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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended October 31, 2006

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 32,836,016 (net of 5,086,256 shares held in treasury) as of November 30, 2006.

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JACKSON HEWITT TAX SERVICE INC.

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PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

JACKSON HEWITT TAX SERVICE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

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 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. “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 (“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. 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 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:

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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. The following securities were considered antidilutive and therefore were excluded from the computation of diluted loss per share:

2. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 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 as of May 1, 2008. The Company is currently assessing the potential impact of adopting SFAS No. 157.

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 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 Company will be required to adopt the provisions of FIN No. 48 beginning in fiscal 2008. The Company is currently assessing the potential impact of adopting FIN No. 48.

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3. GOODWILL AND OTHER INTANGIBLE ASSETS

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

Other intangible assets consist of:

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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 October 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.

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 October 31, 2006, the Company was in compliance with these covenants.

In connection with amending and restating the credit facility, the Company incurred an additional $0.5 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 three months ended October 31, 2006 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 six months ended October 31, 2005 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 six months ended October 31, 2005 related to the write-off of deferred financing costs associated with the termination of the $100 Million Credit Facility.

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.

Average Cost of Debt

The Company’s average cost of debt was 6.2% and 5.1% in the three months ended October 31, 2006 and 2005, respectively, and 6.3% and 5.2% in the six months ended October 31, 2006 and 2005, respectively.

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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 October 31, 2006, the fair value of the interest rate swap agreements was an asset of $0.8 million which was recorded in other non-current assets on the Consolidated Balance Sheet. As of October 31, 2006, the fair value of the interest rate collar agreements was a liability of $24,000 which was recorded in other non-current liabilities on the Consolidated Balance Sheet. Since inception, no amounts have been recognized in the Consolidated Statements of Operations due to ineffectiveness of the interest rate hedges. Refer to Note 1 – Comprehensive Loss – for the change in the fair value of the interest rate hedges during all periods presented.

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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 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 and the transitional provisions of SFAS No. 148. Additionally, on May 1, 2006, the Company adopted the provisions of 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 October 31, 2006 and 2005, respectively, in connection with stock options granted to employees. The associated future income tax benefit recognized was $0.4 million and $0.3 million in the three months ended October 31, 2006 and 2005, respectively. The Company incurred stock-based compensation expense of $1.8 million (net of a $0.1 million cumulative effect adjustment related to forfeitures upon adopting SFAS No. 123R) and $1.1 million in the six months ended October 31, 2006 and 2005, respectively, in connection with stock options granted to employees. The associated future income tax benefit recognized was $0.7 million and $0.4 million in the six months ended October 31, 2006 and 2005, respectively.

The weighted average grant date fair value of the Jackson Hewitt stock options granted during the six months ended October 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 the expected term, the Company used the methodology permitted under SEC SAB 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.

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The following table sets forth the weighted average assumptions used to determine compensation cost for stock options granted during the six months ended October 31, 2006 and 2005:

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

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 $1.2 million and $1.1 million for the six months ended October 31, 2006 and 2005, respectively.

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

As of October 31, 2006, there was $10.0 million of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted average period of 2.9 years. The total fair value of stock options vested during the six months ended October 31, 2006 and 2005 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 October 31, 2006.

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Restricted Stock Units

The Company incurred stock-based compensation expense of $0.1 million in each of the six month periods ended October 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 six months ended October 31, 2006:

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7. SHARE REPURCHASES

During the six months ended October 31, 2006, the Company repurchased 2,467,059 shares of its common stock totaling $79.6 million, including commissions, under two separately authorized share repurchase programs, as described below.

During the six months ended October 31, 2005, the Company repurchased 2,422,900 shares of its common stock totaling $58.5 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 October 31, 2006.

8. ACQUISITIONS

In the six months ended October 31, 2006, the Company acquired two tax return preparation businesses for a total purchase price of $0.6 million, of which $0.2 million represented accrued purchase price obligations that are included in accounts payable and accrued liabilities on the Consolidated Balance Sheet as of October 31, 2006.

In fiscal 2006, the Company acquired five tax return preparation businesses for a total purchase price of $2.7 million, of which $1.2 million represented accrued purchase price obligations that were included in accounts payable and accrued liabilities on the Consolidated Balance Sheet as of April 30, 2006. In the six months ended October 31, 2006, 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 is deductible for tax purposes.

9. RELATED PARTY TRANSACTIONS

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 $0.2 million for the three months ended October 31, 2006 and 2005, respectively. Such costs were $0.2 million and $0.5 million for the six months ended October 31, 2006 and 2005, respectively.

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10. SEGMENT INFORMATION

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 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.

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11. COMMITMENTS AND CONTINGENCIES

Guarantees

There was a $0.8 million letter of credit outstanding under the $450 Million Credit Facility as of October 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.

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 October 31, 2006, the maximum potential payment under the aggregate outstanding surety bonds is $2.1 million. Historically, no surety bonds have been drawn upon and there is no future expectation that these surety bonds will be drawn upon.

The Company, 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 October 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 is the suit brought by Canieva Hood in California, which is discussed below 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 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, the Company could be obligated to make such payments in the future.

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 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. 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.

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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. A decision by the California Supreme Court to grant review of the Court of Appeal reversal is 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 has appealed. The Company believes it has meritorious defenses and is contesting this matter vigorously.

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. On January 31, 2006, the Company filed a notice removing the complaint to the United States District Court for the Northern District of California. Pursuant to court rules, on November 15, 2006, the parties proceeded to mediation. At mediation, the parties agreed on preliminary settlement terms, subject to, among other things, agreement upon final terms, the execution of definitive documentation and court approval. The Company believes that the settlement as proposed will not have a material adverse effect on the Company’s financial position, results of operations or cashflows. There can be no assurance that the Company’s efforts to resolve this matter will be successful. 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. 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. 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. The Company does not believe that the terms of the proposed

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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 October 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.

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.

12. SUBSEQUENT EVENT

Declaration of Dividend

On December 1, 2006, the Company’s Board of Directors declared a quarterly cash dividend of $0.12 per share of common stock, payable on January 12, 2007, to common stockholders of record on December 28, 2006.

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

The following discussion may be understood more fully by reference to the Consolidated Financial Statements, Notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K 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; 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:

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. In fiscal 2006, our network consisted of 6,022

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franchised and company-owned offices and prepared 3.7 million returns, which represented approximately 4% of all tax returns prepared with the assistance of a paid tax return preparer. 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.

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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

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

Total Revenues

Total revenues decreased $2.9 million, or 32%, primarily due to the elimination of other financial product revenues under our financial product agreements that became effective for the 2006 tax season. Prior to the financial product agreements that became effective for the 2006 tax season, a portion of the financial product related revenues had historically been earned in the first and second fiscal quarters. Under the financial product agreements that became effective for the 2006 tax season, financial product fees are earned during the tax season in the third and fourth fiscal quarters for providing access to Jackson Hewitt’s offices and supporting the technology needs of the programs. Financial product fees earned in the first and second fiscal quarters are now primarily related to the Gold Guarantee product, under which revenues are earned ratably over the product’s 36 month life.

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Total Expenses

Total operating expenses increased $3.5 million, or 13%. The more notable highlights were as follows:

Cost of franchise operations: Cost of franchise operations increased $1.0 million, or 14%, 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, as well as increased personnel costs related to expected growth in the business.

Marketing and advertising: Marketing and advertising expenses increased $0.3 million, or 9%, 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 $0.9 million, or 19%, primarily due to the higher planned off-season occupancy and personnel costs associated with operating the increased number of offices that were opened in 2006 and that are planned for 2007.

Selling, general and administrative: Selling, general and administrative increased $1.0 million, or 11%, due to the (i) increase of $0.3 million in stock-based compensation as we granted additional stock options in the first quarter of fiscal 2007 for which the associated cost is recognized over the four-year vesting period following the grant date and (ii) increase of $1.4 million in personnel and other administrative expenses. These expenses were partially offset by $0.7 million due to the elimination of duplicate rental costs for our corporate headquarters that were incurred in the same quarter last year at lease inception which was several months prior to occupancy, costs incurred in the same quarter last year in connection with our technology data center move from Colorado to Georgia and lower Sarbanes-Oxley consulting expenses.

Depreciation and amortization: Depreciation and amortization increased $0.3 million, or 10%, primarily due to increased capital expenditures.

Other Income/(Expense)

Interest income: Interest income increased $0.1 million, or 30%, primarily due to finance charges on outstanding receivables, including notes receivable balances.

Interest expense: Interest expense increased $0.6 million, or 33%, primarily as a result of higher average debt outstanding to fund our share repurchase programs and higher interest rates.

Write-off of deferred financing costs: In the three months ended October 31, 2006, we incurred a non-cash charge of $0.1 million related to the write-off of unamortized deferred financing costs associated with amending and restating our credit facility.

Six Months Ended October 31, 2006 as Compared to Six Months Ended October 31, 2005

Total Revenues

Total revenues decreased $3.1 million, or 21%, primarily due to the same reason discussed in the three month comparison. Partially offsetting this decrease were increased revenues associated with the cumulative growth in our Gold Guarantee program over the past three years and growth in territory sales.

Total Expenses

Total operating expenses increased $5.7 million, or 11%. The more notable highlights were as follows:

Cost of franchise operations: Cost of franchise operations increased $1.5 million, or 10%, primarily due to the same reasons discussed in the three month comparison.

Marketing and advertising: Marketing and advertising expenses increased $0.4 million, or 8%, due to the same reason discussed in the three month comparison.