UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended October 31, 2005           or

[   ]		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		77-0034661
(State of incorporation)		(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 [X]       No [   ]

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [X]       No [   ]

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

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

176,945,929 shares of Common Stock, $0.01 par value, as of November 30, 2005

INTUIT INC.
FORM 10-Q
INDEX

				Page
				Number
PART I		FINANCIAL INFORMATION
ITEM 1:		Financial Statements
		Condensed Consolidated Statements of Operations for the three months ended October 31, 2005 and 2004			3
		Condensed Consolidated Balance Sheets at October 31, 2005 and July 31, 2005			4
		Consolidated Statements of Stockholders’ Equity for the three months ended October 31, 2005 and 2004			5
		Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2005 and 2004			6
		Notes to Condensed Consolidated Financial Statements			7
ITEM 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
ITEM 3:		Quantitative and Qualitative Disclosures about Market Risk			55
ITEM 4:		Controls and Procedures			56
PART II		OTHER INFORMATION
ITEM 1:		Legal Proceedings			57
ITEM 2:		Unregistered Sales of Equity Securities and Use of Proceeds			58
ITEM 6:		Exhibits			59
		Signatures			60
EXHIBIT 10.01
EXHIBIT 10.04
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, SnapTax, 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.

INTUIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended
(In thousands, except per share amounts; unaudited)		October 31,				October 31,
		2005				2004
Net revenue:
Product		$	182,454			$	154,003
Service			104,620				84,157
Other			16,997				14,616
Total net revenue			304,071				252,776
Costs and expenses:
Cost of revenue:
Cost of product revenue			32,431				29,844
Cost of service revenue			53,396				39,752
Cost of other revenue			5,852				5,797
Amortization of purchased intangible assets			2,949				2,541
Selling and marketing			147,430				128,546
Research and development			97,280				74,365
General and administrative			63,595				49,641
Acquisition-related charges			3,759				4,441
Total costs and expenses			406,692				334,927
Operating loss from continuing operations			(102,621	)			(82,151	)
Interest and other income			6,304				3,855
Gains on marketable equity securities and other investments, net			4,267				158
Loss from continuing operations before income taxes			(92,050	)			(78,138	)
Income tax benefit			(34,439	)			(32,641	)
Net loss from continuing operations			(57,611	)			(45,497	)
Net income (loss) from discontinued operations			11,807				(639	)
Net loss		$	(45,804	)		$	(46,136	)
Basic and diluted net loss per share from continuing operations		$	(0.33	)		$	(0.24	)
Basic and diluted net income (loss) per share from discontinued operations			0.07				-
Basic and diluted net loss per share		$	(0.26	)		$	(0.24	)
Shares used in basic and diluted per share amounts			177,406				188,346

Net loss for the three months ended October 31, 2005 included share-based compensation expense for stock options and purchases under 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 $19.1 million before income taxes and $11.9 million net of income taxes. We recorded no share-based compensation expense for stock options or purchases under our Employee Stock Purchase Plan for the three months ended October 31, 2004 because we did not adopt the optional recognition provisions of SFAS 123. As previously disclosed in the notes to our financial statements, net loss including pro forma share-based compensation expense for the three months ended October 31, 2004 was $60.0 million. See Note 1 to the financial statements for additional information.

See accompanying notes.

INTUIT INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		October 31,				July 31,
(In thousands; unaudited)		2005				2005
ASSETS
Current assets:
Cash and cash equivalents		$	74,974			$	83,842
Investments			622,330				910,416
Accounts receivable, net			73,226				86,125
Income taxes receivable			71,520				38,665
Deferred income taxes			61,460				54,854
Prepaid expenses and other current assets			72,078				60,610
Current assets of discontinued operations			20,716				21,989
Current assets before funds held for payroll customers			996,304				1,256,501
Funds held for payroll customers			345,432				357,838
Total current assets			1,341,736				1,614,339
Property and equipment, net			210,974				208,548
Goodwill, net			509,884				509,499
Purchased intangible assets, net			71,611				69,678
Long-term deferred income taxes			109,347				118,475
Loans to executive officers and other employees			9,245				9,245
Other assets			32,889				30,078
Long-term assets of discontinued operations			156,680				156,589
Total assets		$	2,442,366			$	2,716,451
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	96,928			$	65,812
Accrued compensation and related liabilities			80,536				144,823
Deferred revenue			274,315				279,382
Income taxes payable			13,707				30,423
Other current liabilities			94,072				103,131
Current liabilities of discontinued operations			19,839				21,995
Current liabilities before payroll customer fund deposits			579,397				645,566
Payroll customer fund deposits			345,432				357,838
Total current liabilities			924,829				1,003,404
Long-term obligations			16,693				17,308
Long-term obligations of discontinued operations			221				240
Total long-term obligations			16,914				17,548
Commitments and contingencies
Stockholders’ equity:
Preferred stock			-				-
Common stock and additional paid-in capital			1,984,777				1,977,954
Treasury stock, at cost			(1,723,972	)			(1,557,833	)
Deferred compensation			-				(16,283	)
Accumulated other comprehensive loss			1,291				174
Retained earnings			1,238,527				1,291,487
Total stockholders’ equity			1,500,623				1,695,499
Total liabilities and stockholders’ equity		$	2,442,366			$	2,716,451

See accompanying notes.

INTUIT INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																						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 loss:
Net loss																											(45,804	)			(45,804	)
Other comprehensive income, net of tax																							1,117								1,117
Comprehensive net loss																															(44,687	)
Issuance of common stock upon exercise of options and other			514,209				5								22,355												(6,069	)			16,291
Issuance of common stock pursuant to Employee Stock Purchase Plan			136,588				1								6,263												(1,087	)			5,177
Stock repurchases under stock repurchase programs			(4,315,000	)			(43	)							(194,757	)															(194,800	)
Tax benefit from employee stock option transactions											2,522																				2,522
Share-based compensation - restricted stock											1,325																				1,325
Share-based compensation - all other (1)											19,296																				19,296
Balance at October 31, 2005			175,605,859			$	1,756			$	1,983,021			$	(1,723,972	)		$	-			$	1,291			$	1,238,527			$	1,500,623

																						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 loss:
Net loss																											(46,136	)			(46,136	)
Other comprehensive income, net of tax																							2,092								2,092
Comprehensive net loss																															(44,044	)
Issuance of common stock upon exercise of options and other			913,264				9								47,005												(21,397	)			25,617
Issuance of common stock pursuant to Employee Stock Purchase Plan			155,276				2								7,992												(2,653	)			5,341
Stock repurchases under stock repurchase programs			(3,947,000	)			(40	)							(170,521	)															(170,561	)
Repurchases of vested restricted stock			(32	)											(1	)															(1	)
Tax benefit from employee stock option transactions											5,153																				5,153
Stock bonus awards and related stock issuance			87								22								(22	)											-
Reduction of deferred stock compensation due to stock option cancellations											(18	)							18												-
Share-based compensation - restricted stock																			1,705												1,705
Other			74																												-
Balance at October 31, 2004			187,212,273			$	1,872			$	1,952,482			$	(1,203,914	)		$	(17,733	)		$	(1,283	)		$	914,205			$	1,645,629

INTUIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended
		October 31,				October 31,
(In thousands; unaudited)		2005				2004
Cash flows from operating activities:
Net loss		$	(45,804	)		$	(46,136	)
Net (income) loss from discontinued operations			(11,807	)			639
Net loss from continuing operations			(57,611	)			(45,497	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation			23,145				21,410
Acquisition-related charges			3,759				4,441
Amortization of purchased intangible assets			2,949				2,541
Amortization of other purchased intangible assets			2,031				1,883
Share-based compensation - restricted stock			1,325				1,625
Share-based compensation - all other			19,099				-
(Gain) loss on disposal of property and equipment			34				(126	)
Amortization of premiums and discounts on available-for-sale debt securities			1,094				3,466
Net realized loss on sales of available-for-sale debt securities			380				1,297
Net gains on marketable equity securities and other investments			(4,267	)			(158	)
Deferred income taxes			2,520				(10,920	)
Tax benefit from employee stock options			1,583				5,153
Gain on foreign exchange transactions			(15	)			(327	)
Subtotal			(3,974	)			(15,212	)
Changes in operating assets and liabilities:
Accounts receivable			12,921				21,513
Prepaid expenses, taxes and other current assets			(38,494	)			(96,389	)
Accounts payable			30,665				13,665
Accrued compensation and related liabilities			(64,399	)			(60,254	)
Deferred revenue			(5,237	)			(2,037	)
Income taxes payable			(16,771	)			48,700
Other current liabilities			(9,471	)			(2,218	)
Total changes in operating assets and liabilities			(90,786	)			(77,020	)
Net cash used in operating activities of continuing operations			(94,760	)			(92,232	)
Net cash provided by operating activities of discontinued operations			10,981				4,846
Net cash used in operating activities			(83,779	)			(87,386	)
Cash flows from investing activities:
Purchases of available-for-sale debt securities			(289,119	)			(667,184	)
Liquidation and maturity of available-for-sale debt securities			575,844				948,003
Net change in funds held for payroll customers’ money market funds and other cash equivalents			12,406				(10,057	)
Purchases of property and equipment			(25,057	)			(24,397	)
Change in other assets			(4,454	)			(4,886	)
Net change in payroll customer funds deposits			(12,406	)			10,057
Acquisitions of intangible assets			(10,148	)			-
Net cash provided by investing activities			247,066				251,536
Cash flows from financing activities:
Change in long-term obligations			(634	)			(624	)
Net proceeds from issuance of common stock under stock plans			21,468				30,958
Purchase of treasury stock			(194,800	)			(170,562	)
Excess tax benefit from employee stock options			939				-
Net cash used in financing activities			(173,027	)			(140,228	)
Effect of exchange rates on cash and cash equivalents			872				877
Net increase (decrease) in cash and cash equivalents			(8,868	)			24,799
Cash and cash equivalents at beginning of period			83,842				25,992
Cash and cash equivalents at end of period		$	74,974			$	50,791

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 other amounts previously reported in our financial statements to conform to the current presentation.

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 loss from continuing operations for the three months ended October 31, 2005 includes approximately $19.1 million in share-based employee compensation expense for stock options and purchases under our Employee Stock Purchase Plan. Results for prior periods have not been restated.

As discussed in Note 4, in May 2005 our Board of Directors formally approved a plan to sell 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 presented 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 Form 10-K, filed with the Securities and Exchange Commission on September 26, 2005. Results for the three months ended October 31, 2005 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 upgrades for 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 when employing the Black-Scholes valuation model to estimate the fair value of stock options granted. See “Share-Based Compensation Plans” later in this Note 1. 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 until we ship the products or perform the services. Deferred revenue consisted of the following at the dates indicated:

		October 31,				July 31,
(In thousands)		2005				2005
Product and product-related services		$	251,803			$	261,135
Customer support			22,512				18,247
Total deferred revenue		$	274,315			$	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 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 for the Web 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 undelivered items that are services, then we recognize the entire arrangement fee ratably over the service period. 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
		October 31,				October 31,
(In thousands, except per share amounts)		2005				2004
Numerator:
Net loss from continuing operations		$	(57,611	)		$	(45,497	)
Net income (loss) from discontinued operations			11,807				(639	)
Net loss		$	(45,804	)		$	(46,136	)
Denominator:
Shares used in basic and diluted per share amounts:
Weighted average common shares outstanding			177,406				188,346
Basic and diluted net loss per share:
Basic and diluted net loss per share from continuing operations		$	(0.33	)		$	(0.24	)
Basic and diluted net income (loss) per share from discontinued operations			0.07				-
Basic and diluted net loss per share		$	(0.26	)		$	(0.24	)
Weighted average stock options and restricted stock awards excluded from calculation due to anti-dilutive effect:
Stock options that would have been included in the computation of dilutive common equivalent shares oustanding if net income had been reported in the period			21,234				23,298
Restricted stock awards that would have been included in the computation of dilutive common equivalent shares oustanding if net income had been reported in the period			508				455
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			11,004				10,048
			32,746				33,801

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 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

Adoption of SFAS 123(R)

Under our 2005 Equity Incentive Plan, we are permitted to grant incentive and non-qualified stock options, restricted stock awards, restricted stock units and stock bonus awards to our and our subsidiaries’ employees, non-employee directors and consultants. There were a total of 6,500,000 shares authorized under the 2005 Plan at October 31, 2005. The 2005 Plan limits the number of awards that can be granted at a price less than the full fair market value of Intuit’s common stock on the date of grant to a maximum of 2,000,000 shares. In connection with Intuit’s annual meeting of stockholders to be held on December 16, 2005, we are submitting for stockholder approval an amendment to the 2005 Plan to authorize 6,500,000 additional shares and to amend the existing 2,000,000-share cap on equity awards that can be granted at below fair market value (for example restricted stock or restricted stock units) to allow that up to 50% of equity awards granted each year can be at less than full fair market value. All options granted under the 2005 Plan through October 31, 2005 have exercise prices equal to the fair market value of our stock on the date of grant. Options granted under the 2005 Plan typically vest over three years based on continued service and have a seven-year term. Outstanding awards that were originally granted under several predecessor plans also remain in effect in accordance with their terms. In addition, we maintain an Employee Stock Purchase Plan. The 2005 Plan, its predecessor plans and our Employee Stock Purchase Plan are described more fully in our fiscal 2005 Form 10-K.

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 months ended October 31, 2004 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 that period 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,” later in this Note 1 we disclose our net loss and net loss per share for the three months ended October 31, 2004 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 months ended October 31, 2005 included: (a) 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, and (b) 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). Results for prior periods have not been restated.

The following table summarizes the share-based compensation expense for stock options and purchases under our Employee Stock Purchase Plan that we recorded in accordance with SFAS 123(R) for continuing operations:

		Three Months Ended
		October 31,				October 31,
(In thousands)		2005				2004
Share-based compensation expense for stock options and purchases under Employee Stock Purchase Plan recorded in accordance with SFAS 123(R) for continuing operations:
Cost of product revenue		$	288			$	-
Cost of service revenue			637				-
Selling and marketing			6,307				-
Research and development			5,610				-
General and administrative			6,257				-
Total		$	19,099			$	-

The following table presents the impact of our adoption of SFAS 123(R) on selected statement of operations line items for the three months ended October 31, 2005.

		Three Months Ended October 31, 2005
		As Reported
		Under				Under
(In thousands, except per share amounts)		SFAS 123(R)				APB 25				Difference
Operating loss from continuing operations		$	(102,621	)		$	(83,522	)		$	(19,099	)
Loss from continuing operations before income taxes		$	(92,050	)		$	(72,951	)		$	(19,099	)
Net loss from continuing operations		$	(57,611	)		$	(45,655	)		$	(11,956	)
Net income from discontinued operations			11,807				11,919				(112	)
Net loss		$	(45,804	)		$	(33,736	)		$	(12,068	)
Basic and diluted net loss per share from continuing operations		$	(0.33	)		$	(0.26	)		$	(0.07	)
Basic and diluted net income per share from discontinued operations			0.07				0.07				-
Basic and diluted net loss per share		$	(0.26	)		$	(0.19	)		$	(0.07	)
Shares used in basic and diluted per share amounts			177,406				177,406				177,406

Prior to the adoption of SFAS 123(R), we presented deferred compensation as a separate component of stockholders’ equity. In accordance with the provisions of SFAS 123(R), on August 1, 2005 we reclassified the balance in deferred compensation to additional paid-in capital on our balance sheet.

Prior to the adoption of SFAS 123(R), we presented all tax benefits for deductions resulting from the exercise of stock options as operating cash flows on our statement of cash flows. SFAS 123(R) requires the cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense recorded for those options (excess tax benefits) to be classified as financing cash flows. Accordingly, the $0.9 million excess tax benefit that is

classified as a financing cash inflow on our statement of cash flows for the three months ended October 31, 2005 would have been classified as an operating cash inflow if we had not adopted SFAS 123(R).

Determining Fair Value

Valuation and Amortization Method. We estimate the fair value of stock options granted using the Black-Scholes option valuation model and a multiple option award approach. For options granted before August 1, 2005, we amortize the fair value on an accelerated basis. For options granted on or after August 1, 2005, we amortize the fair value on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods.

Expected Term. The expected term of options granted represents the period of time that they are expected to be outstanding. We estimate the expected term of options granted based on the history of grants and exercises in our option database. We have examined our historical pattern of option exercises in an effort to determine if there were any discernable patterns of activity based on certain demographic characteristics. Demographic characteristics tested included age, salary level, job level and geographic location. We have determined that there were no meaningful differences in option exercise activity based on the demographic characteristics tested.

Expected Volatility. We estimate the volatility of our common stock at the date of grant based on the implied volatility of two-year publicly traded options on our common stock, consistent with SFAS 123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility.

Risk-Free Interest Rate. We base the risk-free interest rate that we use in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with equivalent remaining terms.

Dividends. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

Forfeitures. We use historical data to estimate pre-vesting option forfeitures. As required by SFAS 123(R), we record share-based compensation expense only for those awards that are expected to vest.

We used the following assumptions to estimate the fair value of options granted and shares purchased under our Employee Stock Purchase Plan for the three months ended October 31, 2005 and 2004:

		Stock Options								Employee Stock Purchase Plan
		Three Months Ended								Three Months Ended
		October 31,				October 31,				October 31,			October 31,
		2005				2004				2005			2004
Average expected term (years)			2.44				3.02				0.31				1.00
Expected volatility (range)			23% - 24	%			42	%			22% - 23	%			29	%
Weighted average expected volatility			23	%			42	%			22	%			29	%
Risk-free interest rate (range)			3.70% - 4.21	%			2.09% - 2.88	%			3.14% - 3.69	%			1.79	%
Expected dividend yield			0	%			0	%			0	%			0	%

Stock Option Activity and Share-Based Compensation Expense

A summary of stock option activity under all share-based compensation plans during the three months ended October 31, 2005 is as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
Options		Shares				Price				Term (Years)				Value
(Aggregate intrinsic value in thousands)
Outstanding at July 31, 2005			32,308,280			$	39.18
Granted			1,017,100				44.64
Exercised			(514,209	)			31.68
Cancelled			(342,337	)			44.77
Outstanding at October 31, 2005			32,468,834			$	39.41				5.0			$	272,435
Exercisable at October 31, 2005			22,709,557			$	37.40				4.5			$	245,249

The weighted average fair value of options granted during the three months ended October 31, 2005 was $8.37. The aggregate intrinsic value of options outstanding at October 31, 2005 is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 22.9 million shares that had exercise prices that were lower than the $45.93 market price of our common stock at October 31, 2005. The total intrinsic value of options exercised during the three months ended October 31, 2005 was $7.3 million, determined as of the date of exercise.

At July 31, 2005 we had 359,920 non-vested restricted stock awards and at October 31, 2005 we had 332,589 non-vested restricted stock awards that had a weighted average grant date fair value of $45.27.

We recorded $19.1 million in share-based compensation expense for stock options and purchases under our Employee Stock Purchase Plan and $1.3 million in share-based compensation expense for restricted stock awards in continuing operations for the three months ended October 31, 2005. The total tax benefit related to this share-based compensation was $7.1 million. As of October 31, 2005, there was $93.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of 2.1 years.

We received $16.3 million in cash from option exercises under all share-based payment arrangements for the three months ended October 31, 2005. The actual tax benefit that we realized for the tax deductions from option exercise of the share-based payment arrangements totaled $2.5 million for that period.

Due primarily to our ongoing program of repurchasing shares on the open market, at October 31, 2005 we had 38.7 million treasury shares. We satisfy option exercises from this pool of treasury shares.

Comparable Disclosures

As discussed earlier in this Note 1, we accounted for share-based compensation under SFAS 123(R)’s fair value method during the three months ended October 31, 2005. The following table illustrates the effect on our net loss and net loss per share for the three months ended October 31, 2004 if we had applied the fair value recognition provisions of SFAS 123 to share-based compensation using the Black-Scholes valuation model.

		Three Months Ended
		October 31,				October 31,
(In thousands, except per share amounts)		2005				2004
Net loss
Net loss, as reported in prior year						$	(46,136	)
Add: Share-based employee compensation expense included in reported net loss, net of income taxes							48
Deduct: Total share-based employee compensation expense determined under fair value method for all awards, net of income taxes							(13,954	)
Net loss, including share-based employee compensation		$	(45,804	)		$	(60,042	)
Net loss per share
Basic and diluted - as reported in prior year						$	(0.24	)
Basic and diluted - including share-based employee compensation		$	(0.26	)		$	(0.32	)

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, 2005, the height of the 2004 consumer tax season, amounts due from our eight largest retailers and distributors represented approximately 45% 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 months ended October 31, 2005 or 2004. No customer accounted for 10% or more of total accounts receivable at October 31, 2005 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.

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.

		October 31, 2005								July 31, 2005
(In thousands)		Cost				Fair Value				Cost				Fair Value
Type of issue:
Cash and cash equivalents in funds held for payroll customers		$	252,953			$	252,953			$	263,860			$	263,860
Available-for-sale debt securities:
Corporate notes			-				-				7,000				7,000
Municipal bonds			697,643				696,943				981,341				980,500
U.S. government securities			17,991				17,866				16,991				16,894
Total available-for-sale debt securities			715,634				714,809				1,005,332				1,004,394
Total investments and funds held for payroll customers		$	968,587			$	967,762			$	1,269,192			$	1,268,254
Classification of investments on balance sheets:
Investments		$	623,155			$	622,330			$	911,354			$	910,416
Funds held for payroll customers			345,432				345,432				357,838				357,838
Total investments and funds held for payroll customers		$	968,587			$	967,762			$	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:

		October 31,				July 31,
(In thousands)		2005				2005
Gross unrealized gains		$	20			$	31
Gross unrealized losses			(845	)			(969	)
Net unrealized losses		$	(825	)		$	(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 October 31, 2005:

		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			187,597				(589	)			28,700				(131	)			216,297				(720	)
U.S. government securities			10,903				(93	)			6,963				(32	)			17,866				(125	)
		$	198,500			$	(682	)		$	35,663			$	(163	)		$	234,163			$	(845	)

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 October 31, 2005 were not other-than-temporarily impaired. While certain available-for-sale debt securities have fair values that are below cost, we believe that it is probable that principal and interest will 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
		October 31,				October 31,
(In thousands)		2005				2004
Gross realized gains		$	11			$	160
Gross realized losses			(391	)			(1,457	)
Net realized losses		$	(380	)		$	(1,297	)

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.

		October 31, 2005
(In thousands)		Cost				Fair Value
Due within one year		$	143,156			$	142,812
Due within two years			65,095				64,769
Due within three years			-				-
Due after three years			507,383				507,228
Total available-for-sale debt securities		$	715,634			$	714,809

Approximately 85% of our available-for-sale debt securities have an interest reset date, put date or mandatory call date within one year.

3. 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, net of income tax benefits of $102 and $40			(165	)			(65	)			-				(230	)
Reclassification adjustment for realized loss included in net income, net of income tax provision of $144			236				-				-				236
Translation adjustment			-				-				1,111				1,111
Other comprehensive income			71				(65	)			1,111				1,117
Balance October 31, 2005		$	(511	)		$	1,386			$	416			$	1,291
Balance July 31, 2004		$	(1,502	)		$	375			$	(2,248	)		$	(3,375	)
Unrealized (loss) gain, net of income tax provisions of $35 and $89			(76	)			178				-				102
Reclassification adjustment for realized loss included in net income, net of income tax provision of $493			804				-				-				804
Translation adjustment			-				-				1,186				1,186
Other comprehensive income (loss)			728				178				1,186				2,092
Balance October 31, 2004		$	(774	)		$	553			$	(1,062	)		$	(1,283	)

Comprehensive net income (loss) was as follows for the periods indicated:

		Three Months Ended
		October 31,				October 31,
(In thousands)		2005				2004
Net loss		$	(45,804	)		$	(46,136	)
Other comprehensive income			1,117				2,092
Comprehensive net loss, net of income taxes		$	(44,687	)		$	(44,044	)
Income tax provision netted against other comprehensive income		$	2			$	617

4. Discontinued Operations

Intuit Information Technology Solutions

In May 2005 our Board of Directors formally approved a plan to sell our Intuit Information Technology Solutions (ITS) business, which was part of our Intuit-Branded Small Business segment. In October 2005 we signed a definitive agreement to sell ITS, subject to closing conditions, for approximately $200 million in cash. We expect the sale to be completed in the second quarter of fiscal 2006. The decision was a result of management’s desire to focus resources on Intuit’s core products and services. In accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” we determined that ITS became a long-lived asset held for sale in the fourth quarter of fiscal 2005. SFAS 144 provides that a long-lived asset classified as held for sale should be measured at the lower of its carrying amount or fair value less cost to sell. Since the carrying value of ITS at October 31, 2005 was less than the estimated fair value less cost to sell, no adjustment to the carrying value of this long-lived asset was necessary during the first quarter of fiscal 2006. In accordance with SFAS 144, we discontinued the amortization of ITS intangible assets and the depreciation of ITS property and equipment in the fourth quarter of fiscal 2005.

Also in accordance with the provisions of SFAS 144, we determined that ITS became a discontinued operation in the fourth quarter of fiscal 2005. Consequently, we have segregated the net assets, operating results and cash flows of ITS from continuing operations on our balance sheets, statements of operations and statements of cash flows for all periods presented. For the three months ended October 31, 2005, we recorded net income from ITS operations of $3.3 million and recognized $8.5 million in tax benefits from the anticipated disposal of ITS. We expect ITS to continue to generate cash flows from its business operations until it is sold.

The carrying amounts of the major classes of assets and liabilities of ITS at October 31, 2005 were as shown in the following table. Carrying amounts approximated fair values.

		October 31,
(In thousands)		2005
Cash		$	9,676
Accounts receivable			10,600
Other current assets			440
Current assets of discontinued operations			20,716
Goodwill			150,282
Purchased intangible assets and other			6,398
Long-term assets of discontinued operations			156,680
Total assets of discontinued operations			177,396
Accounts payable			1,972
Accrued compensation			1,143
Deferred revenue			15,745
Other current liabilities			979
Current liabilities of discontinued operations			19,839
Long-term obligations of discontinued operations			221
Total liabilities of discontinued operations			20,060
Net assets of discontinued operations		$	157,336

Intuit Public Sector Solutions

In December 2004 we sold our Intuit Public Sector Solutions (IPSS) business for approximately $11 million. IPSS was part of our Intuit-Branded Small Business segment. In accordance with SFAS 144, we accounted for the sale as discontinued operations. We have therefore segregated the net assets, operating results and cash flows of IPSS from continuing operations on our balance sheets, statements of operations and statements of cash flows for all periods prior to the sale. We recorded a $3.4 million net loss on disposal of IPSS for the three months ended October 31, 2004 that represented an 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
		October 31,				October 31,
(In thousands)		2005				2004
Net income (loss) from discontinued operations
Net loss from Intuit Public Sector Solutions operations		$	-			$	(298	)
Net loss on disposal of Intuit Public Sector Solutions discontinued operations			-				(3,368	)
Net income from Intuit Information Technology Solutions operations			3,291				3,027
Tax benefits from anticipated disposal of Intuit Information Technology Solutions discontinued operations			8,516				-
Total net income (loss) from discontinued operations		$	11,807			$	(639	)
Net revenue from discontinued operations
Intuit Public Sector Solutions		$	-			$	2,781
Intuit Information Technology Solutions			14,360				13,214
Total net revenue from discontinued operations		$	14,360			$	15,995
Income from discontinued operations before income taxes
Intuit Public Sector Solutions		$	-			$	(482	)
Intuit Information Technology Solutions			5,807				4,882
Total income from discontinued operations before income taxes		$	5,807			$	4,400

5. Industry Segment and Geographic Information

SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way in which public companies disclose certain information about operating segments in their financial reports. Consistent with SFAS 131, we have defined five reportable segments, described below, based on factors such as how we manage our operations and how our chief operating decision maker views results. We define the chief operating decision maker as our chief executive officer and our chief financial officer.

QuickBooks-Related product revenue is derived primarily from QuickBooks desktop software products; QuickBooks Payroll, a family of products sold on a subscription basis offering payroll tax tables, forms, electronic tax payment and filing, and in some cases QuickBooks software upgrades, to small businesses that prepare their own payrolls; and financial supplies such as paper checks, envelopes and invoices. QuickBooks-Related service revenue is derived primarily from QuickBooks Online Edition, QuickBooks support plans and merchant services. Other revenue for this segment consists primarily of royalties from small business online services.

Intuit-Branded Small Business product revenue is derived primarily from business management software for three selected industries: residential, commercial and corporate property management; wholesale durable goods distribution: and construction. Intuit-Branded Small Business service revenue is derived from technical support, consulting and training services for those software products and from outsourced payroll services. Service revenue for this segment also includes interest earned on funds held for payroll customers.

Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer desktop tax return preparation software. Consumer Tax service revenue is derived primarily from TurboTax for the Web online tax return preparation, consumer electronic filing and refund transfer services.

Professional Tax product revenue is derived primarily from Lacerte and ProSeries professional tax preparation software products. Professional Tax service revenue is derived primarily from electronic filing, bank product transmission and training services.

Other Businesses consist primarily of Quicken and Canada. Quicken product revenue is derived primarily from Quicken desktop software products. Quicken other revenue consists primarily of fees from consumer online transactions and from Quicken-branded credit card and bill payment offerings that we provide through our partners. In Canada, product revenue is derived primarily from localized versions of QuickBooks and Quicken as well as QuickTax and TaxWiz consumer desktop tax return preparation software and ProFile professional tax preparation products. Service revenue in Canada consists primarily of revenue from payroll services and software maintenance contracts sold with QuickBooks.

Our QuickBooks-Related, Consumer Tax and Professional Tax segments operate primarily in the United States. All of our segments sell primarily to customers located in the United States. International total net revenue was less than 5% of consolidated total net revenue for all periods presented.

We include costs such as corporate general and administrative expenses and share-based compensation expenses that are not allocated to specific segments in a category we call Corporate. The Corporate category also includes amortization of purchased intangible assets, acquisition-related charges, impairment of goodwill and purchased intangible assets, interest and other income, and realized net gains or losses on marketable equity securities and other investments.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1. Except for goodwill and purchased intangible assets, we do not generally track assets by reportable segment and, consequently, we do not disclose total assets by reportable segment.

The following tables show our financial results by reportable segment for the three months ended October 31, 2005 and 2004.

						Intuit-
						Branded
		QuickBooks				Small				Consumer				Professional				Other
(In thousands)		Related				Business				Tax				Tax				Businesses				Corporate				Consolidated
Three months ended October 31, 2005
Product revenue		$	133,545			$	7,575			$	2,790			$	8,111			$	30,433			$	-			$	182,454
Service revenue			41,860				50,632				5,075				785				6,268				-				104,620
Other revenue			2,673				24				22				1				14,277				-				16,997
Total net revenue			178,078				58,231				7,887				8,897				50,978				-				304,071
Segment operating income (loss)			50,547				(554	)			(24,270	)			(21,960	)			18,678				-				22,441
Common expenses																							(118,354	)			(118,354	)
Subtotal			50,547				(554	)			(24,270	)			(21,960	)			18,678				(118,354	)			(95,913	)
Amortization of purchased intangible assets			-				-				-				-				-				(2,949	)			(2,949	)
Acquisition-related charges			-				-				-				-				-				(3,759	)			(3,759	)
Interest and other income			-				-				-				-				-				6,304				6,304
Realized net gain on marketable equity securities			-				-				-				-				-				4,267				4,267
Income (loss) from continuing operations before income taxes		$	50,547			$	(554	)		$	(24,270	)		$	(21,960	)		$	18,678			$	(114,491	)		$	(92,050	)