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Article by DailyStocks_admin    (04-24-08 06:40 AM)

Filed with the SEC from Apr 10 to Apr 16:

Jackson Hewitt Tax Service (JTX)
Shamrock Activist Value Fund wants JTX to remove its shareholder-rights plan, de-stagger its board and institute annual elections for all directors -- and to adopt a majority-voting standard for election of directors who run unopposed. Shamrock said these changes in governance would be "an important step towards improving board accountability and creating greater value" for shareholders. Shamrock holds 2,883,000 shares (10.14% of the total outstanding).

BUSINESS OVERVIEW

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 ® . We provide our customers with convenient, fast and accurate tax return preparation services and electronic filing of their tax returns. In connection with their tax return preparation experience, our customers may select various financial products, including refund anticipation loans (“RALs”). “Jackson Hewitt,” the “Company,” “we,” “our,” and “us” are used interchangeably in this report to refer to Jackson Hewitt Tax Service Inc. and its subsidiaries, appropriate to the context.

We are the second largest paid individual tax return preparer in the United States based upon the number of individual tax returns prepared and filed with the Internal Revenue Service (“IRS”). In 2007, our network consisted of 6,501 franchised and company-owned offices and prepared 3.65 million tax returns. We estimate our network prepared approximately 4% of all tax returns prepared by a paid tax return preparer (“paid tax return preparer market”). We had total revenues for 2007 of $293.2 million which consisted of fees paid by our franchisees, service revenues earned at company-owned offices and financial product fees.

The core of our business is our franchise system. In 2007, our franchisees operated 5,778 offices and prepared 88% of the total number of tax returns prepared by our network. Our franchise model enables us to grow more quickly with less capital investment and lower operating expenses than if we operated all of the offices in our network directly. Complementing our franchise system are our company-owned offices.

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

INDUSTRY OVERVIEW

We estimate that more than 136 million federal individual income tax returns will be filed in the United States in 2007 with more than 60% of these tax returns being prepared with the assistance of a paid tax return preparer. The market is highly fragmented and consists of tens of thousands of paid tax return preparers. In 2007, Jackson Hewitt was the second largest paid tax return preparer in the United States, with an approximate 4% share of the paid tax return preparer market. Electronic filing continues to be an important component in the filing of individual income tax returns. In 2007, 60% of United States individual income tax returns filed through April 30 were filed electronically. Electronic filing provides the taxpayer with benefits, including acknowledgment of receipt of the filing, better accuracy and faster tax refund processing.

The industry consists of customers with two filing behaviors—those who file during the early season (defined as January and February) and those who file during the late season (defined as March and April). Early season filers typically file their tax returns shortly after their Form W-2s become available in order to receive their tax refunds as quickly as possible. Historically, most of the tax returns filed by our network have been filed by the end of February, including approximately 74% of the returns filed by our network in 2007. Late season filers tend to have a higher adjusted gross income (“AGI”) on average and have more complex tax return preparation needs. These late season customers are generally less concerned with the speed of receipt of their tax refunds.

Over the past few years, the overall tax filing market has experienced a shift in which more taxpayers are filing later in the tax season, moving from the early season to the late season. Through the end of February 2007, there were just under two million fewer tax returns filed with the IRS than during the same period in 2004. Total IRS tax filings have continued to grow, but the growth has occurred in the late season. We believe the stronger economy over the past few years—with declining unemployment and continued wage growth—has reduced the desire for certain taxpayers to file in the early season and receive their income tax refund as soon as possible. We believe this shift in taxpayer filings from early season to late season may be cyclical and could reverse following a slower economy.

BUSINESS OPERATIONS

Tax Return Preparation Services

Our network provides our customers with convenient, fast and accurate federal, state and local individual income tax return preparation services and electronic filing of their tax returns. Our network filed over 90% of our tax returns electronically in 2007. Through the use of our proprietary tax software, ProFiler ® , we provide a comprehensive computerized individual tax return preparation experience designed to ensure accuracy. The cost of the tax return preparation service is generally based upon the complexity of the tax return. In connection with the filing of their tax returns, our customers may elect to receive their tax refund directly from the IRS, or if they prefer, may select one or more financial products.

In 2007, our network consisted of 5,778 franchised offices and 723 company-owned offices and prepared 3.65 million tax returns. Our total revenues in 2007 were $293.2 million, including revenues from franchisees, consisting of royalty and marketing and advertising fees and other revenues (45.4% of total revenues), service revenues earned at company-owned offices (27.3% of total revenues), and financial product fees (27.3% of total revenues).

Our network of offices consists of both storefront and retail-partner locations. Our retail-partner locations are located within other businesses, typically retail stores and shopping malls. In 2007, we had relationships with national and large regional retailers and shopping malls, including Wal-Mart Stores, Inc. (“Wal-Mart”), Kmart Corporation, Simon Property Group and General Growth Property, Inc., whose customer and employee demographics overlap with ours. Our agreements with these retailers allow Jackson Hewitt Tax Service offices to be located within the retail-partner’s locations in high-traffic areas during the tax season at relatively modest costs. During 2007, our network had over 1,600 retail-partner locations in retailers and shopping malls nationwide, including more than 1,300 in Wal-Mart stores. In 2007, approximately 13% of the tax returns prepared by our network were generated in retail-partner locations located in Wal-Mart stores.

Our franchisees and company-owned operations operate in defined geographic territories. We divide the country into over 5,100 specific territories. The average population of a territory is approximately 60,000. Approximately 1,900 of our territories, or 37%, remain available for sale to expand our network. We reevaluate the population size of available territories from time to time. We focus on selling new territories to high-quality franchisees already in our franchise system and to tax preparers or entrepreneurs new to our franchise system. We also seek to expand our network by increasing the number of offices operated in each territory. In 2007, the territories in which our network operated were largely under-penetrated, with only 31% of these territories having reached our target of at least three offices per territory. On average, we had 2.0 offices per territory in 2007.

Financial Products

In connection with our customers’ tax return preparation experience, various financial products are available for their choosing. Certain of these financial products provide the customer with the ability to have all fees, including fees for tax return preparation and the financial product, withheld from the proceeds of the financial product. In addition, financial products which are loans provide the customer with access to funds more quickly than if the customer had filed the tax return and waited to receive a tax refund directly from the IRS. Financial products available to our customers include:

Refund Anticipation Loans (“RALs”). A RAL is a loan made by a third party financial institution to a customer and secured by a customer’s anticipated federal tax refund. The loan amount, less applicable fees and charges, including tax return preparation fees, is generally disbursed to the customer within approximately one day from the time the tax return is electronically filed with the IRS.

Our financial product providers also offer instant loan products that are generally available to the customer on the same day that the customer applies for a loan.

Assisted Refunds. Assisted refunds (formerly called accelerated check refunds and assisted direct deposits) are not loans. Assisted refunds are provided by third party financial institutions and provide the customer with the ability to have their tax return preparation fees and other charges withheld directly from their tax refund. The customer’s tax refund is deposited by the taxing authority directly into a bank account established for this purpose by the financial institution. The customer then has the choice of (i) receiving a bank check in the amount of the net tax refund or (ii) having the financial institution directly deposit the amount of the net tax refund into the customer’s own bank account.

Over the past several tax seasons, our financial product providers have provided customers with various loan products, both during the pre-season (defined as November through early January) and tax season. In April 2007, we announced that we supported our financial product partners’ decisions to discontinue the pre-season loan products that were available in connection with the 2007 tax filing season and that we intended to discontinue the availability of such products. We expect our financial product providers to continue to offer instant loan products in connection with RALs during the tax season.

Gold Guarantee ® . Gold Guarantee is an extended warranty that a customer may purchase whereby the taxpayer may be reimbursed up to a set limit for any additional tax liability owed due to an error in the preparation of the customer’s tax return.

As an alternative to receiving financial product proceeds by bank check, our customers may, for an additional fee, elect to receive funds on the ipower ® CashCard, a debit MasterCard ® card.

We have contractual arrangements with certain financial institutions that provide many of the financial products, including RALs, to our customers. These financial institutions are Santa Barbara Bank & Trust, a division of Pacific Capital Bank, N.A. (“SBB&T”) and HSBC Taxpayer Financial Services, Inc. (“HSBC”). We provide the financial institutions with access to our customers and technology support. The agreements with HSBC will expire on October 31, 2007. The agreements with SBB&T will expire on October 31, 2008. We are currently in negotiations with each financial institution.

Franchise Operations

Our growth has been largely attributable to the expansion of our franchise system. We seek to increase the number of franchised offices each year through the sale of new territories and by increasing the number of locations in existing territories. In 2007, we sold 205 new territories and increased the number of our franchised offices by 399. The franchise model has an inherently higher profit margin than that of our company-owned offices, as our existing infrastructure permits additional franchise growth without significant additional fixed cost investment. In 2007, 22% of our franchisees earned more than $1.0 million in revenues.

Historically, approximately three-fourths of our sales of territories have been sold to existing franchisees. In 2007, approximately 82% of our sales of territories were sold to our existing franchisees and the remaining territories were sold to new franchisees. We recruit new franchisees through a number of sources, including advertising in select publications that target entrepreneurs who are interested in new franchise opportunities.

In certain situations, we provide financial support to convert independent tax practices to the Jackson Hewitt brand as either a new franchisee or through the acquisition of the independent tax practice by an existing franchisee (“Conversion”). We also provide financing and/or other incentives to support franchisees in new office growth.

The Franchise Agreement. Under the terms of our franchise agreement, each franchisee receives the right to operate a tax return preparation business under the Jackson Hewitt Tax Service brand within a designated geographic area. Franchisees are required to utilize our proprietary tax return preparation ProFiler software and other proprietary operating methods and procedures in the operation of their business. Franchisees are permitted to operate as many offices within a specified territory as they choose. The term of our standard franchise agreement is 10 years. In 1999 and 2000, we offered our franchisees the opportunity to renew their franchise relationship with us before their franchise agreement expired. In these early renewal programs, 93% of our franchisees entered into a new franchise agreement for a new 10-year term. As a result, 18% of our existing franchise agreements are up for renewal in 2009.

Our current franchise agreement requires franchisees to pay us royalties equal to 15% of their revenues (the royalty is 12% for most territories sold before mid-year 2000) and marketing and advertising fees equal to 6% of their revenues. We also charge franchisees a $2.00 fee for each tax return that they file electronically with the IRS.

Franchisee Support. We provide our franchisees with services, including training, administrative support, access to our proprietary ProFiler tax return preparation software, financial products, toll-free tax preparer and ProFiler support service and a dedicated field staff to advise and monitor their business. We also provide our franchisees assistance with marketing programs and information based on our market research. We offer initial training courses for new franchisees as well as more advanced training for more experienced operators and their staff. Throughout the year, we offer numerous workshops that address such topics as how to train tax return preparers, tax law updates, territory development, recruiting and staffing, new product updates and local advertising. Additionally, we provide each franchisee with field support to aid in site selection, market analysis and business strategies. We also provide access to a franchise service manager at our corporate headquarters who is available to provide information on research, updates, upcoming events and overall general support.

Company-Owned Offices

In 2007, we operated company-owned offices in 19 markets. Tax returns prepared by our company-owned offices represented 12% of the total number of tax returns prepared by our network in 2007. While we focus primarily on organic growth through the opening of new company-owned offices within existing territories as well as increasing office productivity, we also continue to pursue selective acquisition opportunities for our company-owned office segment. We intend to improve the profitability of our company-owned offices by taking advantage of our previous investments in infrastructure. Our company-owned offices also benefit from the support services that we provide to our franchisees.

Marketing and Advertising

Franchisees are required to pay us marketing and advertising fees equal to 6% of their revenues which we use to fund our marketing efforts. These fees are primarily utilized in connection with our regional and local marketing efforts which are designed to increase brand awareness and attract both early season and late season customers. Our marketing efforts also include national advertising and sponsorships and partnering with large, high-traffic retailers to drive customer awareness and increase customer traffic. Our advertising programs target early season and late season filers through network television advertisements, direct mail marketing, promotions and sponsorship of sports organizations whose fan base closely mirrors our core customer demographic group.

Tax Courses

Our franchised and company-owned offices offer a series of income tax courses. The basic income tax courses provide students with a general working knowledge of individual income taxes and tax return preparation. More advanced courses are also offered to provide a higher level of learning to those individuals who already possess a basic understanding of income taxes and income tax return preparation. These courses develop a general interest in tax return preparation and also create public awareness of our brand. Many of the students taking these courses develop an interest in tax return preparation as a career and often become tax preparers for franchisees or our company-owned offices.

SEASONALITY

The tax return preparation business is highly seasonal, and we historically generate substantially all of our revenues during the period from January 1 through April 30. In 2007, 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 associated with preparing for the upcoming tax season.

INTELLECTUAL PROPERTY

We regard our intellectual property as critical to our success, and we rely on trademark, copyright, patent and trade secret laws in the United States to protect our proprietary rights. We pursue the protection of our trademarks by applying to register key trademarks in the United States. The initial duration of trademark registrations in the United States is 10 years. Most registrations can be renewed perpetually at 10-year intervals. In addition, we seek to protect our proprietary rights through the use of confidentiality agreements with employees, consultants, advisors and others.

We have obtained federal trademark registration for a number of marks, including Jackson Hewitt Tax Service, Jackson Hewitt ® , Gold Guarantee, ProFiler and ipower CashCard. We also assert common law rights to certain marks. We do not have any registered patents.

EMPLOYEES

As of April 30, 2007, we employed 408 full-time employees, consisting of 142 employees at our corporate headquarters located in Parsippany, New Jersey, 159 employees at our technology facility located in Sarasota, Florida, 81 employees at our company-owned offices and 26 other employees. In addition, our company-owned offices employed approximately 6,300 seasonal employees primarily from January through April 2007.

COMPETITION

The paid tax return preparation market is highly competitive. Our network competes with tens of thousands of paid tax return preparers, including H&R Block, which is the largest paid tax return preparation service company, Liberty Tax Service, regional and local tax return preparation companies, most of which are independent and some of which are franchised, and regional and national accounting firms and financial service institutions that prepare tax returns as part of their businesses. We also face competitive challenges from the online and software self preparer market, including the Free File Alliance, a consortium of the IRS and online preparation services that provides free online tax return preparation and filing and from volunteer organizations that prepare tax returns at no cost for low-income taxpayers. Certain states may also pass legislation to provide free online tax return preparation and filing from time to time. Our ability to compete in the tax return preparation business depends on our product mix, price for services, customer service, the specific site locations of our offices, local economic conditions, quality of on-site office management, the ability to file tax returns electronically with the IRS and the availability of financial products to our customers.

We also compete for the sale of tax return preparation franchises with H&R Block, Liberty Tax Service and other regional franchisors. In addition, we compete with franchisors of other high-margin services that attract entrepreneurs seeking to become franchisees. Our ability to continue to sell franchises is dependent on our brand image, the products and services to be provided through the network, the relative costs of financing and start-up costs, our reputation for quality, our marketing and advertising support and continuing recognition as an outstanding franchise opportunity by Entrepreneur ® magazine.

In 2007, our early season business was impacted by the shift in taxpayer filings from early season to late season and the increased competitive environment. We believe the increased competitive environment was due in part to various pre-season loan products in the marketplace.

REGULATIONS

We and our franchisees must comply with laws and regulations relating to our businesses. Regulations and related regulatory matters specific to our businesses are described below.

Tax Return Preparation Regulation : Federal legislation requires tax preparers to, among other things, set forth their signatures and identification numbers on all tax returns prepared by them, and retain for three years all tax returns prepared. Federal laws also subject tax preparers to accuracy-related penalties in connection with the preparation of tax returns. Preparers may be enjoined from further acting as tax preparers if they continually or repeatedly engage in specified misconduct. Additionally, all authorized IRS e-file providers must adhere to IRS e-file rules and requirements to continue participation in IRS e-file. Adherence to all rules and regulations is expected of all providers regardless of where published, and includes, but is not limited to, those described in IRS Publication 1345, Handbook for Authorized IRS e-file providers. Various IRS regulations also require tax return preparers to comply with certain due diligence requirements to investigate factual matters in connection with the preparation of tax returns. The IRS conducts audit examinations of authorized IRS e-file providers and tax return preparers, reviewing samples of prepared tax returns to ensure compliance with regulations in connection with tax return preparation activities. Certain of our franchisees and company-owned offices have been the subject of IRS audits from time to time and certain of our franchisees and company-owned offices are currently the subject of ongoing IRS audits reviewing their tax return preparation activities. In addition, the federal government continues to consider further regulation of tax preparers.

In addition to ongoing IRS audits of tax return preparation activities of certain of our franchisees and company-owned offices, the IRS has been conducting an audit of our policies, practices and procedures in connection with such tax return preparation activities. We are cooperating fully with the IRS in connection with these matters. The IRS has requested documents and other information, which we are providing to the IRS.

On April 3, 2007, the Department of Justice (“DOJ”) announced it had filed civil injunction suits against a franchisee and other named defendants operating in four states based upon allegations involving fraudulent tax return preparation (the “DOJ Lawsuits”). We are not named as a defendant in these suits. We are cooperating fully with the DOJ in connection with the DOJ Lawsuits. Based upon publicly-filed court documents, the DOJ Lawsuits are in preliminary stages prior to discovery commencing. The franchises in Georgia, Illinois, North Carolina and Michigan that are the subject of the DOJ Lawsuits, as well as a related franchise in Alabama, have suspended their operations.

We have retained outside counsel to conduct an internal review to investigate the allegations set forth in the DOJ Lawsuits and to examine our policies, practices and procedures in connection with tax return preparation activities of our franchisees and company-owned stores (“Internal Review”). We intend for the Internal Review to be completed promptly. As part of the Internal Review, outside counsel has provided recommendations regarding a variety of enhancements in the areas of tax return preparation compliance and monitoring. We will begin implementing these recommendations for the 2008 tax filing season. The enhancements to our policies, procedures and systems resulting from the recommendations are intended to continue to further support the preparation and filing of accurate tax returns by assisting our franchisees and company-owned offices in complying with regulatory requirements and expanding our monitoring of their compliance with these requirements.

With certain exceptions, the IRS prohibits the use or disclosure by income tax preparers of income tax return information without the prior written consent of the taxpayer. In addition, the Gramm-Leach-Bliley Act and related Federal Trade Commission (“FTC”) regulations require income tax return preparers to adopt and disclose consumer privacy policies and provide consumers a reasonable opportunity to opt out of having personal information disclosed to unaffiliated third parties for marketing purposes. Some states have adopted or proposed stricter opt-in requirements in connection with use or disclosure of consumer information.

Financial Product Regulation : Federal and state statutes and regulations govern the facilitation of RALs and other financial products. These laws require us, among other things, to provide specific RAL disclosures and advertise RALs in a certain manner, including clearly explaining to the customer that the RAL is a loan. In addition, we are subject to federal and state laws that prohibit deceptive claims and require that our marketing practices are fair and not misleading. There are also many states that have statutes regulating, through licensing and other requirements, the activities of brokering loans and offering credit repair services to consumers as well as local usury laws which could be applicable to our business in certain circumstances. From time to time, we receive inquiries from various state regulators regarding our and our franchisees’ facilitation of RALs and other financial products. We have in certain states paid fines, penalties and other payments, as well as agreed to injunctive relief, in connection with resolving these types of inquiries.

Many states have statutes requiring the licensing of persons offering contracts of insurance. If, in any particular state, it was determined that our Gold Guarantee program is subject to these statutes, then the manner in which we offer Gold Guarantee in such states might need to be modified or we may not be able to continue to offer Gold Guarantee in such states. Over the past several years, we have received inquiries from certain state insurance regulators about our Gold Guarantee program and the applicability of the state insurance statutes. In those states where the inquiries are closed, the regulators affirmed our position that the Gold Guarantee is not a contract of insurance and is therefore not subject to state insurance licensing laws.

Franchise Regulations : Our franchising activities are subject to the rules and regulations of the FTC and various state laws regulating the offer and sale of franchises. The FTC and various state laws require that we furnish to prospective franchisees a franchise offering circular containing proscribed information. A number of states, in which we are currently franchising, regulate the sale of franchises and require registration of the franchise offering circular with state authorities and the delivery of a franchise offering circular to prospective franchisees. We are currently operating under exemptions from registration in several of these states based upon our net worth and experience. Substantive state laws that regulate the franchisor/franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor/franchisee relationship in certain respects. The state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply.

From time to time, we may have to make appropriate amendments to our franchise offering circular used to comply with our disclosure obligations under federal and state law.

Tax Course Regulations : Certain states have regulations and requirements relating to our and our franchisees offering income tax courses. These requirements include licensing, bonding and certain restrictions on advertising.

CEO BACKGROUND

Michael D. Lister has served as our Chairman of the Board since March 2004 and as our Chief Executive Officer since September 2003. From September 2003 to April 2007, he also served as our President. From September 2001 to August 2003, he served as our President and Chief Operating Officer. From June 2001 to August 2001, he served as our Chief Operating Officer. From October 1999 to May 2001, he served as our Executive Vice President of Operations. Mr. Lister previously spent 24 years in the tax return preparation industry.

Ulysses L. Bridgeman, Jr . has served as our Director since June 2004. Since May 1988, Mr. Bridgeman has been the owner and president of Bridgeman Foods, Inc. in Louisville, Kentucky, which owns and operates 162 Wendy’s Old Fashioned Hamburger Restaurants in five states. Mr. Bridgeman serves on the board of directors of Fifth Third Bank, which files reports pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”).

Rodman L. Drake has served as our Director since June 2004. Since January 2002, Mr. Drake has been a managing director of Baringo Capital LLC, a private equity group he co-founded. From November 1997 to January 2002, Mr. Drake was president of Continuation Investments Group Inc., a private equity firm. Mr. Drake was a co-founder of KMR Power Corporation, a developer of independent power projects in Latin America and served as its co-chairman from 1994 to 1997. From 1991 to 1994, Mr. Drake was president of The Mandrake Group, a consulting company focused on strategy and organizational design. From 1969 to 1991, Mr. Drake was employed by Cresap, McCormick & Paget, an international management and strategy consulting firm, where he was managing director and chief executive officer from 1980 to 1990. Mr. Drake is chairman of the board of directors of Hyperion Total Return Fund, Inc. and Hyperion Strategic Mortgage Income Fund, Inc., and a director of The Student Loan Corporation, Celgene Corporation, Crystal River Capital, Inc. and Apex Silver Inc., each of which files reports pursuant to the Exchange Act. Mr. Drake also serves on the board of directors of several private companies.

Margaret Milner Richardson has served as our Director since June 2004. Since June 2003, Ms. Richardson has been a tax and business consultant. From 1997 to 2003, Ms. Richardson was a partner at Ernst & Young LLP, where she was the National Director of IRS Practice and Procedure and an advisor to the Foreign Investment Advisory Council in Russia. From 1993 to 1997, Ms. Richardson served as the Commissioner of the Internal Revenue Service. From 1977 to 1993, Ms. Richardson practiced tax law with Sutherland, Asbill and Brennan in Washington, D.C. Ms. Richardson was a member of the Internal Revenue Service Commissioner’s Advisory Group from 1988 to 1990 and chaired the group in 1990. Ms. Richardson serves on the board of directors of Legg Mason, Inc., which files reports pursuant to the Exchange Act.

Louis P. Salvatore has served as our Director since June 2004. Since September 2002, Mr. Salvatore has been the representative of one of the four board members of Arthur Andersen LLP. From September 1992 to August 2002, Mr. Salvatore was the managing partner of Arthur Andersen’s metropolitan New York offices, and from January 1998 to August 2002, he was the Northeast Region managing partner. From 1989 to January 2001, Mr. Salvatore was a member of the Andersen Worldwide S.C. Board of Partners and, from August 2000 to January 2001, he was Interim Managing Partner—Chief Executive Officer of Andersen Worldwide. Mr. Salvatore has worked for Arthur Andersen LLP for over 35 years. Mr. Salvatore is a director and chairman of the audit committees of Hyperion Strategic Mortgage Income Fund, Inc., Hyperion Total Return Fund, Inc. and Crystal River Capital, Inc., each of which files reports pursuant to the Exchange Act. Mr. Salvatore also serves on the boards of directors of several private companies.

James C. Spira has served as our Director since June 2004. Since October 2003, Mr. Spira has been chairman of Brulant, Inc., an information technology consulting firm. From August 2003 to September 2003, Mr. Spira pursued personal interests. From July 2000 to July 2003, Mr. Spira was president and chief operating officer of American Greetings Corporation, a creator, manufacturer and distributor of social expression products. From May 1999 to July 2000, Mr. Spira was chairman of AmericanGreetings.com. From July 1995 to May 1999, Mr. Spira was a managing partner of Diamond Cluster International, Inc., a global management consulting firm. Mr. Spira serves on the board of directors of Ciber Inc., which files reports pursuant to the Exchange Act. Mr. Spira also serves on the board of directors of several private companies.
SHARE OWNERSHIP

(1) Reflects beneficial ownership of 4,794,731 shares of Common Stock by AMVESCAP PLC (“AMVESCAP”) and its subsidiaries AIM Advisors, Inc. (“AIM Advisors”), AIM Capital Management, Inc. (“AIM Capital”), AIM Funds Management Inc. (“AIM Funds”), Atlantic Trust Company, N.A. (“Atlantic Trust”), PowerShares Capital Management LLC (“PowerShares”) and Stein Roe Investment Counsel, Inc. (“Stein Roe” and, collectively, the “AIM Group”), as derived solely from information reported in a Schedule 13G under the Exchange Act filed by the AIM Group with the SEC on May 10, 2007. Such Schedule 13G indicates that sole voting power and sole dispositive power is held over 352,260 shares by AIM Advisors, 163,821 shares by AIM Capital, 4,036,553 by AIM Funds, 148,236 by Atlantic Trust, 2,650 by PowerShares and 91,211 by Stein Roe. The principal business address for the AIM Group is 30 Finsbury Square, London EC2A 1AG, England. Percent of Common Stock Owned is based on the assumption that the AIM Group held 4,794,731 shares of Common Stock as of June 29, 2007.

(2) Reflects beneficial ownership of 2,499,344 shares of Common Stock by Ziff Asset Management, L.P., PBK Holdings, Inc., Philip B. Korsant and ZBI Equities, L.L.C. (collectively, the “ZAM Group”), as derived solely from information reported in a Schedule 13G under the Exchange Act filed by the ZAM Group with the SEC on February 12, 2007. Such Schedule 13G indicates that the ZAM Group has shared voting power and shared dispositive power over all 2,499,344 shares. The principal business address for the ZAM Group is 283 Greenwich Avenue, Greenwich, CT 06830. Percent of Common Stock Owned is based on the assumption that the ZAM Group held 2,499,344 shares of Common Stock as of June 29, 2007.

(3) Shares beneficially owned by Messrs. Lister, Yerington, Heimbouch and Barnett include shares of Common Stock subject to options that are exercisable or that will become exercisable within 60 days of June 29, 2007: Mr. Lister, 702,234; Mr. Yerington, 10,056; Mr. Heimbouch, 106,499; and Mr. Barnett, 84,639.

(4) Shares beneficially owned by non-employee directors include RSUs granted under the Jackson Hewitt Tax Service Inc. Amended and Restated 2004 Equity and Incentive Plan, as may be amended from time to time: Mr. Bridgeman, 7,045; Mr. Drake, 11,038; Ms. Richardson, 9,255; Mr. Salvatore, 11,038; and Mr. Spira, 7,473. Each RSU is payable in one share of Common Stock within 60 days immediately following such Director’s retirement or separation of service from the Board of Directors for any reason.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

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


• Franchise operations: This segment consists of the operations of our franchise business, including royalty and marketing and advertising revenues, financial product fees and other revenues; and


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

Revenues that we earn consist of the following components:

Franchise operations revenues:


• Royalty revenues: We earn royalty revenues from our franchisees. Our franchise agreements require franchisees to pay us a royalty fee of 15% of their revenues (12% for most territories sold before mid-year 2000). In fiscal 2007, our average royalty rate was 13.4%. Franchisees earn revenues from the preparation of tax returns and from related products and services. We recognize royalty revenues upon the completion of tax returns by our franchisees.


• Marketing and advertising revenues: In addition to royalty revenues, franchisees pay us a marketing and advertising fee equal to 6% of their revenues. We recognize marketing and advertising revenues upon the completion of tax returns by our franchisees.


• Financial product fees: In 2006, we entered into program agreements with HSBC and SBB&T. Under the agreements, each financial institution has the right to offer, process and administer RALs and assisted refunds (formerly referred to as accelerated check refunds and assisted direct deposits) to customers of certain of our franchised and company-owned offices. Additionally, we agreed to provide certain technology-related services to the financial institutions in support of the financial institutions’ offering and administration of the financial products.

We earn a fixed annual fee under such agreements during the tax season in the third and fourth fiscal quarters for providing access to Jackson Hewitt offices and supporting the technology needs of the program, as well as a variable payment upon the attainment of certain contractual growth thresholds.

The agreements with HSBC will expire on October 31, 2007. The agreements with SBB&T will expire on October 31, 2008. We are currently in negotiations with each financial institution.

Prior to January 2006 (under the previous financial product agreements), we earned fixed fees from SBB&T and HSBC depending upon the financial product facilitated varying in amounts up to $14.55 per financial product. We recognized revenues for the fixed fees received at the time the financial products were approved by the financial institution.

Additional financial products offered by us include the ipower CashCard and Gold Guarantee product. Revenues from the Gold Guarantee product are earned ratably over the product’s 36-month life.


• Other financial product revenues: Beginning in January 2006, we no longer earn other financial product revenues related to RALs provided to our customers. Prior to January 2006, other financial product revenues represented a portion of the revenues that we earned from the facilitation of RALs. SBB&T provided 80% of the RALs facilitated by us in fiscal 2005, with the remainder provided by HSBC.

SBB&T in 2005 : The agreement with SBB&T in place for the 2005 tax season resulted in the following revenues: (i) a fee of $19.00 for each RAL facilitated by our network; (ii) a portion of RAL fees collected in the 2005 tax season that were originated prior to January 2005; and (iii) a variable fee equal to 50% of the amount by which the net finance fees received by SBB&T exceeded uncollected loans by a threshold amount of at least 1.0% of the aggregate principal amount of RALs made by SBB&T to our customers.

Additionally, through December 2004 (in fiscal 2005), we earned revenues with respect to RALs provided by SBB&T in prior years.

HSBC in 2005 : Other financial product revenues represented revenues we earned equal to a portion (ranging from 59% to 100%) of the difference between net finance fees paid by customers to HSBC and loan amounts that HSBC was unable to collect. These revenues were in addition to the fixed fees recorded in financial product fees earned from the facilitation of RALs. The finance fee was calculated as a percentage of the total loan amount (subject to a minimum and maximum fee). The finance fees were maintained by HSBC as a reserve against uncollected loans. Other financial product revenues were recognized only to the extent that the reserves maintained by HSBC exceeded the uncollected loans made by HSBC at the end of each reporting period.


• Other revenues: Other revenues include ancillary fees we earn from franchisees, including a $2.00 fee per tax return prepared paid by franchisees for the processing of each electronically-transmitte d tax return. We recognize revenues from processing fees at the time the tax returns are filed. In fiscal 2007, approximately 90% of all tax returns filed by our network were filed electronically. Other revenues also include revenues that we earn from the sale or transfer of our franchise territories. Such revenues are recognized when all material services or conditions relating to the sale have been performed, generally upon completion of a mandatory training program for new franchisees.

Company-owned office operations revenues:


• Service revenues: Service revenues include only revenues earned at our company-owned offices and primarily consist of fees that we earn directly from our customers for the preparation of tax returns. We recognize service revenues upon the completion of tax returns by our company-owned offices.

Fiscal Year Ended April 30, 2007 as Compared to the Fiscal Year Ended April 30, 2006

Total Revenues

Total revenues increased $17.8 million, or 6.5%, primarily due to an increase in the average revenues per tax return prepared by our network, higher financial product fees under our agreements with SBB&T and HSBC and cumulative growth and higher pricing per product in our Gold Guarantee program. Average revenues per tax return prepared increased 8% primarily as a result of stronger pricing. The increase in financial product fees is largely related to the attainment of certain contractual growth thresholds and higher fixed fees under our agreements. Customer retention was approximately just over 60% in fiscal 2007. Same store tax return volume decreased approximately 4%.

Our network of franchised and company-owned offices prepared 3.65 million tax returns in fiscal 2007, a decline of 0.2% as compared to fiscal 2006. Contributing to the overall decline were the increased competitive environment, due in part to various pre-season loan products in the marketplace, and the shift in taxpayer filings from early season to late season, compounded by the negative publicity in early April surrounding the announcement by the Department of Justice of the DOJ Lawsuits.

Preceding 2007, our business consistently experienced significant growth in the early season, with approximately three-fourths of the number of tax returns being prepared in our offices during that time. Over the past few years, however, the overall tax filing market has experienced a shift in which more taxpayers are filing later in the tax season, moving from the early season to the late season. Through the end of February 2007, there were just under two million fewer tax returns filed with the IRS than during the same period in 2004. We believe the stronger economy over the past few years—with declining unemployment and continued wage growth—has reduced the desire for certain taxpayers to file in the early season and receive their income tax refund as soon as possible. In fiscal 2007, our early season business was impacted by this shift. We believe the shift in taxpayer filings from early season to late season may be cyclical and could reverse following a slower economy.

Total IRS tax filings have continued to grow over the years, but the growth has occurred in the late season. Our business has also historically experienced higher growth in the late season (as compared to the early season) with the number of tax returns prepared by our network historically growing at a rate significantly exceeding that of the overall tax filing market’s rate. Following the slow start in January 2007 discussed above, many of our traditional early season customers began to come back to our network in February as our business returned to strong growth in the number of tax returns prepared. However, our overall late season business was somewhat impacted by the negative publicity in early April surrounding the announcement by the Department of Justice of the DOJ Lawsuits, which contributed to the overall decline in the number of tax returns prepared by our network in fiscal 2007.

An important element of our location strategy is that the maturation of our offices from which the average number of tax returns prepared per office increases as offices age. Our retail-partner locations typically prepare fewer tax returns as they tend to be smaller in size than typical storefront locations. Due to the factors already discussed above, the average number of tax returns prepared per office presented in the table below decreased in most age categories as compared to fiscal 2006.

The following table includes, for fiscal 2007, the average number of tax returns prepared by offices in our network, including the percentage of retail-partner locations as a percentage of total offices by age category, based upon the number of years in our network:

Total Expenses

Total operating expenses increased $7.1 million, or 4%. The more notable highlights were as follows:

Cost of franchise operations: Cost of franchise operations increased $2.3 million, or 7%, primarily due to the cumulative growth in our Gold Guarantee program over the past three years, including higher program costs, which are charged ratably over the product’s 36-month life.

Marketing and advertising: Marketing and advertising expenses increased $3.3 million, or 8%, primarily in line with the increase in marketing and advertising revenues.

Cost of company-owned office operations: Cost of company-owned office operations increased $4.6 million, or 10%, primarily due to increased labor and facilities expenses incurred to support the new offices opened during the past year to support customer demand. Despite this increase, cost of operations decreased as a percentage of the related service revenues from operations due to a continued focus on strategic initiatives implemented two years ago.

Selling, general and administrative: Selling, general and administrative decreased $3.9 million, or 10%, primarily due to (i) $6.0 million in lower incentive compensation expenses; and (ii) a $1.9 million reduction in litigation related expenses ($1.9 million in fiscal 2007 in connection with the previously disclosed settlement of the California Attorney General and Pierre Brailsford matters regarding the origination of RALs between 2001 and 2005 compared to $3.8 million in fiscal 2006 accrued in connection with the California Attorney General matter). These decreases were partially offset by (i) $1.3 million in higher 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; (ii) a $1.2 increase in salary and commission expense; (iii) a $0.9 million increase in outsourced technology-related service costs; (iv) $0.8 million in higher external legal fees; and (v) $0.5 million in Internal Review expenses.

Other Income/(Expense)

Interest expense: Interest expense increased $1.7 million, or 20%, primarily due to higher interest rates. Our average cost of debt was 6.2% and 5.5% in fiscal 2007 and 2006, respectively.

Write-off of deferred financing costs: In fiscal 2006, we incurred a non-cash charge of $2.7 million related to the write-off of deferred financing costs associated with the repayment of the $175 Million Notes and the replacement of our $100 Million Credit Facility.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

OVERVIEW

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


•

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


•

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

Jackson Hewitt Tax Service Inc. is the second largest paid individual tax return preparer in the United States based upon the number of individual tax returns prepared and filed with the Internal Revenue Service (“IRS”). In fiscal 2007, our network consisted of 6,501 franchised and company-owned offices and prepared 3.65 million returns. We estimate our network prepared approximately 4% of all tax returns prepared by a paid tax return preparer. Our revenues consist of fees paid by our franchisees, service revenues earned at company-owned offices and financial product fees. “Jackson Hewitt,” “the Company,” “we,” “our,” and “us” are used interchangeably in this report to refer to Jackson Hewitt Tax Service Inc. and its subsidiaries, appropriate to the context.

Seasonality of Operations

Given the seasonal nature of the tax return preparation business, we have historically generated and expect to continue to generate substantially all of our revenues during the period from January 1 through April 30. In fiscal 2007, 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 associated with preparing for the upcoming tax season. Additionally, the net loss in these off-season months typically increases each year as a result of our prior year office expansion in the company-owned segment, anticipated growth in the business and the cumulative effect of our share repurchase programs on interest expense.

Recent Developments

We concluded the following notable events during the second quarter of fiscal 2008:

Internal Review

On April 3, 2007, the Department of Justice (“DOJ”) announced it had filed civil injunction suits against a franchisee and other named defendants operating in four states based upon allegations involving fraudulent tax return preparation (“DOJ Lawsuits”). We were not named as a defendant in these suits. We retained outside counsel to conduct an internal review to investigate the allegations set forth in the DOJ Lawsuits and to examine our policies, practices and procedures in connection with such tax return preparation activities (“Internal Review”). The Internal Review determined that there was no corporate involvement in the allegations made against the franchisee. The DOJ Lawsuits have since been resolved and that franchisee has since exited the Jackson Hewitt system.

Additionally, we cooperated fully with the IRS in its examination of us and on September 20, 2007, we reached an agreement with the IRS resolving its audit of us. In connection with closing the audit, we agreed to make a voluntary compliance payment of $1.5 million, which is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

The Internal Review’s examination of our internal tax return preparation compliance systems and processes resulted in recommendations which are currently being implemented for the 2008 tax season to enhance certain systems and processes, including the development of additional compliance requirements such as enhanced monitoring tools and increased training of franchisees and tax return preparers.

Acquisitions

On October 4, 2007, we acquired substantially all of the assets of the tax return preparation businesses in the Atlanta, Chicago and Detroit markets (collectively, the “Acquisitions”) from the franchisee named in the DOJ Lawsuits and will operate those stores as company-owned locations beginning in the 2008 tax season. Total consideration for the Acquisitions is $19.1 million in cash, with fifty percent paid at closing and the remainder to be paid nine months after the closing date. We expect that these businesses, which generated approximately $14 million in revenues for the franchisee last year, will be accretive to our earnings in the current fiscal year.

Financial Product Agreements

In September and October 2007, we entered into the following agreements:


•

Program Agreement (the “Republic Program Agreement”), dated September 19, 2007, with Republic Bank & Trust Company (“Republic”);


•

Technology Services Agreement (the “Republic Technology Agreement”), dated September 19, 2007, with Republic;


•

Amended and Restated Program Agreement (the “Amended and Restated SBBT Program Agreement”), dated September 21, 2007, with Santa Barbara Bank & Trust (“SBBT”);


•

Amended and Restated Technology Services Agreement (the “Amended and Restated SBBT Technology Agreement”), dated September 21, 2007, with SBBT;


•

Amended and Restated Program Agreement (the “Amended and Restated HSBC Program Agreement”), dated October 8, 2007, with HSBC Taxpayer Financial Services Inc. (“HSBC”); and


•

Amended and Restated Technology Services Agreement (the “Amended and Restated HSBC Technology Agreement”), dated October 8, 2007, with HSBC.

The Republic Program Agreement, the Amended and Restated SBBT Program Agreement and the Amended and Restated HSBC Program Agreement are collectively referred to as the “Program Agreements.” The Republic Technology Agreement, the Amended and Restated SBBT Technology Agreement and the Amended and Restated HSBC Technology Agreement are collectively referred to as the “Technology Agreements.”

Under the Program Agreements, Republic, SBBT and HSBC will offer, process and administer certain financial products, including refund anticipation loans, to customers of certain of our locations. In connection with the Program Agreements, each financial product provider will pay us a fixed annual fee. Pursuant to the Technology Agreements, we will provide certain technology services and related support in connection with these programs. Under the Technology Agreements, we will receive a fixed annual fee as well as variable payments tied to growth in the programs.

During tax season 2008, HSBC, Republic and SBBT will collectively provide financial products to the entire network of Jackson Hewitt Tax Service offices. During tax seasons 2009 and 2010, Republic and SBBT will collectively provide financial products to the entire network of Jackson Hewitt Tax Service offices. SBBT will provide a majority of the financial products in each of the tax seasons 2008 through 2010.

The fees earned by us under these Agreements are expected to have a similar impact on total revenues as compared to the prior year.

Management Changes

On October 9, 2007, the employment of Michael D. Lister, formerly Chief Executive Officer and Chairman of the Board of Directors, was terminated without cause. Upon termination, Mr. Lister also resigned as a director and Chairman of the Board. Michael Yerington, formerly President and Chief Operating Officer, was promoted to President and Chief Executive Officer and Mark Heimbouch, formerly Chief Financial Officer, was promoted to Chief Operating Officer. Mr. Heimbouch remains Interim Chief Financial Officer until a successor is named. In order to fill the vacancy created by Mr. Lister’s departure, our Board of Directors elected Mr. Yerington as a Class III director to serve until the annual meeting of our stockholders in 2010 or until his successor is elected and duly qualified or until his earlier resignation or removal. The Board of Directors separated the roles of Chairman and Chief Executive Officer. Margaret Richardson, former Commissioner of Internal Revenue and current member of the Company’s Board of Directors, was named Non-Executive Chair of the Board.

Given the seasonal nature of the tax return preparation business, approximately 2% of the total tax returns prepared by our network in fiscal 2007 were prepared in the first two fiscal quarters. Consequently, the number of tax returns prepared during the first two fiscal quarters and the corresponding revenues are not indicative of the overall trends of our business for the fiscal year. Most tax returns prepared in the first two fiscal quarters are related to either tax returns for which filing extensions had been applied for by the customer or amendments to previously filed tax returns.

Three Months Ended October 31, 2007 as Compared to Three Months Ended October 31, 2006

Total Revenues

Total revenues decreased $0.6 million, or 9%, primarily due to lower territory sales largely offset by an increase in financial product fees due to the cumulative growth and higher pricing related to sales of the Gold Guarantee ® product. Please see Franchise Results of Operations and Company-Owned Office Results of Operations for additional highlights.

Total Expenses

Total operating expenses increased $11.8 million, or 40%. The more notable highlights were as follows:

Cost of franchise operations: Cost of franchise operations increased $0.7 million, or 9%, primarily due to a charge related to the termination of franchise agreements in connection with the acquisition of a former franchisee’s businesses in Atlanta, Chicago and Detroit and higher technology related personnel costs.

Marketing and advertising: Marketing and advertising expenses increased $1.1 million, or 32%, primarily due to a previously disclosed change in contractual arrangements under which the related advertising extends throughout the fiscal year rather than primarily during the tax season as under the prior agreement.

Cost of company-owned office operations: Cost of company-owned office operations increased $1.0 million, or 17%, primarily due to higher planned off-season occupancy and personnel costs associated with operating the increased number of offices that were opened in the 2007 tax season and those acquired from a former franchisee in October 2007.

Selling, general and administrative : The increase in selling, general and administrative of $8.7 million, or 95%, was primarily due to (i) a one-time $5.7 million severance charge (including $2.9 million in non-cash stock-based compensation due to the accelerated vesting of stock options) related to the departure of the Company’s former Chief Executive Officer; (ii) Internal Review expenses of $2.2 million which included a $1.5 million voluntary compliance payment to the IRS as well as professional fees; and (iii) higher personnel-related expenses of $0.6 million. Partially offsetting the overall increase was lower commission expense of $0.3 million due to the decrease in the number of territories sold.

Other Income/(Expense)

Interest expense: Interest expense increased $1.0 million, or 40%, primarily due to higher average debt outstanding related to the cumulative effect of our share repurchase programs.

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