UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, 2006

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     .

INTUIT INC.

Delaware (State of incorporation)		77-0034661 (IRS employer identification no.)

2700 Coast Avenue, Mountain View, CA 94043
(Address of principal executive offices)

(650) 944-6000
(Registrant’s telephone number, including area code)

Indicate by a 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 þ       No o

Indicate by a 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 þ            Accelerated filer o            Non-accelerated filer o

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o       No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

170,847,931 shares of Common Stock, $0.01 par value, as of May 31, 2006

 

 

INTUIT INC.
FORM 10-Q
INDEX

				Page
				Number
PART I		FINANCIAL INFORMATION
ITEM 1:		Financial Statements
		Condensed Consolidated Statements of Operations for the three and nine months ended April 30, 2006 and 2005			3
		Condensed Consolidated Balance Sheets at April 30, 2006 and July 31, 2005			4
		Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended April 30, 2006 and 2005			5
		Condensed Consolidated Statements of Cash Flows for the three and nine months ended April 30, 2006 and 2005			6
		Notes to Condensed Consolidated Financial Statements			7
ITEM 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
ITEM 3:		Quantitative and Qualitative Disclosures about Market Risk			58
ITEM 4:		Controls and Procedures			59
PART II		OTHER INFORMATION
ITEM 1:		Legal Proceedings			60
ITEM 2:		Unregistered Sales of Equity Securities and Use of Proceeds			61
ITEM 5:		Other Information			62
ITEM 6:		Exhibits			63
		Signatures			64
EXHIBIT 10.01
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

Intuit, the Intuit logo, QuickBooks, TurboTax, Lacerte, ProSeries, Quicken and QuickBase, among others, are registered trademarks and/or registered service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Simple Start, QuickTax, TaxWiz and ProFile, among others, are trademarks and/or service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Other parties’ marks are the property of their respective owners.

PART I

INTUIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		April 30,				April 30,				April 30,				April 30,
(In thousands, except per share amounts; unaudited)		2006				2005				2006				2005
Net revenue:
Product		$	420,201			$	414,730			$	1,159,734			$	1,065,931
Service			512,695				402,352				784,232				621,919
Other			19,707				17,782				55,412				48,034
Total net revenue			952,603				834,864				1,999,378				1,735,884
Costs and expenses:
Cost of revenue:
Cost of product revenue			43,667				44,916				147,837				138,623
Cost of service revenue			58,162				50,126				168,829				137,336
Cost of other revenue			6,102				6,928				18,076				17,836
Amortization of purchased intangible assets			2,289				2,542				8,001				7,709
Selling and marketing			187,654				158,035				531,987				460,039
Research and development			97,335				78,394				294,699				229,705
General and administrative			74,009				67,743				202,901				173,809
Acquisition-related charges			3,278				3,966				10,590				12,576
Total costs and expenses			472,496				412,650				1,382,920				1,177,633
Operating income from continuing operations			480,107				422,214				616,458				558,251
Interest and other income			8,691				5,727				20,317				12,564
Gains on marketable equity securities and other investments, net			79				124				7,373				342
Income from continuing operations before income taxes			488,877				428,065				644,148				571,157
Income tax provision			190,229				129,992				247,864				173,607
Net income from continuing operations			298,648				298,073				396,284				397,550
Net income from discontinued operations			—				2,434				39,533				4,073
Net income		$	298,648			$	300,507			$	435,817			$	401,623
Basic net income per share from continuing operations		$	1.74			$	1.63			$	2.27			$	2.14
Basic net income per share from discontinued operations			—				0.01				0.22				0.02
Basic net income per share		$	1.74			$	1.64			$	2.49			$	2.16
Shares used in basic per share amounts			171,835				183,422				174,828				186,062
Diluted net income per share from continuing operations		$	1.68			$	1.60			$	2.19			$	2.10
Diluted net income per share from discontinued operations			—				0.01				0.22				0.02
Diluted net income per share		$	1.68			$	1.61			$	2.41			$	2.12
Shares used in diluted per share amounts			177,959				186,887				181,113				189,808

Net income for the three and nine months ended April 30, 2006 included share-based compensation expense for stock options and our Employee Stock Purchase Plan that we recorded as a result of our adoption of SFAS 123(R) on August 1, 2005. For continuing operations, this expense totaled $15.8 million and $51.4 million before income taxes and $10.3 million and $32.7 million net of income taxes for those periods. We recorded no share-based compensation expense for stock options or our Employee Stock Purchase Plan for the three and nine months ended April 30, 2005 because we did not adopt the optional recognition provisions of SFAS 123. As previously disclosed in the notes to our financial statements for the three and nine months ended April 30, 2005, net income including pro forma share-based compensation expense for those periods was $290.6 million and $364.9 million. See Note 1 and Note 10 to the financial statements for additional information.

See accompanying notes.

INTUIT INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		April 30,				July 31,
(In thousands; unaudited)		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	252,969			$	83,842
Investments			1,029,208				910,416
Accounts receivable, net			144,940				86,125
Deferred income taxes			61,647				54,854
Prepaid expenses, taxes and other current assets			79,553				99,275
Current assets of discontinued operations			—				21,989
Current assets before funds held for payroll customers			1,568,317				1,256,501
Funds held for payroll customers			408,790				357,838
Total current assets			1,977,107				1,614,339
Property and equipment, net			197,495				208,548
Goodwill, net			530,095				509,499
Purchased intangible assets, net			62,096				69,678
Long-term deferred income taxes			147,878				118,475
Loans to executive officers and other employees			8,865				9,245
Other assets			35,250				30,078
Long-term assets of discontinued operations			—				156,589
Total assets		$	2,958,786			$	2,716,451
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	92,985			$	65,812
Accrued compensation and related liabilities			139,095				144,823
Deferred revenue			220,271				279,382
Income taxes payable			241,049				30,423
Other current liabilities			167,952				103,131
Current liabilities of discontinued operations			—				21,995
Current liabilities before payroll customer fund deposits			861,352				645,566
Payroll customer fund deposits			408,790				357,838
Total current liabilities			1,270,142				1,003,404
Long-term obligations			15,709				17,308
Long-term obligations of discontinued operations			—				240
Total long-term obligations			15,709				17,548
Commitments and contingencies
Stockholders’ equity:
Preferred stock			—				—
Common stock and additional paid-in capital			2,063,333				1,977,954
Treasury stock, at cost			(2,033,456	)			(1,557,833	)
Deferred compensation			—				(16,283	)
Accumulated other comprehensive income			2,482				174
Retained earnings			1,640,576				1,291,487
Total stockholders’ equity			1,672,935				1,695,499
Total liabilities and stockholders’ equity		$	2,958,786			$	2,716,451

See accompanying notes.

INTUIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended April 30, 2006 and 2005

																						Accumulated
										Additional												Other								Total
		Common Stock								Paid In				Treasury				Deferred				Comprehensive				Retained				Stockholders’
(Dollars in thousands; unaudited)		Shares				Amount				Capital				Stock				Compensation				Income (Loss)				Earnings				Equity
Balance at July 31, 2005			179,270,062			$	1,793			$	1,976,161			$	(1,557,833	)		$	(16,283	)		$	174			$	1,291,487			$	1,695,499
Reclassification of deferred compensation balance upon adoption of SFAS 123(R)											(16,283	)							16,283												—
Components of comprehensive income:
Net income																											435,817				435,817
Other comprehensive income, net of tax																							2,308								2,308
Comprehensive net income																															438,125
Issuance of common stock upon exercise of options and other			6,249,588				62								285,931												(84,473	)			201,520
Issuance of common stock pursuant to Employee Stock Purchase Plan			399,419				4								18,277												(2,255	)			16,026
Stock repurchases under stock repurchase programs			(15,426,913	)			(154	)							(779,831	)															(779,985	)
Tax benefit from employee stock option transactions											46,109																				46,109
Share-based compensation — restricted stock											4,000																				4,000
Share-based compensation — all other (1)											51,641																				51,641
Balance at April 30, 2006			170,492,156			$	1,705			$	2,061,628			$	(2,033,456	)		$	—			$	2,482			$	1,640,576			$	1,672,935

																						Accumulated
										Additional												Other								Total
		Common Stock								Paid In				Treasury				Deferred				Comprehensive				Retained				Stockholders’
(Dollars in thousands; unaudited)		Shares				Amount				Capital				Stock				Compensation				Income (Loss)				Earnings				Equity
Balance at July 31, 2004			190,090,604			$	1,901			$	1,947,325			$	(1,088,389	)		$	(19,434	)		$	(3,375	)		$	984,391			$	1,822,419
Components of comprehensive income:
Net income																											401,623				401,623
Other comprehensive income, net of tax																							1,679								1,679
Comprehensive net income																															403,302
Issuance of common stock upon exercise of options and other			2,840,230				28								128,762												(47,330	)			81,460
Issuance of common stock pursuant to Employee Stock Purchase Plan			462,469				5								21,898												(5,958	)			15,945
Stock repurchases under stock repurchase programs			(11,493,290	)			(115	)							(499,881	)															(499,996	)
Repurchases of vested restricted stock			(16,053	)											(671	)															(671	)
Tax benefit from employee stock option transactions											14,203																				14,203
Stock bonus awards and related stock issuance			253								71								(71	)											—
Retirement of treasury stock and other			74								(7	)			7																—
Reduction of deferred stock compensation due to stock option cancellations											(33	)							33												—
Share-based compensation — restricted stock																			4,370												4,370
Share-based compensation — acquisitions																			133												133
Balance at April 30, 2005			181,884,287			$	1,819			$	1,961,559			$	(1,438,274	)		$	(14,969	)		$	(1,696	)		$	1,332,726			$	1,841,165

INTUIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended								Nine Months Ended
		April 30,				April 30,				April 30,				April 30,
(In thousands; unaudited)		2006				2005				2006				2005
Cash flows from operating activities:
Net income		$	298,648			$	300,507			$	435,817			$	401,623
Net income from discontinued operations			—				(2,434	)			(39,533	)			(4,073	)
Net income from continuing operations			298,648				298,073				396,284				397,550
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation			23,117				32,517				68,878				77,247
Acquisition-related charges			3,278				3,966				10,590				12,576
Amortization of purchased intangible assets			2,289				2,542				8,001				7,709
Amortization of other purchased intangible assets			2,526				2,220				6,816				5,986
Share-based compensation — restricted stock			1,347				1,119				4,000				4,370
Share-based compensation — all other			15,844				—				51,364				—
Loss (gain) on disposal of property and equipment			62				(546	)			(65	)			(680	)
Amortization of premiums and discounts on available-for-sale debt securities			720				2,569				2,786				8,315
Net realized loss on sales of available-for-sale debt securities			15				99				493				1,619
Net gains on marketable equity securities and other investments			(79	)			(124	)			(7,373	)			(342	)
Deferred income taxes			(33,670	)			(42,566	)			(35,278	)			(42,296	)
Tax benefit from share-based compensation plans			17,033				5,154				46,109				14,203
Excess tax benefit from share-based compensation plans			(9,564	)			—				(22,949	)			—
Gain on foreign exchange transactions			(238	)			(46	)			(132	)			(408	)
Subtotal			321,328				304,977				529,524				485,849
Changes in operating assets and liabilities:
Accounts receivable			174,665				167,749				(58,186	)			(49,580	)
Prepaid expenses, taxes and other current assets			2,802				12,320				35,172				3,041
Accounts payable			(33,146	)			(6,719	)			26,456				25,656
Accrued compensation and related liabilities			14,485				10,220				(5,997	)			(13,764	)
Deferred revenue			(36,607	)			(44,055	)			(59,669	)			(11,245	)
Income taxes payable			209,478				167,185				201,050				184,339
Other current liabilities			5,643				(41,791	)			62,645				67,057
Total changes in operating assets and liabilities			337,320				264,909				201,471				205,504
Net cash provided by operating activities of continuing operations			658,648				569,886				730,995				691,353
Net cash provided by operating activities of discontinued operations			—				5,727				14,090				17,110
Net cash provided by operating activities			658,648				575,613				745,085				708,463
Cash flows from investing activities:
Purchases of available-for-sale debt securities			(589,772	)			(685,709	)			(1,271,564	)			(2,028,769	)
Liquidation and maturity of available-for-sale debt securities			270,696				392,351				1,149,418				1,872,883
Proceeds from sale of marketable equity securities			5,765				—				10,000				—
Net change in funds held for payroll customers’ money market funds and other cash equivalents			15,218				(30,346	)			(50,952	)			(38,191	)
Purchases of property and equipment			(11,539	)			(18,757	)			(59,451	)			(56,317	)
Proceeds from sale of property			2,692				3,151				3,026				3,151
Change in other assets			655				165				(5,724	)			(4,445	)
Net change in payroll customer funds deposits			(15,218	)			30,346				50,952				38,191
Acquisitions of businesses and intangible assets, net of cash acquired			(2,977	)			—				(36,858	)			(4,156	)
Net cash used in investing activities of continuing operations			(324,480	)			(308,799	)			(211,153	)			(217,653	)
Net proceeds from sales of discontinued operations			—				422				171,833				9,619
Net cash used in investing activities			(324,480	)			(308,377	)			(39,320	)			(208,034	)
Cash flows from financing activities:
Change in long-term obligations			(71	)			(1,552	)			(721	)			(2,893	)
Net proceeds from issuance of common stock under stock plans			69,995				37,035				217,546				97,405
Purchase of treasury stock			(285,004	)			(216,456	)			(779,985	)			(500,667	)
Excess tax benefit from share-based compensation plans			9,564				—				22,949				—
Net cash used in financing activities			(205,516	)			(180,973	)			(540,211	)			(406,155	)
Effect of exchange rates on cash and cash equivalents			1,611				(371	)			3,573				493
Net increase in cash and cash equivalents			130,263				85,892				169,127				94,767
Cash and cash equivalents at beginning of period			122,706				34,867				83,842				25,992
Cash and cash equivalents at end of period		$	252,969			$	120,759			$	252,969			$	120,759

See accompanying notes.

INTUIT INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations.

As discussed later in this Note 1, we adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” on August 1, 2005 using the modified prospective transition method. Accordingly, our operating income from continuing operations for the three and nine months ended April 30, 2006 includes approximately $15.8 million and $51.4 million in share-based employee compensation expense for stock options and our Employee Stock Purchase Plan. Because we elected to use the modified prospective transition method, results for prior periods have not been restated.

As discussed in Note 5, in December 2005 we sold our Intuit Information Technology Solutions (ITS) business and in December 2004 we sold our Intuit Public Sector Solutions (IPSS) business. Accordingly, we have reclassified our financial statements for all periods prior to the sales to reflect ITS and IPSS as discontinued operations. Unless noted otherwise, discussions in these notes pertain to our continuing operations.

We have included all normal recurring adjustments and the adjustments for discontinued operations that we considered necessary to give a fair presentation of our operating results for the periods presented. These condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements for the fiscal year ended July 31, 2005 included in Intuit’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 26, 2005. Results for the three and nine months ended April 30, 2006 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2006 or any other future period.

Our QuickBooks, Consumer Tax and Professional Tax businesses are highly seasonal. Some of our other offerings are also seasonal, but to a lesser extent. Revenue from many of our small business software products, including QuickBooks, tends to be concentrated around calendar year end. Sales of income tax preparation products and services are heavily concentrated in the period from November through April. These seasonal patterns mean that our total net revenue is usually highest during our second quarter ending January 31 and third quarter ending April 30. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31, when revenue from our tax businesses is minimal while operating expenses continue at relatively consistent levels.

Use of Estimates

We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the appropriate levels of reserves for product returns and rebates, the collectibility of accounts receivable, the appropriate levels of various accruals, the amount of our worldwide tax provision and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and carrying values of purchased intangible assets (including goodwill), property and equipment and other long-lived assets. In addition, we use assumptions to estimate the fair value of share-based compensation. See Note 10, “Stockholders’ Equity – Share-Based Compensation Plans.” Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.

Net Revenue

We derive revenue from the sale of packaged software products, license fees, software subscriptions, product support, professional services, outsourced payroll services, merchant services, transaction fees and multiple element arrangements that may include any combination of these items. We recognize revenue for software products and related services in accordance with the American Institute of Certified Public Accountants’ Statement of Position

(SOP) 97-2, “Software Revenue Recognition,” as modified by SOP 98-9. For other offerings, we follow Staff Accounting Bulletin No. 104, “Revenue Recognition.” We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collectibility is probable.

In some situations, we receive advance payments from our customers. We also offer multiple element arrangements to our customers. We defer revenue associated with these advance payments and the relative fair value of undelivered elements under multiple element arrangements until we ship the products or perform the services. Deferred revenue consisted of the following at the dates indicated:

		April 30,				July 31,
(In thousands)		2006				2005
Product and product-related services		$	178,640			$	261,135
Customer support			41,631				18,247
Total deferred revenue		$	220,271			$	279,382

In accordance with the Financial Accounting Standards Board’s (FASB’s) Emerging Issues Task Force Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product,” we account for cash consideration such as sales incentives that we give to our customers or resellers as a reduction of revenue rather than as an operating expense unless we receive a benefit that we can identify and for which we can reasonably estimate the fair value.

Product Revenue

We recognize revenue from the sale of our packaged software products and supplies when legal title transfers, which is generally when we ship the products or, in the case of certain agreements, when products are delivered to retailers. We sell some of our QuickBooks, Consumer Tax and Quicken products on consignment to a limited number of retailers. We recognize revenue for these consignment transactions only when the end-user sale has occurred. For products that are sold on a subscription basis and include periodic updates, we recognize revenue ratably over the contractual time period.

We recognize product revenue in accordance with SFAS 48, “Revenue Recognition When Right of Return Exists.” We reduce product revenue from distributors and retailers for estimated returns that are based on historical returns experience and other factors, such as the volume and price mix of products in the retail channel, return rates for prior releases of the product, trends in retailer inventory and economic trends that might impact customer demand for our products (including the competitive environment and the timing of new releases of our product). We also reduce product revenue for the estimated redemption of rebates on certain current product sales. Our estimated reserves for distributor and retailer sales incentive rebates are based on distributors’ and retailers’ actual performance against the terms and conditions of rebate programs, which we typically establish annually. Our reserves for end user rebates are estimated based on the terms and conditions of the specific promotional rebate program, actual sales during the promotion, the amount of redemptions received and historical redemption trends by product and by type of promotional program.

Service Revenue

We recognize revenue from outsourced payroll processing and payroll tax filing services as the services are performed, provided we have no other remaining obligations to these customers. We generally require customers to remit payroll tax funds to us in advance of the applicable payroll due date via electronic funds transfer. We include in total net revenue the interest earned on invested balances resulting from timing differences between when we collect these funds from customers and when we remit the funds to outside parties.

We offer several technical support plans and recognize support revenue over the life of the plans. Service revenue also includes Web services such as TurboTax Online and electronic tax filing services in both our Consumer Tax and Professional Tax segments. Service revenue for electronic payment processing services that we provide to merchants is recorded net of interchange fees charged by credit card associations because we do not control these fees. Finally, service revenue includes revenue from consulting and training services, primarily in our Intuit-Branded Small Business segment. We generally recognize revenue as these services are performed, provided that we have no other remaining obligations to these customers and that the services performed are not essential to the functionality of delivered products and services.

Other Revenue

Other revenue consists primarily of revenue from revenue-sharing arrangements with third-party service providers and from online advertising agreements. We recognize transaction fees from revenue-sharing arrangements as end-user sales are reported to us by these partners. We typically recognize revenue from online advertising agreements as the lesser of when the advertisements are displayed or pro rata based on the contractual time period of the advertisements.

Multiple Element Arrangements

We enter into certain revenue arrangements for which we are obligated to deliver multiple products and/or services (multiple elements). For these arrangements, which generally include software products, we allocate and defer revenue for the undelivered elements based on their vendor-specific objective evidence of fair value (VSOE). VSOE is generally the price charged when that element is sold separately.

In situations where VSOE exists for all elements (delivered and undelivered), we allocate the total revenue to be earned under the arrangement among the various elements, based on their relative fair value. For transactions where VSOE exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue. If VSOE does not exist for an undelivered service element, we recognize the revenue from the arrangement as the services are delivered. If VSOE does not exist for undelivered elements that are specified products or features, we defer revenue until the earlier of the delivery of all elements or the point at which we determine VSOE for these undelivered elements.

We recognize revenue related to the delivered products or services only if: (1) the above revenue recognition criteria are met; (2) any undelivered products or services are not essential to the functionality of the delivered products and services; (3) payment for the delivered products or services is not contingent upon delivery of the remaining products or services; and (4) we have an enforceable claim to receive the amount due in the event that we do not deliver the undelivered products or services.

For arrangements where undelivered services are essential to the functionality of delivered software, we recognize both the product license revenue and service revenue under the percentage of completion contract method in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts.” To date, product license and service revenues recognized pursuant to SOP 81-1 have not been significant.

Shipping and Handling

We record the amounts we charge our customers for the shipping and handling of our software products as product revenue and we record the related costs as cost of product revenue on our statement of operations. Product revenue from shipping and handling is not significant.

Customer Service and Technical Support

We include the costs of providing customer service under paid technical support contracts on the cost of service revenue line on our statement of operations. We include customer service and free technical support costs on the sales and marketing expense line on our statements of operations. Customer service and technical support costs include costs associated with performing order processing, answering customer inquiries by telephone and through Web sites, e-mail and other electronic means, and providing free technical support assistance to customers. In connection with the sale of certain products, we provide a limited amount of free technical support assistance to customers. We do not defer the recognition of any revenue associated with sales of these products, since the cost of providing this free technical support is insignificant. The technical support is provided within one year after the associated revenue is recognized and free product enhancements are minimal and infrequent. We accrue the estimated cost of providing this free support upon product shipment.

Leases

We review all leases for capital or operating classification at their inception under the guidance of SFAS 13, “Accounting for Leases,” as amended. We use our incremental borrowing rate in the assessment of lease classification and define the initial lease term to include the construction build-out period but to exclude lease extension periods. We conduct our operations primarily under operating leases. For leases that contain rent

escalations, we record the total rent payable during the lease term, as defined above, on a straight-line basis over the initial term of the lease. We record the difference between the rents paid and the straight-line rent in a deferred rent account in other current liabilities or long-term obligations, as appropriate, on our balance sheets.

In accordance with FASB Technical Bulletin (FTB) No. 88-1, “Issues Relating to Accounting for Leases,” we record landlord allowances as deferred rent liabilities in other current liabilities or long-term obligations, as appropriate, on our balance sheets. We record landlord cash incentives as operating activity on our statements of cash flows. We record other landlord allowances as non-cash investing and financing activities on our statements of cash flows. Also in accordance with FTB 88-1, we classify the amortization of landlord allowances as a reduction of occupancy expense on our statements of operations.

Income Taxes

When we prepare our financial statements, we estimate our income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. We record an additional amount in our provision for income taxes in the period in which we determine that our recorded tax liability is less than we expect the ultimate tax assessment to be. If in a later period we determine that payment of this additional amount is unnecessary, we reverse the liability and recognize a tax benefit in that later period. As a result, our ongoing assessments of the probable outcomes of the audit issues and related tax positions require judgment and can materially increase or decrease our effective tax rate and materially affect our operating results. This also requires us to estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we show on our balance sheet. We must then assess the likelihood that our deferred tax assets will be realized. To the extent we believe that realization is not likely, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense on our statement of operations.

We record a valuation allowance to reflect uncertainties about whether we will be able to utilize some of our deferred tax assets (consisting primarily of certain state capital loss and net operating loss carryforwards) before they expire. The valuation allowance is based on our estimates of taxable income for the jurisdictions in which we operate and the period over which our deferred tax assets will be realizable. While we have considered future taxable income in assessing the need for the valuation allowance, we could be required to increase the valuation allowance to take into account additional deferred tax assets that we may be unable to realize. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we make the increase.

Per Share Computations

We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income or loss per share using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options under the treasury stock method and vested restricted stock awards. We exclude stock options with combined exercise prices and unamortized fair values that are greater than the average market price for our common stock from the calculation of diluted net income per share because their effect is anti-dilutive. In loss periods, basic net loss per share and diluted net loss per share are identical since the effect of common equivalent shares is anti-dilutive and therefore excluded.

The following table presents the composition of shares used in the computation of basic and diluted net loss per share for the periods indicated.

		Three Months Ended								Nine Months Ended
		April 30,				April 30,				April 30,				April 30,
(In thousands, except per share amounts)		2006				2005				2006				2005
Numerator:
Net income from continuing operations		$	298,648			$	298,073			$	396,284			$	397,550
Net income from discontinued operations			—				2,434				39,533				4,073
Net income		$	298,648			$	300,507			$	435,817			$	401,623
Denominator:
Shares used in basic per share amounts:
Weighted average common shares outstanding			171,835				183,422				174,828				186,062
Shares used in diluted per share amounts:
Weighted average common shares outstanding			171,835				183,422				174,828				186,062
Dilutive common equivalent shares from stock options and restricted stock awards			6,124				3,465				6,285				3,746
Dilutive weighted average common shares outstanding			177,959				186,887				181,113				189,808
Basic and diluted net income per share:
Basic net income per share from continuing operations		$	1.74			$	1.63			$	2.27			$	2.14
Basic net income per share from discontinued operations			—				0.01				0.22				0.02
Basic net income per share		$	1.74			$	1.64			$	2.49			$	2.16
Diluted net income per share from continuing operations		$	1.68			$	1.60			$	2.19			$	2.10
Diluted net income per share from discontinued operations			—				0.01				0.22				0.02
Diluted net income per share		$	1.68			$	1.61			$	2.41			$	2.12
Weighted average stock options excluded from calculation due to anti-dilutive effect:
Stock options with combined exercise prices and unamortized fair values that were greater than the average market price for the common stock in the period			3,836				12,136				8,485				10,147

Cash Equivalents and Investments

We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds in all periods presented. Investments consist of available-for-sale debt securities that we carry at fair value. We use the specific identification method to compute gains and losses on investments. We include unrealized gains and losses on investments, net of tax, in stockholders’ equity. Available-for-sale debt securities are classified as current assets based upon our intent and ability to use any and all of these securities as necessary to satisfy the significant short-term liquidity requirements that may arise from the highly seasonal and cyclical nature of our businesses. Because of our significant business seasonality, stock repurchase programs and acquisition opportunities, cash flow requirements may fluctuate dramatically from quarter to quarter and require us to use a significant amount of the investments held as available-for-sale securities. See Note 2.

Funds Held for Payroll Customers and Payroll Customer Fund Deposits

Funds held for payroll customers represent amounts held on behalf of our payroll customers that are invested in cash, cash equivalents and investments. Payroll customer fund deposits consist primarily of direct deposit funds and payroll taxes we owe on behalf of our payroll customers.

Goodwill, Purchased Intangible Assets and Other Long-Lived Assets

We record goodwill when the purchase price of net tangible and intangible assets we acquire exceeds their fair value. We amortize the cost of identified intangible assets on a straight-line basis over periods ranging from two to seven years.

We regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” we review goodwill and other intangible assets that have indefinite useful lives for impairment at least annually in our fourth fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review intangible assets that have finite useful lives and other long-lived assets when an event occurs indicating the potential for impairment. In our reviews, we look for facts or circumstances, either internal or external, indicating that we may not recover the carrying value of the asset. We measure impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. Our measurement of fair value under SFAS 142 is generally based on a blend of an analysis of the present value of estimated future discounted cash flows and a comparison of revenue and operating income multiples for companies of similar industry and/or size. Our measurement of fair value under SFAS 144 is generally based on the present value of estimated future discounted cash flows. Our analysis is based on available information and on assumptions and projections that we consider to be reasonable and supportable. The discounted cash flow analysis considers the likelihood of possible outcomes and is based on our best estimate of projected future cash flows. If necessary, we perform subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Share-Based Compensation Plans

Our share-based employee compensation plans are described in Note 10. Prior to August 1, 2005, we accounted for these share-based employee compensation plans under the measurement and recognition provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by SFAS 123, “Accounting for Stock-Based Compensation.” Accordingly, we recorded no share-based employee compensation expense for options granted under the 2005 Plan or its predecessor plans during the three and nine months ended April 30, 2005 as all options granted under those plans had exercise prices equal to the fair market value of our common stock on the date of grant. We also recorded no compensation expense in those periods in connection with our Employee Stock Purchase Plan as the purchase price of the stock was not less than 85% of the lower of the fair market value of our common stock at the beginning of each offering period or at the end of each purchase period. In accordance with SFAS 123 and SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” we provided pro forma net income or loss and net income or loss per share disclosures for each period prior to the adoption of SFAS 123(R) as if we had applied the fair value-based method in measuring compensation expense for our share-based compensation plans.

Effective August 1, 2005, we adopted the fair value recognition provisions of SFAS 123(R), “Share-Based Payment,” using the modified prospective transition method. Under that transition method, compensation expense that we recognized for the three and nine months ended April 30, 2006 included: (a) period compensation expense for all share-based payments granted prior to, but not yet vested as of, August 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, adjusted for forfeitures, and (b) period compensation expense for all share-based payments granted on or after August 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Because we elected to use the modified prospective transition method, results for prior periods have not been restated. In March 2005 the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107, which provides supplemental implementation guidance for SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R). See Note 10 for information on the impact of our adoption of SFAS 123(R) and the assumptions we use to calculate the fair value of share-based employee compensation.

Concentration of Credit Risk and Significant Customers and Suppliers

We operate in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer requirements, the emergence of competitive products or services with new capabilities and other factors could negatively impact our operating results.

We are also subject to risks related to changes in the values of our significant balance of investments and funds held for payroll customers. Our portfolio of investments consists of investment-grade securities and our funds held for payroll customers consist of cash, cash equivalents and investment-grade securities. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market or cash management funds, we diversify our investments by limiting our holdings with any individual issuer.

We sell a significant portion of our products through third-party retailers and distributors. As a result, we face risks related to the collectibility of our accounts receivable. For example, at January 31, 2006, in the midst of the 2005 consumer tax season, amounts due from our eight largest retailers and distributors represented approximately 47% of total accounts receivable. To appropriately manage this risk, we perform ongoing evaluations of customer credit and limit the amount of credit extended as we deem appropriate but generally do not require collateral. We maintain reserves for estimated credit losses and these losses have historically been within our expectations. However, since we cannot necessarily predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate. No distributor or individual retailer accounted for 10% or more of total net revenue in the three or nine months ended April 30, 2006 or 2005. No customer accounted for 10% or more of total accounts receivable at April 30, 2006 or July 31, 2005. Amounts due from Rock Acquisition Corporation, the purchaser of our Quicken Loans mortgage business, under certain licensing and distribution agreements comprised 11% of total accounts receivable at July 31, 2005.

We rely on three third-party vendors to perform the manufacturing and distribution functions for our primary retail desktop software products. We also have a key single-source vendor that prints and fulfills orders for all of our checks and most other products for our financial supplies business. While we believe that relying heavily on key vendors improves the efficiency and reliability of our business operations, relying on any one vendor for a significant aspect of our business can have a significant negative impact on our revenue and profitability if that vendor fails to perform at acceptable service levels for any reason, including financial difficulties of the vendor.

Recent Accounting Pronouncements

SFAS 154, “Accounting Changes and Error Corrections”

On June 1, 2005 the FASB issued SFAS 154, “Accounting Changes and Error Corrections,” which replaces APB 20, “Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes made in fiscal years beginning after June 1, 2005. We do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.

SFAS 155, “Accounting for Certain Hybrid Instruments”

On February 16, 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.

2. Investments and Funds Held for Payroll Customers

As discussed in Note 1, “Concentration of Credit Risk and Significant Customers and Suppliers,” our portfolio of investments consists of investment-grade securities and our funds held for payroll customers consist of cash, cash equivalents and investment-grade securities. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market or cash management funds, we diversify our investments by limiting our holdings with any individual issuer.

As also discussed in Note 1, “Cash Equivalents and Investments,” investments consist of available-for-sale debt securities that we carry at fair value. The following table summarizes our investments and funds held for payroll customers at the dates indicated.

		April 30, 2006								July 31, 2005
(In thousands)		Cost				Fair Value				Cost				Fair Value
Type of issue:
Cash and cash equivalents in funds held for payroll customers		$	316,369			$	316,369			$	263,860			$	263,860
Available-for-sale debt securities:
Corporate notes			—				—				7,000				7,000
Municipal bonds			1,112,643				1,111,738				981,341				980,500
U.S. government securities			10,000				9,891				16,991				16,894
Total available-for-sale debt securities			1,122,643				1,121,629				1,005,332				1,004,394
Total investments and funds held for payroll customers		$	1,439,012			$	1,437,998			$	1,269,192			$	1,268,254
Classification of investments on balance sheets:
Investments		$	1,030,222			$	1,029,208			$	911,354			$	910,416
Funds held for payroll customers			408,790				408,790				357,838				357,838
Total investments and funds held for payroll customers		$	1,439,012			$	1,437,998			$	1,269,192			$	1,268,254
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income (loss) in the equity section of our balance sheet. Gross unrealized gains and losses on our available-for-sale debt securities were as follows at the dates indicated:
		April 30,				July 31,
(In thousands)		2006				2005
Gross unrealized gains		$	5			$	31
Gross unrealized losses			(1,019	)			(969	)
Net unrealized losses		$	(1,014	)		$	(938	)

The following table summarizes the fair value and gross unrealized losses related to 92 available-for-sale debt securities, aggregated by type of investment and length of time that individual securities have been in a continuous unrealized loss position, at April 30, 2006:

		In a Loss Position for								In a Loss Position for
		Less Than 12 Months								12 Months or More								Total in a Loss Position
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In thousands)		Value				Losses				Value				Losses				Value				Losses
Corporate notes		$	—			$	—			$	—			$	—			$	—			$	—
Municipal bonds			205,058				(856	)			22,011				(53	)			227,069				(909	)
U.S. government securities			9,890				(110	)			—				—				9,890				(110	)
		$	214,948			$	(966	)		$	22,011			$	(53	)		$	236,959			$	(1,019	)

We periodically review our investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments that we held at April 30, 2006 were not other-than-temporarily impaired. While certain available-for-sale debt securities have fair values that are below cost, we believe that if the securities were held to maturity it is probable that principal and interest would be collected in accordance with contractual terms, and that the decline in market value is due to changes in interest rates and not due to increased credit risk.

We include realized gains and losses on our available-for-sale debt securities in interest and other income on our statement of operations. Gross realized gains and losses on our available-for-sale debt securities were as follows for the periods indicated:

		Three Months Ended								Nine Months Ended
		April 30,				April 30,				April 30,				April 30,
(In thousands)		2006				2005				2006				2005
Gross realized gains		$	2			$	3			$	12			$	168
Gross realized losses			(17	)			(102	)			(505	)			(1,787	)
Net realized losses		$	(15	)		$	(99	)		$	(493	)		$	(1,619	)
The following table summarizes our available-for-sale debt securities held in investments and funds held for payroll customers, classified by the stated maturity date of the security.
		April 30, 2006
(In thousands)		Cost				Fair Value
Due within one year		$	145,845			$	145,382
Due within two years			67,613				67,278
Due within three years			3,151				3,137
Due after three years			906,034				905,832
Total available-for-sale debt securities		$	1,122,643			$	1,121,629

Approximately 90% of our available-for-sale debt securities at April 30, 2006 had an interest reset date, put date or mandatory call date within one year.

3. Goodwill and Purchased Intangible Assets

In November 2005 we acquired all of the outstanding shares of My Corporation Business Services, Inc. for $20.9 million in cash. We deposited $3.0 million of the purchase price in a third-party escrow account, to be held for up to

eighteen months from the date of purchase to satisfy potential indemnification claims that may affect the purchase price. Doing business as MyCorporation.com, the company offers online incorporation and related corporate services to small and medium-sized businesses. We acquired MyCorporation.com as part of our Right for Me initiative to offer a wider range of business solutions for small businesses. MyCorporation.com became part of our Consumer Tax segment. Tangible assets and liabilities acquired were not significant. We allocated $1.4 million of the purchase price to identified intangible assets and recorded the excess purchase price of $19.5 million as goodwill. The identified intangible assets are being amortized over terms ranging from two to four years. In accordance with purchase accounting rules, we have included MyCorporation’s results of operations in our consolidated results of operations from the date of acquisition. MyCorporation.com’s results of operations for periods prior to the date of acquisition were not material when compared with our consolidated results.

4. Comprehensive Net Income (Loss)

SFAS 130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive net income (loss) and its components in stockholders’ equity. SFAS 130 requires that the components of other comprehensive income (loss), such as changes in the fair value of available-for-sale securities and foreign currency translation adjustments, be added to our net income (loss) to arrive at comprehensive net income (loss). Other comprehensive income (loss) items have no impact on our net income (loss) as presented on our statement of operations.

The components of accumulated other comprehensive income (loss), net of income taxes, were as follows for the periods indicated:

		Unrealized Gain (Loss) on								Foreign
						Marketable				Currency
(In thousands)		Investments				Securities				Translation				Total
Balance July 31, 2005		$	(582	)		$	1,451			$	(695	)		$	174
Unrealized (loss) gain, net of income tax benefit of $216 and provision of $1,354			(353	)			2,210				—				1,857
Reclassification adjustment for realized loss (gain) included in net income, net of income tax provision of $187 and benefit of $2,244			306				(3,661	)			—				(3,355	)
Translation adjustment			—				—				3,806				3,806
Other comprehensive income (loss)			(47	)			(1,451	)			3,806				2,308
Balance April 30, 2006		$	(629	)		$	—			$	3,111			$	2,482
Balance July 31, 2004		$	(1,502	)		$	375			$	(2,248	)		$	(3,375	)
Unrealized (loss) gain, net of income tax benefit of $520 and provision of $785			(980	)			1,314				—				334
Reclassification adjustment for realized loss included in net income, net of income tax provision of $616			1,004				—				—				1,004
Translation adjustment			—				—				341				341
Other comprehensive income			24				1,314				341				1,679
Balance April 30, 2005		$	(1,478	)		$	1,689			$	(1,907	)		$	(1,696	)

Comprehensive net income was as follows for the periods indicated:

		Three Months Ended								Nine Months Ended
		April 30,				April 30,				April 30,				April 30,
(In thousands)		2006				2005				2006				2005
Net income		$	298,648			$	300,507			$	435,817			$	401,623
Other comprehensive income (loss)			1,170				(994	)			2,308				1,679
Comprehensive net income, net of income taxes		$	299,818			$	299,513			$	438,125			$	403,302
Income tax provision (benefit) netted against other comprehensive income		$	33			$	(344	)		$	(919	)		$	881

5. Discontinued Operations

Intuit Information Technology Solutions

In December 2005 we sold our Intuit Information Technology Solutions (ITS) business for approximately $200 million in cash. The buyer deposited approximately $20 million of the total purchase price in a third-party escrow account to be held through December 2006 to cover breaches of representations and warranties set forth in the purchase agreement, should they arise. The full escrow amount is included in other current assets on our balance sheet at April 30, 2006. ITS was part of our Intuit-Branded Small Business segment. The decision to sell ITS was a result of our desire to focus resources on our core products and services.

In accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” we accounted for the sale as discontinued operations. We have therefore segregated the net assets, operating results and cash flows of ITS from continuing operations on our balance sheet at July 31, 2005 and from our statements of operations and statements of cash flows for all periods prior to the sale. We recorded a $34.3 million net gain on disposal of ITS which is included in net income from discontinued operations on our statement of operations for the nine months ended April 30, 2006. See the table later in this Note 5 for the components of net income from discontinued operations.

Intuit Public Sector Solutions

In December 2004 we sold our Intuit Public Sector Solutions (IPSS) business for approximately $11 million in cash. IPSS was part of our Intuit-Branded Small Business segment. The decision to sell IPSS was a result of our desire to focus resources on our core products and services. In accordance with SFAS 144, we accounted for the sale as discontinued operations. We have therefore segregated the operating results and cash flows of IPSS from continuing operations on our statements of operations and statements of cash flows for all periods prior to the sale. We recorded a $4.8 million net loss on disposal of IPSS for the six months ended January 31, 2005 that included a $4.3 million income tax provision for the estimated tax payable in connection with the expected tax gain on the sale of IPSS.

Components of Net Income (Loss) from Discontinued Operations

The components of net income (loss) from discontinued operations on our statements of operations as well as net revenue from discontinued operations and income or loss from discontinued operations before income taxes were as follows for the periods indicated:

		Three Months Ended								Nine Months Ended
		April 30,				April 30,				April 30,				April 30,
(In thousands)		2006				2005				2006				2005
Net income (loss) from discontinued operations
Net loss from Intuit Public Sector Solutions operations		$	—			$	—			$	—			$	(486	)
Net loss on disposal of Intuit Public Sector Solutions discontinued operations			—				—				—				(4,771	)
Net income from Intuit Information Technology Solutions operations			—				2,434				5,209				9,330
Net gain on disposal of Intuit Information Technology Solutions discontinued operations			—				—				34,324				—
Total net income from discontinued operations		$	—			$	2,434			$	39,533			$	4,073
Net revenue from discontinued operations
Intuit Public Sector Solutions		$	—			$	—			$	—			$	3,827
Intuit Information Technology Solutions			—				14,641				20,167				42,250
Total net revenue from discontinued operations		$	—			$	14,641			$	20,167			$	46,077
Income (loss) from discontinued operations before income taxes
Intuit Public Sector Solutions		$	—			$	—			$	—			$	(786	)
Intuit Information Technology Solutions			—				3,927				9,100				15,049
Total income from discontinued operations before income taxes		$	—			$	3,927			$	9,100			$	14,263