
the brand name Jackson Hewitt Tax Service®. The Company provides its customers with
convenient, fast and accurate tax return preparation services and electronic filing. In connection with their tax 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 consolidated financial statements to refer to Jackson Hewitt Tax Service Inc. and its subsidiaries,
appropriate to the context.

Jackson Hewitt was incorporated in Delaware in February 2004 to be the parent corporation in connection with
the Companys initial public offering (IPO) pursuant to which Cendant Corporation (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. 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 Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the
United States for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. These interim Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and other financial information included in the Companys Annual Report on Form 10-K which was filed with the SEC on July 14, 2006.

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

Certain prior period amounts have been
reclassified to conform to the current period presentation.

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 EndedJuly 31, |        
|                                     |  | (In thousands)             |        
|                                     |  | 2006                       |         |   | 2005 |  
|Net loss                             |  | $                          | (12,670 | ) |      | $ | (13,207 | )
|Changes in fair value of derivatives |  |                            | (6      | ) |      |   |        |  
|                                     |  |                            |         |   |      |   |         |  
|Total comprehensive loss             |  | $                          | (12,676 | ) |      | $ | (13,207 | )
|                                     |  |                            |         |   |      |   |         |  

Computation of loss per share

Basic loss per share is calculated by dividing net loss available to the Companys common stockholders by the weighted average number of common
shares outstanding for the period. Diluted loss per share is calculated by dividing net loss available to the Companys common stockholders by an adjusted weighted average number of common shares outstanding assuming conversion of potentially
dilutive securities arising from stock options outstanding. Stock options to purchase 2,391,148 and 2,361,495 shares of common stock were not included in the computation of diluted net loss per share for the three months ended July 31, 2006 and
2005, respectively, because the effect would have been antidilutive.



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2. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxesan interpretation of Statement of Financial Accounting Standards (SFAS) No. 109 (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income tax positions that the Company
has taken or expects to take with respect to a tax refund. FIN No. 48 prescribes a more-likely-than-not threshold for recognition as well as measurement criteria for changes in such tax positions for financial statement purposes. In addition,
FIN No. 48 also requires additional qualitative and quantitative disclosures on unrecognized tax benefits to be included in the notes to the consolidated financial statements. The Company will be required to adopt the provisions of FIN
No. 48 beginning in fiscal 2008. The Company is currently assessing the impact of the adoption of FIN No. 48 on its Consolidated Financial Statements.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R), which eliminates the alternative to measure stock-based compensation awards using the
intrinsic value approach permitted by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123). The Company adopted the provisions of SFAS No. 123R on May 1, 2006. On January 1, 2003, the Company had adopted the fair value method of accounting for stock-based compensation provisions of SFAS No. 123 and
the transitional provisions of SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. As a result, the Company has since been recording stock-based compensation expense. Prior to the adoption of SFAS
No. 123R, the Companys practice with respect to forfeitures was to recognize the related benefit upon forfeiture of the award. Beginning in the first quarter of fiscal 2007, the Company began recognizing compensation expense net of
estimated forfeitures upon the issuance of the award. The adoption of SFAS No. 123R did not have a material effect on the Companys results of operations, financial position or cash flows. See Note 5- Stock-Based Compensation
for additional information.

3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

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



|                             |  |                      |         |                                  |   |        |  |   |        
|---------------------------- |  | -------------------- | ------- | -------------------------------- | - | ------ |  | - | -------
|                             |  | Franchise Operations |         | Company- Owned Office Operations |   | Total 
|                             |  | (In thousands)      
|Balance as of April 30, 2006 |  | $                    | 336,767 |                                  | $ | 55,933 |  | $ | 392,700
|Additions                    |  |                      |        |                                  |   | 37     |  |   | 37     
|                             |  |                      |         |                                  |   |        |  |   |        
|Balance as of July 31, 2006  |  | $                    | 336,767 |                                  | $ | 55,970 |  | $ | 392,737
|                             |  |                      |         |                                  |   |        |  |   |        

Other intangible assets consist of:



|                                          |  |                       |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|----------------------------------------- |  | --------------------- | ------ | ------------------------ | - | ------- | ------------------- |  | --------------------- | ------ | ------------------------ | - | ------ | ------------------- | - | ------- | - |  | - | ------
|                                          |  | As of July 31, 2006   |        | As of April 30, 2006    
|                                          |  | Gross Carrying Amount |        | Accumulated Amortization |   |         | Net Carrying Amount |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net Carrying Amount
|                                          |  | (In thousands)       
|Amortizable other intangible assets:      |  |                       |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Franchise agreements(a)                   |  | $                     | 16,052 |                          | $ | (13,192 | )                   |  | $                     | 2,860  |                          | $ | 16,052 |                     | $ | (12,789 | ) |  | $ | 3,263 
|Customer relationships(b)                 |  |                       | 7,535  |                          |   | (5,994  | )                   |  |                       | 1,541  |                          |   | 7,535  |                     |   | (5,713  | ) |  |   | 1,822 
|                                          |  |                       |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Total amortizable other intangible assets |  | $                     | 23,587 |                          | $ | (19,186 | )                   |  |                       | 4,401  |                          | $ | 23,587 |                     | $ | (18,502 | ) |  |   | 5,085 
|                                          |  |                       |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Unamortizable other intangible assets:    |  |                       |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Jackson Hewitt trademark                  |  |                       |        |                          |   |         |                     |  |                       | 81,000 |                          |   |        |                     |   |         |   |  |   | 81,000
|                                          |  |                       |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       
|Total other intangible assets             |  |                       |        |                          |   |         |                     |  | $                     | 85,401 |                          |   |        |                     |   |         |   |  | $ | 86,085
|                                          |  |                       |        |                          |   |         |                     |  |                       |        |                          |   |        |                     |   |         |   |  |   |       

---

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

|(b) | Amortized over a period of two to seven years.
|--- | ----------------------------------------------

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



|                             |  |                      |        |   |                                 |   |       |       |  |   |        |  
|---------------------------- |  | -------------------- | ------ | - | ------------------------------- | - | ----- | ----- |  | - | ------ | -
|                             |  | Franchise Operations |        |   | Company-Owned Office Operations |   |       | Total | 
|                             |  | (In thousands)       |       
|Balance as of April 30, 2006 |  | $                    | 84,263 |   |                                 | $ | 1,822 |       |  | $ | 86,085 |  
|Amortization                 |  |                      | (403   | ) |                                 |   | (281  | )     |  |   | (684   | )
|                             |  |                      |        |   |                                 |   |       |       |  |   |        |  
|Balance as of July 31, 2006  |  | $                    | 83,860 |   |                                 | $ | 1,541 |       |  | $ | 85,401 |  
|                             |  |                      |        |   |                                 |   |       |       |  |   |        |  



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Amortization expense relating to other intangible assets was as follows:



|                       |  |                             |     |      |   |    
|---------------------- |  | --------------------------- | --- | ---- | - | ---
|                       |  | Three Months Ended July 31,
|                       |  | 2006                        |     | 2005
|                       |  | (In thousands)             
|Franchise agreements   |  | $                           | 403 |      | $ | 401
|Customer relationships |  |                             | 281 |      |   | 232
|                       |  |                             |     |      |   |    
|Total                  |  | $                           | 684 |      | $ | 633
|                       |  |                             |     |      |   |    

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



|                                     |  |                |      
|------------------------------------ |  | -------------- | -----
|                                     |  | Amount        
|                                     |  | (In thousands)
|Remaining nine months in fiscal 2007 |  | $              | 1,825
|2008                                 |  |                | 1,522
|2009                                 |  |                | 368  
|2010                                 |  |                | 263  
|2011                                 |  |                | 186  
|2012 and thereafter                  |  |                | 237  
|                                     |  |                |      
|Total                                |  | $              | 4,401
|                                     |  |                |      

4. LONG-TERM DEBT AND CREDIT FACILITIES

$250 Million Credit Facility

On June 29, 2005, the Company established a
$250.0 million five-year unsecured credit facility (the $250 Million Credit Facility) that generally had less restrictive covenants than those contained in the Companys prior debt agreements and reduced the cost of debt.
Borrowings under the $250 Million Credit Facility are to be used to finance working capital needs, potential acquisitions and other general corporate purposes, including repurchases of the Companys common stock.

The $250 Million Credit Facility provides for loans in the form of Eurodollar or Base Rate borrowings. Eurodollar borrowings bear interest at the London
Inter-Bank Offer Rate (LIBOR), as defined in the $250 Million Credit Facility, plus a credit spread as defined in the $250 Million Credit Facility, ranging from 0.85% to 1.05% per annum. Base Rate borrowings, as defined in the $250
Million Credit Facility, bear interest primarily at the Prime Rate, as defined in the $250 Million Credit Facility. The $250 Million Credit Facility carries an annual fee ranging from 0.15% to 0.20% of the unused portion of the $250 Million Credit
Facility, which is payable quarterly. The Company may also use the $250 Million Credit Facility to issue letters of credit for general corporate purposes. There was a $0.8 million letter of credit outstanding under the $250 Million Credit Facility
as of July 31, 2006 as required under the Companys lease agreement for its corporate headquarters in Parsippany, New Jersey, which will be reduced to $0.5 million in fiscal 2008 and terminate thereafter.

In connection with entering into the $250 Million Credit Facility, the Company incurred $0.7 million of financing fees, which were deferred and are
being amortized to interest expense over the term of the $250 Million Credit Facility. Amortization of financing fees under the $250 Million Credit Facility amounted to $34,000 and $11,000 in the three months ended July 31, 2006 and 2005,
respectively.

Interest expense associated with debt outstanding under the $250 Million Credit Facility was $1.1 million and $0.5 million
in the three months ended July 31, 2006 and 2005, respectively.

The $250 Million Credit Facility contains covenants, including the
requirement that the Company meet certain financial covenants, such as a maximum consolidated leverage ratio of 2.5:1.0 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 and Amortization (EBITDA), each as defined in the $250 Million Credit Facility. The consolidated interest coverage ratio is the ratio of consolidated EBITDA to consolidated
interest expense, each as defined in the $250 Million Credit Facility. The maximum leverage ratio and minimum interest coverage ratio remains fixed through the five-year term of the $250 Million Credit Facility. As of July 31, 2006, the Company
was in compliance with these covenants.



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Floating Rate Senior Unsecured Notes

On June 27, 2005, the Company repaid in full $175.0 million of five-year floating-rate senior unsecured notes (the $175 Million
Notes) that were outstanding. To repay the $175 Million Notes, the Company used cash provided by operations from the prior tax season of $76.0 million and borrowed $99.0 million under the $100.0 million five-year revolving credit
facility (the $100 Million Credit Facility), discussed below.

The Company had issued the $175 Million Notes through a private
placement on June 25, 2004 in connection with the Companys IPO. The $175 Million Notes accrued interest based on the three-month LIBOR plus 1.5%.

In connection with the issuance of the $175 Million Notes, the Company incurred $1.7 million of financing fees which were deferred and amortized to interest expense over the term of the $175 Million Notes.
Amortization of such fees was $0.1 million in the three months ended July 31, 2005. The Company incurred a non-cash charge of $1.4 million in the three months ended July 31, 2005 related to the write-off of deferred financing costs
associated with the repayment of the $175 Million Notes in June 2005.

Interest expense under the $175 Million Notes amounted to $1.3
million in the three months ended July 31, 2005.

$100 Million Credit Facility

On June 29, 2005, the Company repaid and then immediately terminated the $100 Million Credit Facility, which the Company had established on
June 25, 2004.

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

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

Average Cost of Debt

The Companys average cost of debt was 6.5% and 5.3% in the three months ended
July 31, 2006 and 2005, respectively.



9



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5. STOCK-BASED COMPENSATION

The Companys 2004 Equity and Incentive Plan (the Plan), which is stockholder approved, provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, RSUs and/or other stock-or cash-based awards representing the Companys common stock to non-employee directors, officers, employees, advisors and consultants who are selected by the Companys Compensation Committee for
participation in the plan. In addition, the Company has authorized a stock purchase plan under which eligible employees have the ability to purchase shares of the Companys common stock at 95% of market value. No stock has been offered for
purchase under this plan as of July 31, 2006.

Under the Plan, stock options are generally granted with an exercise price equal to the
market price of a share of common stock on the date of grant, have a contractual term of ten years and vest based on four years of continuous service from the date of grant. Certain awards provide for accelerated vesting if there is a change in
control (as defined in the Plan). The Plan includes nondiscretionary antidilution provisions in case of an equity restructuring.

As of
July 31, 2006, there were four million securities authorized for issuance under the Plan. Upon option exercise, the number of securities available for future issuance under the Plan is reduced by the respective number of shares issued.

On July 11, 2006, the Companys Board of Directors adopted an amendment and restatement of the Plan, subject to stockholder
approval at the Companys annual meeting of stockholders to be held on September 20, 2006. The amended and restated plan, among other things, increases the number of securities available for issuance under the Plan to 6.5 million.

The Company adopted the provisions of SFAS No. 123R on May 1, 2006, which, among other things, eliminated the alternative to
measure stock-based compensation awards using the intrinsic value approach permitted by APB No. 25 and by SFAS No. 123. On January 1, 2003, the Company had adopted the fair value method of accounting for stock-based compensation
provisions of SFAS No. 123 and the transitional provisions of SFAS No. 148. As a result, the Company has since been recording stock-based compensation expense so therefore the adoption of such provision had no impact to the Company during
the three months ended July 31, 2006. Prior to the adoption of SFAS No. 123R, the Companys practice with respect to forfeitures was to recognize the related benefit upon forfeiture of the award. Beginning in the first quarter of
fiscal 2007, the Company began recognizing compensation expense net of estimated forfeitures upon the issuance of the award.

The Company
incurred stock-based compensation expense of $0.8 million (net of a $0.1 million cumulative effect adjustment related to forfeitures upon adopting SFAS No. 123R) and $0.4 million in the three months ended July 31, 2006 and 2005,
respectively, in connection with stock options granted to employees. The associated future income tax benefit recognized was $0.3 million and $0.2 million in the three months ended July 31, 2006 and 2005, respectively.

The weighted average grant date fair value of the Jackson Hewitt stock options granted during the three months ended July 31, 2006 and 2005 was
$11.50 and $6.41, respectively. The fair value of each option award was estimated on the date of grant using the Black-Scholes option-pricing model that used the assumptions noted below. For expected term, the Company used the methodology permitted
under SEC Staff Accounting Bulletin No. 107 to determine expected holding period and will continue to do so until it can accumulate a reasonably consistent history of exercised options following the Companys IPO to make a more refined
estimate. Expected volatility was based on the Companys historical publicly-traded stock price. The risk-free rates used were based on the U.S. treasury yield curve in effect at the time of grant. The following table sets forth the weighted
average assumptions used to determine compensation cost for stock options granted during the three months ended July 31, 2006 and 2005:



|                        |  |                            |  |      
|----------------------- |  | -------------------------- |  | -----
|                        |  | Three Months EndedJuly 31,
|                        |  | 2006                       |  | 2005 
|Expected term (years)   |  | 6.25                       |  | 6.25 
|Expected volatility     |  | 32.0%                      |  | 28.0%
|Expected dividend yield |  | 1.5%                       |  | 1.5% 
|                        |  |                            |  |      
|Risk-free rate          |  | 5.0%                       |  | 3.9% 
|                        |  |                            |  |      



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The following table summarizes information about stock option activity for the three months ended
July 31, 2006:



|                                 |  |                        |   |  |                                 |       |                                                  |     |                                        |   |     
|-------------------------------- |  | ---------------------- | - |  | ------------------------------- | ----- | ------------------------------------------------ | --- | -------------------------------------- | - | ----
|                                 |  | Number of StockOptions |   |  | Weighted Average Exercise Price |       | Weighted AverageRemainingContractual Term(Years) |     | Aggregate IntrinsicValue (in millions)
|Outstanding as of April 30, 2006 |  | 2,461,152              |   |  | $                               | 17.68 |                                                  |     |                                        |   |     
|Granted                          |  | 549,414                |   |  | $                               | 31.11 |                                                  |     |                                        |   |     
|Exercised                        |  | (63,664                | ) |  | $                               | 16.38 |                                                  |     |                                        |   |     
|Forfeited                        |  | (5,996                 | ) |  | $                               | 17.00 |                                                  |     |                                        |   |     
|Expired                          |  | (344                   | ) |  | $                               | 17.00 |                                                  |     |                                        |   |     
|                                 |  |                        |   |  |                                 |       |                                                  |     |                                        |   |     
|Outstanding as of July 31, 2006  |  | 2,940,562              |   |  | $                               | 20.22 |                                                  | 7.7 |                                        | $ | 40.9
|                                 |  |                        |   |  |                                 |       |                                                  |     |                                        |   |     
|Exercisable as of July 31, 2006  |  | 1,292,814              |   |  | $                               | 16.16 |                                                  | 6.2 |                                        | $ | 23.2
|                                 |  |                        |   |  |                                 |       |                                                  |     |                                        |   |     

The total intrinsic value of stock options exercised (which is the amount by which the
stocks market price exceeded the options exercise price) on the date of exercise was $1.0 million for each of the three month periods ended July 31, 2006 and 2005, respectively.

The following table summarizes information about non-vested stock options as of July 31, 2006 and changes for the three months ended July 31,
2006:



|                                |  |                         |   |  |                                        |      
|------------------------------- |  | ----------------------- | - |  | -------------------------------------- | -----
|                                |  | Number of Stock Options |   |  | Weighted Average Grant Date Fair Value
|Non-vested as of April 30, 2006 |  | 1,546,019               |   |  | $                                      | 6.24 
|Granted                         |  | 549,414                 |   |  | $                                      | 11.50
|Vested                          |  | (441,689                | ) |  | $                                      | 6.22 
|Forfeited                       |  | (5,996                  | ) |  | $                                      | 6.01 
|                                |  |                         |   |  |                                        |      
|Non-vested as of July 31, 2006  |  | 1,647,748               |   |  | $                                      | 8.00 
|                                |  |                         |   |  |                                        |      

As of July 31, 2006, there was $11.0 million of total unrecognized compensation cost related
to non-vested stock options which is expected to be recognized over a weighted average period of 3.1 years. The total fair value of stock options vested during the three months ended July 31, 2006 and 2005 was $2.7 million and $1.5 million,
respectively.

Restricted Stock Units

The Company incurred stock-based compensation expense of $0.1 million in each of the three month periods ended July 31, 2006 and 2005, 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. The following table summarizes the Companys RSU activity during the three months ended
July 31, 2006:



|                                                                                      |  |        |  |                              |      
|------------------------------------------------------------------------------------- |  | ------ |  | ---------------------------- | -----
|                                                                                      |  | RSUs   |  | Weighted Average Grant Price
|Number of shares of common stock represented by RSUs outstanding as of April 30, 2006 |  | 36,516 |  | $                            | 20.54
|RSUs granted at fair value                                                            |  | 2,236  |  | $                            | 34.01
|                                                                                      |  |        |  |                              |      
|Number of shares of common stock represented by RSUs outstanding as of July 31, 2006  |  | 38,752 |  | $                            | 21.32
|                                                                                      |  |        |  |                              |      



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6. SHARE REPURCHASES

On May 31, 2006, the Companys Board of Directors authorized a $75.0 million share repurchase program. As of July 31, 2006, the Company had repurchased 1,090,300 shares of the Companys common
stock totaling $34.1 million, including commissions, under this program.

During the three months ended July 31, 2005, the Company
repurchased 860,600 shares of the Companys common stock totaling $20.3 million, including commissions, under previously authorized repurchase programs.

The Company uses the cost method to account for such repurchases, which to date have been made in the open market. None of the Companys repurchased shares have been retired as of July 31, 2006.

7. SEGMENT INFORMATION

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



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



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

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

Company-owned office operations typically recognizes marketing and advertising expenses equal to 6% of service revenues from operations, similar to that of franchise operations, which typically recognizes marketing and advertising expenses
equal to 6% of total revenues earned by franchises. In addition, company-owned office operations also recognize regional and local marketing and advertising expenses.



|                                 |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|-------------------------------- |  | -------------------- | ------ | - | -------------------------------- | - | ------ | ----------------------- |  | - | ------ | - |  | - | ------- | -
|                                 |  | Franchise Operations |        |   | Company- Owned Office Operations |   |        | Corporate and Other (a) |  |   | Total  |  
|                                 |  | (In thousands)       |       
|Three months ended July 31, 2006 |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Revenues                         |  | $                    | 5,456  |   |                                  | $ | 405    |                         |  | $ |       |   |  | $ | 5,861   |  
|                                 |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Loss before income taxes         |  | $                    | (8,274 | ) |                                  | $ | (5,959 | )                       |  | $ | (6,859 | ) |  | $ | (21,092 | )
|                                 |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Three months ended July 31, 2005 |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Revenues                         |  | $                    | 5,803  |   |                                  | $ | 304    |                         |  | $ |       |   |  | $ | 6,107   |  
|                                 |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  
|Loss before income taxes         |  | $                    | (6,883 | ) |                                  | $ | (5,347 | )                       |  | $ | (9,514 | ) |  | $ | (21,744 | )
|                                 |  |                      |        |   |                                  |   |        |                         |  |   |        |   |  |   |         |  

---

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

8. COMMITMENTS AND CONTINGENCIES

Guarantees

The Company is required to provide
various types of surety bonds, such as tax preparer bonds and performance bonds, which are irrevocable undertakings by the Company to make payment in the event the Company fails to perform certain of its obligations to third parties. These bonds
vary in duration although most are issued and outstanding from one to two years. As of July 31, 2006, the maximum potential payment under the aggregate outstanding surety bonds is $1.8 million. Historically, no surety bonds have been drawn upon
and there is no future expectation that these surety bonds will be drawn upon.



12



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##### Table of Contents

The Company, through TSA, provides customers of company-owned offices with a guarantee in connection with
the preparation of tax returns that may require it in certain circumstances to pay penalties and interest assessed by a taxing authority. The Company has recognized a liability of $0.1 million as of July 31, 2006 for the fair value of the
obligation undertaken in issuing the guarantee. Such liability is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet. In addition, the Company may be required to pay additional tax (or refund shortfall) assessed
by a taxing authority for all customers that purchase the Companys Gold Guarantee® product. The Company may incur a liability to the extent that the total customer Gold Guarantee claims exceed maximum thresholds pursuant to the contract between the Company and the third party program
provider. There have been no amounts paid by the Company under this arrangement in the past 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. The only currently pending litigation against the Company and Cendant are the suits brought by Canieva Hood in
Ohio and California, which are discussed below in Legal Proceedings. Additionally, the transitional agreement provides that the Company will be responsible for the respective tax liabilities imposed on or attributable to the Company and
any of the Companys subsidiaries relating to all taxable periods. Accordingly, the Company will indemnify Cendant and its subsidiaries against any such tax liabilities imposed on or attributable to the Company and any of the Companys
subsidiaries. While there have not been any indemnification payments by the Company under these arrangements since the Companys IPO, there can be no assurance that the Company will not be obligated to make such payments in the future.

There was a $0.8 million letter of credit outstanding under the $250 Million Credit Facility as of July 31, 2006 as required under
the Companys lease agreement for its corporate headquarters in New Jersey, which will be reduced to $0.5 million in fiscal 2008 and terminate thereafter.

The Company routinely enters into contracts that include indemnification provisions that typically 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 purchase of businesses; (b) indemnification of the Companys directors and officers;
(c) indemnities of various lessors in connection with facility leases for certain claims arising from such facility or lease; and (d) third-party claims, including those from franchisees, relating to various arrangements in the normal
course of business. Typically, there is no stated maximum payment related to these 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 have not been any indemnification payments by Jackson Hewitt under these arrangements in the past, there can be no
assurance that the Company will not be obligated to make such payments in the future.

Legal Proceedings

On August 27, 2002, a plaintiff group comprising of 154 franchisees filed an action against Santa Barbara Bank & Trust
(SBB&T) and the Company in the Superior Court of New Jersey, Morris County. The suit alleged, among other things, that the Company breached an agreement with the plaintiffs by not paying them a portion of surpluses in RAL loss
reserves. The plaintiffs sought a declaratory judgment, an accounting, payment of an incentive rebate, unspecified compensatory and punitive damages, treble damages and attorneys fees. By an order dated December 6, 2002, the court
dismissed the conversion and fraud counts of the complaint with prejudice. The plaintiffs filed an amended complaint on March 17, 2003. The parties submitted the matter to mediation in July 2003, which resulted in a settlement in which the
Company agreed, among other things, to make a $2.0 million cash payment, spend an additional $2.0 million on regional advertising from 2004 through 2006, pay additional rebates to franchisees of up to $3.00 per RAL processed during the
2004 through 2006 tax seasons, subject to performance criteria, and implement a temporary royalty fee reduction program for certain new franchise offices. On December 19, 2003, the court issued a ruling enforcing the settlement and dismissed
the action with prejudice. Accordingly, a $10.4 million charge was recognized in fiscal 2004. As of July 31, 2006, the Company has made cash payments of $9.9 million towards the litigation settlement. As of July 31, 2006, the
Companys litigation settlement accrual of $0.7 million is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet.

As of July 31, 2006, 152 plaintiffs in the action have executed the settlement agreement. One plaintiff has appealed the enforcement order of December 19, 2003. On May 17, 2005, the Superior Court of
New Jersey Appellate Division reversed



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##### Table of Contents

the trial courts December 19, 2003 ruling as to the one who appealed, and remanded for further proceedings.
The Company filed a petition for certification with the New Jersey Supreme Court. On May 31, 2006, the New Jersey Supreme Court reversed the judgment of the Appellate Division and remanded to the trial court to reinstate the judgment to enforce
the settlement agreement. The litigation settlement accrual recognized in fiscal 2004 included potential settlement payment obligations to this plaintiff.

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

On June 18, 2004, Myron
Benton brought a purported class action against SBB&T and the Company in the Supreme Court of the State of New York (County of New York) in connection with disclosures made in connection with the provision of RALs, alleging that the disclosures
and related practices are fraudulent and otherwise unlawful, and seeking equitable and monetary relief. The Company filed a motion to dismiss that complaint. In response, Benton withdrew his original complaint and filed an amended complaint on
January 3, 2005. The Company filed a motion for summary judgment and the plaintiff filed a cross-motion for summary judgment. On July 26, 2006, the Court granted the Companys motion for summary judgment in all respects, dismissing
the plaintiffs amended complaint. The plaintiff has the right to appeal.

On December 23, 2005, Pierre Brailsford and Kevin
Gilmore brought a purported class action against the Company in the Superior Court of California, Alameda County in connection with disclosures made in connection with the provision of RALs, alleging that the disclosures and related practices are
fraudulent and otherwise unlawful, and seeking equitable and monetary relief. On January 31, 2006, we filed a notice removing the complaint to the United States District Court for the Northern District of California. On February 7, 2006,
the Company filed a motion to dismiss, which was denied, and subsequently answered the complaint, denying any liability. While this matter is at a preliminary stage, the Company believes it has meritorious defenses and is contesting this matter
vigorously.

In March 2003, the California Attorney Generals Office initiated an inquiry into the Companys business
practices. The Company has been in discussions with the California Attorney Generals Office and has been cooperating with the inquiry and voluntarily providing information and documents requested. Areas of discussion include, but are
not limited to, the manner in which services are marketed and financial products are facilitated. The California Attorney Generals Office has expressed concerns that certain business practices may violate the law. The Company has
reached an understanding with the California Attorney Generals Office which provides that the Company will enter into a consent judgment providing monetary and injunctive relief. The proposed judgment provides for a $4 million fund from
which California customers of Jackson Hewitt who purchased financial products facilitated by Jackson Hewitt between 2001 and 2004 can obtain relief based on the number of financial products they purchased and the amount of cross or direct collection
monies they paid. In addition, the Company would pay a $0.5 million civil monetary penalty and $0.5 million in costs of investigation to the State. The Company is currently in negotiations with the California Attorney Generals Office
regarding the terms of injunctive relief provisions. It is anticipated that the matter will be fully resolved by the end of this calendar year. The Company does not believe that the terms of the proposed settlement will have a material
adverse effect on the Companys financial position, results of operations or cash flows. The Company estimates that the range of liability, net of expected insurance coverage, with respect to resolution of this matter is between $3.8
million and $5.0 million, for which the Company recorded a charge of $3.8 million as of April 30, 2006. The related accrual of $3.8 million is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet as of
July 31, 2006. There can be no assurance that the Companys efforts to resolve this inquiry will be successful, or that the amount reserved will be sufficient.



14



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##### Table of Contents

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

9. SUBSEQUENT EVENTS

Declaration of Dividend

On August 22, 2006, the Companys Board of Directors declared a quarterly cash dividend of $0.12 per share of common stock, payable on
October 13, 2006, to common stockholders of record on September 28, 2006.

Termination of Telecommunications Services Agreement

Since the Companys IPO, Cendant has provided telecommunication services to the Company as an unaffiliated entity pursuant to
the transitional agreement that the Company entered into with Cendant in connection with the Companys IPO. In August 2006, the Company notified Avis Budget Group, Inc., as successor to Cendant, of its intent to terminate the provision of these
services effective September 30, 2006. The Companys costs for telecommunications services were $0.1 million and $0.3 million for the three months ended July 31, 2006 and 2005, respectively.



15



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##### Table of Contents

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

The
following discussion may be understood more fully by reference to the Consolidated Financial Statements, Notes to the Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on July 14, 2006.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including, but not limited to, those contained in
Part I. Item 1Consolidated Financial Statements and notes thereto, Part I. Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations and
Part II. Item 1Legal Proceedings 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 achieve the same levels of growth in revenues and profits in the future as we have in the past; 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 or reduce the size of tax refunds; government legislation and regulation of the tax preparation industry and related financial products, including refund anticipation loans; 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 information; the success of our franchised offices; our responsibility to third parties for the acts of our franchisees; 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 preparation offices; changes in our relationships with retailers that could
affect our growth and profitability; seasonality of our business and its effect on our stock price; competition from tax return preparation service providers, volunteer organizations and the government; our ability to offer innovative new financial
products and services; our reliance on 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; the effect of market conditions, general conditions in the tax return preparation industry or general
economic conditions; changes in accounting policies or practices and our ability to maintain an effective system of internal controls.

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.

OVERVIEW

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



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



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



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##### Table of Contents

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 2006, our network consisted of 6,022 franchised and company-owned offices and prepared 3.7 million returns.
We estimate our network represents approximately 4% of all tax returns prepared with the assistance of a paid tax return preparer (paid tax return preparer market). We generate revenues from fees paid by our franchisees, service revenues
earned at company-owned offices and financial product related revenues. Jackson Hewitt, 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

Given the seasonal nature of the tax preparation business, we have historically generated and expect to continue to generate substantially all of our
revenues during the tax season period from January 1 through April 30 of each year. In fiscal 2006, we earned 93% of our revenues during this period. We historically operate at a loss through the first eight months of each fiscal year,
during which we incur costs primarily associated with preparing for the upcoming tax season.

Termination of Telecommunications Services Agreement

Since our IPO, Cendant has provided telecommunication services to us as an unaffiliated entity pursuant to the transitional
agreement that we entered into with Cendant in connection with the IPO. In August 2006, we notified Avis Budget Group, Inc., as successor to Cendant, of our intent to terminate the provision of these services effective September 30, 2006.
Our costs for telecommunications services were $0.1 million and $0.3 million for the three months ended July 31, 2006 and 2005, respectively.



17



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##### Table of Contents

RESULTS OF OPERATIONS

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

Consolidated Results of Operations



|                                                      |  |                             |         |   |      |   |         |  
|----------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                      |  | Three Months Ended July 31, |        
|                                                      |  | 2006                        |         |   | 2005 |  
|                                                      |  | (in thousands)              |        
|Revenues                                              |  |                             |         |   |      |   |         |  
|Franchise operations revenues:                        |  |                             |         |   |      |   |         |  
|Royalty                                               |  | $                           | 623     |   |      | $ | 455     |  
|Marketing and advertising                             |  |                             | 280     |   |      |   | 210     |  
|Financial product fees                                |  |                             | 2,218   |   |      |   | 1,846   |  
|Other financial product revenues                      |  |                             |        |   |      |   | 1,310   |  
|Other                                                 |  |                             | 2,335   |   |      |   | 1,982   |  
|Service revenues from company-owned office operations |  |                             | 405     |   |      |   | 304     |  
|                                                      |  |                             |         |   |      |   |         |  
|Total revenues                                        |  |                             | 5,861   |   |      |   | 6,107   |  
|                                                      |  |                             |         |   |      |   |         |  
|Expenses                                              |  |                             |         |   |      |   |         |  
|Cost of franchise operations                          |  |                             | 7,960   |   |      |   | 7,512   |  
|Marketing and advertising                             |  |                             | 2,834   |   |      |   | 2,683   |  
|Cost of company-owned office operations               |  |                             | 4,792   |   |      |   | 4,179   |  
|Selling, general and administrative                   |  |                             | 7,571   |   |      |   | 6,837   |  
|Depreciation and amortization                         |  |                             | 2,972   |   |      |   | 2,659   |  
|                                                      |  |                             |         |   |      |   |         |  
|Total expenses                                        |  |                             | 26,129  |   |      |   | 23,870  |  
|                                                      |  |                             |         |   |      |   |         |  
|Loss from operations                                  |  |                             | (20,268 | ) |      |   | (17,763 | )
|Other income/(expense):                               |  |                             |         |   |      |   |         |  
|Interest income                                       |  |                             | 413     |   |      |   | 730     |  
|Interest expense                                      |  |                             | (1,237  | ) |      |   | (2,034  | )
|Write-off of deferred financing costs                 |  |                             |        |   |      |   | (2,677  | )
|                                                      |  |                             |         |   |      |   |         |  
|Loss before income taxes                              |  |                             | (21,092 | ) |      |   | (21,744 | )
|Benefit from income taxes                             |  |                             | 8,422   |   |      |   | 8,537   |  
|                                                      |  |                             |         |   |      |   |         |  
|Net loss                                              |  | $                           | (12,670 | ) |      | $ | (13,207 | )
|                                                      |  |                             |         |   |      |   |         |  

Given the seasonality of our business, approximately 2% of the total tax returns prepared by our
network in fiscal 2006 were prepared in the first two fiscal quarters. Consequently, the number of tax returns prepared during the first two fiscal quarters and the corresponding revenues are not indicative of the overall trends of our business for
the fiscal year. Most tax returns prepared in the first two fiscal quarters are related to either tax returns for which filing extensions had been applied for by the customer or amended tax returns.

Three Months Ended July 31, 2006 as Compared to Three Months Ended July 31, 2005

Total Revenues

Total revenues decreased $0.2 million, or 4%, primarily due to the elimination
of other financial product revenues under our financial product agreements that became effective for the 2006 tax season. The decline was mostly offset by increases in all other categories of total revenues. Financial product fees earned in the
first and second quarters are limited primarily to the Gold Guarantee® product. Please see Franchise Results of Operations and Company-Owned Office Results of Operations for additional highlights.



18



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##### Table of Contents

Total Expenses

Total expenses increased $2.3 million, or 9%. The more notable highlights were as follows:

Cost of
franchise operations: Cost of franchise operations increased $0.4 million, or 6%, primarily due to the cumulative growth in the Gold Guarantee program over the past three years as expense from the Gold Guarantee product is charged ratably
over the products 36-month life.

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

Cost of company-owned office operations: Cost of
company-owned office operations increased $0.6 million, or 15%, primarily due to off-season occupancy costs and other operating costs associated with the increased number of locations opened since July 31, 2005.

Selling, general and administrative: Selling, general and administrative increased $0.7 million, or 11%, due to the: (i) increase of $0.4
million in stock-based compensation due to additional stock options granted in the three months ended July 31, 2006 and the (ii) increase of $0.3 million in personnel and other administrative expenses, including higher commission expenses
incurred as a result of an increased number of territory sales during the current quarter.

Depreciation and amortization:Depreciation and amortization increased $0.3 million, or 12%, primarily due to increased capital expenditures in fiscal 2006.

Other
Income/(Expense)

Interest income:Interest income decreased $0.3 million, or 43%, primarily due to the lower average cash
balances following the repayment of the $175.0 million of five-year floating-rate senior unsecured notes (the $175 Million Notes).

Interest expense: Interest expense decreased $0.8 million, or 39%, primarily due to lower average debt outstanding.

Write-off of deferred financing costs: In the three months ended July 31, 2005, we incurred a non-cash charge of $2.7 million related to the write-off of deferred financing costs associated with the repayment of the
$175 Million Notes and the termination of the $100.0 million five-year revolving credit facility ($100 Million Credit Facility).



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##### Table of Contents

Segment Results and Corporate and Other

Franchise Operations

Results of Operations



|                                    |  |                             |        |   |      |   |        |  
|----------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                    |  | Three Months Ended July 31, |       
|                                    |  | 2006                        |        |   | 2005 |  
|                                    |  | (in thousands)              |       
|Revenues                            |  |                             |        |   |      |   |        |  
|Royalty                             |  | $                           | 623    |   |      | $ | 455    |  
|Marketing and advertising           |  |                             | 280    |   |      |   | 210    |  
|Financial product fees              |  |                             | 2,218  |   |      |   | 1,846  |  
|Other financial product revenues    |  |                             |       |   |      |   | 1,310  |  
|Other                               |  |                             | 2,335  |   |      |   | 1,982  |  
|                                    |  |                             |        |   |      |   |        |  
|Total revenues                      |  |                             | 5,456  |   |      |   | 5,803  |  
|                                    |  |                             |        |   |      |   |        |  
|Expenses                            |  |                             |        |   |      |   |        |  
|Cost of franchise operations        |  |                             | 7,960  |   |      |   | 7,512  |  
|Marketing and advertising           |  |                             | 2,692  |   |      |   | 2,499  |  
|Selling, general and administrative |  |                             | 1,086  |   |      |   | 881    |  
|Depreciation and amortization       |  |                             | 2,263  |   |      |   | 1,983  |  
|                                    |  |                             |        |   |      |   |        |  
|Total expenses                      |  |                             | 14,001 |   |      |   | 12,875 |  
|                                    |  |                             |        |   |      |   |        |  
|Loss from operations                |  |                             | (8,545 | ) |      |   | (7,072 | )
|Other income/(expense):             |  |                             |        |   |      |   |        |  
|Interest income                     |  |                             | 271    |   |      |   | 189    |  
|                                    |  |                             |        |   |      |   |        |  
|Loss before income taxes            |  | $                           | (8,274 | ) |      | $ | (6,883 | )
|                                    |  |                             |        |   |      |   |        |  

Three Months Ended July 31, 2006 as Compared to Three Months Ended July 31, 2005

Total Revenues

Total revenues
decreased $0.3 million, or 6%, primarily due to the elimination of other financial product revenues under the Companys financial product agreements that became effective for the 2006 tax season. The decline was mostly offset by increases
in all other categories of total revenues, as described below:

Royalty and marketing and advertising:Royalty revenues increased
$0.2 million, or 37%, and marketing and advertising revenues increased $0.1 million, or 33%, primarily due to increases in the number of tax returns prepared and average revenues per tax return prepared.

Financial product fees and other financial product revenues:Financial product fees and other financial product revenues together declined by $0.9
million to $2.2 million. Financial product fees in connection with our financial product agreements which became effective for the 2006 tax season are primarily earned during the third and fourth fiscal quarters for providing each financial
institution access to the Companys customers and supporting the technology needs of the programs. Financial product fees earned in the first and second quarters are limited primarily to the Gold Guarantee product. The prior year first fiscal
quarter also included $0.8 million of other financial product revenues from the financial institutions that provided refund anticipation loans to customers prior to 2005.

Other revenues: Other revenues of $2.3 million included the sale of 75 territories. Other revenues in the same prior year period included the sale of 52 territories.



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##### Table of Contents

Total Expenses

Total expenses increased $1.1 million, or 9%. The more notable highlights were as follows:

Cost of
operations: Cost of operations increased $0.4 million, or 6%, primarily due to the cumulative growth in the Gold Guarantee program over the past three years.

Marketing and advertising: Marketing and advertising expenses increased $0.2 million, or 8%, in anticipation of growth in the business in the upcoming tax season.

Selling, general and administrative: Selling, general and administrative increased $0.2 million, or 23%, primarily due to the increase in
personnel and other administrative expenses, including higher commission expenses incurred as a result of an increased number of territory sales during the current quarter.

Depreciation and amortization:Depreciation and amortization increased $0.3 million, or 14%, primarily due to increased capital expenditures in
fiscal 2006.

Company-Owned Office Operations

Results of Operations



|                                    |  |                            |        |   |      |   |        |  
|----------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                    |  | Three Months EndedJuly 31, |       
|                                    |  | 2006                       |        |   | 2005 |  
|                                    |  | (in thousands)             |       
|Revenues                            |  |                            |        |   |      |   |        |  
|Service revenues from operations    |  | $                          | 405    |   |      | $ | 304    |  
|                                    |  |                            |        |   |      |   |        |  
|Expenses                            |  |                            |        |   |      |   |        |  
|Cost of operations                  |  |                            | 4,792  |   |      |   | 4,179  |  
|Marketing and advertising           |  |                            | 142    |   |      |   | 184    |  
|Selling, general and administrative |  |                            | 721    |   |      |   | 612    |  
|Depreciation and amortization       |  |                            | 709    |   |      |   | 676    |  
|                                    |  |                            |        |   |      |   |        |  
|Total expenses                      |  |                            | 6,364  |   |      |   | 5,651  |  
|                                    |  |                            |        |   |      |   |        |  
|Loss from operations                |  |                            | (5,959 | ) |      |   | (5,347 | )
|                                    |  |                            |        |   |      |   |        |  
|Loss before income taxes            |  | $                          | (5,959 | ) |      | $ | (5,347 | )
|                                    |  |                            |        |   |      |   |        |  

Three Months Ended July 31, 2006 as Compared to Three Months Ended July 31, 2005

Loss before income taxes

Loss
before income taxes increased $0.6 million, or 11%, primarily due to off-season occupancy costs and other operating costs associated with the increased number of locations opened since July 31, 2005.



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##### Table of Contents

Corporate and Other

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



|                                      |  |                             |        |   |      |   |        |  
|------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                      |  | Three Months Ended July 31, |       
|                                      |  | 2006                        |        |   | 2005 |  
|                                      |  | (in thousands)              |       
|Expenses (a)                          |  |                             |        |   |      |   |        |  
|General and administrative            |  | $                           | 4,841  |   |      | $ | 4,838  |  
|Stock-based compensation              |  |                             | 923    |   |      |   | 506    |  
|                                      |  |                             |        |   |      |   |        |  
|Total expenses                        |  |                             | 5,764  |   |      |   | 5,344  |  
|Loss from operations                  |  |                             | (5,764 | ) |      |   | (5,344 | )
|                                      |  |                             |        |   |      |   |        |  
|Other income/(expense):               |  |                             |        |   |      |   |        |  
|Interest income                       |  |                             | 142    |   |      |   | 541    |  
|Interest expense                      |  |                             | (1,237 | ) |      |   | (2,034 | )
|Write-off of deferred financing costs |  |                             |       |   |      |   | (2,677 | )
|                                      |  |                             |        |   |      |   |        |  
|Loss before income taxes              |  | $                           | (6,859 | ) |      | $ | (9,514 | )
|                                      |  |                             |        |   |      |   |        |  

---

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

Three Months Ended July 31, 2006 as Compared to Three Months Ended July 31, 2005

Loss from operations increased $0.4 million, or 8%, primarily due to increased stockbased compensation as a result of additional stock options granted to employees during the three months ended July 31, 2006.

Other income/(expense)

Interest income:Interest income decreased $0.4 million, or 74%, primarily due to the lower average cash balances following the repayment of the $175 Million Notes in June 2005.

Interest expense: Interest expense decreased $0.8 million, or 39%, primarily due to lower average debt outstanding.

Write-off of deferred financing costs: In the three months ended July 31, 2005, we incurred a non-cash charge of $2.7 million related to the write-off of deferred financing costs associated with the
repayment of the $175 Million Notes and termination of our $100 Million Credit Facility.

Contractual Obligations

In the three months ended July 31, 2006, we entered into purchase obligations totaling $2.0 million for technology-related services. Payment is due
in the following periods: $0.7 million in the remainder of fiscal 2007; $0.6 million in fiscal 2008; $0.6 million in fiscal 2009 and $0.1 million in fiscal 2010.



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##### Table of Contents

Liquidity and Capital Resources

Historical Sources and Uses of Cash from Operations

Seasonality of Cash Flows

The tax preparation business is highly seasonal resulting in substantially all of our revenues and cash flow being generated during
the tax season, which is 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
$250.0 million five-year unsecured credit facility ($250 Million 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 not capital intensive and has historically generated strong operating cash flow from operations.

Prior Years
Repayment of Long-Term Debt and the Establishment of a $250 Million Credit Facility

On June 27, 2005, we repaid in full the
$175 Million Notes. To repay the $175 Million Notes, we used cash provided by operations of $76.0 million and borrowed $99.0 million under our $100 Million Credit Facility that was established in June 2004. We incurred a non-cash
charge of $2.7 million related to the write-off of deferred financing costs associated with the repayment of the $175 Million Notes and termination of our $100 Million Credit Facility noted below.

On June 29, 2005, we established our $250 Million Credit Facility that made many of the covenants less restrictive than the covenants in our prior
debt agreements and reduced the cost of debt. We repaid in full $99.0 million that was outstanding under our $100 Million Credit Facility with proceeds from our $250 Million Credit Facility and then terminated the $100 Million Credit Facility.
Borrowings under the $250 Million Credit Facility are to be used to finance working capital needs, potential acquisitions and other general corporate purposes including repurchases of our common stock. The $250 Million Credit Facility provides for
loans in the form of Eurodollar or Base Rate borrowings. Eurodollar borrowings bear interest at the LIBOR, as defined in the $250 Million Credit Facility, plus a credit spread as defined, ranging from 0.85% to 1.05% per annum. Base Rate
borrowings, as defined in the $250 Million Credit Facility, bear interest primarily at the Prime Rate, as defined in the agreement. The $250 Million Credit Facility carries an annual fee ranging from 0.15% to 0.20% of the unused portion of the $250
Million Credit Facility, which is payable quarterly. We may also use the $250 Million Credit Facility to issue letters of credit for general corporate purposes. There was a $0.8 million letter of credit outstanding under the $250 Million Credit
Facility as of July 31, 2006 as required under a lease agreement for our corporate headquarters in New Jersey which will be reduced to $0.5 million in fiscal 2008 and terminate thereafter.

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

For a more detailed discussion of our $250 Million Credit Facility, including a description of financial covenants which we are required to meet, please
see Part IItem 1Note 4-Long-Term Debt and Credit Facilities to our Consolidated Financial Statements.



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##### Table of Contents

Sources and Uses of Cash

Operating activities

In the
three months ended July 31, 2006, net cash used in operating activities was $38.9 million as compared to $22.8 million in the same prior year period. Some of the more notable changes include:



| |  |  | The decrease in accounts receivable decreased net cash used in operating activitiesGrowth in our business in fiscal 2006 resulted in a 32% increase in accounts
receivable as of April 30, 2006 as compared to April 30, 2005, which subsequently resulted in higher collections during the three months ended July 31, 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in accounts payable and accrued liabilities increased net cash used in operating activitiesThe decrease in the balance was primarily the result of timing
as various payments being made earlier in the current fiscal year.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in income taxes payable increased net cash used in operating activitiesTax payments increased given the growth in our business and the increase in annual
taxable income.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investing activities

We continue to reinvest capital in our business, primarily for computer equipment and software, expansion of our company-owned office locations, funding
provided to franchisees of development advance notes to convert to the Jackson Hewitt system and costs to acquire independent tax preparation offices. In the three months ended July 31, 2006, net cash used in investing activities was
$3.9 million as compared to $1.7 million in the same prior year period. Some of the more notable changes include:



| |  |  | Increase in capital expendituresThe relocation of our technology headquarters in Sarasota, Florida resulted in capital expenditures of $1.0 million for leasehold
improvements and new equipment.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in acquisition payments  The increase in acquisition payments in the three months ended July 31, 2006 was related primarily to the increase in the
settlement of deferred purchase price obligations for acquisitions executed in the respective prior fiscal year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financing activities

Financing activities primarily relate to net borrowing under our credit facilities, share
repurchase programs and dividends paid to stockholders. In the three months ended July 31, 2006, net cash provided by financing activities was $28.1 million as compared to net cash used in financing activities of $87.3 million in the same
prior year period. Some of the more notable changes include:



| |  |  | Increase in net borrowings -During the current quarter, there was a net increase of $65.0 million in borrowings as we utilized our $250 Million Credit Facility to fund the
business following the tax season. In the same prior year period, we had a net reduction in borrowings of $65.0 million primarily due to the repayment in the three months ended July 31, 2005 of the $175 Million Notes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in common stock repurchases - We repurchased $34.1 million of common stock as compared to $20.3 million of common stock in the same prior year period, primarily as a
result of a larger authorized share repurchase program and the program commencing earlier during the quarter as compared to the same prior year period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in dividend payments -We made quarterly dividend payments to stockholders in both periods for which the quarterly payment was increased from $0.08 per share to
$0.12 cents per share.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Future Cash Requirements and Sources of Cash

Future Cash Requirements

We
are committed to growing our business while maintaining a flexible capital structure to reinvest in the business as well as to return excess capital to stockholders in the form of dividends and share repurchases. Our primary future cash requirements
will be to fund operating activities, repurchase shares of our common stock, repay outstanding borrowings under the $250 Million Credit Facility, make periodic interest payments on our debt outstanding, fund capital expenditures, pay quarterly
dividends, fund development advances and fund acquisitions. For the remainder of fiscal 2007, our primary cash requirements are as follows:



| |  |  | Expenses including cost of franchise operations, marketing and advertising, selling, general and administrative expensesExpenses preceding the tax season relate
primarily to personnel and facility related costs. Marketing and advertising expenses, as compared to the other categories of expenses, are more seasonal in nature and typically increase in our third and fourth fiscal quarters when most of our
revenues are earned. Marketing and advertising expenses include national, regional and local campaigns designed to increase brand awareness and attract both early-season and late-season tax filers. We also receive marketing and advertising payments
from franchisees to fund our budget for most of these expenses. We expect to experience an increase in expenses during the remainder of fiscal 2007 as we expect to grow our business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expenses to operate company-owned officesOur company-owned offices complement our franchise system and are focused primarily on growth through the acquisition of
independent tax practices and the opening of new company-owned offices within existing territories as well as increasing office productivity. 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 preparation services to our customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Repurchase of shares of our common stockOn May 31, 2006, our Board of Directors authorized a $75.0 million share repurchase program which as of August 31,
2006 we had repurchased 1,280,100 shares of our common stock totaling $40.8 million, including commissions, under this program. Such repurchases to date have been made in open market purchases. In the future, such repurchases may be made through
open market purchases or privately negotiated transactions. Such repurchases depend on the prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Repayment of outstanding borrowings under the $250 Million Credit FacilityAs of August 31, 2006, we had $132.0 million outstanding under our $250 Million Credit
Facility. We anticipate generating operating cash flow next tax season to partially repay outstanding borrowings under the $250 Million Credit Facility.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Capital expendituresWe anticipate spending $6 to 8 million over the remainder of fiscal 2007, which will primarily include: (i) leasehold improvements
associated with new locations and replacement of legacy equipment in Company-Owned offices and (ii) investment in information technology upgrades to support our growth.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Quarterly dividendsWe intend to make quarterly cash dividend payments of $0.12 per common share over the remainder of fiscal 2007.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

Future Sources of Cash

We
expect our primary sources of cash to be cash provided by operating activities beginning in January and from borrowings under our $250 Million Credit Facility, which will both be used to fund future cash requirements in fiscal 2007.

Critical Accounting Policies

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



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Goodwill

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. We review the carrying value of goodwill for impairment annually, or more frequently if circumstances indicate impairment may have occurred. An adverse change to our business would impact our consolidated results and may
result in an impairment of our goodwill. The aggregate carrying value of our goodwill was $392.7 million as of July 31, 2006. See Part IItem 1- Note 3Goodwill and Other Intangible Assets, Net to our
Consolidated Financial Statements for more information on goodwill.

Other Intangible Assets

Indefinite-lived intangible assets are carried at the lower of cost or fair value. If the fair value of the indefinite-lived intangible asset is less than
the carrying amount, an impairment loss would be recognized in an amount equal to the difference. We review the carrying value of indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may
have occurred. An adverse change to our business would impact our consolidated results and may result in an impairment of our indefinite-lived intangible assets. The aggregate carrying value of our indefinite-lived intangible assets was
$81.0 million as of July 31, 2006. See Part I-Item 1Note 3Goodwill and Other Intangible Assets, Net to our Consolidated Financial Statements for more information on indefinite-lived intangible assets.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of Statement of Financial
Accounting Standards (SFAS) No. 109 (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income tax positions that we have taken or expect to take with respect to a tax refund. FIN
No. 48 prescribes a more-likely-than-not threshold for recognition as well as measurement criteria for changes in such tax positions for financial statement purposes. In addition, FIN No. 48 also requires additional qualitative and
quantitative disclosures on unrecognized tax benefits to be included in the notes to the consolidated financial statements. We will be required to adopt the provisions of FIN No. 48 beginning in fiscal 2008. We are currently assessing the
impact of the adoption of FIN No. 48 on our Consolidated Financial Statements.

In December 2004, the FASB issued SFAS
No. 123R, Share-Based Payment (SFAS No. 123R), which eliminates the alternative to measure stock-based compensation awards using the intrinsic value approach permitted by Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees and by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). We adopted the provisions of SFAS No. 123R on May 1,
2006. On January 1, 2003, we had adopted the fair value method of accounting for stock-based compensation provisions of SFAS No. 123 and the transitional provisions of SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. As a result, we have since been recording stock-based compensation expense. Prior to our adoption of SFAS No. 123R, our practice with respect to forfeitures was to recognize the related benefit
upon forfeiture of the award. Beginning in the first quarter of fiscal 2007, we began recognizing compensation expense net of estimated forfeitures upon the issuance of the award. The adoption of SFAS No. 123R did not have a material effect on
our results of operations, financial position or cash flows.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

A 1% change in the
interest rate on our floating-rate borrowings outstanding as of July 31, 2006, excluding our $50.0 million of hedged borrowings whereby we fixed the interest rate, would result in an increase or decrease in interest expense of $0.7 million
annually.



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##### Table of Contents

Item 4.Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

The Companys management has established disclosure controls and procedures to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to the officers who certify our reports and to other members of senior management and the Board of Directors.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. The Companys disclosure controls are designed to provide a reasonable level of assurance that the stated objectives are
met. The Companys management, including the principal executive officer and principal financial officer, does not expect that the Companys disclosure controls or internal controls will prevent all errors and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must also reflect the fact that there are resource constraints, with
the benefits of controls considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been prevented or detected. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be prevented or detected.

(b) Changes in Internal Control over Financial Reporting.

During the three months ended July 31, 2006,
there were no changes that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION

Item 1. Legal Proceedings.

See Part 1  Item 1  Note 8  Commitments and
Contingencies, to our Consolidated Financial Statements, which is incorporated by reference herein.

Item 1A. Risk Factors.

During the three months ended July 31, 2006, there were no material changes
from risk factors as previously disclosed in Item 1A. to Part 1 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2006.

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 three months ended July 31, 2006.

Issuer Purchases of Equity Securities:



|                                 |  |                                    |  |                                                      |       |                                                                        |           |                                                                                                 |   |             
|-------------------------------- |  | ---------------------------------- |  | ---------------------------------------------------- | ----- | ---------------------------------------------------------------------- | --------- | ----------------------------------------------------------------------------------------------- | - | ------------
|Period of settlement date        |  | Total Number of Shares Repurchased |  | Average Price Paid per
Share (including Commissions) |       | Total Number of Shares Purchased as Part of Publicly
Announced Program |           | Approximate Dollar Value of Shares that May Yet Be Purchased Under Program at end of Period (a)
|May 1-31, 2006                   |  |                                   |  |                                                      |      |                                                                        |          |                                                                                                 |   |            
|June 1-30, 2006                  |  | 852,500                            |  | $                                                    | 31.23 |                                                                        | 852,500   |                                                                                                 | $ | 48.4 million
|July 1-31, 2006                  |  | 237,800                            |  |                                                      | 31.52 |                                                                        | 237,800   |                                                                                                 | $ | 40.9 million
|                                 |  |                                    |  |                                                      |       |                                                                        |           |                                                                                                 |   |             
|Three months ended July 31, 2006 |  | 1,090,300                          |  | $                                                    | 31.29 |                                                                        | 1,090,300 |                                                                                                 | $ | 40.9 million
|                                 |  |                                    |  |                                                      |       |                                                                        |           |                                                                                                 |   |             

---

|(a) | On June 1, 2006, we announced a $75.0 million share repurchase program.
|--- | -----------------------------------------------------------------------

Item 3. Defaults Upon Senior Securities.

There were no defaults upon senior securities during the three
months ended July 31, 2006.

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

No matters were submitted to a vote of
security holders during the three months ended July 31, 2006.

Item 5. Other Information.

There is no other information to be disclosed.



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Item 6. Exhibits.

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



|     |  |                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------
|10.1 |  | Employment Agreement between Jackson Hewitt Tax Service Inc. and Michael D. Lister effective as of July 20, 2006.    
|     | 
|10.2 |  | Employment Agreement between Jackson Hewitt Tax Service Inc. and Mark L. Heimbouch effective as of July 20, 2006.    
|     | 
|10.3 |  | Employment Agreement between Jackson Hewitt Tax Service Inc. and Steven L. Barnett effective as of July 20, 2006.    
|     | 
|10.4 |  | Employment Agreement between Jackson Hewitt Tax Service Inc. and Michael C. Yerington effective as of August 8, 2006.
|     | 
|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.                  



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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 September 11, 2006.



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




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