SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended JulyOctober 31, 2002
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from __________________________ to __________________________

Commission file number 1-6089

H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)

4400 Main Street
Kansas City, Missouri 64111
(Address of principal executive offices, including zip code)

(816) 753-6900
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No _____    o

The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on August 31,November 29, 2002 was 180,688,747178,656,921 shares.

TABLE OF CONTENTS

H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share amounts

See Notes to Consolidated Financial Statements

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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, amounts in thousands, except per share amounts

See Notes to Consolidated Financial Statements

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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands

See Notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data

1.		Basis of Presentation
		The Consolidated Balance Sheet as of JulyOctober 31, 2002, the Consolidated Statements of Operations for the three and six months ended JulyOctober 31, 2002 and 2001, and the Consolidated Statements of Cash Flows for the threesix months ended JulyOctober 31, 2002 and 2001 have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at JulyOctober 31, 2002 and for all periods presented have been made.
		Reclassifications have been made to prior periods to conform with the current period presentation.
		Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s April 30, 2002 Annual Report to Shareholders on Form 10-K.
		Operating revenues of the U.S. Tax Operations and Business Services segments are seasonal in nature with peak revenues occurring in the months of January through April. Thus, the three-monthsix-month results are not indicative of results to be expected for the year.
2.		The Company files its Federal and state income tax returns on a calendar year basis. The Consolidated Statements of Operations reflect the effective tax rates expected to be applicable for the respective full fiscal years.
3.2.		On June 20, 2001, the Company’s Board of Directors declared a two-for-one split of its common stock in the form of a 100% stock distribution effective August 1, 2001, to shareholders of record as of the close of business on July 10, 2001. All share and per share amounts have been adjusted to reflect the retroactive effect of the stock split.Net Earnings (Loss) Per Share
		Basic net earnings (loss) per share is computed using the weighted average shares outstanding during each period. Diluted net earnings (loss) per share excludes the impact of shares issuable upon the exercise of common stock options of 20,896,80017,621,700 and 24,642,80019,007,400 shares for the three months ended Julyas of October 31, 2002 and 2001, respectively, and the conversion of 1,216 shares of preferred stock to common stock, as they are antidilutive.
		The weighted average shares outstanding for the three and six months ended JulyOctober 31, 2002 decreased to 181,209,000178,880,000 and 180,045,000, respectively, from 183,859,000182,288,000 and 183,073,000, respectively, last year, due to the purchase of treasury shares by the Company. The effect of these repurchases was partially reduced by the issuance of treasury shares for stock option exercises.
		During the threesix months ended JulyOctober 31, 2002 and 2001, the Company issued 556,5113,571,700 and 1,528,6117,288,700 shares of common stock, respectively, pursuant to provisions for exercise of stock options under its stock option plans. During the threesix months ended JulyOctober 31, 2002, the Company acquired 6,523,800 shares of its common stock at an aggregate cost of $313,603.

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		During the six months ended October 31, 2001, the Company acquired 796,9009,688,400 shares of its common stock at an aggregate cost of $37,108. During the three months ended July 31, 2001, the Company acquired 2,037,400 shares of its common stock at an aggregate cost of $67,583.$351,845.
4.3.		Comprehensive Income
		The Company’s comprehensive income is comprised of net earnings (loss), foreign currency translation adjustments and the change in the net unrealized gain (loss) on marketable securities.securities and foreign currency translation adjustments. The components of comprehensive income (loss) during the three and six months ended JulyOctober 31, 2002 and 2001 were:

5.4.		Accounts Receivable
		Receivables consist of the following:

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6.5.

Intangible assets consist of the following:

		Amortization of intangible assets for the three months ended July 31, 2002 was $11,319. Estimated amortization of intangible assets for fiscal years 2003, 2004, 2005, 2006Residual Interests in Securitizations and 2007 is $44,365, $44,061, $43,712, $43,083 and $40,181, respectively.Mortgage Servicing Rights
		Changes in the carrying amount of goodwill for the three months ended July 31, 2002, are as follows by segment:

		The Company tests goodwill for impairment annually, on February 1st, or more frequently whenever events occur or circumstances change which would more likely than not reduce the fair value of a reporting unit below its carrying amount. Due to unsettled market conditions in the investment industry, and particularly in light of the severe decline of comparable business valuations in July 2002, management determined that an impairment loss may have occurred and subsequently proceeded to evaluate the fair value of goodwill related to the Investment Services segment as of July 31, 2002 in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).
		The Company engaged an independent valuation firm to perform step one of the goodwill impairment test required by SFAS 142. Based on their valuation, step one indicated the fair value of the Investment Services segment was $18,000 below its recorded carrying value. As step one indicated a fair value below the carrying value, step two must be performed to determine the amount of goodwill impairment, if any. Step two has not been completed as of the filing of the Form 10-Q for the quarter ended July 31, 2002 and will be completed in the second quarter. The $18,000 recorded in the first quarter of fiscal year 2003 reflects management’s best estimate of the potential goodwill impairment as of July 31, 2002. After the completion of step two, any change in the estimated amount of impairment will be

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		recorded in the second quarter of fiscal 2003. This impairment charge is included as a separate line item in the consolidated statement of operations for the three months ended July 31, 2002 and is included in the Investment Services segment where applicable.
7.		Activity related to residual interests in securitizations for the threesix months ended JulyOctober 31, 2002 and 2001 and the twelve months ended April 30, 2002 consists of the following:

		TheseThe Company sold $7,179,379 of mortgage loans in whole loan sales to third-party trusts (Trusts) during the six months ended October 31, 2002. Gains totaling $296,385 were recorded on these sales, with 89% of the gains received in cash. The Company retains a receivable from the sale, which, depending on the ultimate disposition of the loans by the Trusts may become a residual interest. Residual interests valued at $136,766 were securitized in net interest margin (NIM) transactions during the six-month period. Cash proceeds of $136,013 were received from the NIM transactions and total additions to residual interests for the six months ended October 31, 2002 were $753.
		Gross unrealized holding gains arising during the period are classifiedthe total write-ups of residual interests for the respective period. These write-ups result from lower interest rates, loan losses and loan prepayments to date than originally projected in the Company’s valuation models. Gross unrealized holding losses arising during the period represent reductions of unrealized gains on previous write-ups. Realized gains represent write-ups that have been recognized as available for saleearnings in the income statement through accretion.
		Residual interests are considered available-for-sale securities. Gross unrealized gains on residual interests, which represent the total remaining write-up of residual interests not yet accreted into income, at JulyOctober 31, 2002 and April 30, 2002, were $193,653$194,381 and $139,492, respectively. TheThese gross unrealized gains are recorded net of deferred taxes in other comprehensive income.
		Mortgage servicing rights (MSRs) are included in other assets on the consolidated balance sheet.Consolidated Balance Sheets. The faircarrying value of MSRs at JulyOctober 31, 2002 and April 30, 2002 was $90,589$99,774 and $81,893, respectively. Additions to and amortization of MSRs for the threesix months ended JulyOctober 31, 2002 were $18,185$37,968 and $9,489,$20,087, respectively.

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The following table illustrates key assumptions the Company utilizes to estimate the cash flows and values of the residual interests and MSRs are as follows:MSRs:

Cross-collateralized residual interests are the original residual interestinterests from a securitization, while NIM residuals are the residual interests resulting from a net interest margin (NIM)NIM transaction. At JulyOctober 31, 2002, the sensitivities of the current fair value of the residuals and MSRs to 10% and 20% adverse changes in the above key assumptions are as follows:

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These sensitivities are hypothetical and should be used with caution. As the figures indicate,table indicates, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also in this table, the effect of a variation of a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; it is likely that changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

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6.		Intangible Assets and Goodwill
8.		Intangible assets consist of the following:

		Amortization of intangible assets for the six months ended October 31, 2002 was $22,285. Estimated amortization of intangible assets for fiscal years 2003, 2004, 2005, 2006 and 2007 is $44,365, $44,061, $43,712, $43,083 and $40,181, respectively.
		Changes in the carrying amount of goodwill for the six months ended October 31, 2002, are as follows by segment:

		The Company tests goodwill for impairment annually, on the first day of its fourth quarter, or more frequently if events occur which indicate a potential reduction in the fair value of a reporting unit’s net assets below its carrying value. In light of unsettled market conditions and the severe decline of comparable business valuations in the investment industry, the Company engaged an independent valuation firm in the first quarter of fiscal year 2003 to perform step one of the goodwill impairment test on the Investment Services segment in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).
		Based on the valuation, step one indicated the fair value of the Investment Services segment was $18,000 below its recorded carrying value. This estimated impairment charge was recorded during the first quarter, as step two of the goodwill impairment test was not completed until after the filing of the first quarter Form 10-Q. The independent valuation

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		firm completed step two during the second quarter, and an additional goodwill impairment of $6,000 was identified and recorded during the three months ended October 31, 2002.
7.		New Accounting Pronouncements
		In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). This statement supercedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (SFAS 121), and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The adoption of SFAS 144 on May 1, 2002 had no material effect on the consolidated financial statements.
9.		On February 1, 2002 the Company adopted Emerging Issues Task Force Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (EITF 01-9). EITF 01-9 addresses sales incentives such as discounts, coupons or rebates offered to customers of retailers or other distributors and the income statement classifications of these items. Based on EITF 01-9, these items are recorded as a reduction of revenues. The Company has historically recorded these items as expenses in its

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		U.S. and International Tax Operations segments. The adoption of EITF 01-9 had no impact on net earnings. Revenues and expenses were reduced by $521$501 and $1,022 for the quarterthree and six months ended JulyOctober 31, 2001.2001, respectively.
10.		On February 1, 2002 the Company adopted Emerging Issues Task Force Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (EITF 01-14). EITF 01-14 establishes requirements that must be met to record out-of-pocket expenses as either net in revenues or as expenses. The Company has out-of-pocket expenses associated with its Business Services segment and has historically recorded them net in revenues. Based on EITF 01-14, the Company now records these as gross revenues and expenses. There is no impact on net earnings as a result of the adoption of EITF 01-14. Revenues and expenses were reduced $4,332 and increased by $5,377$1,044 for the quarterthree and six months ended JulyOctober 31, 2001.2001, respectively.
11.		In September 2002, the Emerging Issues Task Force issued Issue No. 02-13, “Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in SFAS 142” (EITF 02-13). EITF 02-13 requires the use of the income tax basis of a reporting unit’s assets and liabilities to be considered in accordance with the taxable status of the hypothetical transaction used to complete step one of the goodwill impairment test. EITF 02-13 is required to be applied for either step of the goodwill impairment test initiated after September 12, 2002. The adoption of EITF 02-13 is not expected to have a material effect on the consolidated financial statements.

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8.		Segment Information
		Information concerning the Company’s operations by reportable operating segmentssegment for the three and six months ended JulyOctober 31, 2002 and 2001 is as follows:

9.		Commitments and Contingencies
		Subsequent to October 31, 2002, the Company, and a major franchisee of a subsidiary of the Company, reached an agreement with the plaintiff class in the class action lawsuit entitledRonnie and Nancy Haese, et al. v. H&R Block, Inc. et al., Case No. CV96-423, in the District Court of Kleberg County, Texas, related to refund anticipation loans (RALs). The proposed settlement provides a five-year package of coupons class members can use to obtain a variety of tax preparation and tax planning services from the Company’s subsidiaries. The Company’s major franchisee, which operates more than half of all H&R Block offices in Texas, will share a portion of the total settlement cost. As a result, the Company recorded a liability and pretax expense of $41.7 million, or $.14 per basic and diluted share, during the three months ended October 31, 2002, which represents the Company’s share of the settlement cost for plaintiff class legal fees and expenses, tax products and associated mailing expenses. This amount represents the Company’s best estimate of its liability at this time. In addition to this liability, the Company will recognize the cost of the tax preparation coupons as they are redeemed each year. The settlement is subject to court approval and there are no assurances such approval will be obtained.
		In addition to the aforementioned case, the Company and its subsidiaries have from time to time been party to claims and lawsuits arising out of such subsidiaries’ business operations, including other claims and lawsuits relating to RALs, and claims and lawsuits concerning the preparation of customers’ income tax returns, the electronic filing of income tax returns, the

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		Intercompany interest represents net interest expensefees charged customers for various services, the Peace of Mind warranty program, commission-free trading programs formerly offered by an acquired firm, relationships with franchisees and contract disputes. Such lawsuits include actions by individual plaintiffs, as well as cases in which plaintiffs seek to financial related businesses for corporate cashrepresent a class of similarly situated customers. The amounts claimed in these claims and lawsuits are substantial in some instances, and the ultimate liability with respect to such litigation and claims is difficult to predict. The Company’s management considers these cases to be ordinary, routine litigation incidental to its business, believes the Company and its subsidiaries have meritorious defenses to each of them and is defending, or intends to defend, them vigorously. While management cannot provide assurance the Company and its subsidiaries will ultimately prevail in each instance, management believes that was borrowedamounts, if any, required to fund their operating activitiesbe paid by the Company and net unallocated interest expense attributable to commitment feesits subsidiaries in the discharge of liabilities or settlements will not have a material adverse effect on the Company’s credit facility.consolidated results of operations or financial position. Regardless of outcome, claims and litigation can adversely affect the Company and its subsidiaries due to defense costs, diversion of management and publicity related to such matters.
12.		Option One Mortgage Corporation provides a guarantee up to a maximum amount equal to approximately 10% of the aggregate principal balance of mortgage loans held by the Trusts before their ultimate disposition by the Trusts. This guarantee would be called upon in the event adequate proceeds were not available from the mortgage loans to satisfy the current or ultimate payment obligations of the Trusts. No losses have been sustained on this commitment since its inception. The total principal balance outstanding on the warehouse facilities as of October 31, 2002 and April 30, 2002 was $1.5 billion and $1.1 billion, respectively.
10.		Condensed Consolidating Financial Statements
		Block Financial Corporation (BFC) is an indirect, wholly ownedwholly-owned subsidiary of the Company. BFC is the Issuer and the Company is the Guarantor of the Senior Notes issued on October 21, 1997 and April 13, 2000. These condensed consolidating financial statements

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have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company’s investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholder’s equity and other intercompany balances and transactions.

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Condensed Consolidating Statements of Operations