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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended January 31, 2007

OR

For the transition period from              to             

Commission file number 1-32215

Jackson Hewitt Tax Service Inc.

(Exact name of registrant as specified in its charter)

3 Sylvan Way

Parsippany, New Jersey 07054

(Address of principal executive offices including zip code)

(973) 630-1040

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 32,314,892 (net of 5,706,656 shares held in treasury) as of February 28, 2007.

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JACKSON HEWITT TAX SERVICE INC.

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PART 1 — FINANCIAL INFORMATION

JACKSON HEWITT TAX SERVICE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

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JACKSON HEWITT TAX SERVICE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

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

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JACKSON HEWITT TAX SERVICE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

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

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JACKSON HEWITT TAX SERVICE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BACKGROUND AND BASIS OF PRESENTATION

Description of Business

Jackson Hewitt Tax Service Inc. provides computerized preparation of federal, state and local individual income tax returns in the United States through a nationwide network of franchised and company-owned offices operating under the brand name Jackson Hewitt Tax Service^®. The Company provides its customers with convenient, fast and 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. “Jackson Hewitt” and the “Company” are used interchangeably in these notes to the Condensed Consolidated Financial Statements to refer to Jackson Hewitt Tax Service Inc. and its subsidiaries, appropriate to the context.

Jackson Hewitt Tax Service Inc. was incorporated in Delaware in February 2004 to be the parent corporation in connection with the Company’s initial public offering (“IPO”) pursuant to which Cendant Corporation, now known as Avis Budget Group, Inc. (“Avis Budget”), divested 100% of its ownership interest in Jackson Hewitt Tax Service Inc. Jackson Hewitt Inc. (“JHI”) is a wholly-owned subsidiary of Jackson Hewitt Tax Service Inc. Jackson Hewitt Technology Services LLC is a wholly-owned subsidiary of JHI that supports the technology needs of the Company. Company-owned office operations are conducted by Tax Services of America, Inc. (“TSA”), which is a wholly-owned subsidiary of JHI. The Condensed Consolidated Financial Statements include the accounts and transactions of Jackson Hewitt and its subsidiaries.

Basis of Presentation

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. These interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and other financial information included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2006 which was filed with the SEC on July 14, 2006.

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

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

Comprehensive Income (Loss)

The Company’s comprehensive income (loss) is comprised of net income (loss) from the Company’s results of operations and changes in the fair value of derivatives. The components of comprehensive income (loss) are as follows:

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Computation of earnings (loss) per share

Basic earnings (loss) per share is calculated by dividing net income (loss) available to the Company’s common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (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. For the three months ended January 31, 2007 and 2006, all stock options outstanding had exercise prices higher than the Company’s average stock price during the respective period. For the nine months ended January 31, 2007, the following securities were considered antidilutive and therefore were excluded from the computation of diluted loss per share:

2. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of 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 provisions of FIN No. 48 are effective for the Company beginning May 1, 2007. The Company is currently assessing the potential impact on its consolidated financial position and results of operations of adopting FIN No. 48.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB No. 108 must be applied to the Company’s annual financial statements for the fiscal year ending April 30, 2007. The impact of adopting SAB No. 108 will not have a material effect on the Company’s consolidated financial position or results of operations.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning May 1, 2008. The Company is currently assessing the potential impact on its consolidated financial position and results of operations of adopting SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for the Company beginning May 1, 2008. The Company is currently assessing the potential impact on its consolidated financial position and results of operations of adopting SFAS No. 159.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

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

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Other intangible assets consist of:

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

Amortization expense relating to other intangible assets was as follows:

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

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4. LONG-TERM DEBT AND CREDIT FACILITIES

$450 Million Credit Facility

On October 6, 2006, the Company amended and restated its five-year unsecured credit facility (the “$450 Million Credit Facility”) to increase the borrowing capacity from $250.0 million to $450.0 million, extend the maturity date to October 2011, reduce the cost of debt and make a financial covenant less restrictive. Borrowings under the $450 Million Credit Facility are to be used to finance working capital needs, general corporate purposes, potential acquisitions and repurchases of the Company’s common stock.

The $450 Million Credit Facility provides for loans in the form of Eurodollar or Base Rate borrowings. Eurodollar borrowings bear interest at the London Inter-Bank Offer Rate (“LIBOR”), as defined in the $450 Million Credit Facility, plus a credit spread as defined in the $450 Million Credit Facility, ranging from 0.50% to 0.75% per annum. Base Rate borrowings, as defined in the $450 Million Credit Facility, bear interest primarily at the Prime Rate, as defined in the $450 Million Credit Facility. The $450 Million Credit Facility carries an annual fee ranging from 0.10% to 0.15% of the unused portion of the $450 Million Credit Facility. The Company may also use the $450 Million Credit Facility to issue letters of credit for general corporate purposes. There was a $0.8 million letter of credit outstanding under the $450 Million Credit Facility as of January 31, 2007 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.

The $450 Million Credit Facility contains covenants, including the requirement that the Company meet certain financial covenants, such as a maximum consolidated leverage ratio of 3.0:1.0 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 $450 Million Credit Facility. The consolidated interest coverage ratio is the ratio of consolidated EBITDA to consolidated interest expense, each as defined in the $450 Million Credit Facility. As of January 31, 2007, the Company was in compliance with these covenants.

In connection with amending and restating the credit facility, the Company incurred an additional $0.6 million of financing fees, which were deferred and are being amortized to interest expense over the term of the $450 Million Credit Facility. Additionally, the Company incurred a non-cash charge of $0.1 million in the nine months ended January 31, 2007 related to the write-off of unamortized deferred financing costs in connection with amending and restating the credit facility.

Floating Rate Senior Unsecured Notes

On June 27, 2005, the Company repaid in full $175.0 million of then-outstanding five-year floating-rate senior unsecured notes (the “$175 Million Notes”). 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 were being amortized to interest expense over the term of the $175 Million Notes. The Company incurred a non-cash charge of $1.4 million in the nine months ended January 31, 2006 related to the write-off of deferred financing costs associated with the repayment of the $175 Million Notes in June 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. The Company incurred a non-cash charge of $1.3 million in the nine months ended January 31, 2006 related to the write-off of deferred financing costs associated with the termination of the $100 Million Credit Facility.

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.

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Average Cost of Debt

The Company’s average cost of debt was 6.0% and 5.5% in the three months ended January 31, 2007 and 2006, respectively, and 6.1% and 5.3% in the nine months ended January 31, 2007 and 2006, respectively.

5. INTEREST RATE HEDGES

In August 2005, the Company entered into interest rate swap agreements with financial institutions to convert a notional amount of $50.0 million of floating-rate borrowings into fixed-rate debt, with the intention of mitigating the economic impact of changing interest rates. In connection with extending the maturity date under the amended and restated credit facility, in October 2006 the Company entered into interest rate collar agreements to become effective after the interest rate swap agreements terminate. The interest rate collar agreements were entered into with financial institutions to limit the variability of expense/payments on $50.0 million of floating-rate borrowings during the period from July 2010 to October 2011 to a range of between 5.5% (the cap) and 4.6% (the floor). These interest rate collar agreements were determined to be cash flow hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 137, No. 138 and No. 149. As of January 31, 2007 and April 30, 2006,, the aggregate fair value of the interest rate hedges were $1.2 million and $0.9 million, respectively, and were included in other non-current assets on the Condensed Consolidated Balance Sheets. Since inception, no amounts have been recognized in the results of operations due to ineffectiveness of the interest rate hedges.

6. STOCK-BASED COMPENSATION

On September 20, 2006, the Company’s stockholders approved and adopted an amendment and restatement of the Jackson Hewitt Tax Service Inc. 2004 Equity and Incentive Plan (the “Amended and Restated Plan”) that, among other things, increases the number of shares of common stock available for grant thereunder from 4.0 million to 6.5 million. The Amended and Restated Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“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. Upon option exercise, the number of securities available for future issuance under the Amended and Restated Plan is reduced by the respective number of shares issued.

Under the Amended and Restated Plan, stock options are granted, with the exception of certain stock options granted at the time of the Company’s IPO, 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 Amended and Restated Plan). The Amended and Restated Plan includes nondiscretionary antidilution provisions in case of an equity restructuring.

On January 1, 2003, the Company had adopted the fair value method of accounting for stock-based compensation provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and the transitional provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Additionally, on May 1, 2006, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”) and began recognizing stock-based compensation net of estimated forfeitures upon the issuance of the stock option. Prior to the adoption of SFAS No. 123R, the Company recognized the related benefit upon forfeiture of the award.

The Company incurred stock-based compensation expense of $1.0 million and $0.7 million in the three months ended January 31, 2007 and 2006, respectively, in connection with the vesting of employee stock options. The associated future income tax benefit recognized was $0.4 million and $0.3 million in the three months ended January 31, 2007 and 2006, respectively. The Company incurred stock-based compensation expense of $2.8 million (net of a $0.1 million cumulative effect adjustment related to forfeitures upon adopting SFAS No. 123R) and $1.8 million in the nine months ended January 31, 2007 and 2006, respectively, in connection with the vesting of employee stock options. The associated future income tax benefit recognized was $1.1 million and $0.7 million in the nine months ended January 31, 2007 and 2006, respectively.

The weighted average grant date fair value of the Jackson Hewitt stock options granted during the nine months ended January 31, 2007 and 2006 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 the expected term, the Company uses the simplified method as permitted under SEC SAB No. 107, “Share-Based Payment” to determine expected holding period and will continue to do through December 31, 2007 at which point it will have accumulated a reasonably consistent history of exercised options since the Company’s IPO in order 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.

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The following table sets forth the weighted average assumptions used to determine compensation cost for stock options granted during the nine months ended January 31, 2007 and 2006:

The following table summarizes information about stock option activity for the nine months ended January 31, 2007:

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 $3.2 million for the nine months ended January 31, 2007. The total intrinsic value on the date of exercise for the 163,085 stock options exercised during the nine months ended January 31, 2006 was $1.5 million.

The following table summarizes information about non-vested stock options as of January 31, 2007 and changes for the nine months ended January 31, 2007:

As of January 31, 2007, there was $9.0 million of deferred stock-based compensation cost which is expected to be recognized over a weighted average period of 2.7 years. The total fair value of stock options vested during the nine months ended January 31, 2007 and 2006 was $2.8 million and $1.5 million, respectively.

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 January 31, 2007.

Restricted Stock Units

The Company incurred stock-based compensation expense of $0.2 million in each of the nine month periods ended January 31, 2007 and 2006, 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. Since May 1, 2006, the Company has granted 6,551 RSUs with a weighted average grant price of $34.95 resulting in total RSUs outstanding of 43,067 with a weighted average grant price of $22.73.

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7. SHARE REPURCHASES

During the nine months ended January 31, 2007, the Company repurchased 3,168,459 shares of its common stock totaling $104.5 million, including commissions, under two separately authorized share repurchase programs, as described below.

During the nine months ended January 31, 2006, the Company repurchased 2,538,197 shares of its common stock totaling $61.3 million, including commissions, under two separately authorized share repurchase programs.

The Company uses the cost method to account for share repurchases, which to date have been made in the open market. None of the Company’s repurchased shares have been retired as of January 31, 2007.

8. ACQUISITIONS

In the nine months ended January 31, 2007, the Company acquired five tax return preparation businesses for a total purchase price of $4.3 million, of which $2.5 million was paid at closings and $1.8 million was included in accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheet as of January 31, 2007. Payment of certain accrued purchase price obligations includes the requirement that the acquired entities achieve specified revenue levels during the tax season.

In fiscal 2006, the Company acquired five tax return preparation businesses for a total purchase price of $2.7 million, of which $1.5 million was paid at respective closings and $1.2 million was included in accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheet as of April 30, 2006. During the nine months ended January 31, 2007, such accrued purchase price obligations were settled.

The Company’s acquisitions in the periods presented were not significant to the Company’s financial position, results of operations or cash flows either individually or in the aggregate and all related goodwill acquired is deductible for tax purposes.

9. RELATED PARTY TRANSACTIONS

Termination of Telecommunications Services Agreement

Since the Company’s IPO, Avis Budget had provided telecommunication services to the Company as an unaffiliated entity pursuant to the transitional agreement that the Company entered into with Avis Budget in connection with the Company’s IPO. In August 2006, the Company notified Avis Budget of its intent to terminate the provision of these services effective September 30, 2006. The Company’s costs for such telecommunications services were $0.2 million for the three months ended January 31, 2006. Such costs were $0.2 million and $0.7 million for the nine months ended January 31, 2007 and 2006, respectively.

10. SEGMENT INFORMATION AND CORPORATE AND OTHER

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

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 recognize marketing and advertising expenses equal to 6% of service revenues from operations and also recognize regional and local marketing and advertising expenses.

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11. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On March 18, 2003, Canieva Hood and Congress of California Seniors brought a purported class action suit against Santa Barbara Bank & Trust (“SBB&T”) and the Company in the Superior Court of California (San Francisco), subsequently adding Cendant, in the Superior Court of California (Santa Barbara, following a transfer from San Francisco) seeking declaratory relief in connection with the provision of RALs, as to the lawfulness of the practice of cross-lender debt collection, as to the validity of SBB&T’s cross-lender debt collection provision and as to whether the method of disclosure to customers with respect to the provision is unlawful or fraudulent, and seeking injunctive relief, restitution, disgorgement, compensatory damages, statutory damages, punitive damages, attorneys’ fees, and expenses. The Company is a party in the action for allegedly collaborating, and aiding and abetting, in the actions of SBB&T. The trial court granted a motion by SBB&T and third-party bank defendants on federal preemption grounds, and stayed all other proceedings pending appeal. The California Court of Appeal reversed the trial court’s preemption decision. The California Supreme Court denied review. SBB&T and third-party banks have moved in the California Court of Appeal to stay remittitur pending certiorari to the United States Supreme Court. A decision by the California Court of Appeal is currently pending. The Company believes it has meritorious defenses and is contesting this matter vigorously. Ms. Hood also filed a separate suit against the Company and Cendant on December 18, 2003 in the Ohio Court of Common Pleas (Montgomery County) and is seeking to certify a class in the action. The allegations of negligence, breach of fiduciary duty, and violation of certain Ohio law relate to the same set of facts as the California action. Plaintiff seeks equitable and declaratory relief, damages, attorneys’ fees, and expenses. Plaintiff subsequently voluntarily dismissed Cendant from this action. 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 as described above. A decision by the Ohio 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. On July 26, 2006, the court granted the Company’s motion for summary judgment in all respects, dismissing the plaintiff’s complaint. The plaintiff appealed. On January 10, 2007, pursuant to a stipulation, the Appellate Division, First Department, dismissed plaintiff’s appeal with prejudice.

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On December 23, 2005, Pierre Brailsford and Kevin Gilmore brought a purported class action complaint 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. As reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on January 10, 2007, on January 9, 2007, the Company finalized the terms of the previously disclosed preliminary settlement. A Stipulation of Class Action Settlement was filed on January 9, 2007 seeking approval by the United States District Court for the Northern District of California. Under the terms of the settlement, California customers of the Company and the Company’s franchisees who purchased RALs from the Company’s providers of financial products between 2001 and 2004 will accept payment from the fund established in connection with the resolution of the inquiry by the Attorney General’s Office of the State of California (as described more fully below) as complete relief for their claims relating to their purchase of RALs (except with respect to any claim relating to the collection of an outstanding delinquent RAL debt). Further, under the terms of the settlement, the Company paid an additional $0.7 million to provide relief to those California customers who purchased RALs during 2005 and paid class counsel’s attorneys’ fees and costs. Such payment of $0.7 million was included in selling, general and administrative expenses in the Company’s Condensed Consolidated Results of Operations during the three and nine months ended January 31, 2007. The settlement is subject to final approval by the Court. In the event the settlement does not proceed, the Company will continue to contest this matter vigorously.

On September 26, 2006, Willie Brown brought a purported class action complaint against the Company in the Ohio Court of Common Pleas, Cuyahoga County, in connection with an alleged failure to comply with Ohio’s Credit Services Organization Act, and for alleged unfair and deceptive acts in violation of Ohio’s Consumer Sales Practices Act, and seeking damages and injunctive relief. On October 30, 2006, the Company filed a notice removing the complaint to the United States District Court for the Northern District of Ohio, Eastern Division. On November 6, 2006, the Company filed a motion to dismiss, and a motion to stay proceedings and to compel arbitration. On December 8, 2006, plaintiff filed a motion to remand the case to the Ohio Court of Common Pleas, Cuyahoga County, which the Company opposed on January 16, 2007. On February 26, 2007 the Court granted plaintiff’s motion to remand, without ruling on the other pending motions. The Company believes it has meritorious defenses and is contesting this matter vigorously.

On October 30, 2006, Linda Hunter brought a purported class action complaint against the Company in the United States District Court, Southern District of West Virginia, for an alleged breach of fiduciary duty, for breach of West Virginia’s Credit Service Organization Act, for breach of contract, and for unfair or deceptive acts or practices, and seeking damages. On November 22, 2006, the Company filed a motion to dismiss. A decision by the Court is currently pending. 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 certain of the Company’s business practices, including, but not limited to, the manner in which services are marketed and financial products are facilitated. As reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2007, on January 3, 2007, simultaneously with the filing of a complaint in this action, the Company finalized the terms of the previously disclosed negotiated settlement of an inquiry by the Attorney General’s Office of the State of California through the entry of a Stipulated Judgment. The suit alleged, among other things, that the Company made misleading or deceptive statements and engaged in unfair competition in connection with the facilitation of financial products. Under the final terms of the Stipulated Judgment, which are consistent with the terms of the previously disclosed proposed settlement, the Company paid $4.0 million into a fund from which California customers of the Company and the Company’s franchisees who purchased refund anticipation loans and other financial products from the Company’s providers of financial products between 2001 and 2004 are eligible to receive monies based on the number and type of products purchased and the amount of outstanding delinquent debt collected by the provider of financial products. In order to receive monies in the collection of outstanding delinquent debt, customers will be required to execute a release of claims. The Company also paid a $0.5 million civil monetary penalty and $0.5 million in costs of investigation to the State of California and has also agreed to certain injunctive relief. The injunctive relief incorporates a number of practices that the Company has implemented over the last several years as part of its ongoing efforts to establish industry leading best practices. In connection with the above, the Company recorded litigation related expenses of $3.8 million in fiscal 2006 and $1.2 million in the nine months ended January 31, 2007. Such costs were included in selling, general and administrative expenses in the Company’s Condensed Consolidated Results of Operations in all periods presented.

The settlement of the California Attorney General inquiry and the Brailsford action reflect a global resolution of pending matters by the Company for California customers regarding the origination of RALs between 2001 and 2005. While the Company believes that it has not violated the law, or engaged in any wrongdoing, in connection with either the California Attorney General inquiry or the Brailsford action, the Company agreed to settle both of these matters in order to avoid the costs and inconvenience of litigation.

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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.

Guarantees

As of January 31, 2007, the Company had outstanding an $0.8 million irrevocable letter of credit under the $450 Million Credit Facility 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.

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. If the Company fails to perform under its obligations, the maximum potential payment under these surety bonds is $2.1 million as of January 31, 2007. Historically, no surety bonds have been drawn upon and there is no future expectation that these surety bonds will be drawn upon.

The Company, through TSA, provides customers of company-owned offices with a guarantee in connection with the preparation of tax returns that may require it in certain circumstances to pay penalties and interest assessed by a taxing authority. The Company recognized a liability of $0.1 million as of January 31, 2007 for the fair value of the obligation undertaken in issuing the guarantee. Such liability was included in accounts payable and accrued liabilities on the Condensed 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 Avis Budget provides that the Company continues to indemnify Avis Budget 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 Avis Budget and any claims arising out of or relating to the Company’s IPO. The only currently pending litigation against the Company and Avis Budget is the suit brought by Canieva Hood in California, which is discussed in “Legal Proceedings.” Additionally, the transitional agreement provides that the Company is responsible for the respective tax liabilities imposed on or attributable to the Company and any of the Company’s subsidiaries relating to all taxable periods. Accordingly, the Company is required to indemnify Avis Budget 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, the Company could be obligated to make such payments in the future.

The Company routinely enters into contracts that include indemnification provisions that serve to protect the contracting parties from losses such parties suffer as a result of acts or omissions of the Company and/or its affiliates, including in particular indemnity obligations relating to (a) tax, legal and other risks related to the purchase of businesses or the provision of services; (b) indemnification of the Company’s directors and officers; (c) indemnities of various lessors in connection with facility leases for certain claims arising from such facility or lease; and (d) third-party claims, including those from franchisees, relating to various arrangements in the normal course of business. There is no stated maximum payment related to these indemnities, and the term of indemnities may vary and in many cases is limited only by the applicable statute of limitations. The likelihood of any claims being asserted against the Company and the ultimate liability related to any such claims, if any, is difficult to predict. While there 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.

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12. SUBSEQUENT EVENT

Declaration of Dividend

On March 8, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.12 per share of common stock, payable on April 13, 2007, to common stockholders of record on March 28, 2007.

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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 for the fiscal year ended April 30, 2006 which was 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—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 and the failure by us, or the financial institutions which provide financial products, to comply with such legal and regulatory requirements; 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; the seasonality of our business and its effect on our stock price; competition from tax return preparation service providers, volunteer organizations and the government; our ability to offer innovative new financial products and services; our reliance on technology systems and electronic communications to perform the core functions of our business; our ability to protect our intellectual property rights or defend against any third party allegations of infringement by us; our reliance on cash flow from subsidiaries; our compliance with credit facility covenants; our exposure to increases in prevailing market interest rates; our ability to pay dividends in the future; 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:

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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. As of January 31, 2007, our network consisted of 6,526 franchised and company-owned offices. During the three months ended January 31, 2007, our network prepared 1.3 million tax returns. 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

The tax preparation business is highly seasonal, and we generate substantially all of our revenues during the tax season, which is the period from January 1 through April 30. In fiscal 2006, we earned 93% of our revenues during this period. We generally operate at a loss during the period from May 1 through December 31, during which we incur costs primarily associated with preparing for the upcoming tax season. Additionally, the industry has experienced a shift in filing trends over the past three years with customers migrating from the early season (defined as January and February) to the late season (defined as March and April).

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

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The following table presents selected key operating statistics for our franchise and company-owned office operations.