Summary of JACKSON HEWITT TAX SERVICE INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements, notes to the consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on June 30, 2008.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including, but not limited to, those contained in "Part I. Item 1-Financial Statements" and notes thereto, "Part I. Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II. Item 1-Legal Proceedings" included in this report are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, cash flows, plans, objectives, future performance and business of Jackson Hewitt Tax Service Inc. All statements in this report, other than statements that are purely historical, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans," "may increase," "may fluctuate" and similar expressions or future or conditional verbs such as "will," "should," "would," "may," and "could." These forward-looking statements involve risks and uncertainties.

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

Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control. As a result of these factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

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OVERVIEW

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

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

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

Jackson Hewitt Tax Service Inc. is the second largest paid individual tax return preparer in the United States based upon the number of individual tax returns prepared and filed with the Internal Revenue Service ("IRS"). As of January 31, 2009 our network consisted of approximately 6,600 franchised and company-owned offices and prepared 1.16 million returns year-to-date. Our revenues consist of fees paid by our franchisees, service revenues earned at company-owned offices and financial product fees.

During the 2009 tax season, the paid return preparer industry has been adversely affected by significant growth in the on-line tax return preparation market. We believe this is due to customers continuing to seek lower priced channels in the market for their tax preparation needs. In order to attract and retain these customers, we plan to offer our own on-line tax preparation product for the 2010 tax season and we will continue to investigate other less expensive options for our customers.

"Jackson Hewitt," "the Company," "we," "our," and "us" are used interchangeably in this report to refer to Jackson Hewitt Tax Service Inc. and its subsidiaries, appropriate to the context.

Seasonality of Operations

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

Amended Bank Agreements

MetaBank

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

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

The Addendum provides that in the event MetaBank's loan losses related to one of the line of credit products provided under the Marketing Agreement significantly exceed MetaBank's projected losses, we will make payments to MetaBank to offset such losses. Our payment obligations will not arise unless MetaBank's actual loan losses are in excess of two times the level of MetaBank's projected losses under the program. Our maximum payment obligation is approximately $13 million, which will occur in the event that MetaBank's actual loan losses are in excess of four times MetaBank's projected losses. In the event we are required to make such payment to MetaBank, we intend for these payment obligations to be shared among us and our franchisees. As of January 31, 2009, we considered the likelihood to be remote of a material payment having to be made to MetaBank to offset actual loan losses.

Republic

On December 2, 2008, we entered into the First Amendment to Program Agreement (the "Republic Program Agreement Amendment") with Republic Bank & Trust Company ("Republic") and the First Amendment to Technology Services Agreement (the "Republic Technology Services Agreement Amendment" and, together with the Republic Program Agreement Amendment, the "Republic Amendments") with Republic. The primary purposes of the Republic Amendments are to establish the number of Jackson Hewitt Tax Service locations during the 2009 tax season in which Republic will offer,

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process and administer certain financial products, including refund anticipation loans, to Jackson Hewitt Tax Service customers (the "Republic Program"), the fees to be paid by Republic to us for the 2009 tax season and certain compliance parameters regarding the Republic Program. The Republic Program Agreement Amendment provides Republic with the right to retain certain monies otherwise payable to us by Republic in the event that Republic fails to attain a minimum level of profitability or number of financial products or if Republic incurs costs in connection with our failure to maintain a minimum level of compliance with Republic's policies and procedures. Republic must initially measure the profitability and compliance thresholds by July 31, 2009. As of the date of this filing, the company has satisfied the minimum level of financial products contingency.

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

The agreements with SBB&T also provides them with termination rights in the event of certain circumstances. In lieu of these termination rights, the fees paid to us may be adjusted during the tax season. Any such change could reduce the revenues we derive from our agreements with this financial product provider.

Walmart

On March 4, 2009, we announced that Wal-Mart had selected us to be the exclusive provider of tax preparation services in Wal-Mart stores beginning in the 2010 tax season. On March 11, 2009, JHI and TSA entered into the Kiosk License Agreement (the "Wal-Mart Agreement") with Wal-Mart Stores East, LP, Wal-Mart Stores, Inc., Wal-Mart Louisiana, LLC, Wal-Mart Stores Arkansas, LLC and Wal-Mart Stores Texas, LLC, pursuant to which we were granted the exclusive right to provide tax preparation services within Wal-Mart stores during the 2010 and 2011 tax seasons. The Wal-Mart Agreement expires on May 30, 2011 and it may be renewed for three additional one-year terms upon the mutual agreement of the parties. The Wal-Mart Agreement contains certain early termination rights and indemnity obligations.

Compensation to Wal-Mart consists of fixed license fees for each Wal-Mart store in which a Jackson Hewitt Tax Service office operates, additional fees based on the number of tax returns prepared by each office in the applicable tax seasons and additional fees based on the preparation and filing of tax returns through our on-line tax preparation software for customers who accessed such on-line tax preparation software via walmart.com (collectively, the "Fees"). Franchised offices operating Jackson Hewitt Tax Service offices in Wal-Mart stores pursuant to the Wal-Mart Agreement are obligated under their Franchise Agreements with us to reimburse us for all Fees paid on their behalf by us to Wal-Mart.

Termination Charges

In the first quarter of fiscal 2009, we recorded termination charges of $3.0 million as discussed below. We recorded additional termination charges of $0.2 million in each of the second and third fiscal quarters as well.

Employee Termination and Related Expenses

As part of an initiative to achieve a lower cost structure in advance of the 2009 tax season, our overall consolidated workforce was reduced by approximately 10% during the first quarter of fiscal 2009. In connection with this action and certain employee terminations, a $1.4 million charge was recorded in selling, general and administrative expense in the first quarter of fiscal 2009. In the third quarter of fiscal 2009, we recorded additional charges of $0.06 million. For the nine months ended January 31, 2009, our reportable segments included employee termination and related expenses of $0.5 million in Company-Owned Office Operations and $0.3 million in Franchise Operations with $0.8 million in Corporate and Other.

Lease Termination and Related Expenses

As part of an overall effort to optimize company-owned store locations and improve profitability, 200 under-performing store locations were closed during the first quarter of fiscal 2009. In connection with this action, a charge of $1.6 million was recorded in cost of company-owned operations expense related to lease termination and related expenses, including a $0.1 million write-down of leasehold improvements, associated with 52 of these store location closures. Costs to terminate these contractual operating leases before the end of their term were measured at fair value and reduced by an amount of estimated sublease rental income that we believe we can reasonably obtain for the properties. In the third quarter of fiscal 2009, we recorded in cost of company-owned operations accretion expense of $0.01 million offset by a credit of $0.13 million to adjust the fair value of this lease termination liability primarily due to favorable negotiations with landlords to buy out certain leases early. We expect to continue to adjust the fair value of this lease termination liability due to the passage of time as an increase in the liability and as an operating expense (accretion) over the remaining terms of the leases. As of January 31, 2009, the remaining lease termination liability consisted of $0.28 million in accounts payable and accrued liabilities and $0.06 million in other non-current liabilities in the accompanying Condensed Consolidated Balance Sheet.

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Restructuring Considerations

Subsequent to the end of the third quarter of fiscal 2009, we continued to experience a much slower than anticipated start to the tax season, including within our company-owned office locations, with decreases in our year over year tax return counts and revenues as well as unfavorable movements in our stock price. Despite our disappointing third quarter results and the challenging economic environment, we believe that opportunities exist in our operational execution to increase customer traffic in our stores, realize growth with our new Walmart and online initiatives and improve our overall profitability.

In the fourth quarter of fiscal 2009, we will evaluate whether additional steps are required to restructure our business operations in an effort to further improve financial results, which may include closing unprofitable company-owned office locations, executing on cost reduction initiatives and implementing workforce reductions. These evaluations could lead to restructuring charges within fiscal year 2009.

Management Changes

Effective November 3, 2008, Mark Heimbouch, formerly Chief Operating Officer, resigned. On March 12, 2009, Douglas K. Foster, our Chief Marketing Officer's employment was terminated.

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.