SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~January~~July 31, 2006


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)


MISSOURI		44-0607856
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		~~44-0607856~~ ~~(I.R.S. Employer~~ Identification No.)

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.

Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filerþ Accelerated filero Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on ~~February 28,~~August 31, 2006 was ~~328,415,828~~321,682,760 shares.

~~H&R BLOCK~~ ( H&R BLOCK LOGO)

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~


CONDENSED CONSOLIDATED BALANCE SHEETS		(amounts in 000s, except share amounts)


	(amounts in 000s, except share amounts)
				Restated
	January 31, 2006			April 30, 2005			July 31, 2006			April 30, 2006
	(Unaudited)						(Unaudited)
ASSETS

Cash and cash equivalents	$	1,460,180		$	1,100,213		$	390,068		$	694,358
Cash and cash equivalents — restricted		430,713			516,909
Cash and cash equivalents – restricted								345,729			394,069
Marketable securities – trading								77,219			16,141
Receivables from customers, brokers, dealers and clearing organizations, net		569,430			590,226			437,697			496,577
Receivables, less allowance for doubtful accounts of $56,985 and $38,879		1,810,945			418,788
Receivables, less allowance for doubtful accounts of $60,732 and $64,480								370,307			467,677
Mortgage loans held for sale								245,006			236,399
Prepaid expenses and other current assets		561,484			444,498			522,675			483,215

Total current assets		4,832,752			3,070,634			2,388,701			2,788,436
Residual interests in securitizations — available-for-sale		175,068			205,936
Beneficial interest in Trusts — trading		279,714			215,367
Residual interests in securitizations – available-for-sale								145,779			159,058
Beneficial interest in Trusts – trading								125,628			188,014
Mortgage servicing rights		262,369			166,614			275,266			272,472
Property and equipment, at cost less accumulated depreciation and amortization of $729,405 and $658,425		415,844			330,150
Mortgage loans held for investment, net								541,361			407,538
Property and equipment, at cost less accumulated depreciation and amortization of $735,426 and $704,792								452,010			443,785
Intangible assets, net		235,236			247,092			205,101			219,494
Goodwill, net		1,104,267			1,015,947			1,104,273			1,100,452
Other assets		367,091			286,316			398,149			409,886

Total assets	$	7,672,341		$	5,538,056		$	5,636,268		$	5,989,135


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Short-term borrowings	$	2,595,948		$	—
Commercial paper							$	189,356		$	—
Current portion of long-term debt		13,373			25,545			515,305			506,992
Accounts payable to customers, brokers and dealers		851,827			950,684			716,305			781,303
Customer banking deposits								404,030			—
Accounts payable, accrued expenses and other current liabilities		782,744			564,749			703,730			768,505
Accrued salaries, wages and payroll taxes		291,811			318,644			146,346			330,946
Accrued income taxes		214,559			375,174			259,509			505,690

Total current liabilities		4,750,262			2,234,796			2,934,581			2,893,436
Long-term debt		916,926			923,073			411,734			417,539
Other noncurrent liabilites		417,200			430,919
Other noncurrent liabilities								478,384			530,361

Total liabilities		6,084,388			3,588,788			3,824,699			3,841,336


Stockholders’ equity:
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, 435,890,796 shares issued at January 31, 2006 and April 30, 2005		4,359			4,359
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, 435,890,796 shares issued at July 31, 2006 and April 30, 2006								4,359			4,359
Additional paid-in capital		631,729			598,388			649,451			653,053
Accumulated other comprehensive income		33,641			68,718			20,255			21,948
Retained earnings		2,945,887			3,161,682			3,320,197			3,492,059
Less cost of 107,594,856 and 104,649,850 shares of common stock in treasury		(2,027,663	)		(1,883,879	)
Less cost of 114,315,001 and 107,377,858 shares of common stock in treasury								(2,182,693	)		(2,023,620	)

Total stockholders’ equity		1,587,953			1,949,268			1,811,569			2,147,799

Total liabilities and stockholders’ equity	$	7,672,341		$	5,538,056		$	5,636,268		$	5,989,135

~~H&R BLOCK~~ ( H&R BLOCK LOGO)

~~CONDENSED CONSOLIDATED STATEMENTS OF~~
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME (Unaudited, amounts in 000s,
except per share amounts)


							(Unaudited, amounts in 000s,
							except per share amounts)
	Three months ended January 31,						Nine months ended January 31,
				Restated						Restated
	2006			2005			2006			2005
Three months ended July 31,												2006			2005

Revenues:
Service revenues	$	812,224		$	657,306		$	1,511,615		$	1,196,126	$	421,699		$	315,128
Other revenues:
Gains on sales of mortgage assets, net		157,897			198,584			541,595			566,092		63,913			236,431
Interest income		51,074			50,545			155,337			138,817		41,010			49,253
Product and other revenues		135,552			129,801			168,236			163,705		14,157			14,181

		1,156,747			1,036,236			2,376,783			2,064,740		540,779			614,993


Operating expenses:
Cost of services		633,927			508,207			1,364,362			1,123,266		446,089			347,688
Cost of other revenues		144,663			133,343			402,884			307,987		92,014			123,357
Selling, general and administrative		344,246			248,114			740,047			593,177		215,998			184,782

		1,122,836			889,664			2,507,293			2,024,430		754,101			655,827


Operating income (loss)		33,911			146,572			(130,510	)		40,310
Operating loss													(213,322	)		(40,834	)
Interest expense		12,211			13,026			37,031			48,900		(12,135	)		(12,435	)
Other income, net		3,708			19,732			13,951			23,250		6,798			7,400

Income (loss) before taxes		25,408			153,278			(153,590	)		14,660
Income taxes (benefit)		13,295			59,542			(56,460	)		5,680
Loss before income tax benefit													(218,659	)		(45,869	)
Income tax benefit													(87,282	)		(17,875	)

Net income (loss)	$	12,113		$	93,736		$	(97,130	)	$	8,980
Net loss												$	(131,377	)	$	(27,994	)

Basic and diluted loss per share												$	(0.41	)	$	(0.08	)

Basic earnings (loss) per share	$	0.04		$	0.28		$	(0.30	)	$	0.03


Basic shares		327,289			329,039			328,017			331,894

Diluted earnings (loss) per share	$	0.04		$	0.28		$	(0.30	)	$	0.03


Diluted shares		331,935			334,875			328,017			337,889
Basic and diluted shares													323,671			330,714

Dividends per share	$	0.13		$	0.11		$	0.36		$	0.32	$	0.13		$	0.11


Comprehensive income (loss):
Net income (loss)	$	12,113		$	93,736		$	(97,130	)	$	8,980
Net loss												$	(131,377	)	$	(27,994	)
Change in unrealized gain on available-for-sale securities, net		(3,002	)		(6,494	)		(32,466	)		23,060		(2,511	)		(5,811	)
Change in foreign currency translation adjustments		(7,820	)		1,917			(2,611	)		9,958		818			824

Comprehensive income (loss)	$	1,291		$	89,159		$	(132,207	)	$	41,998	$	(133,070	)	$	(32,981	)

~~H&R BLOCK~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, amounts in 000s)


	(Unaudited, amounts in 000s)
				Restated
Nine months ended January 31,	2006			2005
Three months ended July 31,							2006			2005

Cash flows from operating activities:
Net income (loss)	$	(97,130	)	$	8,980
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Net loss							$	(131,377	)	$	(27,994	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		138,882			127,631			46,394			44,085
Accretion of residual interests in securitizations		(93,189	)		(96,242	)		(13,509	)		(30,777	)
Impairments of available-for-sale residual interests		29,175			7,162			17,266			11,875
Additions to trading securities — residual interests in securitizations, net		(228,587	)		(115,213	)
Additions to trading residual interests in securitizations, net								(58,417	)		(100,462	)
Proceeds from net interest margin transactions, net		195,159			98,743			—			40,371
Realized gain on sale of available-for-sale residual interests		(28,675	)		—

Additions to mortgage servicing rights		(196,245	)		(94,569	)		(50,122	)		(49,306	)
Amortization and impairment of mortgage servicing rights		100,490			60,879			47,328			27,212
Net change in beneficial interest in Trusts		(64,347	)		(8,735	)
Tax benefits from stock-based compensation								8,075			12,699
Excess tax benefits from stock-based compensation								(1,114	)		—
Other, net of acquisitions		(1,445,080	)		(1,553,069	)		(322,939	)		(238,218	)

Net cash used in operating activities		(1,689,547	)		(1,564,433	)		(458,415	)		(310,515	)


Cash flows from investing activities:
Cash received from available-for-sale residual interests		74,931			100,344
Cash received from sale of available-for-sale residual interests		30,497			—
Cash received from residual interests in securitizations								4,567			24,031
Mortgage loans originated for investment, net								(135,161	)		—
Purchases of property and equipment, net		(167,181	)		(143,232	)		(42,868	)		(30,330	)
Payments made for business acquisitions, net of cash acquired		(209,816	)		(26,348	)		(4,627	)		(3,452	)
Other, net		17,297			15,207			7,068			7,935

Net cash used in investing activities		(254,272	)		(54,029	)		(171,021	)		(1,816	)


Cash flows from financing activities:
Repayments of commercial paper		(2,632,444	)		(2,348,966	)		(1,034,210	)		—
Proceeds from issuance of commercial paper		4,678,392			3,877,848			1,223,566			—
Proceeds from other short-term borrowings		550,000			—
Repayments of long-term debt		—			(250,000	)
Proceeds from issuance of long-term debt, net		—			395,221
Customer deposits								404,030			—
Dividends paid		(118,665	)		(106,422	)		(40,485	)		(36,537	)
Acquisition of treasury shares		(260,078	)		(529,852	)		(186,339	)		(131,642	)
Proceeds from issuance of common stock		105,760			119,892
Excess tax benefits from stock-based compensation								1,114			—
Proceeds from exercise of stock options								6,791			27,180
Other, net		(19,179	)		(35,414	)		(49,321	)		(14,082	)

Net cash provided by financing activities		2,303,786			1,122,307
Net cash provided by (used in) financing activities								325,146			(155,081	)


Net increase (decrease) in cash and cash equivalents		359,967			(496,155	)
Net decrease in cash and cash equivalents								(304,290	)		(467,412	)
Cash and cash equivalents at beginning of the period		1,100,213			1,072,745			694,358			1,100,213

Cash and cash equivalents at end of the period	$	1,460,180		$	576,590		$	390,068		$	632,801


Supplementary cash flow data:
Income taxes paid							$	190,378		$	35,278
Interest paid								18,702			13,830


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		(Unaudited)

1.		Basis of Presentation

		The condensed consolidated balance sheet as of ~~January~~July 31, 2006, the condensed consolidated statements of income and comprehensive income for the three ~~and nine~~ months ended ~~January~~July 31, 2006 and 2005, and the condensed consolidated statements of cash flows for the ~~nine~~three months ended ~~January~~July 31, 2006 and 2005 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 ~~January~~July 31, 2006 and for all periods presented have been made.

“H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.

Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These reclassifications had no effect on our results of operations or stockholders’ equity as previously reported. Adjustments related to the restatements of previously issued financial statements are detailed in note 2.

On June 8, 2005, our Board of Directors declared a two-for-one stock split of the Company’s Common Stock in the form of a 100% stock distribution, effective August 22, 2005, to shareholders of record as of the close of business on August 1, 2005. All share and per share amounts in this document have been adjusted to reflect the effect of the stock split.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2005 Annual Report to Shareholders on Form 10-K/A.

Operating revenues of the Tax Services and Business Services segments are seasonal in nature with peak revenues occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.

2.		~~Restatements of Previously Issued Financial Statements~~

		~~(A)~~ On February 22, 2006, management and the Audit Committee of the Board of Directors concluded to restate previously issued consolidated financial statements for the fiscal quarters ended October 31, 2005 and July 31, 2005, the fiscal years ended April 30, 2005 and 2004 and the related fiscal quarters. We arrived at this conclusion during the course of our closing process for the quarter ended January 31, 2006. This restatement pertains primarily to errors in determining the Company’s state effective income tax rate, including errors in identifying changes in state apportionment, expiring state net operating losses and related factors. These errors resulted in an understatement of income tax expense (net of federal income tax benefit) of approximately $2.0 million and $0.2 million for the three and nine months ended January 31, 2005, respectively, an overstatement of deferred income tax assets of $1.2 million as of April 30, 2005 and an understatement of accrued income taxes of approximately $25.9 million as of April 30, 2005. The effect of the above adjustments on the condensed consolidated financial statements is set forth in “2C” below.

		Income tax expense for the three months ended January 31, 2006 includes $3.4 million related to the correction of errors in state income taxes relating to periods prior to May 1, 2003. These errors were determined to be immaterial to both the current fiscal year and the applicable prior period results.

~~(B)~~On June 7, 2005, management and the Audit Committee of the Board of Directors determined that restatement of our previously issued consolidated financial statements, including financial statements for the three and nine months ended January 31, 2005, was appropriate as a result of the errors noted below. All amounts listed are pretax, unless otherwise noted.

An error in calculating the gain on sale of residual interests in fiscal year 2003. This error was corrected by deferring a portion of the gain on sale of residual interests as of the transaction date in fiscal year 2003 and recognizing revenue from the sale as interest income from accretion of residual interests in subsequent periods. Interest income from accretion increased $3.9 million

~~-4-~~

and $9.6 million for the three and nine months ended January 31, 2005, respectively. This correction also decreased impairments of residual interests $0.3 million and $1.1 million for the three and nine months ended January 31, 2005, respectively, and decreased comprehensive income $2.6 million and $6.7 million for the three and nine months ended January 31, 2005, respectively.

	•		An error in the calculation of an incentive compensation accrual at our Mortgage Services segment as of April 30, 2004. This error resulted in an overstatement of compensation expense for the nine months ended January 31, 2005 of $12.1 million.

	•		An error in accounting for leased properties related to rent holidays and mandatory rent escalation in our Tax Services, Mortgage Services and Investment Services segments. Rent expense was understated for the three and nine months ended January 31, 2005 by $1.2 million and $1.8 million, respectively.

	•		An error from the capitalization of certain branch office costs at our Investment Services segment, which should have been expensed as incurred. This error resulted in an understatement of occupancy expenses and an overstatement of depreciation expense and capital expenditures, resulting in a net overstatement of operating expenses of $0.4 million and $5.9 million for the three and nine months ended January 31, 2005, respectively.

	•		Errors related to accounting for acquisitions at our Business Services and Investment Services segments, the largest of which was the acquisition of OLDE in fiscal year 2000. Amortization of customer relationships was understated by $1.8 million and $5.5 million for the three and nine months ended January 31, 2005, respectively, and the provision for income taxes was overstated by approximately $3.7 million and $11.2 million, respectively, related to this error.

			~~The effect of the above adjustments on the condensed consolidated financial statements is set forth in “2C” below.~~

(C)Notes 4, 5, 6, 7, 9, 13 and 15 have been restated to reflect the above described adjustments. The following is a summary of the impact of the restatements on our condensed consolidated statement of income and comprehensive income for the three and nine months ended January 31, 2005:

(in 000s, except per share amounts)
Three months ended January 31, 2005
As Previously
Reported⁽¹⁾ Adjustments⁽²⁾ Subtotal Adjustments⁽³⁾ Restated

Gain on sale of mortgage assets, net $ 198,301 $ 283 $ 198,584 $ — $ 198,584
Interest income 46,599 3,946 50,545 — 50,545
Total revenues 1,032,007 4,229 1,036,236 — 1,036,236
Total operating expenses 887,030 2,634 889,664 — 889,664
Operating income 144,977 1,595 146,572 — 146,572
Income before taxes 151,683 1,595 153,278 — 153,278
Income taxes 59,991 (2,478 ) 57,513 2,029 59,542
Net income 91,692 4,073 95,765 (2,029 ) 93,736
Basic earnings per share $ 0.28 $ 0.01 $ 0.29 $ (0.01 ) $ 0.28
Diluted earnings per share $ 0.27 $ 0.02 $ 0.29 $ (0.01 ) $ 0.28
Change in unrealized gain on available-for-sale securities, net $ (3,881 ) $ (2,613 ) $ (6,494 ) $ — $ (6,494 )
Comprehensive income 89,728 1,460 91,188 (2,029 ) 89,159

~~-5-~~

Nine months ended January 31, 2005
As Previously
Reported⁽¹⁾ Adjustments⁽²⁾ Subtotal Adjustments⁽³⁾ Restated

Gain on sale of mortgage assets, net $ 564,949 $ 1,143 $ 566,092 $ — $ 566,092
Interest income 129,193 9,624 138,817 — 138,817
Total revenues 2,053,973 10,767 2,064,740 — 2,064,740
Total operating expenses 2,035,128 (10,698 ) 2,024,430 — 2,024,430
Operating income 18,845 21,465 40,310 — 40,310
Income (loss) before taxes (6,805 ) 21,465 14,660 — 14,660
Income taxes (benefit) (2,215 ) 7,724 5,509 171 5,680
Net income (loss) (4,590 ) 13,741 9,151 (171 ) 8,980
Basic earnings (loss) per share $ (0.01 ) $ .04 $ 0.03 $ — $ 0.03
Diluted earnings (loss) per share $ (0.01 ) $ .04 $ 0.03 $ — $ 0.03
Change in unrealized gain on available-for-sale securities, net $ 29,714 $ (6,654 ) $ 23,060 $ — $ 23,060
Comprehensive income 35,082 7,087 42,169 (171 ) 41,998


⁽¹⁾		~~As reported in our Form 10-Q filed on March 9, 2005 for the nine months ended January 31, 2005. Amounts~~Certain reclassifications have been ~~reclassified~~made to prior year amounts to conform to the current year presentation. ~~See discussion~~These reclassifications had no effect on our results of ~~reclassifications in note 1.~~

⁽²⁾		~~Adjusted~~operations or stockholders’ equity as previously reported. In March 2006, the Office of Thrift Supervision (OTS) approved the charter of H&R Block Bank (HRB Bank). The bank commenced operations on May 1, 2006, at which time we realigned certain segments of our business to reflect a new management reporting structure. The previously reported Investment Services segment, H&R Block Mortgage Corporation (HRBMC), which was previously included in the ~~restatement described in “2B” above, as derived from the Company’s Form 10-K/A filed on August 5, 2005 for the fiscal year ended April 30, 2005.~~

⁽³⁾		~~Adjusted to reflect the restatement described in “2A” above.~~

~~The following is a summary of the impact of the restatements on our condensed consolidated statement of cash flows for the nine months ended January 31, 2005:~~

(in 000s)
As Previously
Reported⁽¹⁾ Adjustments⁽²⁾ Subtotal Adjustments⁽³⁾ Restated

Net income (loss) $ (4,590 ) $ 13,741 $ 9,151 $ (171 ) $ 8,980
Depreciation and amortization 122,305 5,326 127,631 — 127,631
Accretion of residual interests in securitizations (86,618 ) (9,624 ) (96,242 ) — (96,242 )
Impairment of available-for-sale residual interests 8,304 (1,142 ) 7,162 — 7,162
Other, net of acquisitions (1,550,688 ) (2,552 ) (1,553,240 ) 171 (1,553,069 )
Net cash used in operating activities (1,570,182 ) 5,749 (1,564,433 ) — (1,564,433 )
Purchases of property and equipment, net (137,483 ) (5,749 ) (143,232 ) — (143,232 )
Net cash used in investing activities (48,280 ) (5,749 ) (54,029 ) — (54,029 )


⁽¹⁾		~~As reported in our Form 10-Q filed on March 9, 2005 for the nine months ended January 31, 2005. Amounts~~Mortgage Services segment, and H&R Block Bank have been ~~reclassified to conform to current year presentation.~~combined in the Consumer Financial Services segment. Presentation of prior-year results reflects the new segment alignment. See ~~discussion of reclassifications in~~ note 1.

⁽²⁾		~~Adjusted to reflect the restatement described in “2B” above, as derived from the Company’s Form 10-K/A filed~~11 for additional information on ~~August 5, 2005 for the fiscal year ended April 30, 2005.~~

⁽³⁾		~~Adjusted to reflect the restatement described in “2A” above.~~

~~The restatements had no impact on our cash flows from financing activities as previously reported.~~

3.		~~Business Combinations~~this new segment.

		~~Effective October 1, 2005, we acquired all outstanding common stock of American Express Tax~~ Certain information and Business Services, Inc. for an aggregate purchase price of $191.7 million, subject to a post-closing adjustment based upon determination of the final September 30, 2005 net asset value. During the three months ended January 31, 2006, we completed the final valuation of intangible assets. Results related to American Express Tax and Business Services, Inc.footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been ~~included in our~~condensed or omitted. These condensed consolidated financial statements ~~since October 1, 2005. Pro forma results of operations have not been presented because~~should be read in conjunction with the ~~effects of this acquisition were not material~~financial statements and notes thereto included in our April 30, 2006 Annual Report to ~~our results. The accompanying balance sheet reflects a preliminary allocation of the purchase price to assets acquired and liabilities assumed as follows:~~

~~-6-~~

(in 000s)

Property and equipment $ 17,664
Other assets 121,228
Liabilities (51,701 )
Amortizing intangible assets 28,100
Goodwill 76,383

$ 191,674

Goodwill recognized in these transactions is included in the Business Services segment and is not deductible for tax purposes. The preliminary purchase price allocations are subject to change and will be adjusted based upon resolution of several matters including, but not limited to, the following:

	•		~~Determination of the post-closing adjustment and final purchase price;~~Shareholders on Form 10-K.

	•		~~Determination~~Operating revenues of ~~final liabilities relating~~the Tax Services and Business Services segments are seasonal in nature with peak revenues occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to ~~planned exit activities; and~~be expected for the full year.

	•		~~Determination of the tax basis of acquired assets and liabilities, and deferred tax balances of the acquired business.~~

4.2.		Earnings (Loss) Per Share

		Basic ~~earnings (loss)~~and diluted loss per share is computed using the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings ~~(loss)~~ per share except in those periods with a loss. ~~The computations of basic and diluted~~Diluted earnings ~~(loss)~~ per share ~~are as follows:~~

(in 000s, except per share amounts)
Three months ended January 31, Nine months ended January 31,
Restated Restated
2006 2005 2006 2005

Net income (loss) $ 12,113 $ 93,736 $ (97,130 ) $ 8,980

Basic weighted average common shares 327,289 329,039 328,017 331,894
Potential dilutive shares from stock options and restricted stock 4,644 5,834 — 5,993
Convertible preferred stock 2 2 — 2

Dilutive weighted average common shares 331,935 334,875 328,017 337,889

Earnings (loss) per share:
Basic $ 0.04 $ 0.28 $ (0.30 ) $ 0.03
Diluted 0.04 0.28 (0.30 ) 0.03

Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 29.3 million shares of stock for the nine months ended Januaryexcludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 32.9 million shares and 33.7 million shares of stock for the three months ended July 31, 2006 and 2005, respectively, as the effect would be antidilutive due to the net loss recorded during the period. Diluted earnings per share for the three months ended January 31, 2006 and the three and nine months ended January 31, 2005 excludes the impact of 7.1 million, 0.7 million and 1.4 million shares, respectively, issuable upon the exercise of stock options, as the effect would be antidilutive due to the options’ exercise prices being greater than the average market price of the common shares during the period.

The weighted average shares outstanding for the three and nine months ended January 31, 2006 decreased to 327.3 million and 328.0 million, respectively, from 329.0 million and 331.9 million last year, primarily due to our purchases of treasury shares. The effect of these purchases was partially offset by the issuance of treasury shares related to our stock-based compensation plans.

During each of the nine month periods ended January 31, 2006 and 2005, we issued 6.3 million and 6.5 million shares of common stock, respectively, pursuant to the exercise of stock options, employee stock purchases and awards of restricted shares, in accordance with our stock-based compensation plans.

During the nine months ended January 31, 2006, we acquired 9.2 million shares of our common stock, of which 9.0 million shares were purchased from third parties with the remaining shares swapped or surrendered to us, at an aggregate cost of $260.1 million. During the nine months ended

~~-7-~~

~~January 31, 2005, we acquired 22.6 million shares of our common stock, of which 22.5 million were purchased from third parties, at an aggregate cost of $529.9 million.~~

5.		~~Receivables~~

		~~Receivables consist~~ The weighted average shares outstanding for the three months ended July 31, 2006 decreased to 323.7 million from 330.7 million last year, primarily due to purchases of treasury shares. The effect of these purchases was partially offset by the ~~following:~~issuance of treasury shares related to our stock-based compensation plans.

		During the three months ended July 31, 2006 and 2005, we issued 1.4 million and 2.5 million shares of common stock, respectively, pursuant to the exercise of stock options, employee stock purchases and awards of nonvested shares, in accordance with our stock-based compensation plans.

		During the three months ended July 31, 2006, we acquired 8.4 million shares of our common stock, of which 8.1 million shares were purchased from third parties with the remaining shares swapped or surrendered to us, at an aggregate cost of $186.3 million. During the three months ended July 31, 2005, we acquired 4.6 million shares of our common stock, of which 4.4 million shares were purchased from third parties with the remaining shares swapped or surrendered to us, at an aggregate cost of $131.6 million.

-4-

and are subsequently securitized in a NIM transaction. Mark-to-market adjustments on trading residuals are included in gains on sales of mortgage assets on the condensed consolidated income statement. Such adjustments resulted in a net loss of $1.4 million and a net gain of $0.6 million for the three and nine months ended January 31, 2006, respectively. Similar adjustments resulted in a net gain of $0.4 million and $5.4 million for the three and nine months ended January 31, 2005, respectively. Cash flows from trading residuals of $12.9 million were received for the nine months ended January 31, 2006 and are included in operating activities in the accompanying condensed consolidated statement of cash flows. Accretion of trading residuals totaled $3.5 million and $5.9 million for the three and nine months ended January 31, 2006, respectively, and zero in the prior year periods. There were no trading residuals recorded as of April 30, 2005.

Cash flows from available-for-sale residual interests of $74.9 million and $100.3 million were received from the securitization trusts for the nine months ended January 31, 2006 and 2005, respectively. Cash received on available-for-sale residual interests is included in investing activities in the condensed consolidated statements of cash flows.
The key weighted average assumptions we used to estimate the cash flows and values of the residual interests initially recorded during the three months ended July 31, 2006 and 2005 are as follows:

Aggregate net unrealized gains on residual interests not yet accreted into income totaled $63.0 million at January 31, 2006 and $115.4 million at April 30, 2005. These unrealized gains are recorded net of deferred taxes in other comprehensive income, and may be recognized in income in future periods either through accretion or upon further securitization or sale of the related residual interest.

Three months ended July 31, 2006 2005

Estimated credit losses 3.51 % 2.70 %
Discount rate 18.00 % 21.57 %
Variable returns to third-party beneficial interest holders LIBOR forward curve at closing date

~~Activity related to mortgage servicing rights (MSRs) consists of the following:~~
The key weighted average assumptions we used to estimate the cash flows and values of the residual interests and MSRs at July 31, 2006 and April 30, 2006 are as follows:

(in 000s)
Nine months ended January 31, 2006 2005

Balance, beginning of period $ 166,614 $ 113,821
Additions 196,245 94,569
Amortization (100,170 ) (60,616 )
Impairment (320 ) (263 )

Balance, end of period $ 262,369 $ 147,511

July 31, 2006 April 30, 2006

Estimated credit losses 3.10 % 3.07 %
Discount rate – residual interests 20.24 % 21.98 %
Discount rate – MSRs 18.00 % 18.00 %
Variable returns to third-party beneficial interest holders LIBOR forward curve at valuation date

Additions to MSRs during fiscal year 2006 have increased primarily as a result of higher origination volumes, higher average loan balances and higher interest rates. In addition, during fiscal year 2006 we updated our assumptions used to value MSRs. The assumptions were updated primarily to reflect lower servicing costs, in particular interest paid to bondholders on monthly loan prepayments, and higher discount rates. These changes in assumptions increased the weighted average value of MSRs recorded during the second and third quarters by approximately $17.0 million (0.14% of loans originated) and $10.0 million (0.11% of loans originated), respectively, over the prior year. Estimated amortization of MSRs for fiscal years 2006 through 2010 is $140.5 million, $123.9 million, $61.0 million, $25.3 million and $11.8 million, respectively.
We originate both adjustable and fixed rate mortgage loans. A key assumption used to estimate the cash flows and values of the residual interests and MSRs is average annualized prepayment speeds. Prepayment speeds include voluntary prepayments, involuntary prepayments and scheduled principal payments. Prepayment rate assumptions are as follows:

~~The key weighted average assumptions we used to estimate the cash flows and values of the residual interests initially recorded during the nine months ended January 31, 2006 and 2005 are as follows:~~

Months Outstanding After
Prior to Initial Initial Rate Reset Date
Rate Reset Date Zero - 3 Remaining Life

Adjustable rate mortgage loans:
With prepayment penalties 31 % 72 % 39 %
Without prepayment penalties 35 % 52 % 34 %
Fixed rate mortgage loans:
With prepayment penalties 30 % 48 % 38 %

Nine months ended January 31, 2006 2005

Estimated credit losses 2.85 % 2.72 %
Discount rate 20.34 % 25.00 %
Variable returns to third-party beneficial interest holders LIBOR forward curve at closing
For fixed rate mortgages without prepayment penalties, we use an average prepayment rate of 32% over the life of the loans. Prepayment rate is projected based on actual paydown including voluntary, involuntary and scheduled principal payments.
Expected static pool credit losses are as follows:

~~The key weighted average assumptions we used to estimate the cash flows and values of the residual interests and MSRs at January 31, 2006 and April 30, 2005 are as follows:~~

Mortgage Loans Securitized in Fiscal Year
Prior to 2002 2002 2003 2004 2005 2006 2007

As of:
July 31, 2006 4.75 % 2.69 % 2.12 % 2.20 % 2.29 % 3.19 % 3.51 %
April 30, 2006 4.75 % 2.69 % 2.13 % 2.18 % 2.48 % 3.05 % —
April 30, 2005 4.52 % 2.53 % 2.08 % 2.30 % 2.83 % — —
April 30, 2004 4.46 % 3.58 % 4.35 % 3.92 % — — —

January 31, 2006 April 30, 2005

Estimated credit losses 2.97 % 3.03 %
Discount rate — residual interests 21.60 % 21.01 %
Discount rate — MSRs 18.00 % 12.80 %
Variable returns to third-party beneficial interest holders LIBOR forward curve at valuation date
Static pool credit losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets.
At July 31, 2006, the sensitivities of the current fair value of the residual interests and MSRs to 10% and 20% adverse changes in the above key assumptions are as presented in the following table. These sensitivities are hypothetical and should be used with caution. As the figures indicate, 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; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

~~-9-~~-6-

We originate both adjustable and fixed rate mortgage loans. A key assumption used to estimate the cash flows and values of the residual interests and MSRs is average annualized prepayment speeds. Prepayment speeds include voluntary prepayments, involuntary prepayments and scheduled principal payments. Prepayment rate assumptions are as follows:

Prior to Months Outstanding After
Initial Rate Initial Rate Reset Date
Reset Date Zero - 3 Remaining Life
Adjustable rate mortgage loans:
With prepayment penalties 31 % 72 % 41 %
Without prepayment penalties 35 % 52 % 35 %
Fixed rate mortgage loans:
With prepayment penalties 30 % 48 % 38 %

For fixed rate mortgages without prepayment penalties, we use an average prepayment rate of 32% over the life of the loans. Prepayment rate is projected based on actual paydown including voluntary, involuntary and scheduled principal payments.

~~Expected static pool credit losses are as follows:~~

Mortgage Loans Securitized in Fiscal Year
Prior to 2002 2002 2003 2004 2005 2006
As of:
January 31, 2006 4.58 % 2.54 % 2.08 % 2.14 % 2.59 % 2.91 %
October 31, 2005 4.52 % 2.49 % 2.05 % 2.16 % 2.93 % 2.84 %
July 31, 2005 4.53 % 2.53 % 2.03 % 2.20 % 2.86 % 2.70 %
April 30, 2005 4.52 % 2.53 % 2.08 % 2.30 % 2.83 % —
April 30, 2004 4.46 % 3.58 % 4.35 % 3.92 % — —

~~Static pool credit losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets.~~

~~At January 31, 2006, the sensitivities of the current fair value of the residual interests and MSRs to 10% and 20% adverse changes in the above key assumptions are as follows:~~

(dollars in 000s)
Residential Mortgage Loans
NIM Beneficial Interest Servicing
Residuals in Trusts Assets
Carrying amount/fair value $ 175,068 $ 279,714 $ 262,369
Weighted average remaining life (in years) 1.9 2.0 1.3

Prepayments (including defaults):
Adverse 10% — $impact on fair value $ 3,981 $ (12,497 ) $ (35,910 )
Adverse 20% — $impact on fair value 11,679 (17,632 ) (60,158 )

Credit losses:
Adverse 10% — $impact on fair value $ (45,495 ) $ (13,062 ) Not applicable
Adverse 20% — $impact on fair value (77,590 ) (23,942 ) Not applicable

Discount rate:
Adverse 10% — $impact on fair value $ (5,860 ) $ (5,650 ) $ (4,114 )
Adverse 20% — $impact on fair value (11,333 ) (11,130 ) (8,112 )

Variable interest rates (LIBOR forward curve):
Adverse 10% — $impact on fair value $ (5,330 ) $ (74,636 ) Not applicable
Adverse 20% — $impact on fair value (9,410 ) (147,357 ) Not applicable

These sensitivities are hypothetical and should be used with caution. 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 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.

~~-10-~~

~~Mortgage loans that have been securitized at January 31, 2006 and April 30, 2005, past due sixty days or more and the related credit losses incurred are presented below:~~

(in 000s)
Total Principal Principal Amount of
Amount of Loans Loans 60 Days or Credit Losses
Outstanding More Past Due (net of recoveries)
January 31, April 30, January 31, April 30, Three months ended
2006 2005 2006 2005 January 31, 2006 April 30, 2005

Securitized mortgage loans $ 11,492,170 $ 10,300,805 $ 1,017,855 $ 1,128,376 $ 27,972 $ 21,641
Mortgage loans in warehouse Trusts 11,209,456 6,742,387 — — — —

Total loans $ 22,701,626 $ 17,043,192 $ 1,017,855 $ 1,128,376 $ 27,972 $ 21,641

(dollars in 000s)
Residential Mortgage Loans
NIM Beneficial Interest Trading
Residuals in Trusts Residuals MSRs

Carrying amount/fair value $ 145,779 $ 125,628 $ 59,326 $ 275,266
Weighted average remaining life (in years) 2.1 1.9 1.2 1.3

Prepayments (including defaults):
Adverse 10% – $ impact on fair value $ 5,159 $ (2,019 ) $ (1,720 ) $ (41,994 )
Adverse 20% – $ impact on fair value 13,390 (1,692 ) (897 ) (70,642 )

Credit losses:
Adverse 10% – $ impact on fair value $ (43,684 ) $ (4,216 ) $ (2,601 ) Not applicable
Adverse 20% – $ impact on fair value (73,023 ) (8,095 ) (5,197 ) Not applicable

Discount rate:
Adverse 10% – $ impact on fair value $ (5,305 ) $ (2,021 ) $ (1,090 ) $ (4,473 )
Adverse 20% – $ impact on fair value (10,255 ) (3,987 ) (2,139 ) (8,813 )

Variable interest rates (LIBOR forward curve):
Adverse 10% – $ impact on fair value $ (3,988 ) $ (29,141 ) $ 756 Not applicable
Adverse 20% – $ impact on fair value (10,171 ) (55,963 ) 1,357 Not applicable

Increases in prepayment rates related to available-for-sale NIM residuals can generate a positive impact to fair value when reductions in estimated credit losses and increases in prepayment penalties exceed the adverse impact to accretion from accelerating the life of the available-for-sale residual interest.

Mortgage loans that have been securitized at July 31, 2006 and April 30, 2006, past due sixty days or more and the related credit losses incurred are presented below:

(in 000s)
Total Principal Principal Amount of
Amount of Loans Loans 60 Days or Credit Losses
Outstanding More Past Due (net of recoveries)
July 31, April 30, July 31, April 30, Three months ended
2006 2006 2006 2006 July 31, 2006 April 30, 2006

Securitized mortgage loans $ 10,486,419 $ 10,046,032 $ 1,067,076 $ 1,012,414 $ 29,636 $ 35,307
Mortgage loans in warehouse Trusts 4,268,181 7,845,834 — — — —
Mortgage loans held for sale 265,133 255,224 124,635 98,906 22,208 33,504

Total loans $ 15,019,733 $ 18,147,090 $ 1,191,711 $ 1,111,320 $ 51,844 $ 68,811

4.		Goodwill and Intangible Assets

		Changes in the carrying amount of goodwill for the ~~nine~~three months ended ~~January~~July 31, 2006 consist of the following:


								(in 000s)
(in 000s)										(in 000s)
	April 30, 2005		Additions		Other			January 31, 2006			April 30, 2006		Additions		Other			July 31, 2006

Tax Services	$	360,781	$	8,829	$	192		$	369,802		$	376,515	$	1,683	$	(9	)	$	378,189
Mortgage Services		152,467		—		—			152,467			136,586		—		—			136,586
Business Services		328,745		80,929		(1,630	)		408,044			397,516		2,147		—			399,663
Investment Services		173,954		—		—			173,954
Consumer Financial Services												189,835		—		—			189,835

Total goodwill	$	1,015,947	$	89,758	$	(1,438	)	$	1,104,267		$	1,100,452	$	3,830	$	(9	)	$	1,104,273

The goodwill and intangible assets added in the Business Services segment relate primarily to the acquisition of American Express Tax and Business Services, Inc., as discussed in note 3. The intangible asset valuations were completed during the quarter, however, goodwill is subject to change pending determination of the final purchase price.

(in 000s)
July 31, 2006 April 30, 2006
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net

Tax Services:
Customer relationships $ 27,750 $ (11,726 ) $ 16,024 $ 27,257 $ (10,842 ) $ 16,415
Noncompete agreements 18,904 (17,778 ) 1,126 18,879 (17,686 ) 1,193
Business Services:
Customer relationships 153,767 (84,657 ) 69,110 153,844 (81,178 ) 72,666
Noncompete agreements 32,521 (15,169 ) 17,352 32,534 (14,300 ) 18,234
Trade name – amortizing 4,050 (2,163 ) 1,887 4,050 (1,823 ) 2,227
Trade name – non-amortizing 55,637 (4,868 ) 50,769 55,637 (4,868 ) 50,769
Consumer Financial Services:
Customer relationships 293,000 (244,167 ) 48,833 293,000 (235,010 ) 57,990

Total intangible assets $ 585,629 $ (380,528 ) $ 205,101 $ 585,201 $ (365,707 ) $ 219,494

8.		Amortization of intangible assets for the three months ended July 31, 2006 and 2005 was $15.0 million and $15.2 million, respectively. Estimated amortization of intangible assets for fiscal years 2007 through 2011 is $56.7 million, $38.9 million, $15.7 million, $13.3 million and $11.8 million, respectively.

		In October 2005, we acquired all outstanding common stock of American Express Tax and Business Services, Inc. for an aggregate purchase price of $190.7 million. The preliminary purchase price allocations are subject to change and will be adjusted based upon resolution of several matters including, but not limited to, determination of the post-closing adjustment and final purchase price, determination of final liabilities relating to planned exit activities and determination of the tax basis of acquired assets and liabilities, and deferred tax balances of the acquired business.

5.		Derivative Instruments

		We enter into derivative instruments to reduce risks relating to mortgage loans we originate and sell, and therefore all gains or losses are included in gains on sales of mortgage assets, net in the condensed consolidated income statements. A summary of our derivative instruments as of ~~January~~July 31, 2006 and April 30, ~~2005,~~2006, and gains or losses incurred during the three ~~and nine~~ months ended ~~January~~July 31, 2006 and 2005 is as follows:


(in 000s)																			(in 000s)
																										Gain (Loss) for the Three
																(in 000s)				Asset (Liability) Balance at						Months Ended July 31,
	Asset (Liability) Balance at						Gain (Loss) for the Three						Gain (Loss) for the Nine							July 31, 2006			April 30, 2006			2006			2005
	January 31,			April 30,			Months Ended January 31,						Months Ended January 31,
	2006			2005			2006			2005			2006			2005
Rate-lock equivalents																				$	7,428		$	(317	)	$	7,745		$	(1,093	)
Interest rate swaps	$	23,422		$	(1,325	)	$	6,292		$	31,039		$	91,578		$	28,934				6,240			8,831			13,179			25,543
Put options on Eurodollar futures																					2,108			3,282			(38	)		—
Prime short sales																					(1,176	)		777			(561	)		996
Forward loan sale commitments																					(5,121	)		1,961			(7,082	)		—
Interest rate caps		—			12,458			—			—			802			—				—			—			—			640
Rate-lock equivalents		96			801			34			141			(705	)		1,841
Prime short sales		(333	)		(805	)		(1,266	)		(424	)		221			(1,949	)

	$	23,185		$	11,129		$	5,060		$	30,756		$	91,896		$	28,826			$	9,479		$	14,534		$	13,243		$	26,086

9.		The notional amount of interest rate swaps to which we were a party at July 31, 2006 was $3.9 billion, with a weighted average duration of 1.9 years. The notional value and the contract value of our forward loan sale commitments at July 31, 2006 was $3.2 billion and $3.3 billion, respectively.

		None of our derivative instruments qualify for hedge accounting treatment as of July 31, 2006 or April 30, 2006.

6.		Stock-Based Compensation

		~~Effective~~Beginning May 1, ~~2003,~~2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123R) under the modified prospective approach. Under SFAS 123R, we continue to measure and recognize the fair value ~~recognition provisions~~ of stock-based compensation consistent with our past practice under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based ~~Compensation” (SFAS 123),~~Compensation,” which we adopted on May 1, 2003 under the prospective transition ~~method as described in Statement~~method. The adoption of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Had compensation cost for all stock-based compensation plan grants been determined in accordance with the fair value accounting method prescribed under SFAS ~~123,~~123R did not have a material impact on our ~~net income (loss) and earnings (loss) per share would have been as follows:~~consolidated financial statements.

-8-

(in 000s, except per share amounts)
Three months ended January 31, Nine months ended January 31,
Restated Restated
2006 2005 2006 2005

Net income (loss) as reported $ 12,113 $ 93,736 $ (97,130 ) $ 8,980
Add: Stock-based compensation expense included in reported net income (loss), net of related tax effects 9,916 8,918 21,927 17,260
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects (12,460 ) (11,599 ) (29,558 ) (25,304 )

Pro forma net income (loss) $ 9,569 $ 91,055 $ (104,761 ) $ 936

Basic earnings (loss) per share:
As reported $ 0.04 $ 0.28 $ (0.30 ) $ 0.03
Pro forma 0.03 0.28 (0.32 ) —
Diluted earnings (loss) per share:
As reported $ 0.04 $ 0.28 $ (0.30 ) $ 0.03
Pro forma 0.03 0.27 (0.32 ) —
     The following is a comparison of reported and pro forma results had compensation cost for all stock-based compensation grants been determined in accordance with SFAS 123 for the three months ended July 31, 2005.

(in 000s, except per share amounts)

Net loss as reported $ (27,994 )
Add: Stock-based compensation expense included in reported net loss, net of related tax effects 5,765
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects (8,309 )

Pro forma net loss $ (30,538 )

Basic and diluted loss per share:
As reported $ (0.08 )
Pro forma (0.09 )
     Stock-based compensation expense of $10.5 million and the related tax benefits of $3.7 million are included in our results for the three months ended July 31, 2006.
     SFAS 123R requires the reclassification, in the statement of cash flows, of the excess tax benefits from stock-based compensation from operating cash flows to financing. As a result, we classified $1.1 million as a cash inflow from financing activities rather than as an operating activity for the three months ended July 31, 2006.
     We have four stock-based compensation plans which have been approved by our shareholders. As of July 31, 2006, we had approximately 21.7 million shares reserved for future awards under these plans. We issue shares from our treasury stock to satisfy the exercise or release of stock-based awards.
     Our 2003 Long-Term Executive Compensation Plan provides for awards of options (both incentive and nonqualified), nonvested shares, performance nonvested share units and other stock-based awards to employees. These awards are granted to employees and entitle the holder to shares or the right to purchase shares of common stock as the award vests, typically over a three-year period with one-third vesting each year. Nonvested shares receive dividends during the vesting period and performance nonvested share units receive cumulative dividends at the end of the vesting period. We measure the fair value of options on the grant date or modification date using the Black-Scholes option valuation model. We measure the fair value of nonvested shares and performance nonvested share units based the average of the high and low quoted price of our common stock on the grant date. Generally, we expense the grant-date fair value, net of estimated forfeitures, over the vesting period on a straight-line basis. Upon adoption of SFAS 123R, awards granted to employees who are of retirement age, or reach retirement age at least one year after the grant date but prior to the end of the service period of the award, are expensed over the shorter of the two periods. Options are granted at a price equal to the fair market value of our common stock on the grant date and have a contractual term of ten years.
     Our 1999 Stock Option Plan for Seasonal Employees provides for awards of nonqualified options to employees. These awards are granted to seasonal employees in our Tax Services segment and entitle the holder to the right to purchase shares of common stock as the award vests, typically over a two-year period. We measure the fair value of options on the grant date using the Black-Scholes option valuation model. We expense the grant-date fair value, net of estimated forfeitures, over the service period. Options are granted at a price equal to the fair market value of our common stock on the grant date, are exercisable during September through November in each of the two years following the calendar year of the grant and have a contractual term of 29 months.
     Our 1989 Stock Option Plan for Outside Directors provides for awards of nonqualified options to outside directors. These awards are granted to outside directors and entitle the holder to the right to purchase shares of common stock. We measure the fair value of options on the grant date using the Black-Scholes option valuation model. These awards vest immediately upon issuance and are therefore fully expensed on the grant date. Options are granted at a price equal to the fair market value of our common stock on the grant date and have a contractual term of ten years.
-9-

Our 2000 Employee Stock Purchase Plan (ESPP) provides employees the option to purchase shares of our Common Stock through payroll deductions. The purchase price of the stock is 90% of the lower of either the fair market value of our Common Stock on the first trading day within the Option Period or on the last trading day of the Option Period. The Option Periods are six-month periods beginning on January 1 and July 1 each year. We measure the fair value of options on the grant date utilizing the Black-Scholes option valuation model in accordance with FASB Technical Bulletin 97-1, “Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option.” We expense the grant-date fair value over the six-month vesting period.

A summary of options for the three months ended July 31, 2006 is as follows:

(in 000s, except per share amounts)
Weighted Average
Weighted Average Remaining Aggregate
Shares Exercise Price Contractual Term Intrinsic Value

Outstanding, beginning of period 26,048 $ 21.40
Granted 4,943 23.86
Exercised (460 ) 14.84
Forfeited or expired (191 ) 22.98

Outstanding, end of period 30,340 21.89 5 years $ 80,521

Exercisable, end of period 18,301 $ 19.35 4 years $ 75,626
Exercisable and expected to vest 28,547 21.70 5 years $ 80,265

The total intrinsic value of options exercised during the three months ended July 31, 2006 and 2005 were $0.5 million and $7.8 million, respectively. We utilize the Black-Scholes option pricing model to value our options on the grant date. We estimated the expected volatility using our historical stock price data. We also used historical exercise and forfeiture behaviors to estimate the options expected term and our forfeiture rate. The following assumptions were used to value options during the periods:

Three months ended July 31, 2006 2005

Options – management and director:
Expected volatility 23.67% - 29.06 % 27.05% - 27.30 %
Expected term 4 - 7 years 5 years
Dividend yield 2.15% - 2.35 % 1.71 %
Risk-free interest rate 4.77% - 5.10 % 3.65% - 3.75 %
Weighted-average fair value $ 5.17 $ 7.42

Options – seasonal:
Expected volatility 20.05 % 23.28 %
Expected term 2 years 2 years
Dividend yield 2.26 % 1.71 %
Risk-free interest rate 5.11 % 3.61 %
Weighted-average fair value $ 3.17 $ 4.16

ESPP options:
Expected volatility 26.30 % 24.52 %
Expected term 0.5 years 0.5 years
Dividend yield 2.26 % 1.71 %
Risk-free interest rate 5.24 % 3.37 %
Weighted-average fair value $ 1.91 $ 2.12

A summary of nonvested shares and performance nonvested share units for the three months ended July 31, 2006 is as follows:

(shares in 000s)
Weighted Average
Shares Grant Date Fair Value

Outstanding, beginning of period 2,455 $ 25.27
Granted 944 23.93
Released (738 ) 25.01
Forfeited (77 ) 24.63

Outstanding, end of period 2,584 24.95

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The total fair value of shares vesting during the three months ended July 31, 2006 and 2005 was $17.6 million and $16.3 million, respectively. Upon the grant of nonvested shares and performance nonvested share units, unearned compensation cost is recorded as an offset to additional paid in capital and is amortized as compensation expense over the vesting period. As of July 31, 2006, we had $57.1 million of total unrecognized compensation cost related to these shares. This cost is expected to be recognized over a weighted-average period of two years.

~~10.~~7.		Supplemental Cash Flow Information

		~~During~~The following transactions were treated as non-cash investing activities in the ~~nine months ended January~~condensed consolidated statement of cash flows:

(in 000s)
Three months ended July 31, 2006 2005

Residual interest mark-to-market $ 531 $ 12,942
Additions to residual interests — 2,109

8.		Regulatory Requirements

		Registered Broker-Dealer

		HRBFA is subject to regulatory requirements intended to ensure the general financial soundness and liquidity of broker-dealers. At July 31, 2006, ~~we paid $224.8~~HRBFA’s net capital of $124.2 million, ~~and $63.0~~which was 26.4% of aggregate debit items, exceeded its minimum required net capital of $9.4 million for income taxes and interest, respectively. During the nine months ended January 31, 2005, we paid $406.6 million and $53.6 million for income taxes and interest, respectively. See note 3 for discussion of cash payments made, assets acquired and liabilities assumed related to our acquisition of American Express Tax and Business Services, Inc.by $114.8 million.

~~The following transactions were treated~~Pledged securities at July 31, 2006 totaled $42.5 million, an excess of $5.9 million over the margin requirement. Pledged securities at April 30, 2006 totaled $53.0 million, an excess of $9.9 million over the margin requirement.

Banking

HRB Bank is subject to various regulatory capital guidelines and requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on HRB Bank’s operations. Under these capital adequacy guidelines and the regulatory framework for prompt corrective action, HRB Bank must meet specific capital guidelines that involve quantitative measures of HRB Bank’s assets, liabilities and certain off-balance sheet items as ~~non-cash investing activities~~calculated under regulatory accounting practices. HRB Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require HRB Bank to maintain minimum amounts and ratios of capital to assets. As shown in the ~~condensed consolidated statement~~table below, at June 30, 2006, the most recent date of ~~cash flows:~~reporting to Federal banking agencies, HRB Bank is categorized as “well capitalized” for regulatory purposes, which is the highest classification. There are no conditions or events since June 30, 2006 that management believes have changed the Bank’s category. At July 31, 2006, management believes that HRB Bank meets all capital adequacy requirements to which it is subject. However, events beyond management’s control, such as fluctuations in interest rates or a downturn in the economy in areas in which HRB Bank’s loans or securities are concentrated, could adversely affect future earnings and consequently, HRB Bank’s ability to meet its future capital requirements.

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~~11.~~9.		Commitments and Contingencies

		~~We maintain two unsecured committed lines~~Changes in the deferred revenue liability related to our Peace of ~~credit (CLOCs) for working capital, support of our commercial paper~~Mind (POM) program ~~and general corporate purposes. The two CLOCs~~ are from a consortium of thirty-one banks and expire in August 2010. These lines are subject to various affirmative and negative covenants, including a minimum net worth covenant. These CLOCs were undrawn at January 31, 2006.as follows:

We obtained an additional $900.0 million line of credit for the period of January 3 to February 24, 2006 to back-up peak commercial paper issuance or use as an alternate source of funding for RAL participations. This line is subject to various covenants, substantially similar to the primary CLOCs.

(in 000s)
Three months ended July 31, 2006 2005

Balance, beginning of period $ 141,684 $ 130,762
Amounts deferred for new guarantees issued 511 408
Revenue recognized on previous deferrals (28,738 ) (23,900 )

Balance, end of period $ 113,457 $ 107,270

The ~~balance outstanding on this facility at January 31, 2006 was $550.0 million.~~

~~As a result~~following table summarizes certain of our failure to file this Form 10-Q by the SEC’s prescribed due date, we will be unable to issue any debt securities under our shelf registration statement for a period of twelve calendar months after the month of our filing.other contractual obligations and commitments:

(in 000s)
As of July 31, 2006 April 30, 2006

Commitment to fund mortgage loans $ 3,664,877 $ 4,032,045
Commitment to sell mortgage loans 3,185,000 3,052,688
Commitment to fund Franchise Equity Lines of Credit 75,965 75,909
Contingent business acquisition obligations 22,845 24,482

We offer guarantees under our Peace of Mind (POM) program to tax clients whereby we will assume the cost of additional taxes attributable to tax return preparation errors for which we are responsible. We defer all revenues and direct costs associated with these guarantees, recognizing

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~~these amounts over the term of the guarantee based upon historic and actual payment of claims. Changes in the deferred revenue liability are as follows:~~

(in 000s)
Nine months ended January 31, 2006 2005
Balance, beginning of period $ 130,762 $ 123,048
Amounts deferred for new guarantees issued 20,533 19,925
Revenue recognized on previous deferrals (55,932 ) (52,295 )

Balance, end of period $ 95,363 $ 90,678

We have commitments to fund mortgage loans to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. The commitments to fund loans amounted to $2.9 billion and $3.9 billion at January 31, 2006 and April 30, 2005, respectively. Of these commitments, $697.3 million and $947.5 million are considered binding commitments as of January 31, 2006 and April 30, 2005, respectively. External market forces impact the probability of commitments being exercised, and therefore, total commitments outstanding do not necessarily represent future cash requirements.

~~We have entered into loan sale agreements with investors in~~In the normal course of business, ~~which include~~we maintain recourse with standard representations and warranties customary to the mortgage banking industry. Violations of these representations and warranties, such as early payment defaults by borrowers, may require us to repurchase loans previously sold. ~~A liability has been established related to the potential loss on repurchase of~~In accordance with these loan sale agreements, we repurchased loans previously sold into the secondary market with an outstanding principal balance of ~~$40.9~~$92.3 million and ~~$41.2~~$60.0 million ~~at January~~during the three months ended July 31, 2006 and ~~April 30,~~ 2005, ~~respectively, based on historical experience.~~respectively. Repurchased loans are normally sold in subsequent sale transactions.

~~Option One Mortgage Corporation provides~~ We established a ~~guarantee up~~liability related to ~~a maximum amount equal~~the potential loss we expect to ~~approximately 10%~~incur on repurchase of ~~the aggregate principal balance of mortgage~~ loans held by the Trusts before ultimate disposition of the loans. This guarantee would be called upon in the event adequate proceeds were not available from the sale of the mortgage loans by the Trusts to satisfy their payment obligations. No losses have been sustained on this commitment since its inception. The total principal amount of Trust obligations outstanding as of Januarypreviously sold and premium recapture, totaling $104.0 million and $33.4 million at July 31, 2006 and April 30, ~~2005 was $11.2 billion~~2006, respectively. This liability relates to loans not yet repurchased. On an ongoing basis, we monitor the adequacy of this liability, which is established upon the initial sale of the loans, and ~~$6.7 billion, respectively. The fair value of mortgage loans held by~~is included in accounts payable, accrued expenses and other current liabilities in the ~~Trusts as of January~~condensed consolidated balance sheets. During the three months ended July 31, 2006 we experienced higher early payment defaults, resulting in an increase in actual and ~~April 30, 2005 was $11.4 billion~~expected loan repurchase activity. As a result, we increased our reserves accordingly. In establishing our reserves, we’ve assumed all loans that are currently delinquent and ~~$6.8 billion, respectively.~~

~~We have various contingent purchase price obligations in connection with prior acquisitions. In many cases, contingent payments to be made in connection with these acquisitions are not~~ subject to contractual repurchase terms will be repurchased, and that 5% of loans previously sold but not yet subject to contractual repurchase terms will be repurchased. Based on historical experience, we assumed 30% of all loans we repurchase will cure with no loss incurred, and of those that do not cure, we assumed an average 15% loss severity.

HRB Bank is a ~~stated limit. We estimate~~member of the ~~potential payments (undiscounted) total approximately $13.8 million~~Federal Home Loan Bank (FHLB) of Des Moines, which extends credit availability to member banks based on eligible collateral and ~~$5.1 million as of January~~asset size. At July 31, 2006, and April 30, 2005, respectively. Our estimate is based on current financial conditions. Should actual results differ materially from our assumptions, the potential payments will differ from the above estimate. Such payments, if and when paid, would be recorded as additional costHRB Bank had FHLB advance capacity of ~~the acquired business, generally goodwill.~~

We have contractual commitments to fund certain franchises requesting draws on Franchise Equity Lines of Credit (FELCs). Our commitment to fund FELCs as of January 31, 2006 and April 30, 2005 totaled $75.9$198.0 million, ~~and $68.9 million, respectively. We have a receivable of $60.2 million and $39.0 million, which represents the~~but no amounts had been drawn on ~~the FELCs, as of January 31, 2006 and April 30, 2005, respectively.~~this facility.

We routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees, including obligations to protect counterparties from losses arising from the following: (a) tax, legal and other risks related to the purchase or disposition of businesses; (b) penalties and interest assessed by Federal and state taxing authorities in connection with tax returns prepared for clients; (c) indemnification of our directors and officers; and (d) third-party claims relating to various arrangements in the normal course of business. Typically, there is no stated maximum payment related to these indemnifications, and the term of indemnities may vary and in many cases is limited only by the applicable statute of limitations. The likelihood of any claims being asserted against us and the ultimate liability related to any such claims, if any, is difficult to predict. While we cannot provide assurance that such claims will not be successfully asserted, we believe the fair value of these guarantees and indemnifications is not material as of ~~January~~July 31, 2006.

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~~12.~~		Restructuring Charge

		During fiscal year 2006, we initiated a restructuring plan to reduce costs within our mortgage operations. Changes in the restructuring charge liability during the three months ended July 31, 2006 are as follows:

(in 000s)
Accrual Balance Cash Accrual Balance
as of April 30, 2006 Payments as of July 31, 2006

Employee severance costs $ 1,737 $ (1,737 ) $ —
Contract termination costs 5,821 (2,889 ) 2,932

$ 7,558 $ (4,626 ) $ 2,932

The remaining liability related to this restructuring charge is included in accounts payable, accrued expenses and other current liabilities on our condensed consolidated balance sheet and relates to lease obligations for vacant space resulting from branch office closings.

10.		Litigation ~~Commitments~~ and Related Contingencies

		We have been ~~involved in a number of class actions and putative class action cases since 1990, as well~~named as a ~~state attorney general lawsuit,~~defendant in numerous lawsuits throughout the country regarding our RAL ~~programs. These cases are based on~~programs (the “RAL Cases”). The RAL Cases have involved a variety of legal theories ~~and allegations.~~asserted by plaintiffs. These theories ~~and~~include allegations ~~include,~~that, among others, ~~that~~ (i) disclosures in the RAL applications were inadequate, misleading and untimely; (ii) the RAL interest rates were usurious and unconscionable; (iii) we ~~improperly~~ did not disclose ~~license fees~~that we ~~received from RAL lending banks~~would receive part of the finance charges paid by the customer for ~~RALs they make~~such loans; (iv) untrue, misleading or deceptive statements in marketing RALs; (v) breach of state laws on credit service organizations; (vi) breach of contract, unjust enrichment, unfair and deceptive acts or practices; (vii) violations of the federal Racketeer Influenced and Corrupt Organizations Act; (viii) violations of the federal Fair Debt Collection Practices Act and unfair competition with respect to ~~our clients, (ii)~~debt collection activities; and (ix) we owe, and breached, a fiduciary duty to our ~~clients and (iii)~~customers in connection with the RAL program violates laws such as state credit service organization laws and the federal Racketeer Influenced and Corrupt Organizations (RICO) Act. Although we have successfully defended many RAL cases, we have settled others. On December 21, 2005, we entered into a settlement agreement regarding four RAL cases, subject to final court approval. Pursuant to the terms of this settlement agreement, we will contribute a total of up to $62.5 million in cash for purposes of making payments to the settlement class, paying all attorneys’ fees and costs to class counsel and covering service awards to the representative plaintiffs. In addition, we will pay costs for providing notice of the settlement to settlement class members. We recorded a reserve of $52.2 million related to this settlement in our third quarter. Two RAL class action cases and the state attorney general lawsuit are still pending, with the amounts claimed on a collective basis being very substantial. The ultimate cost of this litigation could be substantial, and in March 2006, we increased our reserves as of January 31, 2006 by an additional $19.5 million related to one of the other RAL cases. We intend to continue defending the other RAL cases vigorously, although there are no assurances as to their outcome.program.

The amounts claimed in the RAL Cases have been very substantial in some instances. We have successfully defended against numerous RAL cases, some of which were dismissed on our motions for dismissal or summary judgment, and others were dismissed voluntarily by the plaintiffs after denial of class certification. Other cases have been settled, with the combined pretax expense for such settlements in fiscal year 2006 totaling $70.2 million. During the three months ended July 31, 2006, the 2006 settlements were paid in full.

One RAL class action case and a state attorney general lawsuit are still pending, with the amounts claimed on a collective basis being very substantial. The ultimate cost of this litigation could be substantial. We believe we have meritorious defenses to the remaining RAL Cases and we intend to defend them vigorously. There can be no assurances, however, as to the outcome of the pending RAL Cases individually or in the aggregate or the associated impact on our financial statements.

We are also a party to claims and lawsuits pertaining to our electronic tax return filing services, our POM guarantee program, ~~and~~ our Express IRA ~~product.~~product, business valuation services and tax planning services. These claims and lawsuits include actions by individual plaintiffs, as well as cases in which plaintiffs seek to represent 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. We intend to continue defending these cases vigorously, although there are no assurances as to their outcome.

In addition we and certain of our current and former directors and officers are party to ~~two shareholder derivative actions stemming from our recent financial restatement as well as separate~~several putative class actions alleging violations of certain securities ~~laws.~~laws, and certain of our current and former officers and directors are defendants in several putative shareholder derivative actions, which have purportedly been brought on behalf of the Company and in which the Company is named as a nominal defendant. The putative securities class actions allege, among other things, deceptive, material and misleading financial statements, failure to prepare financial statements in accordance with generally accepted accounting principles and concealment of the potential for lawsuits stemming from the allegedly fraudulent nature of our operations. The shareholder derivative cases

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pertain primarily to our recent financial restatement and certain of our products and business activities and generally allege breach of fiduciary duty, abuse of control, gross mismanagement, waste and unjust enrichment. 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. We intend to continue defending these cases vigorously, although there are no assurances as to their outcome.

In addition to the aforementioned types of cases, we are parties to claims and lawsuits that we consider to be ordinary, routine disputes incidental to our business (Other Claims and Lawsuits), including claims and lawsuits concerning the preparation of customers’ income tax returns, tax planning services, the fees charged customers for various services, investment products, relationships with franchisees, contract disputes, employment matters and civil actions, arbitrations, regulatory inquiries and class actions arising out of our business as a broker-dealer and provider of investment products and as a servicer of mortgage loans. We believe we have meritorious defenses to each of the Other Claims and Lawsuits and are defending them vigorously. Although we cannot provide assurance we will ultimately prevail in each instance, we believe that amounts, if any, required to be paid in the discharge of liabilities or settlements pertaining to Other Claims and Lawsuits will not have a material adverse effect on our consolidated financial statements. Regardless of outcome, claims and litigation can adversely affect us due to defense costs, diversion of management attention and time, and publicity related to such matters.

It is our policy to accrue for amounts related to legal matters if it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Many of the various legal proceedings are covered in whole or in part by insurance. Any receivable for insurance recoveries is recorded separately from the corresponding litigation reserve, and only if recovery is determined to be probable. Receivables for insurance recoveries at January 31, 2006 were immaterial.

~~-15-~~

~~13.~~11.		Segment Information

		Information concerning our operations by reportable operating segment is as follows:

(in 000s)
Three months ended January 31, Nine months ended January 31,
Restated Restated
2006 2005 2006 2005

Revenues:
Tax Services $ 548,494 $ 531,086 $ 686,498 $ 655,639
Mortgage Services 296,493 308,872 943,082 865,177
Business Services 235,840 132,872 529,491 371,021
Investment Services 73,176 62,104 211,177 169,446
Corporate 2,744 1,302 6,535 3,457

$ 1,156,747 $ 1,036,236 $ 2,376,783 $ 2,064,740

Pretax income (loss):
Tax Services $ (6,332 ) $ 63,655 $ (293,702 ) $ (182,923 )
Mortgage Services 67,453 115,483 248,160 332,980
Business Services (1,035 ) 5,916 (9,943 ) (9,021 )
Investment Services (7,668 ) (19,775 ) (23,126 ) (60,882 )
Corporate (27,010 ) (12,001 ) (74,979 ) (65,494 )

Income (loss) before taxes $ 25,408 $ 153,278 $ (153,590 ) $ 14,660

(in 000s)
Consumer
Tax Mortgage Business Financial
Services Services Services Services Corporate Eliminations Consolidated

Three months ended July 31, 2006:

Revenues:
External $ 66,018 $ 166,961 $ 205,017 $ 100,288 $ 2,495 $ — $ 540,779
Loan sales to HRB Bank — 10,378 — — — (10,378 ) —
HRBMC loan sales to Option One — (8,472 ) — 8,472 — — —
Other intersegment 17 809 114 (462 ) 3,063 (3,541 ) —

$ 66,035 $ 169,676 $ 205,131 $ 108,298 $ 5,558 $ (13,919 ) $ 540,779

Pretax loss $ (153,148 ) $ (4,924 ) $ (14,565 ) $ (7,780 ) $ (28,512 ) $ (9,730 ) $ (218,659 )

Three months ended July 31, 2005:

Revenues:
External $ 57,165 $ 308,276 $ 126,739 $ 120,145 $ 2,668 $ — $ 614,993
HRBMC loan sales to Option One — (4,235 ) — 4,235 — — —
Other intersegment 26 1,006 107 — 2,336 (3,475 ) —

$ 57,191 $ 305,047 $ 126,846 $ 124,380 $ 5,004 $ (3,475 ) $ 614,993

Pretax income (loss) $ (144,506 ) $ 130,664 $ (6,765 ) $ (3,748 ) $ (21,762 ) $ 248 $ (45,869 )

~~Pretax results from~~HRB Bank commenced operations on May 1, 2006, at which time we realigned certain segments of our ~~Tax~~business to reflect a new management reporting structure. The previously reported Investment Services segment, HRBMC (which was previously included in the Mortgage Services segment), and HRB Bank are now reported in the Consumer Financial Services segment. Presentation of prior-year results reflects the new segment alignment.

The Consumer Financial Services segment is primarily engaged in offering advice-based brokerage services and investment planning through HRBFA, mortgage loans through HRBMC and full-service banking through HRB Bank. HRB Bank offers traditional banking services, including

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checking and savings accounts, home equity lines of credit, individual retirement accounts, certificates of deposit and prepaid debit card deposit accounts. HRB Bank also purchases loans from Option One Mortgage Corporation (OOMC) to hold for ~~the three~~investment purposes. HRBMC originates non-prime loans for sale to OOMC and ~~nine months ended January 31, 2006 includes a $71.7 million provision~~prime loans for ~~legal reserves~~sale to other third-party buyers.

All intersegment transactions are eliminated in consolidation. The largest intersegment revenue transactions include gains recognized on loans sold to HRB Bank by OOMC and ~~related litigation~~mortgage fees ~~as discussed in note 12.~~earned by HRBMC on loans sold to OOMC.

~~14.~~12.	New Accounting Pronouncements

		In ~~February~~June 2006, ~~Statement of Financial Accounting Standards~~FASB Interpretation No. ~~155,~~48, “Accounting for ~~Certain Hybrid Instruments” (SFAS 155)~~Uncertainty in Income Taxes” (FIN 48), ~~an amendment of FASB Statements No. 133 and 140,~~ was issued. The ~~provisions~~interpretation requires that a tax position meet a “more-likely-than-not” recognition threshold for the benefit of ~~this standard allow~~the uncertain tax position to be recognized in the financial ~~instruments that have embedded derivatives~~statements and provides guidance on the measurement of the benefit. The interpretation also requires interim period estimated tax benefits of uncertain tax positions to be accounted for in the period of change rather than as a ~~whole if~~component of the holder elects to account for the whole instrument on a fair value basis, and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. The new standard also amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.annual effective tax rate. The provisions of this standard are effective as of the beginning of our fiscal year 2008. Our residual interests typically have interests in derivative instruments embedded within the securitization trusts. If we elect to account for our residual interests on a fair value basis, changes in fair value will impact earnings in the period in which the change occurs. We are currently evaluating what effect the adoption of ~~SFAS 155~~FIN 48 will have on our consolidated financial statements.

In June 2006, Emerging Issues Task Force Issue No. 06-3, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (EITF 06-3) was issued. EITF 06-3 requires disclosure of the presentation of taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis as an accounting policy decision. The provisions of this standard are effective for interim and annual reporting periods beginning after December 15, 2006. We do not expect the adoption of EITF 06-3 to have a material impact on our consolidated financial statements.

In March 2006, Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets —– An Amendment of FASB Statement No. 140,” (SFAS 156), was issued. The provisions of this standard require mortgage servicing rights to be initially valued at fair value. SFAS 156 ~~also~~ allows servicers to choose to subsequently measure their servicing rights at fair value or to continue using the “amortization method” under SFAS 140. The provisions of this standard are effective as of the beginning of our fiscal year 2008. We are currently evaluating what effect the adoption of SFAS 156 will have on our consolidated financial statements.

In February 2006, Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Instruments – An Amendment of FASB Statements No. 133 and 140” (SFAS 155), was issued. The provisions of this standard establish a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. The standard permits a hybrid financial instrument to be accounted for in its entirety if the holder irrevocably elects to measure the hybrid financial instrument at fair value, with changes in fair value recognized currently in earnings. The provisions of this standard are effective as of the beginning of our fiscal year 2008. Our residual interests typically have interests in derivative instruments embedded within the securitization trusts. If we elect to account for our residual interests on a fair value basis, changes in fair value will impact earnings in the period in which the change occurs. We are currently evaluating what effect the adoption of SFAS 155 will have on our consolidated financial statements.

Exposure Draft —– Amendment of SFAS 140

In August 2005, the Financial Accounting Standards Board (FASB) issued an exposure draft which amends Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

This exposure draft seeks to clarify the derecognition requirements for financial assets and the initial measurement of interests related to transferred financial assets that are held by a transferor. Our current off-balance sheet warehouse facilities (the Trusts) in our Mortgage Services segment would be required to be consolidated in our financial statements based on the provisions of the exposure draft. We will

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~~exposure draft. We will~~ continue to monitor the status of the exposure draft and consider what changes, if any, could be made to the structure of the Trusts to continue to derecognize mortgage loans transferred to the Trusts. At ~~January~~July 31, 2006, the Trusts held loans and debt totaling ~~$11.2~~$4.2 billion, which we would be required to consolidate into our financial statements under the provisions of this exposure draft.

The final standard for this exposure draft is scheduled to be issued in the second quarter of calendar year ~~2006.~~2007.

~~15.~~13.		Condensed Consolidating Financial Statements

		Block Financial Corporation (BFC) is an indirect, wholly owned consolidated subsidiary of the Company. BFC is the Issuer and the Company is the Guarantor of the Senior Notes issued on April 13, 2000 and October 26, 2004. These condensed consolidating financial statements 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.


Condensed Consolidating Income Statements											(in 000s)		Condensed Consolidating Income Statements													(in 000s)
Three months ended	H&R Block, Inc.		BFC		Other						Consolidated			H&R Block, Inc.			BFC			Other						Consolidated
January 31, 2006	(Guarantor)		(Issuer)		Subsidiaries			Elims			H&R Block
July 31, 2006														(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block

Total revenues	$	—	$	492,631	$	667,754		$	(3,638	)	$	1,156,747		$	—		$	323,661		$	218,565		$	(1,447	)	$	540,779


Cost of services		—		136,863		497,035			29			633,927			—			125,798			320,259			32			446,089
Cost of other revenues		—		124,037		20,626			—			144,663			—			88,691			3,323			—			92,014
Selling, general and administrative		—		127,185		220,728			(3,667	)		344,246			—			101,591			115,886			(1,479	)		215,998

Total expenses		—		388,085		738,389			(3,638	)		1,122,836			—			316,080			439,468			(1,447	)		754,101

Operating income (loss)		—		104,546		(70,635	)		—			33,911			—			7,581			(220,903	)		—			(213,322	)
Interest expense		—		11,810		401			—			12,211			—			(11,808	)		(327	)		—			(12,135	)
Other income, net		25,408		—		3,708			(25,408	)		3,708			(218,659	)		2,772			4,026			218,659			6,798

Income (loss) before taxes		25,408		92,736		(67,328	)		(25,408	)		25,408
Income taxes (benefit)		13,295		37,505		(24,210	)		(13,295	)		13,295
Loss before tax benefit															(218,659	)		(1,455	)		(217,204	)		218,659			(218,659	)
Income tax benefit															(87,282	)		(567	)		(86,715	)		87,282			(87,282	)

Net income (loss)	$	12,113	$	55,231	$	(43,118	)	$	(12,113	)	$	12,113
Net loss														$	(131,377	)	$	(888	)	$	(130,489	)	$	131,377		$	(131,377	)

Nine months ended H&R Block, Inc. BFC Other Consolidated
January 31, 2006 (Guarantor) (Issuer) Subsidiaries Elims H&R Block

Total revenues $ — $ 1,349,096 $ 1,038,594 $ (10,907 ) $ 2,376,783

Cost of service revenues — 362,034 1,002,167 161 1,364,362
Cost of other revenues — 374,253 28,631 — 402,884
Selling, general and administrative — 315,333 435,782 (11,068 ) 740,047

Total expenses — 1,051,620 1,466,580 (10,907 ) 2,507,293

Operating income (loss) — 297,476 (427,986 ) — (130,510 )
Interest expense — 35,431 1,600 — 37,031
Other income, net (153,590 ) — 13,951 153,590 13,951

Income (loss) before taxes (153,590 ) 262,045 (415,635 ) 153,590 (153,590 )
Income taxes (benefit) (56,460 ) 103,536 (159,996 ) 56,460 (56,460 )

Net income (loss) $ (97,130 ) $ 158,509 $ (255,639 ) $ 97,130 $ (97,130 )

Condensed Consolidating Balance Sheets (in 000s)
H&R Block, Inc. BFC Other Consolidated
July 31, 2006 (Guarantor) (Issuer) Subsidiaries Elims H&R Block

Cash & cash equivalents $ — $ 214,375 $ 175,693 $ — $ 390,068
Cash & cash equivalents – restricted — 332,757 12,972 — 345,729
Receivables from customers, brokers and dealers, net — 437,697 — — 437,697
Receivables, net 69 103,955 266,283 — 370,307
Mortgage loans held for investment — 541,361 — — 541,361
Intangible assets and goodwill, net — 377,991 931,383 — 1,309,374
Investments in subsidiaries 5,027,345 215 — (5,027,345 ) 215
Other assets — 1,545,035 696,754 (272 ) 2,241,517

Total assets $ 5,027,414 $ 3,553,386 $ 2,083,085 $ (5,027,617 ) $ 5,636,268

Commercial paper $ — $ 189,356 $ — $ — $ 189,356
Accts. payable to customers, brokers and dealers — 716,305 — — 716,305
Long-term debt — 398,060 13,674 — 411,734
Other liabilities 2 1,467,295 1,040,007 — 2,507,304
Net intercompany advances 3,215,843 (1,005,129 ) (2,210,714 ) — —
Stockholders’ equity 1,811,569 1,787,499 3,240,118 (5,027,617 ) 1,811,569

Total liabilities and stockholders’ equity $ 5,027,414 $ 3,553,386 $ 2,083,085 $ (5,027,617 ) $ 5,636,268

Nine months ended H&R Block, Inc. BFC Other Consolidated
January 31, 2005 (Restated) (Guarantor) (Issuer) Subsidiaries Elims H&R Block

Total revenues $ — $ 1,115,976 $ 959,051 $ (10,287 ) $ 2,064,740

Cost of services — 291,531 831,695 40 1,123,266
Cost of other revenues — 282,504 25,483 — 307,987
Selling, general and administrative — 235,581 367,923 (10,327 ) 593,177

Total expenses — 809,616 1,225,101 (10,287 ) 2,024,430

Operating income (loss) — 306,360 (266,050 ) — 40,310
Interest expense — 46,330 2,570 — 48,900
Other income, net 14,660 — 23,250 (14,660 ) 23,250

Income (loss) before taxes 14,660 260,030 (245,370 ) (14,660 ) 14,660
Income taxes (benefit) 5,680 108,061 (102,381 ) (5,680 ) 5,680

Net income (loss) $ 8,980 $ 151,969 $ (142,989 ) $ (8,980 ) $ 8,980


~~Condensed Consolidating Balance Sheets~~


													(in 000s)		H&R Block, Inc.		BFC			Other						Consolidated
	H&R Block, Inc.		BFC			Other						Consolidated
January 31, 2006	(Guarantor)		(Issuer)			Subsidiaries			Elims			H&R Block
April 30, 2006														(Guarantor)		(Issuer)			Subsidiaries			Elims			H&R Block

Cash & cash equivalents	$	—	$	286,226		$	1,173,954		$	—		$	1,460,180	$	—	$	151,561		$	542,797		$	—		$	694,358
Cash & cash equivalents — restricted		—		424,115			6,598			—			430,713
Cash & cash equivalents – restricted															—		377,445			16,624			—			394,069
Receivables from customers, brokers and dealers, net		—		569,430			—			—			569,430		—		496,577			—			—			496,577
Receivables, net		747		1,316,571			493,627			—			1,810,945		161		128,123			339,393			—			467,677
Intangible assets and goodwill, net		—		396,397			943,106			—			1,339,503		—		387,194			932,752			—			1,319,946
Investments in subsidiaries		4,685,740		219			521			(4,685,740	)		740		5,237,611		215			456			(5,237,611	)		671
Other assets		—		1,613,833			447,023			(26	)		2,060,830		—		2,116,900			499,477			(540	)		2,615,837

Total assets	$	4,686,487	$	4,606,791		$	3,064,829		$	(4,685,766	)	$	7,672,341	$	5,237,772	$	3,658,015		$	2,331,499		$	(5,238,151	)	$	5,989,135


Commercial paper	$	—	$	2,575,756		$	20,192		$	—		$	2,595,948
Accts. payable to customers, brokers and dealers		—		851,827			—			—			851,827	$	—	$	781,303		$	—		$	—		$	781,303
Long-term debt		—		897,217			19,709			—			916,926		—		398,001			19,538			—			417,539
Other liabilities		2		600,609			1,119,076			—			1,719,687		2		1,042,611			1,599,881			—			2,642,494
Net intercompany advances		3,098,532		(1,976,900	)		(1,121,606	)		(26	)		—		3,089,971		(355,358	)		(2,734,567	)		(46	)		—
Stockholders’ equity		1,587,953		1,658,282			3,027,458			(4,685,740	)		1,587,953		2,147,799		1,791,458			3,446,647			(5,238,105	)		2,147,799

Total liabilities and stockholders’ equity	$	4,686,487	$	4,606,791		$	3,064,829		$	(4,685,766	)	$	7,672,341	$	5,237,772	$	3,658,015		$	2,331,499		$	(5,238,151	)	$	5,989,135

H&R Block, Inc. BFC Other Consolidated
April 30, 2005 (Restated) (Guarantor) (Issuer) Subsidiaries Elims H&R Block

Cash & cash equivalents $ — $ 162,983 $ 937,230 $ — $ 1,100,213
Cash & cash equivalents — restricted — 488,761 28,148 — 516,909
Receivables from customers, brokers and dealers, net — 590,226 — — 590,226
Receivables, net 101 199,990 218,697 — 418,788
Intangible assets and goodwill, net — 421,036 842,003 — 1,263,039
Investments in subsidiaries 4,851,680 210 449 (4,851,680 ) 659
Other assets — 1,407,082 241,532 (392 ) 1,648,222

Total assets $ 4,851,781 $ 3,270,288 $ 2,268,059 $ (4,852,072 ) $ 5,538,056

Accts. payable to customers, brokers and dealers $ — $ 950,684 $ — $ — $ 950,684
Long-term debt — 896,591 26,482 — 923,073
Other liabilities 2 532,562 1,182,459 8 1,715,031
Net intercompany advances 2,902,511 (641,611 ) (2,262,818 ) 1,918 —
Stockholders’ equity 1,949,268 1,532,062 3,321,936 (4,853,998 ) 1,949,268

Total liabilities and stockholders’ equity $ 4,851,781 $ 3,270,288 $ 2,268,059 $ (4,852,072 ) $ 5,538,056

Condensed Consolidating Statements of Cash Flows (in 000s)
Three months ended H&R Block, Inc. BFC Other Consolidated
July 31, 2006 (Guarantor) (Issuer) Subsidiaries Elims H&R Block

Net cash provided by (used in) operating activities: $ 16,281 $ 263,292 $ (737,988 ) $ — $ (458,415 )

Cash flows from investing:
Cash received on residuals — 4,567 — — 4,567
Mortgage loans originated for investment, net — (135,161 ) — — (135,161 )
Purchase property & equipment — (3,691 ) (39,177 ) — (42,868 )
Payments for business acquisitions — — (4,627 ) — (4,627 )
Net intercompany advances 196,279 — — (196,279 ) —
Other, net — — 7,068 — 7,068

Net cash provided by (used in) investing activities 196,279 (134,285 ) (36,736 ) (196,279 ) (171,021 )

Cash flows from financing:
Repayments of commercial paper — (1,034,210 ) — �� — (1,034,210 )
Proceeds from commercial paper — 1,223,566 — — 1,223,566
Customer deposits — 404,030 — — 404,030
Dividends paid (40,485 ) — — — (40,485 )
Acquisition of treasury shares (186,339 ) — — — (186,339 )
Proceeds from stock options 6,791 — — — 6,791
Excess tax benefits on stock-based compensation 1,114 — — — 1,114
Net intercompany advances — (649,771 ) 453,492 196,279 —
Other, net 6,359 (9,808 ) (45,872 ) — (49,321 )

Net cash provided by (used in) financing activities (212,560 ) (66,193 ) 407,620 196,279 325,146

Net increase (decrease) in cash — 62,814 (367,104 ) — (304,290 )
Cash – beginning of period — 151,561 542,797 — 694,358

Cash – end of period $ — $ 214,375 $ 175,693 $ — $ 390,068

~~Condensed Consolidating Statements of Cash Flows~~


													(in 000s)
Nine months ended	H&R Block, Inc.			BFC			Other						Consolidated
January 31, 2006	(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block
Three months ended																H&R Block, Inc.			BFC			Other						Consolidated
July 31, 2005																(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block

Net cash provided by (used in) operating activities:	$	43,228		$	(1,193,527	)	$	(539,248	)	$	—		$	(1,689,547	)	$	15,721		$	(51,974	)	$	(274,262	)	$	—		$	(310,515	)

Cash flows from investing:
Cash received on residuals		—			74,931			—			—			74,931			—			24,031			—			—			24,031
Cash received on sale of residuals		—			30,497			—			—			30,497
Purchase property & equipment		—			(31,627	)		(135,554	)		—			(167,181	)		—			(9,255	)		(21,075	)		—			(30,330	)
Payments for business acquisitions		—			(3,140	)		(206,676	)		—			(209,816	)		—			(2,994	)		(458	)		—			(3,452	)
Net intercompany advances		229,755			—			—			(229,755	)		—			120,140			—			—			(120,140	)		—
Other, net		—			—			17,297			—			17,297			—			330			7,605			—			7,935

Net cash provided by (used in) investing activities		229,755			70,661			(324,933	)		(229,755	)		(254,272	)		120,140			12,112			(13,928	)		(120,140	)		(1,816	)

Cash flows from financing:
Repayments of commercial paper		—			(2,610,432	)		(22,012	)		—			(2,632,444	)
Proceeds from commercial paper		—			4,636,188			42,204			—			4,678,392
Proceeds from short-term borrowings		—			550,000			—			—			550,000
Dividends paid		(118,665	)		—			—			—			(118,665	)		(36,537	)		—			—			—			(36,537	)
Acquisition of treasury shares		(260,078	)		—			—			—			(260,078	)		(131,642	)		—			—			—			(131,642	)
Proceeds from common stock		105,760			—			—			—			105,760
Proceeds from stock options																	27,180			—			—			—			27,180
Net intercompany advances		—			(1,335,289	)		1,105,534			229,755			—			—			14,587			(134,727	)		120,140			—
Other, net		—			5,642			(24,821	)		—			(19,179	)		5,138			10,579			(29,799	)		—			(14,082	)

Net cash provided by (used in) financing activities		(272,983	)		1,246,109			1,100,905			229,755			2,303,786			(135,861	)		25,166			(164,526	)		120,140			(155,081	)

Net increase in cash		—			123,243			236,724			—			359,967
Cash — beginning of period		—			162,983			937,230			—			1,100,213
Net decrease in cash																	—			(14,696	)		(452,716	)		—			(467,412	)
Cash – beginning of period																	—			162,983			937,230			—			1,100,213

Cash — end of period	$	—		$	286,226		$	1,173,954		$	—		$	1,460,180
Cash – end of period																$	—		$	148,287		$	484,514		$	—		$	632,801

Nine months ended H&R Block, Inc. BFC Other Consolidated
January 31, 2005 (Restated) (Guarantor) (Issuer) Subsidiaries Elims H&R Block

Net cash provided by (used in) operating activities: $ 16,683 $ (840,959 ) $ (740,157 ) $ — $ (1,564,433 )

Cash flows from investing:
Cash received on residuals — 100,344 — — 100,344
Purchase property & equipment — (28,104 ) (115,128 ) — (143,232 )
Payments for business acquisitions — — (26,348 ) — (26,348 )
Net intercompany advances 499,699 — — (499,699 ) —
Other, net — (152 ) 15,359 — 15,207

Net cash provided by (used in) investing activities 499,699 72,088 (126,117 ) (499,699 ) (54,029 )

Cash flows from financing:
Repayments of commercial paper — (2,348,966 ) — — (2,348,966 )
Proceeds from commercial paper — 3,857,750 20,098 — 3,877,848
Repayments of long-term debt — (250,000 ) — — (250,000 )
Proceeds from long-term debt — 395,221 — — 395,221
Dividends paid (106,422 ) — — — (106,422 )
Acquisition of treasury shares (529,852 ) — — — (529,852 )
Proceeds from common stock 119,892 — — — 119,892
Net intercompany advances — (880,648 ) 380,949 499,699 —
Other, net — — (35,414 ) — (35,414 )

Net cash provided by (used in) financing activities (516,382 ) 773,357 365,633 499,699 1,122,307

Net increase (decrease) in cash — 4,486 (500,641 ) — (496,155 )
Cash — beginning of period — 133,188 939,557 — 1,072,745

Cash — end of period $ — $ 137,674 $ 438,916 $ — $ 576,590

~~-20-~~


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

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

RESULTS OF OPERATIONS

H&R Block is a diversified company delivering tax services and financial advice, investment, mortgage and ~~mortgage~~banking services, and business and consulting services. For more than 50 years, we have been developing relationships with millions of tax clients and our strategy is to expand on these relationships. Our Tax Services segment provides income tax return preparation services, electronic filing services and other services and products related to income tax return preparation to the general public in the United States, Canada, Australia and the United Kingdom. ~~We also offer investment services through H&R Block Financial Advisors, Inc. (HRBFA).~~ Our Mortgage Services segment offers a full range of home mortgage services through Option One Mortgage Corporation (OOMC) ~~and H&R Block Mortgage Corporation (HRBMC)~~. RSM McGladrey Business Services, Inc. (RSM)~~, together with its attest-firm affiliations,~~ is ~~the fifth largest~~a national accounting, tax and business consulting firm primarily serving ~~mid-sized~~midsized businesses. Our Consumer Financial Services segment offers investment services through H&R Block Financial Advisors, Inc. (HRBFA), full-service banking through H&R Block Bank (HRB Bank) and mortgage services through H&R Block Mortgage Corporation (HRBMC).

Our Mission
To help our clients achieve their financial objectives
by serving as their tax and financial partner.

Key to achieving our mission is the enhancement of client experiences through consistent delivery of valuable services and advice. Operating through multiple lines of business allows us to better meet the changing financial needs of our clients.

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the restatements of previously issued financial statements, as discussed in note 2 to our condensed consolidated financial statements. The analysis that follows should be read in conjunction with the tables below and the condensed consolidated income statements found on page 2.

~~Consolidated H&R Block, Inc. — Operating Results~~

Tax Services - Operating Results (in 000s)
Three months ended July 31, 2006 2005

Service revenues:
Tax preparation and related fees $ 25,662 $ 23,637
Other services 35,028 28,967

60,690 52,604
Royalties 2,923 2,396
Other 2,422 2,191

Total revenues 66,035 57,191

Cost of services:
Compensation and benefits 45,840 42,592
Occupancy 67,671 59,313
Depreciation 9,254 10,169
Other 48,237 39,967

171,002 152,041
Other, selling, general and administrative 48,181 49,656

Total expenses 219,183 201,697

Pretax loss $ (153,148 ) $ (144,506 )

(in 000s, except per share amounts)
Three months ended January 31, Nine months ended January 31,
Restated Restated
2006 2005 2006 2005

Revenues:
Tax Services $ 548,494 $ 531,086 $ 686,498 $ 655,639
Mortgage Services 296,493 308,872 943,082 865,177
Business Services 235,840 132,872 529,491 371,021
Investment Services 73,176 62,104 211,177 169,446
Corporate 2,744 1,302 6,535 3,457

$ 1,156,747 $ 1,036,236 $ 2,376,783 $ 2,064,740

Pretax income (loss):
Tax Services $ (6,332 ) $ 63,655 $ (293,702 ) $ (182,923 )
Mortgage Services 67,453 115,483 248,160 332,980
Business Services (1,035 ) 5,916 (9,943 ) (9,021 )
Investment Services (7,668 ) (19,775 ) (23,126 ) (60,882 )
Corporate (27,010 ) (12,001 ) (74,979 ) (65,494 )

25,408 153,278 (153,590 ) 14,660
Income taxes (benefit) 13,295 59,542 (56,460 ) 5,680

Net income (loss) $ 12,113 $ 93,736 $ (97,130 ) $ 8,980

Basic and diluted earnings (loss) per share $ 0.04 $ 0.28 $ (0.30 ) $ 0.03

~~-21-~~

~~TAX SERVICES~~

~~This segment primarily consists of our income tax preparation businesses — retail, online and software.~~

~~Tax Services — Operating Statistics (U.S. only)~~

Period January 1 through January 31,
2006 2005
Clients served (in 000s):
Company-owned operations 2,372 2,447
Franchise operations 1,398 1,406

3,770 3,853

Average fee per client served:⁽¹⁾

Company-owned operations $ 160.19 $ 149.94
Franchise operations 137.06 130.82

$ 151.61 $ 142.97

Refund anticipation loans (RALs) (in 000s):
Company-owned operations 1,149 1,197
Franchise operations 716 714

1,865 1,911

Offices:
Company-owned 6,387 5,811
Company-owned shared locations⁽²⁾
1,473 1,296

Total company-owned offices 7,860 7,107

Franchise 3,703 3,528
Franchise shared locations⁽²⁾
602 526

Total franchise offices 4,305 4,054

12,165 11,161


⁽¹⁾		~~Calculated as tax preparation and related fees divided by clients served.~~

⁽²⁾		~~Shared locations include offices located within Wal-Mart, Sears and other third-party businesses.~~

~~Tax Services — Operating Results~~

(in 000s)
Three months ended January 31, Nine months ended January 31,
Restated Restated
2006 2005 2006 2005
Service revenues:
Tax preparation and related fees $ 389,040 $ 375,346 $ 452,862 $ 428,323
Online tax services 7,057 10,739 8,310 12,048
Other services 25,459 23,623 85,437 76,682

421,556 409,708 546,609 517,053
Royalties 53,706 50,920 60,263 56,271
RAL participation fees 42,616 43,354 42,893 43,520
Software sales 16,914 18,072 19,123 20,779
Other 13,702 9,032 17,610 18,016

Total revenues 548,494 531,086 686,498 655,639

Cost of services:
Compensation and benefits 193,410 184,282 283,562 258,205
Occupancy 79,516 74,951 201,112 178,078
Depreciation 11,132 14,908 31,629 33,522
Other 51,030 53,385 123,965 122,734

335,088 327,526 640,268 592,539
Cost of software sales 10,864 13,248 17,601 20,400
Provision for RAL litigation 71,700 — 71,700 —
Selling, general and administrative 137,174 126,657 250,631 225,623

Total expenses 554,826 467,431 980,200 838,562

Pretax income (loss) $ (6,332 ) $ 63,655 $ (293,702 ) $ (182,923 )

~~-22-~~

Three months ended ~~January~~July 31, 2006 compared to ~~January~~July 31, 2005

Tax Services’ revenues increased ~~$17.4~~$8.8 million, or ~~3.3%~~15.5%, for the three months ended ~~January~~July 31, 2006 compared to the prior year.

Tax preparation and related fees increased ~~$13.7~~$2.0 million, or ~~3.6%~~8.6%, for the current quarter. This increase is primarily due to improved performance in our Canadian operations coupled with an increase of ~~6.8%~~8.7% in the average fee per U.S. client served, partially offset by a decrease of 3.2% in U.S. clients served in company-owned offices. The decrease in clients served was partially due to a number of technology problems that severely hurt the start of our filing season coupled withserved.

Other service revenues increased ~~competition due to competitors’ refund lending products.~~

~~Online tax service revenue declined $3.7~~$6.1 million, or ~~34.3%~~20.9%, ~~primarily due to planned reductions in unit prices.~~

~~Royalty revenue increased $2.8 million, or 5.5%, due to a 4.8% increase in the average fee slightly offset by a 0.4% decline in clients served in franchise offices.~~

~~Other revenues increased $4.7 million~~ primarily due to an increase in ~~supply sales to franchises during~~ the ~~current quarter.~~recognition of deferred fee revenue from our POM guarantees, which resulted from a more favorable claims pattern.

-20-

Total expenses increased ~~$87.4~~$17.5 million, or ~~18.7%~~8.7%, primarily due to $71.7 million of legal reserves and related litigation fees recorded in the current period. During the current quarter we entered into a settlement agreement regarding four separate RAL cases covering 22 states. As a result of this settlement agreement, we recorded a pretax charge of $52.2 million, or $0.10 per diluted share, for the unreserved cost of the proposed litigation settlement and related fees. In March 2006, we engaged in settlement negotiations with plaintiffs in another RAL case and accordingly increased our reserves as of January 31, 2006 and recorded a pretax charge of $19.5 million. See additional discussion below and in note 12 to the condensed consolidated financial statements.

~~Cost of services~~ for the three months ended ~~January~~July 31, ~~2006~~2006. Cost of services increased ~~$7.6~~$19.0 million, or ~~2.3%~~12.5%, from the prior year. Our real estate expansion efforts have contributed to a total increase of ~~$13.0~~$5.1 million across all cost of services categories. Compensation and benefits increased ~~$9.1~~$3.2 million, or ~~5.0%~~7.6%, primarily due to ~~an increase in staff needed for our new offices and the addition of~~severance costs ~~related to our small business initiatives in the current year.~~associated with district realignments. Occupancy expenses increased ~~$4.6~~$8.4 million, or ~~6.1%~~14.1%, primarily as a result of higher rent expenses due to a ~~9.6%~~10.0% increase in company-owned offices under lease and a ~~7.5%~~6.2% increase in the average rent. ~~Depreciation declined $3.8 million, or 25.3%, primarily due to decreased capital expenditures compared to the prior year and the timing of certain depreciation expenses.~~ Other cost of services ~~declined $2.4~~increased $8.3 million, or ~~4.4%~~20.7%, due to ~~a decline of $3.4~~$3.3 million in additional corporate shared services for information technology projects, coupled with increases in travel expenses and ~~lower~~ expenses associated with our POM ~~guarantee, partially offset by an increase of $3.8 million in supplies expenses.~~guarantee.

Selling, general and administrative expenses ~~increased $10.5~~decreased $1.5 million, or ~~8.3%~~3.0%, primarily due to a ~~$9.7~~$2.7 million ~~increase~~decrease in corporate shared services ~~$6.6~~and a $2.5 million ~~of which was related to our marketing efforts. We also incurred higher costs associated with increased supply sales to franchises and additional costs related to our small business initiatives~~decrease in ~~the current year.~~

~~The pretax loss was $6.3 million for the three months ended January 31, 2006 compared to income of $63.7 million in the prior year.~~

Due to the seasonal nature of this segment’s business, operating results for the three months ended January 31, 2006 are not comparable to the three months ended October 31, 2005 and are not indicative of the expected results for the entire fiscal year.

~~Nine months ended January 31, 2006 compared to January 31, 2005~~

~~Tax Services’ revenues increased $30.9 million, or 4.7%, for the nine months ended January 31, 2006 compared to the prior year.~~

~~Tax preparation and related fees increased $24.5 million, or 5.7%, primarily due to an increase in the average fee per U.S. client served,~~legal expenses, partially offset by a ~~decrease in U.S. clients served in company-owned offices during the first month of the tax season. Improved performance during the Australian and Canadian tax seasons also contributed $3.0~~$2.9 million ~~and $2.6 million, respectively, of additional tax preparation revenues in the current year.~~

~~Online tax service revenue declined $3.7 million, or 31.0%, primarily due to planned reductions in unit prices.~~

~~-23-~~

~~Other service revenues increased $8.8 million primarily as a result of additional revenues associated with POM guarantees and our small business initiatives.~~

~~Royalty revenue increased $4.0 million, or 7.1%, due to an~~ increase in ~~the average fee slightly offset by a slight decline in clients served in franchise offices.~~

Total expenses increased $141.6 million, or 16.9%, primarily due to $71.7 million of legal reserves and related litigation fees recorded in the current period. Cost of services for the nine months ended January 31, 2006 increased $47.7 million, or 8.1%, from the prior year. Our real estate expansion efforts have contributed to a total increase of $29.0 million across all cost of services categories.

Compensation and benefits increased $25.4 million primarily due to an increase in the staff needed for our new offices, payroll taxes and the addition of costs related to our small business initiatives. Occupancy expenses increased $23.0 million, or 12.9%, primarily as a result of higher rent expenses, due to an 8.9% increase in company-owned offices under lease and an 8.5% increase in the average rent. Utilities and real estate taxes also contributed to the increase.

Selling, general and administrative expenses increased $25.0 million, or 11.1%, over the prior year primarily due to $13.1 million in additional costs from corporate shared services, $7.6 million of which was related to our marketing efforts. We also incurred $4.1 million in additional legal expenses and $6.0 million in additional corporate wages.

The pretax loss was ~~$293.7~~$153.1 million for the ~~nine~~three months ended ~~January~~July 31, 2006 compared to a ~~prior year~~ loss of ~~$182.9 million.~~

~~Fiscal 2006 outlook~~

Our fiscal year 2006 outlook for the Tax Services segment has not changed materially from the discussion in our April 30, 2005 Form 10-K/A. As part of our real estate expansion, we opened 550 new company-owned offices and 184 new franchise offices$144.5 million in the ~~current tax season, exceeding our goal to open between 500 and 700 company-owned and franchise offices this~~prior year.

RAL Litigation

~~On December 21, 2005, we entered into a settlement agreement regarding litigation pertaining to our RAL programs entitled~~~~Deadra D. Cummins, et al~~.~~v. H&R Block~~,~~Inc. et al.~~;~~Mitchell v. H&R Block, Inc. et al.; Green v. H&R Block, Inc. et al.;~~~~and~~~~Becker v. H&R Block, Inc.~~~~(the “Settlement Agreement”)~~.The Settlement Agreement is subject to final court approval. Pursuant to the Settlement Agreement’s terms, we will contribute a total of up to $62.5 million in cash for purposes of making payments to the settlement class, paying all attorneys’ fees and costs to class counsel, and covering service awards to the representative plaintiffs. In addition, we will pay costs for providing notice of the settlement to settlement class members. We recorded a reserve of $52.2 million related to this settlement in our third quarter.

We are named as a defendant in ~~two other~~one pending class-action ~~lawsuits~~lawsuit and one pending state attorney general lawsuit alleging that we engaged in wrongdoing with respect to the RAL program. ~~In March 2006, we engaged in settlement negotiations with the plaintiffs in one of these RAL cases and accordingly increased our reserves as of January 31, 2006 by $19.5 million.~~ We believe we have strong defenses to ~~the other~~these lawsuits and will vigorously defend our position. Nevertheless, the amounts claimed in these lawsuits are, in some instances, very ~~substantial, and there~~substantial. In fiscal year 2006, we entered into settlement agreements regarding several RAL Cases, with the combined pretax expense for such settlements totaling $70.2 million. There can be no assurances as to ~~their~~the ultimate outcome of the remaining pending RAL Cases, or as to their impact on our financial statements. See additional discussion of RAL Litigation in note 1210 to the ~~condensed~~ consolidated financial statements and in Part II, Item 1, “Legal Proceedings.”

-21-

~~Mortgage Services — Operating Statistics~~


Mortgage Services - Operating Statistics													(dollars in 000s)
Three months ended July 31,										2006			2005
							(dollars in 000s)
				Restated
Three months ended	January 31, 2006			January 31, 2005			October 31, 2005

Volume of loans originated:
Wholesale (non-prime)	$	7,941,048		$	7,378,071		$	11,078,960
Retail: Non-prime		667,542			776,797			1,111,924
Prime		343,897			238,867			429,924
Volume of loans originated and purchased:
Third-party brokers										$	7,207,631		$	9,537,227
Intersegment (HRBMC)											584,426			950,806

	$	8,952,487		$	8,393,735		$	12,620,808		$	7,792,057		$	10,488,033


Loan characteristics:
Weighted average FICO score⁽¹⁾		621			615			629
Weighted average interest rate for borrowers⁽¹⁾		8.27	%		7.30	%		7.48	%
Weighted average loan-to-value⁽¹⁾		80.0	%		79.3	%		80.6	%

Origination margin (% of origination volume):⁽²⁾
Weighted average FICO score											614			623
Weighted average interest rate for borrowers (WAC)											8.68	%		7.52	%
Weighted average loan-to-value											82.6	%		81.1	%
Origination margin (% of origination volume):⁽¹⁾
Loan sale premium		1.43	%		2.42	%		0.55	%		1.58	%		2.30	%
Residual cash flows from beneficial interest in Trusts		0.81	%		0.57	%		0.41	%		0.57	%		0.49	%
Gain on derivative instruments		0.06	%		0.37	%		0.48	%		0.16	%		0.27	%
Loan sale repurchase reserves		(0.15	%)		(0.14	%)		(0.16	%)		(1.19	%)		(0.17	%)
Retained mortgage servicing rights		0.67	%		0.43	%		0.69	%		0.64	%		0.47	%

		2.82	%		3.65	%		1.97	%		1.76	%		3.36	%
Cost of acquisition		(0.27	%)		(0.60	%)		(0.40	%)		(0.52	%)		(1.08	%)
Direct origination expenses		(0.69	%)		(0.63	%)		(0.56	%)		(0.43	%)		(0.44	%)

Net gain on sale — gross margin⁽³⁾		1.86	%		2.42	%		1.01	%
Net gain on sale — gross margin⁽²⁾											0.81	%		1.84	%
Other revenues		(0.04	%)		0.03	%		0.02	%		(0.05	%)		—	%
Other cost of origination		(1.43	%)		(1.47	%)		(1.23	%)		(0.98	%)		(0.94	%)

Net margin		0.39	%		0.98	%		(0.20	%)		(0.22	%)		0.90	%

Total cost of origination		2.12	%		2.10	%		1.79	%
Total cost of origination⁽¹⁾											1.41	%		1.38	%
Total cost of origination and acquisition		2.39	%		2.70	%		2.19	%		1.93	%		2.46	%
Loan delivery:
Loan sales:
Third-party buyers										$	7,654,445		$	10,443,411
Intersegment (HRB Bank)											553,502			—

Loan delivery:
Loan sales	$	8,924,788		$	8,348,537		$	12,497,526
Execution price⁽⁴⁾		0.51	%		2.82	%		1.63	%
										$	8,207,947		$	10,443,411

Execution price⁽³⁾											1.31	%		2.54	%

The value of MSRs we recorded in the third quarter increased to 67 basis points from 43 basis points in the prior year, which coupled with an increase in origination volume, resulted in an increase of $24.3 million in gains on sales of mortgage loans. In the second quarter of fiscal year 2006, we completed an evaluation of the assumptions used to value our MSRs. Based on the changes in our assumptions as a result of this evaluation, the gain on sale for our retained MSRs increased by approximately 14 basis points, primarily as a result of lower servicing costs, in particular interest paid to bondholders on monthly loan prepayments. In addition, the increase in average loan size to $194,000 from $164,000 in the current quarter resulted in an approximate 8 basis point increase in the value of retained MSRs.

To mitigate the risk of short-term changes in market interest rates related to our loan originations, we use interest rate swaps and forward loan sale commitments. We generally enter into interest rate swap arrangements related to existing loan applications with rate-lock commitments and for rate-lock commitments we expect to make in the next two to three weeks. During the current quarter, we recorded a net $5.1 million in gains, compared to $30.8 million in the prior year, related to our various derivative instruments. See note 8 to the condensed consolidated financial statements.

During the current quarter, our available-for-sale residual interests performed better than expected in our internal valuation models, with lower credit losses than originally modeled, partially offset by higher interest rates. We recorded favorable pretax mark-to-market adjustments, which increased the fair value of our residual interests $16.8 million during the quarter. These adjustments were recorded, net of write-downs of $3.7 million and deferred taxes of $5.0 million, in other comprehensive income and will be accreted into income throughout the remaining life of those residual interests. Offsetting this increase were impairments of $8.6 million, which were recorded in gains on sales of mortgage assets. Future changes in interest rates or other assumptions, based on market conditions or actual loan pool performance, could cause additional adjustments to the fair value of the residual interests and could cause changes to the accretion of these residual interests in future periods.

~~The following table summarizes the key drivers of loan servicing revenues:~~

(dollars in 000s)
Three months ended January 31, 2006 2005

Average servicing portfolio:
With related MSRs $ 59,344,676 $ 41,753,865
Without related MSRs 21,046,638 15,584,677

$ 80,391,314 $ 57,338,542

Ending servicing portfolio:
With related MSRs $ 60,787,507 $ 43,642,212
Without related MSRs 15,994,170 15,342,627

$ 76,781,677 $ 58,984,839

Number of loans serviced 466,026 387,619
Average delinquency rate 5.58 % 5.02 %
Weighted average FICO score 621 621
Weighted average interest rate (WAC) of portfolio 7.63 % 7.38 %
Value of MSRs $ 262,369 $ 147,511

Loan servicing revenues increased $33.1 million, or 45.4%, compared to the prior year. The increase reflects a higher loan servicing portfolio resulting from our continued origination growth. The average servicing portfolio for the three months ended January 31, 2006 increased $23.1 billion, or 40.2%, to $80.4 billion. The annualized rate earned on our entire servicing portfolio was 34 basis points for the current quarter, compared to 37 basis points in the prior year.

Total expenses for the three months ended January 31, 2006, increased $35.7 million, or 18.4%, over the prior year. Cost of services increased $26.3 million as a result of a higher average servicing portfolio during the current quarter and increased amortization of MSRs.

Cost of other revenues increased $12.2 million, primarily due to $6.5 million in increased compensation and benefits as a result of an increase in the average number of sales associates during the period and origination-based incentives. Other expenses increased $6.0 million primarily as a

~~-27-~~

~~result of $6.1 million in additional interest expense related to mortgage loans held on our balance sheet.~~

~~Selling, general and administrative expenses decreased $2.8 million due to a reduction in corporate staffing levels.~~

~~Pretax income decreased $48.0 million to $67.5 million for the three months ended January 31, 2006.~~

~~Three months ended January 31, 2006 compared to October 31, 2005~~

Mortgage Services’ revenues increased $10.3 million, or 3.6%, for the three months ended January 31, 2006, compared to the second quarter. Revenues increased primarily due to improving margins and higher loan servicing revenue, partially offset by lower gains on derivatives and a gain on sale of residual interests recorded in the second quarter.

~~The following table summarizes the key drivers of gains on sales of mortgage loans:~~

(dollars in 000s)
Three months ended January 31, 2006 October 31, 2005

Application process:
Total number of applications 75,103 105,444
Number of sales associates⁽¹⁾
3,486 3,910
Closing ratio⁽²⁾
61.4 % 63.8 %
Originations:
Total number of originations 46,134 67,264
Weighted average interest rate for borrowers (WAC) 8.27 % 7.48 %
Average loan size $ 194 $ 188
Total originations $ 8,952,487 $ 12,620,808
Direct origination and acquisition expenses, net $ 85,974 $ 120,981
Revenue (loan value):
Net gain on sale — gross margin⁽³⁾
1.86 % 1.01 %


⁽¹⁾		~~Includes all direct sales and back office sales support associates.~~

⁽²⁾		~~Percentage of loans funded divided by total applications in the period.~~

⁽³⁾		~~Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume.~~

Gains on sales of mortgage loans increased $94.8 million primarily as a result of better pricing in the market coupled with increases in our coupon rates and lower origination expenses. We implemented a series of increases in our coupon rate beginning in September 2005 and continuing into our third quarter, and as a result, our WAC increased 79 basis points, from 7.48% to 8.27%. These rate changes, which were partially offset by lower gains on derivatives, caused our net gain on sale — gross margin to increase 85 basis points. Our loan origination volumes decreased 29.1% from the second quarter.

To mitigate the risk of short-term changes in market interest rates, we use interest rate swaps and forward loan sale commitments. We recorded $5.1 million in net gains during the third quarter, compared to $60.8 million in the second quarter, related to our various derivative instruments. See note 8 to the condensed consolidated financial statements.

During the preceding quarter, we recorded a $28.7 million gain on the sale of available-for-sale residual interests. This gain accelerated cash flows from residual interests, and resulted in realization of previously recorded unrealized gains included in other comprehensive income. We had no similar transaction in the current quarter.

~~-28-~~

~~The following table summarizes the key drivers of loan servicing revenues:~~

(dollars in 000s)
Three months ended January 31, 2006 October 31, 2005

Average servicing portfolio:
With related MSRs $ 59,344,676 $ 55,150,897
Without related MSRs 21,046,638 22,065,265

$ 80,391,314 $ 77,216,162

Ending servicing portfolio:
With related MSRs $ 60,787,507 $ 57,760,816
Without related MSRs 15,994,170 24,614,920

$ 76,781,677 $ 82,375,736

Number of loans serviced 466,026 500,935
Average delinquency rate 5.58 % 4.37 %
Weighted average FICO score 621 622
Weighted average interest rate (WAC) of portfolio 7.63 % 7.47 %
Value of MSRs $ 262,369 $ 245,928

Loan servicing revenues increased $5.7 million, or 5.7%, compared to the second quarter. The increase reflects a higher average loan servicing portfolio, which increased $3.2 billion, or 4.1%. The annualized rate earned on our entire servicing portfolio was 34 basis points for the current quarter, which was flat compared to the second quarter rate.

Total expenses decreased $10.9 million compared to the second quarter. Cost of services increased $15.3 million as a result of a higher average servicing portfolio during the current quarter. Cost of other revenues decreased $18.9 million, primarily due to a $13.5 million decrease in compensation and benefits as a result of 10.8% decrease in sales associates and lower origination-based incentives. Other expenses decreased $4.1 million for the current quarter, primarily due to cost savings initiatives, partially offset by $2.2 million in additional interest expense.

~~Selling, general and administrative expenses declined $7.2 million, or 14.8%, due to cost savings initiatives and lower marketing expenses.~~

~~Pretax income increased $21.2 million, or 45.9%, for the three months ended January 31, 2006 compared to the preceding quarter.~~

~~-29-~~

~~Mortgage Services — Operating Statistics~~

(dollars in 000s)
Restated
Nine months ended January 31, 2006 January 31, 2005
Volume of loans originated:
Wholesale (non-prime) $ 28,557,235 $ 18,887,536
Retail:Non-prime 2,730,272 2,197,898
Prime 1,173,417 637,801

$ 32,460,924 $ 21,723,235

Loan characteristics:
Weighted average FICO score⁽¹⁾
625 611
Weighted average interest rate for borrowers⁽¹⁾
7.71 % 7.32 %
Weighted average loan-to-value⁽¹⁾
80.6 % 78.6 %

Origination margin (% of origination volume):⁽²⁾

Loan sale premium 1.39 % 2.83 %
Residual cash flows from beneficial interest in Trusts 0.54 % 0.66 %
Gain (loss) on derivative instruments 0.28 % 0.13 %
Loan sale repurchase reserves (0.15 %) (0.15 %)
Retained mortgage servicing rights 0.60 % 0.44 %

2.66 % 3.91 %
Cost of acquisition (0.39 %) (0.56 %)
Direct origination expenses (0.60 %) (0.71 %)

Net gain on sale — gross margin⁽³⁾
1.67 % 2.64 %
Other revenues (0.01 %) 0.04 %
Other cost of origination (1.32 %) (1.57 %)

Net margin 0.34 % 1.11 %

Total cost of origination 1.92 % 2.28 %
Total cost of origination and acquisition 2.31 % 2.84 %

Loan delivery:
Loan sales $ 32,265,319 $ 21,653,373
Execution price⁽⁴⁾
1.68 % 3.21 %


⁽¹⁾		~~Represents non-prime production.~~

⁽²⁾		~~See “Reconciliation of Non-GAAP Financial Information” on page 44.~~

⁽³⁾		~~Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume.~~

⁽⁴⁾		Defined as total premium received divided by total balance of loans delivered to third-party investors or securitization vehicles (excluding mortgage servicing rights and the effect of loan origination expenses).

~~-30-~~

~~Mortgage Services — Operating Results~~

(in 000s)
Restated
Nine months ended January 31, 2006 January 31, 2005

Components of gains on sales:
Gain on mortgage loans $ 450,199 $ 544,428
Gain (loss) on derivatives 91,896 28,826
Gain on sales of residual interests 28,675 —
Impairment of residual interests (29,175 ) (7,162 )

541,595 566,092

Interest income:
Accretion — residual interests 93,190 96,242
Other interest income 10,837 7,948

104,027 104,190

Loan servicing revenue 296,720 193,690
Other 740 1,205

Total revenues 943,082 865,177

Cost of services 215,279 159,558
Cost of other revenues:
Compensation and benefits 235,081 165,220
Occupancy 32,329 26,468
Other 76,297 58,040

343,707 249,728
Selling, general and administrative 135,936 122,911

Total expenses 694,922 532,197

Pretax income $ 248,160 $ 332,980

~~Nine months ended January 31, 2006 compared to January 31, 2005~~

Mortgage Services’ revenues increased $77.9 million, or 9.0%, for the nine months ended January 31, 2006 compared to the prior year. Revenues increased as a result of higher loan servicing revenues, increased gains on derivatives and a gain on sale of residual interests, partially offset by lower margins on mortgage loans sold and impairments of residual interests.

~~The following table summarizes the key drivers of gains on sales of mortgage loans:~~

(dollars in 000s)
Nine months ended January 31, 2006 2005

Application process:
Total number of applications 290,476 232,001
Number of sales associates⁽¹⁾
3,486 3,523
Closing ratio⁽²⁾
61.8 % 58.9 %
Originations:
Total number of originations 179,439 136,615
Weighted average interest rate for borrowers (WAC) 7.71 % 7.32 %
Average loan size $ 181 $ 159
Total originations $ 32,460,924 $ 21,723,235
Direct origination and acquisition expenses, net $ 321,177 $ 275,217
Revenue (loan value):
Net gain on sale — gross margin⁽³⁾
1.67 % 2.64 %


⁽¹⁾		~~Includes all direct sales and back office sales support associates.~~

⁽²⁾		Percentage of loans funded divided by total applications in the period.

⁽³⁾		Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume.

Gains on sales of mortgage loans decreased ~~$94.2~~$118.6 million and our net gain on sale - gross margin declined 103 basis points from the prior year. These decreases resulted primarily ~~as a result of rapidly rising two-year swap rates~~from higher loss provisions for loan repurchases recorded during the current quarter, lower premiums on loan sales and ~~moderating demand by loan buyers,~~lower origination volumes, partially offset by improved cost of acquisition.

During the quarter we experienced higher early payment defaults, resulting in an increase in actual and expected loan repurchase activity. As a result, we recorded total loss provisions of $102.1 million during the three months ended July 31, 2006, which included $9.8 million in premium recapture reserves, compared to $16.9 million in the prior year.

-23-

The provision recorded in the current quarter consists of $46.1 million recorded on loans sold during the current quarter and $56.0 million related to loans sold in prior quarters. Loss provisions as a percent of origination volume increased ~~origination volume.~~102 basis points over the prior year. In establishing loss reserves on recent production, we’ve assumed all loans that are currently delinquent and subject to contractual repurchase terms will be repurchased, and that 5% of loans previously sold but not yet subject to contractual repurchase terms will be repurchased. Based on historical experience, we assumed 30% of all loans we repurchase will cure with no loss incurred, and of those that do not cure, we assumed an average 15% loss severity. See additional discussion of our reserves and repurchase obligations in note 9 to our condensed consolidated financial statements.

Market interest rates, based on the two-year swap, increased from an average of ~~3.10%~~4.06% last year to ~~4.45%~~5.51% in the current ~~year.~~quarter. However, our WAC increased only 39116 basis points, up to ~~7.71%~~8.68% from ~~7.32%~~7.52% in the prior year. ~~Because~~These changes in interest rates, coupled the higher loss provisions, caused our ~~WAC was not more aligned with market rates, increased~~

~~-31-~~

~~funding costs and poor pricing in the market, offset by derivative gains, our gross margin declined 97~~premium on loan sales to decline 72 basis points, to ~~1.67%~~1.58% from ~~2.64%~~2.30% last year. ~~Origination volumes~~

The value of MSRs recorded in the first quarter increased ~~49.4% over~~to 64 basis points from 47 basis points in the prior year due to ~~increased productivity of our account executives and support staff, new product introductions, increased applications and a higher closing ratio.~~

~~Changes~~changes in our ~~MSR~~ assumptions anused to value MSRs and other factors. However this increase ~~in the average loan size and an increase~~was offset by a decline in origination ~~volume~~volumes, which resulted in ana net increase of ~~$101.7~~$0.8 million ~~related to the retained MSR component of~~in gains on sales of mortgage loans.

~~As a result~~Our cost of ~~rising interest rates and an increase in the notional amounts of interest rate swaps in place~~acquisition improved 56 basis points to 0.52% primarily as a result of ~~increased origination volumes during~~a decrease in the cost to acquire loans from HRBMC and lower third-party broker commissions.

For the three months ended July 31, 2006, gains on sales of mortgage loans includes $10.4 million in gains on sales of loans to HRB Bank and $8.5 million in acquisition costs paid to HRBMC to purchase its non-prime loans, both of which are eliminated in consolidation.

To mitigate the risk of short-term changes in market interest rates related to our loan originations, we use interest rate swaps, forward loan sale commitments and rate-lock equivalents. We generally enter into interest rate swap arrangements related to existing loan applications with rate-lock commitments and for rate-lock commitments we expect to make in the next two to three weeks. During the current ~~year,~~quarter, we recorded a net ~~$91.9~~$12.5 million in gains, compared to ~~$28.8~~$23.9 million in the prior year, related to our various derivative instruments. See note 85 to the condensed consolidated financial statements.

~~We recorded a $0.6 million net favorable mark-to-market adjustment for our trading residuals during~~During the current ~~period, and a gain of $28.7 million on the sale of residual interests. During the prior year, we recorded $5.4 million in net favorable mark-to-market adjustments for our trading residuals.~~

~~During the nine months ended January 31, 2006,~~quarter, our available-for-sale residual interests performed ~~better~~worse than expected in our internal valuation models, with ~~lower~~higher credit losses and interest rates than originally ~~modeled, partially offset by higher interest rates.~~modeled. We recorded impairments of $17.3 million in gains on sales of mortgage assets. We also recorded favorable pretax mark-to-market adjustments, which increased the fair value of our residual interests ~~$47.8~~$3.4 million during the ~~period.~~quarter. These adjustments were recorded, net of write-downs of ~~$8.9~~$2.9 million and deferred taxes of ~~$14.9~~$0.2 million, in other comprehensive income and will be accreted into income throughout the remaining life of those residual interests. ~~Offsetting this increase were impairments~~Future changes in interest rates or other assumptions, based on market conditions or actual loan pool performance, could cause additional adjustments to the fair value of ~~available-for-sale~~the residual interests totaling $29.2 million, which were recorded in gains on sales of mortgage assets. Impairments increased $22.0 million over the prior year due to interest rates increasing greater than originally modeled and ~~a decline in the value of older residuals based on loan performance.~~

During the current year, Gulf Coast hurricanes caused severe damage to property, including property securing mortgage loans underlying our beneficial and residual interests. As of January 31, 2006, we have exposure to losses related to approximately $359 million of loans in the affected areas, including $338 million related to loans underlying securitizations in which we hold a residual interest and $21 million related to loans that are in the Trusts or have been repurchased from the Trusts. At January 31, 2006, total 31+ days delinquencies in the affected areas were approximately $106 million, compared to approximately $50 million that were 31+ days delinquent prior to the hurricanes. We recorded a specific provision for estimated losses arising from hurricane damage totaling $6.0 million during our second quarter, based on an analysis of delinquent loans within the federally declared disaster areas. Of the total provision, $3.1 million was recorded as a reserve for losses on loans that we have or may be required to repurchase pursuant to existing standard representations and warranties, and $2.9 million was recorded as an impairment of our residual interests. There were no significantcould cause changes to the ~~reserves during the third quarter. In addition to the~~accretion of these residual ~~impairments recorded this quarter,~~interests in future ~~write-downs~~periods.

Accretion of residual interests ~~may be incurred~~of $13.5 million for the three months ended July 31, 2006 represents a decrease of $17.3 million from the prior year. This decrease is primarily due to the sale of previously securitized residual interests during fiscal year 2006 and ~~recorded in other comprehensive income. We are continuing~~lower write-ups to ~~analyze our exposure to potential losses and the amount of losses ultimately realized may differ from amounts previously recorded.~~residual interest balances.

~~-32-~~-24-

BUSINESS SERVICES

This segment offers middle-market companies accounting, tax and consulting services, wealth management, retirement resources, payroll and benefits services, corporate finance and financial process outsourcing.

~~Business Services — Operating Statistics~~

Business Services - Operating Statistics
Three months ended July 31, 2006 2005

Accounting, tax and consulting:
Chargeable hours 1,024,649 597,202
Chargeable hours per person 276 270
Net billed rate per hour $ 143 $ 134
Average margin per person $ 19,666 $ 17,321

Three months ended January 31, Nine months ended January 31,
2006 2005 2006 2005

Accounting, tax and consulting:
Chargeable hours 1,107,398 641,009 2,467,355 1,852,346
Chargeable hours per person 314 332 895 935
Net billed rate per hour $ 145 $ 134 $ 141 $ 129
Average margin per person $ 25,154 $ 25,194 $ 65,567 $ 64,621

~~Business Services — Operating Results~~


	(in 000s)
	Three months ended January 31,					Nine months ended January 31,
				Restated					Restated
	2006			2005		2006			2005
Business Services - Operating Results															(in 000s)
Three months ended July 31,												2006			2005

Service revenues:
Accounting, tax and consulting	$	187,154		$	91,588	$	392,772		$	259,519		$	161,850		$	83,828
Capital markets		13,567			17,631		44,394			48,309			13,660			15,472
Payroll, benefits and retirement services		8,796			5,885		25,690			14,384			7,410			8,277
Other services		16,898			8,805		37,893			22,911			12,933			9,882

		226,415			123,909		500,749			345,123			195,853			117,459
Other		9,425			8,963		28,742			25,898			9,278			9,387

Total revenues		235,840			132,872		529,491			371,021			205,131			126,846


Cost of services:
Compensation and benefits		130,490			68,695		297,031			206,684			121,619			71,647
Occupancy		18,339			6,627		37,514			17,031			19,308			8,163
Other		20,124			8,129		43,421			31,151			12,446			10,810

		168,953			83,451		377,966			254,866			153,373			90,620
Amortization of intangible assets													4,879			3,803
Selling, general and administrative		67,922			43,505		161,468			125,176			61,444			39,188

Total expenses		236,875			126,956		539,434			380,042			219,696			133,611

Pretax income (loss)	$	(1,035	)	$	5,916	$	(9,943	)	$	(9,021	)
Pretax loss												$	(14,565	)	$	(6,765	)

The pretax loss for the three months ended January 31, 2006 of $1.0 million, which includes losses of $6.0 million from American Express Tax and Business Services, Inc., compared to pretax income of $5.9 million in the prior year.

~~Nine months ended January 31, 2006 compared to January 31, 2005~~

Business Services’ revenues for the nine months ended January 31, 2006 increased $158.5 million, or 42.7%, from the prior year. This increase was primarily due to a $133.3 million increase in accounting, tax and consulting revenues resulting primarily from the acquisition of American Express Tax and Business Services, Inc., which increased revenues $115.9 million. We also benefited from a 6.9% increase in the net billed rate per hour, excluding the impact of the acquisition.

Capital markets revenues declined $3.9 million due to a 19.6% decline in the number of business valuation projects. Payroll, benefits and retirement services revenues increased $11.3 million, or 78.6%, primarily due to acquisitions completed during the third and fourth quarters of fiscal year 2005. Other service revenues increased $15.0 million as a result of acquisitions completed in the fourth quarter of fiscal year 2005 in our financial process outsourcing business and growth in wealth management services.

Total expenses increased $159.4 million, or 41.9%, for the nine months ended January 31, 2006 compared to the prior year. Cost of services increased $123.1 million, primarily due to a $90.3 million increase in compensation and benefits. Compensation and benefits increased $72.0 million due to the American Express Tax and Business Services, Inc. acquisition. Baseline increases in the number of personnel and the average wage per employee, driven by marketplace competition for professional staff and other acquisitions completed in the third and fourth quarters of fiscal year 2005, also contributed to this increase. Occupancy expenses increased $20.5 million due primarily to acquisitions. Other cost of services increased $12.3 million primarily due to the American Express Tax and Business Services, Inc. acquisition.

~~Selling, general and administrative expenses increased $36.3~~$22.3 million primarily due to acquisitions and additional costs associated with our business development initiatives.

The pretax loss for the ~~nine~~three months ended ~~January~~July 31, 2006 ~~was $9.9~~of $14.6 million ~~which includes losses~~compares to a pretax loss of ~~$9.3 million from American Express Tax and Business Services, Inc., compared to $9.0~~$6.8 million in the prior year.

~~Fiscal 2006 outlook~~

Our fiscal year 2006 outlook for our Business Services segment is consistent with the discussion in our April 30, 2005 Form 10-K/A, except for the previously announced acquisition of American Express Tax and Business Services, Inc. effective October 1, 2005. We expect organic growth for this segment’s pretax income of approximately 30%, and expect the acquisition of American Express Tax and Business Services, Inc. will be accretive by two cents per diluted share for fiscal year 2006, after expected integration costs. We expect Business Services’ pretax income for fiscal year 2006 to increase nearly 75% over the prior year.

~~-35-~~-26-

~~INVESTMENT~~CONSUMER FINANCIAL SERVICES

This segment is primarily engaged in offering advice-based brokerage services and investment ~~planning. Our integration~~planning through HRBFA, full-service banking through HRB Bank and prime and non-prime mortgage loans through HRBMC. HRBFA, HRB Bank and HRBMC, our “Block-branded” businesses, are focused on increasing client loyalty and retention by offering expanded financial services to our retail tax clients. HRBFA offers our customers traditional brokerage services, as well as annuities, insurance, fee-based accounts, online account access, equity research and focus lists, model portfolios, asset allocation strategies, and other investment tools and information. HRB Bank offers traditional banking services including checking and savings accounts, home equity lines of credit, individual retirement accounts, certificates of deposit and prepaid debit card deposit accounts. HRB Bank also purchases loans from OOMC to hold for investment ~~advice~~purposes and ~~new service offerings are allowing us~~HRBFA utilizes HRB Bank for certain FDIC-insured deposits for its customers. HRBMC originates mortgage loans for sale to ~~shift our emphasis from a transaction-based client relationship to a more advice-based focus.~~OOMC or other third-party buyers.

~~Investment Services — Operating Statistics~~

Three months ended January 31, 2006 January 31, 2005 October 31, 2005

Customer trades⁽¹⁾
255,879 245,612 233,262
Customer daily average trades 4,127 3,899 3,589
Average revenue per trade⁽²⁾
$ 113.83 $ 120.62 $ 123.16
Customer accounts:⁽³⁾

Traditional brokerage 426,699 431,902 428,543
Express IRAs 381,859 295,676 378,200

808,558 727,578 806,743

Ending balance of assets under administration (billions) $ 31.4 $ 28.4 $ 29.8
Average assets per traditional brokerage account $ 72,914 $ 65,339 $ 68,837
Average margin balances (millions) $ 529 $ 596 $ 560
Average customer payable balances (millions) $ 769 $ 989 $ 794
Number of advisors 956 1,013 995

Included in the numbers above are the following relating to fee-based accounts:
Customer household accounts 8,806 7,263 8,547
Average revenue per account $ 2,551 $ 2,149 $ 2,164
Ending balance of assets under administration (millions) $ 2,420 $ 1,911 $ 2,217
Average assets per active account $ 270,217 $ 248,400 $ 259,355

Consumer Financial Services - Operating Statistics
Three months ended July 31, 2006 2005

Broker-dealer:
Traditional brokerage accounts⁽¹⁾
409,147 431,046
New traditional brokerage accounts funded by HRB Tax clients 3,188 4,224
Average assets per traditional brokerage account $ 75,311 $ 68,870
Average margin balances (millions) $ 451 $ 573
Average customer payable balances (millions) $ 647 $ 841
Number of advisors 938 985
Banking:
Efficiency ratio⁽²⁾
35 % N/A
Annualized net interest margin⁽³⁾
3.65 % N/A
Annualized return on average assets⁽⁴⁾
1.15 % N/A
Total assets (thousands) $ 566,792 N/A
Loans purchased from OOMC (thousands) $ 553,502 N/A
Retail mortgage activities:
Volume of loans originated (thousands):
Total $ 844,314 $ 1,350,402
Loans originated to HRB Tax clients $ 140,243 $ 326,521
Average loan size (thousands) $ 175 $ 149
Loans sold to OOMC (thousands) $ 584,426 $ 950,806


⁽¹⁾		Includes only ~~trades on which revenues are earned (“revenue trades”). Revenues are earned on both transactional and annuitized trades.~~accounts with a positive balance.

⁽²⁾		~~Calculated~~Defined as ~~total trade revenues~~non-interest expense divided by revenue ~~trades.~~net of interest expense. See “Reconciliation of Non-GAAP Financial Information” at the end of Part I, Item 2.

⁽³⁾		~~Includes only accounts with a positive balance.~~Defined as annualized net interest revenue divided by average assets. See “Reconciliation of Non-GAAP Financial Information” at the end of Part I, Item 2.

⁽⁴⁾		Defined as annualized pretax banking income divided by average assets. See “Reconciliation of Non-GAAP Financial Information” at the end of Part I, Item 2.

~~-36-~~-27-

~~Investment Services — Operating Results~~


Consumer Financial Services - Operating Results													(in 000s)
Three months ended July 31,										2006			2005

Service revenues:
Financial advisor production revenue										$	47,019		$	45,106
Other											8,368			8,207

	(in 000s)										55,387			53,313
				Restated
Three months ended	January 31, 2006			January 31, 2005			October 31, 2005

Service revenue:
Transactional revenue	$	23,078		$	24,654		$	23,332
Annuitized revenue		25,300			18,382			23,062

Production revenue		48,378			43,036			46,394
Other service revenue		8,169			7,000			8,064
Gain on sale of mortgage loans, net											29,382			56,397
Net interest revenue on:
Margin lending and other											13,742			12,737
Banking activities											3,729			—

		56,547			50,036			54,458			17,471			12,737


Margin interest revenue		15,947			11,975			14,826
Less: interest expense		(1,789	)		(1,090	)		(1,363	)

Net interest revenue		14,158			10,885			13,463


Loan loss reserves — mortgage loans held for investment											(1,338	)		—
Other		682			93			734			356			577

Total revenues⁽¹⁾		71,387			61,014			68,655			101,258			123,024


Cost of services:
Compensation and benefits		35,901			28,986			32,676			31,864			30,535
Occupancy		5,283			5,948			5,187			5,061			5,165
Other		5,626			5,530			5,541			5,165			4,935

		46,810			40,464			43,404			42,090			40,635
Cost of other revenues											13,840			35,168
Amortization of intangible assets											9,156			9,156
Selling, general and administrative		32,245			40,325			33,157			43,952			41,813

Total expenses		79,055			80,789			76,561			109,038			126,772

Pretax loss	$	(7,668	)	$	(19,775	)	$	(7,906	)	$	(7,780	)	$	(3,748	)

Net interest revenue on banking activities totaled $3.7 million for the three months ended July 31, 2006. The following table summarizes the key drivers of net interest revenue on banking activities:

(in 000s)
Three months ended July 31, 2006 2005

Average loans $ 380,866 N/A
Average investments $ 20,879 N/A
Average deposits $ 247,445 N/A

Total segment expenses decreased ~~$1.7~~$17.7 million, or ~~2.1%.~~14.0%, over the prior year. Cost of ~~services increased $6.3~~other revenues decreased $21.3 million, or ~~15.7%~~60.6%, primarily as a result of ~~$6.9 million~~the restructuring of ~~additional compensation and benefits expenses resulting from higher production revenues.~~our mortgage operations in fiscal year 2006.

Selling, general and administrative expenses ~~decreased $8.1~~increased $2.1 million, or ~~20.0%~~5.1%, primarily due to ~~a $3.9 million decline in legal~~ expenses ~~due in part to a favorable arbitration outcome. Current quarter results also improved due to reduced back-office headcount relating to cost containment efforts and gains on the disposition~~ of ~~certain assets during the quarter. These decreases were partially offset by increased bonus accruals associated with the segment’s improved performance.~~HRB Bank, which opened May 1, 2006.

The pretax loss for ~~Investment~~Consumer Financial Services for the three months ended ~~January~~July 31, 2006 was ~~$7.7~~$7.8 million compared to the prior year loss of ~~$19.8~~$3.7 million.

~~-37-~~

~~Three months ended January 31, 2006 compared to October 31, 2005~~

~~Investment Services’ revenues, net of interest expense, for the three months ended January 31, 2006 increased $2.7 million, or 4.0% compared to the preceding quarter.~~

~~Production revenue increased $2.0 million, or 4.3%, over the preceding quarter, primarily due to increased sales of wealth management accounts, mutual funds, annuities and insurance.~~

Total expenses increased $2.5 million, or 3.3%. Compensation and benefits increased $3.2 million, primarily resulting from higher production revenues. This increase was partially offset by a $2.5 million decrease in legal expenses, due in part to a favorable arbitration outcome.

~~The pretax loss for the Investment Services segment was $7.7 million, compared to a loss of $7.9 million in the second quarter of fiscal year 2006.~~

~~Investment Services — Operating Statistics~~

Nine months ended January 31, 2006 January 31, 2005

Customer trades⁽¹⁾
715,519 644,469
Customer daily average trades 3,766 3,410
Average revenue per trade⁽²⁾
$ 120.94 $ 121.68
Customer accounts:⁽³⁾

Traditional brokerage 426,699 431,902
Express IRAs 381,859 295,676

808,558 727,578

Ending balance of assets under administration (billions) $ 31.4 $ 28.4
Average assets per traditional brokerage account $ 72,914 $ 65,339
Average margin balances (millions) $ 554 $ 595
Average customer payable balances (millions) $ 801 $ 988
Number of advisors 956 1,013

Included in the numbers above are the following relating to fee-based accounts:
Customer household accounts 8,806 7,263
Average revenue per account $ 2,319 $ 2,039
Ending balance of assets under administration (millions) $ 2,420 $ 1,911
Average assets per active account $ 270,217 $ 248,400


⁽¹⁾		~~Includes only trades on which revenues are earned (“revenue trades”). Revenues are earned on both transactional and annuitized trades.~~

⁽²⁾		~~Calculated as total trade revenues divided by revenue trades.~~

⁽³⁾		~~Includes only accounts with a positive balance.~~

~~-38-~~

~~Investment Services — Operating Results~~

(in 000s)
Restated
Nine months ended January 31, 2006 January 31, 2005

Service revenue:
Transactional revenue $ 69,245 $ 64,594
Annuitized revenue 70,633 54,114

Production revenue 139,878 118,708
Other service revenue 24,440 19,789

164,318 138,497

Margin interest revenue 44,866 30,773
Less: interest expense (4,406 ) (1,930 )

Net interest revenue 40,460 28,843

Other 1,993 176

Total revenues⁽¹⁾
206,771 167,516

Cost of services:
Compensation and benefits 99,112 84,908
Occupancy 15,635 16,510
Other 16,102 14,885

130,849 116,303
Selling, general and administrative 99,048 112,095

Total expenses 229,897 228,398

Pretax loss $ (23,126 ) $ (60,882 )


⁽¹⁾		~~Total revenues, less interest expense.~~

~~Nine months ended January 31, 2006 compared to January 31, 2005~~

~~Investment Services’ revenues, net of interest expense, for the nine months ended January 31, 2006 increased $39.3 million, or 23.4%, over the prior year.~~

Production revenue increased $21.2 million, or 17.8%, over the prior year. Transactional revenue increased $4.7 million, or 7.2%, from the prior year due primarily to a 6.6% increase in transactional trading volume and a 1.8% increase in average revenue per transactional trade. Annuitized revenue increased $16.5 million, or 30.5%, due to increased sales of annuities, insurance, mutual funds, wealth management accounts and UITs.

Annualized productivity averaged approximately $187,000 per advisor during the current year compared to $158,000 in the prior year. Increased productivity was due to higher production levels across all recruiting classes. Minimum production standards put into place during the fourth quarter of fiscal year 2005 resulted in 122 advisors increasing their production to date. These standards also resulted in 141 low-producing advisors leaving the company to date.

~~Other service revenue increased $4.7 million due to increased money market, account and underwriting fees.~~

~~Margin interest revenue increased $14.1 million, or 45.8%, from the prior year, as a result of higher interest rates earned, partially offset by lower average margin balances.~~

Total expenses increased $1.5 million, or 0.7%. Cost of services increased $14.5 million, or 12.5%, primarily as a result of $14.2 million of additional compensation and benefits. This increase is primarily due to higher production revenues, partially offset by cost containment measures implemented in the fourth quarter of fiscal year 2005.

Selling, general and administrative expenses decreased $13.0 million, or 11.6%, primarily due to a $5.6 million decline in legal expenses, due in part to a favorable arbitration outcome. We also experienced a $4.3 million decline in compensation and benefits from reduced back-office headcount relating to cost containment efforts and $3.2 million in additional gains on the disposition of certain assets during the year. These decreases were partially offset by increased bonuses associated with the segment’s improved performance.

~~The pretax loss for Investment Services through January 31, 2006 was $23.1 million compared to the prior year loss of $60.9 million.~~

~~-39-~~

~~Fiscal 2006 outlook~~

Our fiscal year 2006 outlook for our Investment Services segment has improved slightly from the discussion in our April 30, 2005 Form 10-K/A. We now anticipate the loss for Investment Services for fiscal year 2006 will be approximately $30 million to $37 million less than the loss reported in fiscal year 2005, instead of the $25 million to $35 million improvement we previously discussed.

~~CORPORATE~~

This segment consists primarily of corporate support departments, which provide services to our operating segments. These support departments consist of marketing, information technology, facilities, human resources, executive, legal, finance, government relations and corporate communications. Support department costs are generally allocated to our operating segments. Our captive insurance and franchise financing subsidiaries are also included within this segment, as was our small business initiatives subsidiary in the first half of fiscal year 2005.

~~Corporate — Operating Results~~

(in 000s)
Three months ended January 31, Nine months ended January 31,
Restated Restated
2006 2005 2006 2005

Operating revenues $ 5,857 $ 3,425 $ 15,266 $ 10,290
Eliminations (3,113 ) (2,123 ) (8,731 ) (6,833 )

Total revenues 2,744 1,302 6,535 3,457

Corporate expenses:
Interest expense 20,334 20,937 49,566 55,673
Other 12,559 12,317 44,396 35,422

32,893 33,254 93,962 91,095

Shared services:
Information technology 30,068 29,023 85,615 81,435
Marketing 52,574 46,030 63,655 57,292
Finance 11,072 9,107 36,138 26,620
Other 38,610 31,584 82,944 78,179

132,324 115,744 268,352 243,526

Allocation of shared services (131,952 ) (117,297 ) (268,370 ) (245,096 )
Other income, net 3,511 18,398 12,430 20,574

Pretax loss $ (27,010 ) $ (12,001 ) $ (74,979 ) $ (65,494 )

~~Three months ended January 31, 2006 compared to January 31, 2005~~

Marketing department expenses increased $6.5 million, or 14.2%, due primarily to an increase in digital advertising efforts. Finance department expenses increased $2.0 million, primarily due to additional consulting expenses and increases in compensation expenses. Other support department expenses increased $7.0 million primarily due to increases in stock-based compensation expenses.

~~Other income declined $14.9 million primarily as a result of a $16.7 million legal recovery we received during the prior year quarter.~~

~~The pretax loss was $27.0 million, compared with last year’s third quarter loss of $12.0 million.~~

Due to the nature of this segment, the three months ended January 31, 2006 are not comparable to the three months ended October 31, 2005 and are not indicative of the expected results for the entire fiscal year.

Our effective tax rate for the quarter increased to 52.3% compared to 38.8% in the prior year. This increase is due to an additional $3.4 million in income tax expense in the current quarter related to the correction of errors in state income taxes for periods prior to May 1, 2003. See discussion of restatement in note 2A to the condensed consolidated financial statements.

~~Nine months ended January 31, 2006 compared to January 31, 2005~~

Corporate expenses increased $2.9 million primarily due an increase of $4.6 million in allocated costs from finance shared services and $1.5 million in additional consulting, accounting and auditing expenses related to the restatement of our previously issued financial statements. These increases were partially offset by a decline of $6.1 million in interest expense.

Our consolidated interest expense, both operating and non-operating, totaled $74.3 million for the nine months ended January 31, 2006, an increase of $9.3 million over the prior year. Of the $74.3 million in total interest, $37.0 million related to interest expense on previous acquisitions, with the

~~-40-~~

remaining $37.3 million related to our operations recorded directly in our operating segments. Intercompany interest expense, which is also recorded directly in our operating segments, is eliminated within the Corporate segment. These eliminations resulted in the decline of $6.1 million in interest expense recorded in our Corporate segment for the current period.

Information technology department expenses increased $4.2 million primarily due to higher compensation and benefits. Marketing department expenses increased $6.4 million primarily due to an increase in digital advertising. Finance department expenses increased $9.5 million, primarily due to $5.1 million of additional consulting expenses and an increase of $4.5 million in compensation expenses. Other support department expenses increased $4.8 million primarily due to increases in stock-based compensation and legal department expenses, partially offset by a decrease in supply department expenses.

Other income decreased $8.1 million primarily as a result of a $16.7 million legal recovery received during the prior year, partially offset by a $3.4 million gain recognized on the sale of an investment in the current year.

~~The pretax loss was $75.0 million, compared with last year’s loss of $65.5 million.~~

Our effective tax rate for the nine months ended January 31, 2006 decreased to 36.8% compared to 38.7% in the prior year. This decrease is due to an additional $3.4 million in income tax expense in the current quarter related to the correction of errors in state income taxes for periods prior to May 1, 2003. See discussion of restatement in note 2A to the condensed consolidated financial statements.

FINANCIAL CONDITION

These comments should be read in conjunction with the condensed consolidated balance sheets and condensed consolidated statements of cash flows found on pages 1 and 3, respectively.

CAPITAL RESOURCES & LIQUIDITY BY SEGMENT

Our sources of capital include cash from operations, issuances of common stock and debt. We use capital primarily to fund working capital requirements, pay dividends, repurchase our shares and acquire businesses.

Cash From Operations.Cash used in operations totaled ~~$1.7 billion~~$458.4 million and ~~$1.6 billion~~$310.5 million for the ~~nine~~three months ended ~~January~~July 31, 2006 and 2005, respectively. The increase in cash used in operating activities is primarily due to ~~increases in mortgage loans held for sale and MSRs during the current year and increased losses. These items were partially offset by~~ a ~~decline~~$155.1 million increase in income tax payments. ~~Income tax payments totaled $224.8 million during the current year, a decrease of $181.8 million from the prior year.~~

Issuance of Common Stock.We issue shares of common stock, in accordance with our stock-based compensation plans, out of treasury shares. Proceeds from the issuance of common stock totaled ~~$105.8~~$13.2 million and ~~$119.9~~$32.3 million for the ~~nine~~three months ended ~~January~~July 31, 2006 and 2005, respectively.

Dividends.Dividends paid totaled ~~$118.7~~$40.5 million and ~~$106.4~~$36.5 million for the ~~nine~~three months ended ~~January~~July 31, 2006 and 2005, respectively. On June 8, 2005, our Board of Directors declared a two-for-one stock split of the Company’s Common Stock in the form of a 100% stock distribution, effective August 22, 2005, to shareholders of record as of the close of business on August 1, 2005. All share and per share amounts in this document have been adjusted to reflect the retroactive effect of the stock split.

Share Repurchases.On June ~~9, 2004,~~7, 2006, our Board ~~of Directors~~ approved an additional authorization to repurchase 1520.0 million shares. During the ~~nine~~three months ended ~~January~~July 31, 2006, we repurchased ~~9.0~~8.1 million shares pursuant to this authorization and a prior authorization at an aggregate price of ~~$254.2~~$180.9 million or an average price of ~~$28.18~~$22.22 per share. There are ~~10.5~~22.4 million shares remaining under ~~this authorization~~these authorizations at ~~January~~July 31, 2006. We plan to continue to purchase shares on the open market in accordance with this authorization, subject to various factors including the price of the stock, the availability of excess cash, our ability to maintain liquidity and financial flexibility, securities law restrictions, targeted capital levels and other investment opportunities available.

Debt.We plan to refinance our $500.0 million in Senior Notes, which are due in April 2007.

Restricted Cash.We hold certain cash balances that are restricted as to use. Cash and cash equivalents — restricted totaled ~~$430.7~~$345.7 million at ~~January~~July 31, 2006 compared to ~~$516.9~~$394.1 million at April 30, ~~2005. Investment~~2006. Consumer Financial Services held ~~$376.0~~$315.0 million of this total segregated in a special reserve account for the exclusive benefit of its broker-dealer customers. Restricted cash held by Mortgage Services totaled ~~$48.1~~$17.8 million and is held primarily for outstanding commitments to fund mortgage loans. Restricted

~~-41-~~

In the first ~~nine~~three months of fiscal year ~~2006, Investment~~2007, Consumer Financial Services provided ~~$14.7~~$45.5 million in cash from its operating activities primarily due to ~~working capital changes, including~~ the timing of cash deposits that are restricted for the benefit of its broker-dealer customers. The segment also used $138.6 million in investing activities primarily for the purchase of mortgage loans held for investment and provided $394.2 million in financing activities due primarily to $404.0 million in FDIC-insured deposits held at HRB Bank.

~~Liquidity needs relating~~To finance our prime mortgage loan originations, we utilize an on-balance sheet warehouse facility with capacity up to ~~client trading and margin-borrowing activities are met primarily through cash balances in client brokerage accounts and working capital. We believe these sources~~$25 million. This annual facility bears interest at one-month LIBOR plus 140 to 200 basis points. As of funds will continue to be the primary sources of liquidity for Investment Services. Stock loans have historically been used as a secondary source of funding and could be used in the future, if warranted.

~~Pledged securities at January~~July 31, 2006 ~~totaled $51.9~~and April 30, 2006, the balance outstanding under this facility was $5.9 million ~~an excess~~and $1.6 million, respectively.

HRB Bank is a member of ~~$11.7~~the FHLB of Des Moines, which extends credit availability to member banks based on eligible collateral and asset size. At July 31, 2006, HRB Bank had FHLB advance capacity of $198.0 million, ~~over the margin requirement. Pledged securities at the end of fiscal year 2005 totaled $44.6 million, an excess of $7.9 million over the margin requirement.~~but no amounts had been drawn on this facility.

We believe the funding sources for ~~Investment~~Consumer Financial Services are stable. Liquidity risk within this segment is primarily limited to maintaining sufficient capital levels to obtain securities lending liquidity to support margin borrowing by customers.

-31-

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

Substantially all non-prime mortgage loans we originate are sold daily to the Trusts. The Trusts purchase the loans from us utilizing nine warehouse facilities that were arranged by us, bear interest at one-month LIBOR plus 45 to 400 basis points and expire on various dates during the year. During the third quarter, the warehouse facilities were increased from $13.5 billion to $15.0 billion. An additional uncommitted facility of $1.5 billion brings total capacity to $16.5 billion.

There have been no ~~other~~ material changes in our off-balance sheet financing arrangements from those reported at April 30, ~~2005~~2006 in our Annual Report on Form ~~10-K/A.~~10-K.

COMMERCIAL PAPER ISSUANCE AND SHORT-TERM BORROWINGS

We maintain two unsecured CLOCs for working capital, support of our commercial paper program and general corporate purposes. In August 2005, the first CLOC expired and was replaced with a new $1.0 billion CLOC, which expires in August 2010. Also in August 2005, the second CLOC was extended, and now expires in August 2010. These CLOCs were undrawn at January 31, 2006.

There have been no ~~other~~ material changes in our commercial paper program from those reported at April 30, ~~2005~~2006 in our Annual Report on
Form ~~10-K/A.~~10-K.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As a result of our failure to file this Form 10-Q by the SEC’s prescribed due date, we will be unable to issue any debt securities under our shelf registration statement for a period of twelve calendar months after the month of our filing.

There have been no ~~other~~ material changes in our contractual obligations and commercial commitments from those reported at April 30, ~~2005~~2006 in our Annual Report on Form ~~10-K/A.~~10-K.

REGULATORY ENVIRONMENT

~~There~~In March 2006, the OTS approved the federal savings bank charter of HRB Bank. The bank commenced operations on May 1, 2006, at which time H&R Block, Inc. became a savings and loan holding company. As a savings and loan holding company, H&R Block, Inc. is subject to regulation by the OTS. Federal savings associations are subject to extensive regulation and examination by the OTS, their primary federal regulator, as well as the Federal Deposit Insurance Corporation (FDIC). H&R Block, Inc. is now subject to a three percent minimum ratio of adjusted tangible capital to adjusted total assets, as defined by the OTS, and HRB Bank is subject to various OTS capital requirements. A banking institution’s capital category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure, a tangible equity ratio measure, and certain other factors. See note 8 to the condensed consolidated financial statements for additional discussion of regulatory capital requirements and classifications.

HRB Bank is an indirect wholly-owned subsidiary of H&R Block, Inc. and is insured by the FDIC. If an insured institution fails, claims for administrative expenses of the receiver and for deposits in U.S. branches (including claims of the FDIC as subrogee of the failed institution) have priority over the claims of general unsecured creditors. In addition, the FDIC has authority to require H&R Block, Inc. to reimburse it for losses it incurs in connection with the failure of HRB Bank or with the FDIC’s provision of assistance to a banking subsidiary that is in danger of failure.

Other than the items discussed above, there have been no material changes in our regulatory environment from those reported at April 30, ~~2005~~2006 in our Annual Report on Form ~~10-K/A.~~10-K.

CRITICAL ACCOUNTING POLICIES
The following discussion is an update to previous disclosure regarding certain of our critical accounting policies and should be read in conjunction with the complete critical accounting policies disclosures included in our Annual Report on Form 10-K for the year ended April 30, 2006. For all of our critical accounting policies, we caution that future events rarely develop precisely as forecasted, and estimates routinely require adjustment and may require material adjustment.

Gains on Sales of Mortgage Assets
We sell substantially all of the non-prime mortgage loans we originate to warehouse trusts (the ‘Trusts”) which are qualifying special purpose entities (QSPEs), with servicing rights generally retained. Prime mortgage loans are sold in loan sales, servicing released, to third-party buyers. Gains on sales of mortgage assets are recognized when control of the assets is surrendered (when loans are sold to third-party buyers, including the Trusts) and are based on the difference between net proceeds received (cash proceeds less recourse obligations) and the allocated cost of the assets sold. We determine the allocated cost of assets sold based on the relative fair values of net proceeds (i.e. the loans sold), retained MSRs and the beneficial interest in Trusts, which represents our residual interest in the ultimate expected outcome from the disposition of the loans by the Trusts.

The following is an example of a hypothetical gain on sale calculation:

(in 000s)

Acquisition cost of underlying mortgage loans $ 1,000,000

Fair values:
Net proceeds
Cash received $ 999,000
Less recourse obligation (4,000 ) $ 995,000

Beneficial interest in Trusts 20,000
MSRs 7,000

$ 1,022,000

Computation of gain on sale:
Net proceeds $ 995,000
Less allocated cost ($995,000 / $1,022,000 x $1,000,000) 973,581

Recorded gain on sale $ 21,419

Recorded beneficial interest in Trusts ($20,000 / $1,022,000 x $1,000,000) $ 19,570

Recorded value of MSRs ($7,000 / $1,022,000 x $1,000,000) $ 6,849

Recorded liability for recourse obligation $ 4,000

Variations in the assumptions we use affect the estimated fair values and the reported gains on sales. Gains on sales of mortgage loans totaled $45.6 million and $181.0 million for three months ended July 31, 2006 and 2005, respectively.

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Our recourse obligation relates to potential losses that could be incurred related to the repurchase of sold loans or indemnification of losses as a result of early payment defaults or breaches of other representations and warranties customary to the mortgage banking industry.

The substantial majority of loan repurchases or indemnification for losses occurs within nine months from the date the loans are sold. We estimate the fair value of the recourse liability at the time the loan is sold. Provisions for losses are charged to gain on sale of mortgage loans and credited to the recourse liability while actual losses are charged to the liability. We evaluate, and adjust if necessary, the fair value of the recourse obligation quarterly based on current information and trends in underlying loan performance. The amount of losses we expect to incur related to the repurchase of sold loans depends primarily on the frequency of early payment defaults, the rate at which defaulted loans subsequently become current on payments (“cure rate”), the propensity of the buyer of the loans to demand recourse under the loan sale agreement and the severity of loss incurred on loans which have been repurchased. The frequency of early payment defaults, cure rates and loss severity may vary depending on the creditworthiness of the borrower and economic factors such as home price appreciation and interest rates. To the extent actual losses related to repurchase activity are different from our estimates, the fair value of our recourse obligation will increase or decrease.

During the quarter ended July 31, 2006 we experienced higher early payment defaults, resulting in an increase in actual and expected loan repurchase activity. As a result, we recorded total loss provisions of $102.1 million during the three months ended July 31, 2006, which included $9.8 million in premium recapture reserves, compared to $16.9 million in the prior year. Loss provisions recorded in the current quarter consist of $46.1 million recorded on loans sold during the current quarter and $56.0 million related to loans sold in prior quarters. At July 31, 2006, we assumed that substantially all loans that failed to make timely payments according to contractual early payment default provisions will be repurchased, and that 5% of loans will be repurchased from sales that have not yet reached the contractual date upon which repurchases can be determined. Based on historical experience and review of current early payment default, cure rate and loss severity trends, we assumed 30% of all loans we repurchase will cure with no loss incurred, and of those that do not cure, we assumed an average 15% loss severity.

Based on our analysis as of July 31, 2006, we estimated our liability for recourse obligations to be $104.0 million. The sensitivity of the recourse liability to 10% and 20% adverse changes in loss assumptions is $10.4 million and $20.8 million, respectively.

Valuation of MSRs
MSRs are recorded when we sell to third-parties with the servicing of those loans retained. At the time of the loan sale, we determine and record on our balance sheet the allocated historical cost of the MSRs attributable to loans sold, as illustrated above. These MSRs are amortized into expense over the estimated life of the underlying loans. MSRs are carried at the lower of cost or market (LOCOM). On a quarterly basis, MSRs are assessed to determine if our carrying value exceeds fair value. Fair value is estimated using a discounted cash flow approach by stratifying the MSRs based on underlying loan characteristics, including the calendar year the loans are sold. To the extent fair value is less than carrying value we record an impairment charge and adjust the carrying value of the MSRs.

A market price of our MSRs is not readily available because non prime MSRs are not actively traded in the marketplace. Therefore, the fair value of our MSRs is estimated using a discounted cash flow approach, using valuation methods and assumptions we believe incorporate assumptions used by market participants. Certain of these assumptions are subjective and require a high level of management judgment. MSR valuation assumptions are reviewed and approved by management on a quarterly basis. In determining the assumptions to be used to value MSRs, we review the historical performance of our MSRs, including backtesting of the performance of certain individual assumptions (comparison of actual results to those expected). In addition, we periodically review third-party valuations of certain of our MSRs and peer group MSR valuation surveys to assess the reasonableness of our valuation assumptions and resulting fair value estimates.

Critical assumptions used in our discounted cash flow model include mortgage prepayment speeds, discount rates, costs to service and ancillary income. Variations in our assumptions could materially affect the estimated fair values. Changes to our assumptions are made when current trends and market data indicate that new trends have developed. Certain assumptions, such as ancillary interest income, may change from quarter to quarter as market conditions and projected interest rates change. Other assumptions, such as expected prepayment speeds, discount rates and costs of servicing may change less frequently as they are less sensitive to near-term market conditions.

Prepayment speeds may be affected by economic factors such as home price appreciation, market interest rates, the availability of other credit products to our borrowers, and customer payment patterns. Prepayment speeds include the impact of all borrower prepayments including full payoffs, additional principal payments and the impact of loans paid off due to foreclosure liquidations. As market interest rates decline, prepayment speeds will generally increase as customers refinance existing mortgages under more favorable interest rate terms. As prepayment speeds increase, anticipated cash flows will generally decline resulting in a potential reduction, or impairment, to the fair value of the capitalized MSRs. Alternatively, an increase in market interest rates may cause a decrease in prepayment speeds, and an increase in fair value of MSRs. Many of our loans include prepayment penalties during the first two to three years. Prepayment penalties tend to lower prepayment speeds during the early life of our loans, regardless of market interest rate movements, therefore decreasing the sensitivity of expected prepayment speeds to changes in interest rates. Prepayment speeds are estimated based on historical experience and third-party market sources. Changes are made as necessary to ensure such estimates reflect current market conditions specific to our individual MSR stratas.

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Discount rates are determined by reviewing market rates used by market participants. These rates may vary based on economic factors such as market perception of risk and changes in the risk-free interest rates. Changes are made as necessary to ensure such estimates reflect current market conditions for MSR assets.

Costs to service includes the cost to process loan payments, make payments to bondholders, collect delinquent accounts and administrative foreclosure activities. Market trends and changes to underlying expenses are evaluated to determine if updates to assumptions are necessary. The economic factors affecting costs to service include unemployment rates, the housing market and the cost of labor. Higher unemployment may lead to higher delinquency and foreclosure rates resulting in higher costs to service loans. The housing market, including home price appreciation rates, impacts sale prices for homes in foreclosure and our borrowers’ ability to refinance or sell their properties in the event that they can no longer afford their homes, thus impacting delinquencies and foreclosures.

Ancillary fees and income include late charges, non-sufficient funds fees, collection fees and interest earning funds held in deposit. These fees could be impacted by state legislation efforts, customer behavior, fee waiver policies and industry trends.

During the period from July 31, 2005 to the current quarter ended July 31, 2006, assumptions used in valuing MSRs have been updated. The significant changes and their impact, both in dollars and basis points of loans sold during the quarter of initial implementation, are outlined below beginning with the most recent changes.


			(dollars in 000s)
Description	Change	Impact	Quarter Implemented

Ancillary fees	Decreased average number of days of interest collected related to prepayments	($3,677) or (5) basis points	July 31, 2006

Discount rate	15% to 18%	($2,555) or (3) basis points	January 31, 2006

Costs to service	Decreased the number of days of interest paid to investors	$12,893 or 11 basis points	October 31, 2005

During the quarter ended July 31, 2006, we updated our assumption related to the average number of days of interest collected on funds received as a result of prepayments (Ancillary fees on the table above). We decreased the average number of days of interest collected following a review of the servicing portfolio data. During the quarter ended January 31, 2006, we increased the discount rate assumption (Discount rate on the table above) used to determine the fair value of MSRs from 15% to 18% as a result of an analysis of third party data including rates used by other market participants. During the quarter ended October 31, 2005, we updated our assumption for number of days of interest paid to investors (Costs to service on the table above) on monthly loan prepayments upon the completion of a review of the historical performance of the servicing portfolio. The cumulative net impact of the changes outlined above and other less significant changes made during the period from July 31, 2005 to July 31, 2006 was an increase of approximately 5 basis points for MSRs initially recorded in the current quarter compared to the prior year quarter.

The changes outlined above are applied not only when we determine the allocated historical cost of MSRs, but are also used in our evaluation of the fair value of the MSR portfolio in conjunction with our impairment review. The changes in assumptions primarily impact the recognition of our initial MSR value through calculation of the gain on sale of mortgage assets. Because MSRs are recorded at LOCOM, we are unable to adjust our MSR portfolio value upward, thus have not recognized the positive impact of the assumption changes on the MSR portfolio as a whole.

MSRs with a book value of $275.3 million are included in our condensed consolidated balance sheet at July 31, 2006. While changes in any assumption could impact the value of our MSRs, the primary drivers of significant changes to the value of our MSRs are prepayment speeds, discount rates, costs to service and ancillary fees. Below is a table showing the effect of a variation of a particular assumption on the fair value of our MSRs without changing any other assumptions. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.



Assumption		Impact on Fair Value

Prepayments (including defaults):
Adverse 10% — % impact on fair value		(15%)
Adverse 20% — % impact on fair value		(26%)
Discount rate:
Adverse 10% — % impact on fair value		(2%)
Adverse 20% — %$impact on fair value		(3%)
Ancillary Fees and Income:
Adverse 10% — %impact on fair value		(1%)
Adverse 20% — % impact on fair value		(5%)
Costs to service:
Adverse 10% — % impact on fair value		(3%)
Adverse 20% — % impact on fair value		(7%)

FORWARD-LOOKING INFORMATION

In this report, and from time to time throughout the year, we share our expectations for our future performance. These forward-looking statements are based upon current information, expectations, estimates and projections regarding the Company, the industries and markets in which we operate, and our assumptions and beliefs at that time. These statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these forward-looking statements. Words such as “believe,” “will,” “plan,” “expect,” “intend,” “estimate,” “approximate,” and similar expressions may identify such forward-looking statements.

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(dollars in 000s)
Three months ended Nine months ended
Restated Restated
January 31, January 31, October 31, January 31, January 31,
2006 2005 2005 2006 2005

Total expenses $ 229,040 $ 193,389 $ 239,912 $ 694,922 $ 532,197
Add: Expenses netted against gain on sale revenues 85,974 102,878 120,981 321,177 275,217
Less:
Cost of services 83,076 56,766 67,811 215,279 159,558
Cost of acquisition 24,305 50,084 50,591 127,201 122,194
Allocated support departments 6,549 6,244 6,793 19,173 18,391
Other 11,291 6,900 10,300 29,891 10,900

$ 189,793 $ 176,273 $ 225,398 $ 624,555 $ 496,371

Divided by origination volume $ 8,952,487 $ 8,393,735 $ 12,620,808 $ 32,460,924 $ 21,723,235
Total cost of origination 2.12 % 2.10 % 1.79 % 1.92 % 2.28 %

Banking Ratios (dollars in 000s)
Three months ended July 31, 2006

Efficiency Ratio:
Total Consumer Financial Services expenses $ 116,078
Less: Interest and non-banking expenses (114,744 )

Non-interest banking expenses $ 1,334

Total Consumer Financial Services revenues $ 108,298
Less: Non-banking revenues and interest expense (104,457 )

Net interest revenue — banking $ 3,841

35 %
Net Interest Margin (annualized):
Net banking interest revenue $ 3,729
Net banking interest revenue (annualized) $ 14,916

Divided by average assets $ 408,117

3.65 %
Return on Average Assets (annualized):
Total Consumer Financial Services pretax loss $ (7,780 )
Less: Non-banking pretax loss 8,949

Pretax banking income $ 1,169

Pretax banking income (annualized) $ 4,676

Divided by average assets $ 408,117

1.15 %
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks from those reported at April 30, ~~2005~~2006 in our Annual Report on Form ~~10-K/A.~~10-K.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have established disclosure controls and procedures (Disclosure Controls) to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusions of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective, maturing control system, misstatements due to error or fraud may occur and not be detected.
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As of the end of the period covered by this Form 10-Q, we evaluated the effectiveness of the design and operation of our ~~Disclosure Controls.~~disclosure controls and procedures. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial ~~Officer, and included consideration of the material weakness initially disclosed in our Annual Report on Form 10-K/A for the year ended April 30, 2005.~~Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our ~~Disclosure Controls~~disclosure controls and procedures ~~were not~~are effective as of the end of the period covered by this Quarterly Report on Form ~~10-Q because of the material weakness described below.~~

As disclosed initially in our Annual Report on Form 10-K/A for the year ended April 30, 2005, management identified a material weakness in our accounting for income taxes. Specifically, the Company did not maintain sufficient resources in the corporate tax function to accurately identify, evaluate and report, in a timely manner, non-routine and complex transactions. In addition, the Company had not completed the requisite historical analysis and related reconciliations to ensure tax balances were appropriately stated prior to the completion of the Company’s April 30, 2005 internal control activities.

In February 2006, as a result of the ongoing controls and procedural work to remediate the material weakness in the Company’s internal controls over accounting for income taxes as of April 30, 2005, management discovered additional income tax errors which required the restatement of prior periods. In preparation for its 10-Q filing, management reviewed this disclosure and believes it accurately describes the nature of the internal control deficiencies that contributed to the material weakness as of April 30, 2005.10-Q.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

In order to remediate the aforementioned material weakness, management completed the requisite historical analysis including creation of the necessary tax basis balance sheets and current and deferred reconciliations required and related internal control testing to ensure propriety of all tax related financial statement account balances as of the Form 10-K/A filing date. The Company believes it established appropriate controls and procedures and created appropriate tax account analysis and support subsequent to April 30, 2005.

Additionally, in our efforts to remediate the material weakness management has engaged a third-party firm to assist us in performing a comprehensive evaluation of the corporate tax function, including resource requirements. Since August 1, 2005, we have hired a Senior Vice President — Corporate Tax, an Income Tax Accounting Manager, a Corporate Tax Manager and two additional Tax Analysts. In addition to implementing management’s action plan addressing items from the comprehensive evaluation, we will continue to monitor the improvements in the controls over accounting for income taxes to ensure remediation of the material weakness.

~~Other than the changes outlined above, there~~There were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information below should be read in conjunction with the information included in note 1210 to our condensed consolidated financial statements.

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deceptive acts or practices; violations of the federal Racketeer Influenced and Corrupt Organizations Act; violations of the federal Fair Debt Collection Practices ~~Act;~~Act and ~~breach of~~unfair competition with respect to debt collection activities; and that we owe, and breached, a fiduciary duty to our customers in connection with the RAL program.

The amounts claimed in the RAL Cases have been very substantial in some instances. We have successfully defended against numerous RAL Cases, ~~although several~~some of ~~the RAL Cases are still pending. Of the RAL Cases that are no longer pending, some~~which were dismissed on our motions for dismissal or summary judgment, and others were dismissed voluntarily by the plaintiffs after denial of class certification. Other cases have been settled, with one settlement resulting in a pretax expense of $43.5 million in fiscal year 2003 (the “Texas RAL Settlement”)~~. On December 21, 2005, we entered into~~ and other settlements resulting in a ~~settlement agreement, subject to final court approval, regarding four RAL Cases entitled~~~~Deadra D. Cummins, et al~~.~~v. H&R Block~~,~~Inc. et al.~~;~~Mitchell v. H&R Block, Inc. et al.~~;~~Green v. H&R Block, Inc. et al.~~~~; and~~~~Becker v. H&R Block, Inc.~~~~(the “~~~~Cummins~~~~Settlement Agreement”~~combined pretax expense in fiscal year 2006 of $70.2 million (the “2006 Settlements”). ~~Pursuant to~~During the ~~terms of~~three months ended July 31, 2006, the~~CumminsSettlement Agreement, we will contribute a total of up to $62.5 million~~ 2006 settlements were paid in cash for purposes of making payments to the settlement class, paying all attorneys’ fees and costs to class counsel and covering service awards to the representative plaintiffs. In addition, we will pay costs for providing notice of the settlement to settlement class members. We recorded a reserve of $52.2 million related to this settlement in our third quarter.full.

We believe we have meritorious defenses to the remaining RAL Cases and we intend to defend ~~the remaining RAL Cases~~them vigorously. There can be no assurances, however, as to the outcome of the pending RAL Cases individually or in the aggregate. Likewise, there can be no assurances regarding the impact of the RAL Cases on our financial statements. We have accrued our best estimate of the probable loss related to the RAL Cases. The following is updated information regarding the pending RAL Cases that are attorney general actions or class actions or putative class ~~actions in which developments occurred during or after the three months ended January 31, 2006:~~actions:

Lynne A. Carnegie, et al. v. Household International, Inc., H&R Block, Inc., et al., (formerly Joel E. Zawikowski, et al. v. Beneficial National Bank, H&R Block, Inc., Block Financial Corporation, et al.) Case No. 98 C 2178, United States District Court for the Northern District of Illinois, Eastern Division, instituted on April 18, 1998. ~~In March 2004, the court either dismissed or decertified all~~This case constitutes one of the ~~plaintiffs’ claims other than part of one count alleging violations of the racketeering and conspiracy provisions of the Racketeer Influenced and Corrupt Organizations Act.~~2006 Settlements. On January 23, 2006, the court granted our motion for partial summary judgment applying a four-year RICO statute of limitations to the plaintiffs’ claims, reducing the class period to primarily the 1995 and 1996 tax seasons and reducing the class size to approximately 1.7 million members. This class action case is scheduled to go to trial on May 15, 2006. We intend to continue defending the case vigorously, but there are no assurances as to its outcome. We have, however, engaged in settlement discussions with counsel for the plaintiffs and, while no definitive agreement has been reached, plan to pursue those negotiations to either conclusion or take the matter to trial. During the quarter ended January 31,April 19, 2006, we ~~increased our legal reserves related to~~entered into a settlement agreement regarding this ~~matter by $19.5 million in connection with these developments.~~

~~Deadra D. Cummins, et al. v. H&R Block, Inc., et al~~~~., Case No. 03-C-134 in the Circuit Court of Kanawha County, West Virginia, instituted on January 22, 2003. This~~ case, ~~is stayed and will be resolved as part of the~~~~Cummins~~~~Settlement Agreement,~~ subject to final court approval.

~~Joyce Green, et al. v. H&R Block, Inc., Block Financial Corporation, et al.~~~~, Case No. 97195023, in~~ The settlement was approved by the ~~Circuit Court for Baltimore City, Maryland, instituted~~court on ~~July 14, 1997. This case is stayed and will be resolved as part of the~~~~Cummins~~~~Settlement Agreement, subject to final approval.~~

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~~Levon and Geral Mitchell, et al. v. H&R Block,, Inc. and Ruth Wren,~~~~Case No. CV-95-2067, in the Circuit Court of Mobile County, Alabama, instituted on June 13, 1995. This case is stayed and will be resolved as part of the~~~~Cummins~~~~Settlement Agreement, subject to final approval.~~

~~Lynn Becker v. H&R Block, Inc.,~~~~Case No. CV-2004-03-1680 in the Court of Common Pleas, Summit County, Ohio, Instituted on April 15, 2004. This case is stayed and will be resolved as part of the~~~~Cummins~~~~Settlement Agreement, subject to final approval.~~

~~On February 15, 2006, the California attorney general filed a lawsuit in the Superior Court of California, City and County of San Francisco entitled~~~~The People of California v. H&R Block, Inc., H&R Block Services, Inc., H&R Block Enterprises, Inc., H&R Block Tax Services, Inc., Block Financial Corporation, HRB Royalty, Inc. and Does 1 through 50~~. The complaint alleges, among other things, untrue, misleading or deceptive statements in marketing RALS and unfair competition with respect to debt collection activities. The complaint seeks equitable relief, civil penalties and restitution. We intend to defend the case vigorously, but there are no assurances as to its outcome.August 28, 2006.

PEACE OF MIND LITIGATION

Lorie J. Marshall, et al. v. H&R Block Tax Services, Inc., et al., Civil Action 2003L000004, in the Circuit Court of Madison County, Illinois, is a class action case filed on January 18, 2002, that was granted class certification on August 27, 2003. Plaintiffs’ claims consist of five counts relating to the Peace of Mind (POM) program under which the applicable tax return preparation subsidiary assumes liability for additional tax assessments attributable to tax return preparation error. The plaintiffs allege that the sale of POM guarantees constitutes (i) statutory fraud by selling insurance without a license, (ii) an unfair trade practice, by omission and by “cramming” (i.e., charging customers for the guarantee even though they did not request it or want it), and (iii) a breach of fiduciary duty. In August 2003, the court certified the plaintiff classes consisting of all persons who from January 1, 1997 to final judgment (i) were charged a separate fee for POM by “H&R Block” or a defendant H&R Block class member; (ii) reside in certain class states and were charged a separate fee for POM by “H&R Block” or a defendant H&R Block class member not licensed to sell insurance; and (iii) had an unsolicited charge for POM posted to their bills by “H&R Block” or a defendant H&R Block class member. Persons who received the POM guarantee through an H&R Block Premium office and persons who reside in Alabama are excluded from the plaintiff class. The court also certified a defendant class consisting of any entity with names that include “H&R Block” or “HRB,” or are otherwise affiliated or associated with H&R Block Tax Services, Inc., and that sold or sells the POM product. The trial court subsequently denied the defendants’ motion to certify class certification issues for interlocutory appeal. Discovery is proceeding. No trial date has been set.

There is one other putative class action pending against us in Texas that involves the POM guarantee. This case is being tried before the same judge that presided over the Texas RAL Settlement, involves the same plaintiffs’ attorneys that are involved in the Marshall litigation in Illinois, and contains similar allegations. No class has been certified in this case.

We believe the claims in the POM ~~action~~actions are without merit, and we intend to defend them vigorously. The amounts claimed in the POM actions are substantial, however, and there can be no assurances as to the outcome of these pending actions individually or in the aggregate. Likewise, there can be no assurances regarding the impact of these actions on our consolidated financial statements.

~~OTHER CLAIMS AND LITIGATION~~

As reported previously, the NASD brought charges against HRBFA regarding the sale by HRBFA of Enron debentures in 2001. A hearing for this matter is scheduled for May 2, 2006. We intend to defend the NASD charges vigorously, although there can be no assurances regarding the outcome and resolution of the matter.

As part of an industry-wide review, the IRS is investigating tax-planning strategies that certain RSM clients utilized during fiscal years 2000 through 2003. Specifically, the IRS is examining these strategies to determine whether RSM complied with tax shelter registration and listing regulations and whether such strategies were appropriate. If the IRS were to determine that these strategies were inappropriate, clients that utilized the strategies could face penalties and interest for underpayment of taxes. Some of these clients are seeking or may attempt to seek recovery from

~~-47-~~-36-

RSM. While there can be no assurance regarding the outcome of these matters, we do not believe its resolution will have a material adverse effect on our operations or consolidated financial statements.EXPRESS IRA LITIGATION

On March 15, 2006, the New York Attorney General filed a lawsuit in the Supreme Court of the State of New York, County of New York (Index No. 06/401110) entitledThe People of New York v. H&R Block, Inc. and H&R Block Financial ~~Services,~~Advisors, Inc.The complaint alleges fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the Express IRA product. The complaint seeks equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. A number of civil actions were subsequently filed against us concerning the matter. We intend to defend these cases vigorously, but there are no assurances as to their outcome.

~~On or about March 16, 2006, two~~SECURITIES AND SHAREHOLDER DERIVATIVE LITIGATION

Six shareholder derivative actions ~~were initiated~~purportedly brought on behalf of the Company (which is named as a “nominal defendant”) are pending against certain of the ~~Board~~Company’s current and former directors and officers. These cases generally involve allegations of ~~Directors~~breach of fiduciary duty, abuse of control, gross mismanagement, waste and ~~certain company officers. The cases involve claims that~~unjust enrichment pertaining to (i) the ~~defendants failed to properly manage certain company activities resulting in a~~Company’s restatement of financial results due to errors in determining the Company’s state effective income tax ~~miscalculations. These cases are pending in~~rate and (ii) certain of the ~~Circuit Court of Jackson County, Missouri~~Company’s products and ~~are styled~~Priscilla Fisk v. Mark A. Ernst, Jeffrey E. Nachbor, William L. Trubeck, Melanie K. Coleman, Frank J. Cotroneo, Thomas M. Bloch, Donna R. Ecton, Henry F. Frigon, Roger W. Hale, Len J. Lauer, David Baker Lewis, Tom D. Seip, Louis W. Smith, Ray Wilkins Jr. and Kenneth Baum~~. The plaintiff in the second action is Robert Lang. The named defendants in the~~~~Lang~~ ~~matter are the same as in~~~~Fisk~~.other business activities. We intend to defend these cases vigorously, but there are no assurances as to their outcome. These areHibbard v. H&R Block, Inc., et al.,in the United States District Court for the Western District of Missouri, Case No. 06- CV -06059 (instituted on May 16, 2006);Gottlieb v. H&R Block, et al.,in the United States District Court for the Western District of Missouri, Case No. 06-CV-00496 (instituted on June 5, 2006);Lebowitz v. H&R Block, et al.,in the United States District Court for the Western District of Missouri, Case No. 06-CV-00496 (instituted on June 5, 2006);Staehr v. H&R Block, Inc., et al.,in the United States District Court for the Western District of Missouri, Case No. 06- CV-00284 (instituted on April 5, 2006);Momentum Partners v. H&R Block, et al.,in the United States District Court for the Western District of Missouri, Case No. 06- CV-00465 (instituted on June 8, 2006); andIron Workers Local 16 Pension Fund v. H&R Block, et al.,in the United States District Court for the Western District of Missouri, Case No. 06- CV-00466 (instituted on June 8, 2006).

~~Subsequent~~In addition to ~~February 2006, a number of~~the shareholder derivative actions, three putative class actions alleging violations of certain securities laws ~~were filed.~~are pending against the Company and certain of its current and former officers and directors. These actions allege, among other things, deceptive, material and misleading financial statements, failure to prepare financial statements in accordance with generally accepted accounting principles and concealment of the potential for lawsuits stemming from the allegedly fraudulent nature of the Company’s operations. The actions seek unspecified damages and equitable relief. We intend to defend these cases vigorously, but there are no assurances as to ~~its~~their outcome. These cases areNettie v. H&R Block, Inc. and Mark A. Ernstin the United States District Court for the Western District of Missouri, Case No. 06- CV- 0235 (instituted on March 17, 2006);Winters v. H&R Block, Inc., et al.,in the United States District Court for the Western District of Missouri, Case No. 06-CV-00243 (instituted on March 20, 2006); andKadagian v. H&R Block, Inc., et al.,in the United States District Court for the Western District of Missouri , Case No. 06-CV-00574 (instituted on March 24, 2006).

OTHER CLAIMS AND LITIGATION

As reported previously, the NASD brought charges against HRBFA regarding the sale by HRBFA of Enron debentures in 2001. A hearing for this matter commenced in May 2006 and was recessed until the fall of 2006. We intend to defend the NASD charges vigorously, although there can be no assurances regarding the outcome and resolution of the matter.

As part of an industry-wide review, the IRS is investigating tax-planning strategies that certain RSM clients utilized during fiscal years 2000 through 2003. Specifically, the IRS is examining these strategies to determine whether RSM complied with tax shelter reporting and listing regulations and whether such strategies were abusive as defined by the IRS. If the IRS were to determine that RSM did not comply with the tax shelter reporting and listing regulations, it might assess fines or penalties against RSM. Moreover, if the IRS were to determine that the tax planning strategies were inappropriate, clients that utilized the strategies could face penalties and interest for underpayment

-37-

of taxes. Some of these clients are seeking or may attempt to seek recovery from RSM. There can be no assurance regarding the outcome of and resolution of this matter.

We have from time to time been party to claims and lawsuits not discussed herein arising out of our business operations. These claims and lawsuits include actions by state attorneys general, individual plaintiffs, and cases in which plaintiffs seek to represent 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. Some of these claims and lawsuits pertain to RALs, the electronic filing of customers’ income tax returns, the POM guarantee program, business valuation services and our Express IRA program. We believe we have meritorious defenses to each of these claims, and we are defending or intend to defend them vigorously, although there is no assurance as to their outcome.

In addition to the aforementioned types of cases, we are parties to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including claims and lawsuits ~~(“Other Claims”)~~(Other Claims) concerning investment products, the preparation of customers’ income tax returns, the fees charged customers for various products and services, losses incurred by customers with respect to their investment accounts, relationships with franchisees, denials of mortgage loans, contested mortgage foreclosures, other aspects of the mortgage business, intellectual property disputes, employment matters and contract disputes. We believe we have meritorious defenses to each of the Other Claims, and we are defending them vigorously. While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are required to pay in the discharge of liabilities or settlements in these Other Claims will not have a material adverse effect on our consolidated financial statements.

~~-48-~~

ITEM 1A. RISK FACTORS

Consumer Financial Services.H&R Block, Inc. is a savings and loan holding company, and HRB Bank is a federal savings bank, which is subject to regulation by the OTS and FDIC. Federal and state laws and regulations govern numerous matters including: changes in the ownership or control of banks and bank holding companies; maintenance of adequate capital and the financial condition of a financial institution; permissible types, amounts and terms of extensions of credit and investments; permissible non-banking activities; the level of reserves against deposits; and restrictions on dividend payments. If we do not comply with these regulations, it could result in regulatory actions and negative publicity, which could adversely affect our results of operations.

Other than the item discussed above, there have been no material changes in our risk factors from those reported at April 30, 2006 in our Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

A summary of our purchases of H&R Block common stock during the ~~third~~first quarter of fiscal year ~~2006~~2007 is as follows:

(shares in 000s)
�� Total Number of Shares Maximum Number
Total Average Purchased as Part of of Shares that May
Number of Shares Price Paid Publicly Announced Be Purchased Under
Purchased⁽¹⁾ per Share Plans or Programs⁽²⁾ the Plans or Programs⁽²⁾

November 1 — November 30 — $ — — 10,494
December 1 — December 31 2 $ 24.97 — 10,494
January 1 — January 31 11 $ 25.50 — 10,494

(shares in 000s)
Total Number of Shares Maximum Number
Total Average Purchased as Part of of Shares that May
Number of Shares Price Paid Publicly Announced Be Purchased Under
Purchased⁽¹⁾ per Share Plans or Programs⁽²⁾ the Plans or Programs⁽²⁾

May 1 - May 31 6,633 $ 22.02 6,633 3,862
June 1 - June 30 158 $ 22.92 156 23,706
July 1 - July 31 1,579 $ 23.21 1,354 22,352


⁽¹⁾		~~All~~We purchased 227,344 shares ~~were purchased~~ in connection with the funding of employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on ~~restricted~~nonvested shares.

⁽²⁾		On June 9, 2004, our Board of Directors approved the repurchase of 1515.0 million shares of H&R Block, Inc. common stock. ~~This~~On June 7, 2006, our Board approved an additional authorization ~~has~~to repurchase 20.0 million shares. These authorizations have no expiration date.

-38-

ITEM 6. EXHIBITS


10.1		Description of Executive Officer Compensation.


10.2		Omnibus Amendment Number ~~One~~Three to the ~~Amended and Restated Sale and Servicing Agreement~~Option One Owner Trust 2005-6 Warehouse Facility dated ~~November 11, 2005~~as of June 29, 2006, among Option One ~~Mortgage Corporation,~~Owner Trust 2005-6, Option One Loan Warehouse Corporation, Option One ~~Owner Trust 2003-5, and~~Mortgage Corporation, Wells Fargo Bank, ~~N.A.~~N. A. and Lehman Brothers Bank.



	~~10.2~~		Amendment Number Four to the Second Amended and Restated Sale and Servicing Agreement dated March 8, 2005 among Option One Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2001-2, and Wells Fargo Bank, N.A.

	~~10.3~~		Amendment Number Seven to the Amended and Restated Note Purchase Agreement dated November 25, 2003 among Option One Loan Warehouse Corporation, the Option One Owner Trust 2001-2, and Bank of America, N.A.

	~~10.4~~		~~Amendment Number Eight to the Amended and Restated Indenture dated as of November 25, 2003 between Option One Owner Trust 2001-2 and Wells Fargo Bank, N.A.~~

	~~10.5~~		Agreement of Settlement dated December 23, 2005 among H&R Block, Inc., H&R Block Services, Inc., H&R Block Tax Services, Inc., Block Financial Corporation, HRB Royalty, Inc., H&R Block Eastern Enterprises, Inc., Deadra D. Cummins, Ivan and LaDonna Bell, Levon Mitchell, Geral Mitchell, Joyce Green, Lynn Becker, Justin Sevey, Maryanne Hoekman and Renea Griffith.*

	~~10.6~~		~~Sale and Servicing Agreement dated as of December 30, 2005, among Option One Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2005-9, and Wells Fargo Bank, N.A.~~

	~~10.7~~		Note Purchase Agreement dated as of December 30, 2005, among Option One Loan Warehouse Corporation, Option One Owner Trust 2005-9, DB Structured Products, Inc., Gemini Securitization Corp., LLC, Aspen Funding Corp. and Newport Funding Corp.

	~~10.8~~		~~Indenture dated as of December 30, 2005, between Option One Owner Trust 2005-9 and Wells Fargo Bank, N.A.~~

	31.1		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


	31.2		Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


	32.1		Certification by Chief Executive Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.


	32.2		Certification by Chief Financial Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.


*		~~Confidential information has been omitted from this exhibit and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2.~~

~~-49-~~-39-


			Page
PART I	Financial Information

Item 1.	Condensed Consolidated Balance Sheets ~~January~~July 31, 2006 and April 30, ~~2005 (Restated)~~2006			1

	Condensed Consolidated Statements of Income and Comprehensive Income Three ~~and Nine~~ Months Ended ~~January~~July 31, 2006 and 2005 ~~(Restated)~~			2

	Condensed Consolidated Statements of Cash Flows ~~Nine~~Three Months Ended ~~January~~July 31, 2006 and 2005 ~~(Restated)~~			3

	Notes to Condensed Consolidated Financial Statements			4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			2120

Item 3.	Quantitative and Qualitative Disclosures about Market Risk			4435

Item 4.	Controls and Procedures			4435

PART II	Other Information

Item 1. Legal Proceedings		35

Item 1.1A. Risk Factors	~~Legal Proceedings~~			4538

Item 2.	Unregistered Sales of Equity Securities			4938

Item 6. Exhibits	~~Exhibits~~			4939

SIGNATURES				5040
~~Amendment No. 1 to Amended/Restated Sale & Servicing Agreement~~Description of Executive Officer Compensation
Omnibus Amendment ~~No. 4~~#3 to ~~2nd Amended/Restated Sale & Servicing Agreement~~Option One Owner Trust
~~Amendment No. 7 to Amended/Restated Note Purchase Agreement~~302 Certification of Chief Executive Officer
~~Amendment No. 8 to Amended/Restated Indenture~~302 Certification of Chief Financial Officer
~~Agreement~~906 Certification of ~~Settlement~~Chief Executive Officer
~~Sale and Servicing Agreement~~
~~Note Purchase Agreement~~
~~Indenture~~
906 Certification ~~Pursuant to Section 302~~ of ~~CEO~~
~~Certification Pursuant to Section 302 of CFO~~
~~Certification Pursuant to 18 U.S.C. Section 1350 of CEO~~
~~Certification Pursuant to 18 U.S.C. Section 1350 of CFO~~Chief Financial Officer


							(in 000s)
	January 31, 2006			January 31, 2005			April 30, 2005

Participation in refund anticipation loans (RALs)	$	900,230		$	829,325		$	57,084
Mortgage loans held for sale		336,213			128,607			79,458
Business Services accounts receivable		312,087			175,140			178,338
Receivables for tax-related fees		115,906			108,331			5,760
Loans to franchisees		60,185			52,712			39,022
Royalties from franchisees		50,575			46,900			668
Software receivables		18,938			26,420			22,578
Other		73,796			87,539			74,759

		1,867,930			1,454,974			457,667
Allowance for doubtful accounts		(34,144	)		(21,336	)		(34,201	)
Lower of cost or market adjustment — mortgage loans		(22,841	)		(11,645	)		(4,678	)

	$	1,810,945		$	1,421,993		$	418,788


													(in 000s)
	January 31, 2006							April 30, 2005
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
	Amount		Amortization			Net		Amount		Amortization			Net

Tax Services:
Customer relationships	$	26,962	$	(9,751	)	$	17,211	$	23,717	$	(7,207	)	$	16,510
Noncompete agreements		18,961		(16,135	)		2,826		17,677		(11,608	)		6,069
Business Services:
Customer relationships		153,227		(77,564	)		75,663		130,585		(68,433	)		62,152
Noncompete agreements		32,483		(13,431	)		19,052		27,796		(11,274	)		16,522
Trade name — amortizing		4,050		(1,481	)		2,569		1,450		(995	)		455
Trade name — non-amortizing		55,637		(4,868	)		50,769		55,637		(4,868	)		50,769
Investment Services:
Customer relationships		293,000		(225,854	)		67,146		293,000		(198,385	)		94,615

Total intangible assets	$	584,320	$	(349,084	)	$	235,236	$	549,862	$	(302,770	)	$	247,092


(dollars in 000s)
						Minimum Required to
						Qualify as Well
	Actual					Capitalized
	Amount		Ratio			Amount		Ratio

Tier 1 capital to adjusted total assets (leverage)	$	160,270		33.70	%	$	23,776		5.0	%
Total risk-based capital to total risk-weighted assets	$	161,393		67.20	%	$	24,017		10.0	%


CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME		(Unaudited, amounts in 000s, except per share amounts)


	(in 000s, except per share amounts)
	Three months ended January 31, 2005
	As Previously
	Reported⁽¹⁾			Adjustments⁽²⁾			Subtotal			Adjustments⁽³⁾			Restated

Gain on sale of mortgage assets, net	$	198,301		$	283		$	198,584		$	—		$	198,584
Interest income		46,599			3,946			50,545			—			50,545
Total revenues		1,032,007			4,229			1,036,236			—			1,036,236
Total operating expenses		887,030			2,634			889,664			—			889,664
Operating income		144,977			1,595			146,572			—			146,572
Income before taxes		151,683			1,595			153,278			—			153,278
Income taxes		59,991			(2,478	)		57,513			2,029			59,542
Net income		91,692			4,073			95,765			(2,029	)		93,736
Basic earnings per share	$	0.28		$	0.01		$	0.29		$	(0.01	)	$	0.28
Diluted earnings per share	$	0.27		$	0.02		$	0.29		$	(0.01	)	$	0.28
Change in unrealized gain on available-for-sale securities, net	$	(3,881	)	$	(2,613	)	$	(6,494	)	$	—		$	(6,494	)
Comprehensive income		89,728			1,460			91,188			(2,029	)		89,159


	Nine months ended January 31, 2005
	As Previously
	Reported⁽¹⁾			Adjustments⁽²⁾			Subtotal		Adjustments⁽³⁾			Restated

Gain on sale of mortgage assets, net	$	564,949		$	1,143		$	566,092	$	—		$	566,092
Interest income		129,193			9,624			138,817		—			138,817
Total revenues		2,053,973			10,767			2,064,740		—			2,064,740
Total operating expenses		2,035,128			(10,698	)		2,024,430		—			2,024,430
Operating income		18,845			21,465			40,310		—			40,310
Income (loss) before taxes		(6,805	)		21,465			14,660		—			14,660
Income taxes (benefit)		(2,215	)		7,724			5,509		171			5,680
Net income (loss)		(4,590	)		13,741			9,151		(171	)		8,980
Basic earnings (loss) per share	$	(0.01	)	$	.04		$	0.03	$	—		$	0.03
Diluted earnings (loss) per share	$	(0.01	)	$	.04		$	0.03	$	—		$	0.03
Change in unrealized gain on available-for-sale securities, net	$	29,714		$	(6,654	)	$	23,060	$	—		$	23,060
Comprehensive income		35,082			7,087			42,169		(171	)		41,998


	(in 000s)

Property and equipment	$	17,664
Other assets		121,228
Liabilities		(51,701	)
Amortizing intangible assets		28,100
Goodwill		76,383

	$	191,674

6.3.		Mortgage Banking Activities

		Activity related to trading residual interests in securitizations consists of the following:

		At July 31, 2006 and 2005, we had $59.3 million and $58.0 million, respectively, in residual interests classified as trading securities, which are included in marketable securities – trading on the condensed consolidated balance sheet. These residual interests are the result of the initial securitization of mortgage loans and those held at July 31, 2006 are expected to be securitized in a NIM transaction during our second quarter. There were no such trading securities recorded as of April 30, 2006. Cash received on trading residual interests is included in operating activities in the condensed consolidated statements of cash flows.

		Activity related to available-for-sale residual interests in securitizations consists of the following:

		Cash flows from available-for-sale residual interests of $4.6 million and $24.0 million were received from the securitization trusts for the three months ended July 31, 2006 and 2005, respectively. Cash received on available-for-sale residual interests is included in investing activities in the condensed consolidated statements of cash flows.

		Aggregate net unrealized gains on available-for-sale residual interests not yet accreted into income totaled $40.1 million at July 31, 2006 and $44.1 million at April 30, 2006. These unrealized gains are recorded net of deferred taxes in other comprehensive income, and may be recognized in income in future periods either through accretion or upon further securitization or sale of the related residual interest.

		Activity related to mortgage servicing rights (MSRs) consists of the following:


	July 31, 2006			April 30, 2006

Estimated credit losses		3.10	%		3.07	%
Discount rate – residual interests		20.24	%		21.98	%
Discount rate – MSRs		18.00	%		18.00	%
Variable returns to third-party beneficial interest holders	LIBOR forward curve at valuation date


				Months Outstanding After
	Prior to Initial			Initial Rate Reset Date
	Rate Reset Date			Zero - 3			Remaining Life

Adjustable rate mortgage loans:
With prepayment penalties		31	%		72	%		39	%
Without prepayment penalties		35	%		52	%		34	%
Fixed rate mortgage loans:
With prepayment penalties		30	%		48	%		38	%

		For fixed rate mortgages without prepayment penalties, we use an average prepayment rate of 32% over the life of the loans. Prepayment rate is projected based on actual paydown including voluntary, involuntary and scheduled principal payments.

		Expected static pool credit losses are as follows:


	Mortgage Loans Securitized in Fiscal Year
	Prior to 2002			2002			2003			2004			2005			2006			2007

As of:
July 31, 2006		4.75	%		2.69	%		2.12	%		2.20	%		2.29	%		3.19	%		3.51	%
April 30, 2006		4.75	%		2.69	%		2.13	%		2.18	%		2.48	%		3.05	%		—
April 30, 2005		4.52	%		2.53	%		2.08	%		2.30	%		2.83	%		—			—
April 30, 2004		4.46	%		3.58	%		4.35	%		3.92	%		—			—			—

		Static pool credit losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets.

		At July 31, 2006, the sensitivities of the current fair value of the residual interests and MSRs to 10% and 20% adverse changes in the above key assumptions are as presented in the following table. These sensitivities are hypothetical and should be used with caution. As the figures indicate, 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; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.


	Prior to			Months Outstanding After
	Initial Rate			Initial Rate Reset Date
	Reset Date			Zero - 3			Remaining Life
Adjustable rate mortgage loans:
With prepayment penalties		31	%		72	%		41	%
Without prepayment penalties		35	%		52	%		35	%
Fixed rate mortgage loans:
With prepayment penalties		30	%		48	%		38	%


							(dollars in 000s)
	Residential Mortgage Loans
	NIM			Beneficial Interest			Servicing
	Residuals			in Trusts			Assets
Carrying amount/fair value	$	175,068		$	279,714		$	262,369
Weighted average remaining life (in years)		1.9			2.0			1.3

Prepayments (including defaults):
Adverse 10% — $impact on fair value	$	3,981		$	(12,497	)	$	(35,910	)
Adverse 20% — $impact on fair value		11,679			(17,632	)		(60,158	)

Credit losses:
Adverse 10% — $impact on fair value	$	(45,495	)	$	(13,062	)	Not applicable
Adverse 20% — $impact on fair value		(77,590	)		(23,942	)	Not applicable

Discount rate:
Adverse 10% — $impact on fair value	$	(5,860	)	$	(5,650	)	$	(4,114	)
Adverse 20% — $impact on fair value		(11,333	)		(11,130	)		(8,112	)

Variable interest rates (LIBOR forward curve):
Adverse 10% — $impact on fair value	$	(5,330	)	$	(74,636	)	Not applicable
Adverse 20% — $impact on fair value		(9,410	)		(147,357	)	Not applicable


											(in 000s)
	Total Principal				Principal Amount of
	Amount of Loans				Loans 60 Days or				Credit Losses
	Outstanding				More Past Due				(net of recoveries)
	January 31,		April 30,		January 31,		April 30,		Three months ended
	2006		2005		2006		2005		January 31, 2006		April 30, 2005

Securitized mortgage loans	$	11,492,170	$	10,300,805	$	1,017,855	$	1,128,376	$	27,972	$	21,641
Mortgage loans in warehouse Trusts		11,209,456		6,742,387		—		—		—		—

Total loans	$	22,701,626	$	17,043,192	$	1,017,855	$	1,128,376	$	27,972	$	21,641


(in 000s, except per share amounts)

Net loss as reported	$	(27,994	)
Add: Stock-based compensation expense included in reported net loss, net of related tax effects		5,765
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects		(8,309	)

Pro forma net loss	$	(30,538	)

Basic and diluted loss per share:
As reported	$	(0.08	)
Pro forma		(0.09	)


(in 000s, except per share amounts)
						Weighted Average
				Weighted Average		Remaining	Aggregate
	Shares			Exercise Price		Contractual Term	Intrinsic Value

Outstanding, beginning of period		26,048		$	21.40
Granted		4,943			23.86
Exercised		(460	)		14.84
Forfeited or expired		(191	)		22.98

Outstanding, end of period		30,340			21.89	5 years	$	80,521


Exercisable, end of period		18,301		$	19.35	4 years	$	75,626
Exercisable and expected to vest		28,547			21.70	5 years	$	80,265


(shares in 000s)
				Weighted Average
	Shares			Grant Date Fair Value

Outstanding, beginning of period		2,455		$	25.27
Granted		944			23.93
Released		(738	)		25.01
Forfeited		(77	)		24.63

Outstanding, end of period		2,584			24.95


(in 000s)
As of	July 31, 2006		April 30, 2006

Commitment to fund mortgage loans	$	3,664,877	$	4,032,045
Commitment to sell mortgage loans		3,185,000		3,052,688
Commitment to fund Franchise Equity Lines of Credit		75,965		75,909
Contingent business acquisition obligations		22,845		24,482


(in 000s)
	Accrual Balance		Cash			Accrual Balance
	as of April 30, 2006		Payments			as of July 31, 2006

Employee severance costs	$	1,737	$	(1,737	)	$	—
Contract termination costs		5,821		(2,889	)		2,932

	$	7,558	$	(4,626	)	$	2,932


(in 000s)
										Consumer
	Tax			Mortgage			Business			Financial
	Services			Services			Services			Services			Corporate			Eliminations			Consolidated

Three months ended July 31, 2006:
Revenues:
External	$	66,018		$	166,961		$	205,017		$	100,288		$	2,495		$	—		$	540,779
Loan sales to HRB Bank		—			10,378			—			—			—			(10,378	)		—
HRBMC loan sales to Option One		—			(8,472	)		—			8,472			—			—			—
Other intersegment		17			809			114			(462	)		3,063			(3,541	)		—

	$	66,035		$	169,676		$	205,131		$	108,298		$	5,558		$	(13,919	)	$	540,779


Pretax loss	$	(153,148	)	$	(4,924	)	$	(14,565	)	$	(7,780	)	$	(28,512	)	$	(9,730	)	$	(218,659	)


Three months ended July 31, 2005:
Revenues:
External	$	57,165		$	308,276		$	126,739		$	120,145		$	2,668		$	—		$	614,993
HRBMC loan sales to Option One		—			(4,235	)		—			4,235			—			—			—
Other intersegment		26			1,006			107			—			2,336			(3,475	)		—

	$	57,191		$	305,047		$	126,846		$	124,380		$	5,004		$	(3,475	)	$	614,993


Pretax income (loss)	$	(144,506	)	$	130,664		$	(6,765	)	$	(3,748	)	$	(21,762	)	$	248		$	(45,869	)


Condensed Consolidating Balance Sheets												(in 000s)
	H&R Block, Inc.		BFC			Other						Consolidated
July 31, 2006	(Guarantor)		(Issuer)			Subsidiaries			Elims			H&R Block

Cash & cash equivalents	$	—	$	214,375		$	175,693		$	—		$	390,068
Cash & cash equivalents – restricted		—		332,757			12,972			—			345,729
Receivables from customers, brokers and dealers, net		—		437,697			—			—			437,697
Receivables, net		69		103,955			266,283			—			370,307
Mortgage loans held for investment		—		541,361			—			—			541,361
Intangible assets and goodwill, net		—		377,991			931,383			—			1,309,374
Investments in subsidiaries		5,027,345		215			—			(5,027,345	)		215
Other assets		—		1,545,035			696,754			(272	)		2,241,517

Total assets	$	5,027,414	$	3,553,386		$	2,083,085		$	(5,027,617	)	$	5,636,268


Commercial paper	$	—	$	189,356		$	—		$	—		$	189,356
Accts. payable to customers, brokers and dealers		—		716,305			—			—			716,305
Long-term debt		—		398,060			13,674			—			411,734
Other liabilities		2		1,467,295			1,040,007			—			2,507,304
Net intercompany advances		3,215,843		(1,005,129	)		(2,210,714	)		—			—
Stockholders’ equity		1,811,569		1,787,499			3,240,118			(5,027,617	)		1,811,569

Total liabilities and stockholders’ equity	$	5,027,414	$	3,553,386		$	2,083,085		$	(5,027,617	)	$	5,636,268


Condensed Consolidating Statements of Cash Flows														(in 000s)
Three months ended	H&R Block, Inc.			BFC			Other							Consolidated
July 31, 2006	(Guarantor)			(Issuer)			Subsidiaries				Elims			H&R Block

Net cash provided by (used in) operating activities:	$	16,281		$	263,292		$	(737,988	)		$	—		$	(458,415	)

Cash flows from investing:
Cash received on residuals		—			4,567			—				—			4,567
Mortgage loans originated for investment, net		—			(135,161	)		—				—			(135,161	)
Purchase property & equipment		—			(3,691	)		(39,177	)			—			(42,868	)
Payments for business acquisitions		—			—			(4,627	)			—			(4,627	)
Net intercompany advances		196,279			—			—				(196,279	)		—
Other, net		—			—			7,068				—			7,068

Net cash provided by (used in) investing activities		196,279			(134,285	)		(36,736	)			(196,279	)		(171,021	)

Cash flows from financing:
Repayments of commercial paper		—			(1,034,210	)		—		��		—			(1,034,210	)
Proceeds from commercial paper		—			1,223,566			—				—			1,223,566
Customer deposits		—			404,030			—				—			404,030
Dividends paid		(40,485	)		—			—				—			(40,485	)
Acquisition of treasury shares		(186,339	)		—			—				—			(186,339	)
Proceeds from stock options		6,791			—			—				—			6,791
Excess tax benefits on stock-based compensation		1,114			—			—				—			1,114
Net intercompany advances		—			(649,771	)		453,492				196,279			—
Other, net		6,359			(9,808	)		(45,872	)			—			(49,321	)

Net cash provided by (used in) financing activities		(212,560	)		(66,193	)		407,620				196,279			325,146

Net increase (decrease) in cash		—			62,814			(367,104	)			—			(304,290	)
Cash – beginning of period		—			151,561			542,797				—			694,358

Cash – end of period	$	—		$	214,375		$	175,693			$	—		$	390,068


Tax Services - Operating Results				(in 000s)
Three months ended July 31,	2006			2005

Service revenues:
Tax preparation and related fees	$	25,662		$	23,637
Other services		35,028			28,967

		60,690			52,604
Royalties		2,923			2,396
Other		2,422			2,191

Total revenues		66,035			57,191


Cost of services:
Compensation and benefits		45,840			42,592
Occupancy		67,671			59,313
Depreciation		9,254			10,169
Other		48,237			39,967

		171,002			152,041
Other, selling, general and administrative		48,181			49,656

Total expenses		219,183			201,697

Pretax loss	$	(153,148	)	$	(144,506	)


	Period January 1 through January 31,
	2006		2005
Clients served (in 000s):
Company-owned operations		2,372		2,447
Franchise operations		1,398		1,406

		3,770		3,853


Average fee per client served:⁽¹⁾
Company-owned operations	$	160.19	$	149.94
Franchise operations		137.06		130.82

	$	151.61	$	142.97


Refund anticipation loans (RALs) (in 000s):
Company-owned operations		1,149		1,197
Franchise operations		716		714

		1,865		1,911


Offices:
Company-owned		6,387		5,811
Company-owned shared locations⁽²⁾		1,473		1,296

Total company-owned offices		7,860		7,107

Franchise		3,703		3,528
Franchise shared locations⁽²⁾		602		526

Total franchise offices		4,305		4,054

		12,165		11,161


Mortgage Services - Operating Results													(in 000s)
Three months ended July 31,										2006			2005
							(in 000s)
				Restated
Three months ended	January 31, 2006			January 31, 2005			October 31, 2005
Components of gains on sales:
Gain on mortgage loans	$	161,399		$	172,381		$	66,580		$	50,348		$	168,968
Gain (loss) on derivatives		5,060			30,756			60,750
Gain on sales of residual interests		—			—			28,675
Gain on derivatives											12,520			23,947
Impairment of residual interests		(8,562	)		(4,553	)		(8,738	)		(17,266	)		(11,875	)

											45,602			181,040
		157,897			198,584			147,267

Interest income:
Accretion — residual interests		28,849			32,728			33,564			13,509			30,777
Other interest income		3,464			4,064			4,605
Other											1,525			2,768

		32,313			36,792			38,169			15,034			33,545

Loan servicing revenue		106,065			72,928			100,386			109,040			90,269
Other		218			568			329			—			193

Total revenues		296,493			308,872			286,151			169,676			305,047


Cost of services		83,076			56,766			67,811			78,688			64,392
Cost of other revenues:
Compensation and benefits		70,647			64,100			84,151			34,184			50,829
Occupancy		9,169			9,546			10,531			4,506			9,568
Other		24,682			18,698			28,737			20,732			20,123

		104,498			92,344			123,419			59,422			80,520
Selling, general and administrative		41,466			44,279			48,682			36,490			29,471

Total expenses		229,040			193,389			239,912			174,600			174,383

Pretax income	$	67,453		$	115,483		$	46,239
Pretax income (loss)										$	(4,924	)	$	130,664


⁽¹⁾		Includes all direct sales and back office sales support associates.

⁽²⁾		~~Percentage of loans funded divided by total applications in the period.~~

⁽³⁾		~~Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume.~~


Business Services - Operating Statistics
Three months ended July 31,	2006		2005

Accounting, tax and consulting:
Chargeable hours		1,024,649		597,202
Chargeable hours per person		276		270
Net billed rate per hour	$	143	$	134
Average margin per person	$	19,666	$	17,321


⁽¹⁾		Total revenues, less interest ~~expense.~~expense and loan loss reserves on mortgage loans held for investment.


						(in 000s)

Acquisition cost of underlying mortgage loans				$	1,000,000

Fair values:
Net proceeds
Cash received	$	999,000
Less recourse obligation		(4,000	)	$	995,000

Beneficial interest in Trusts					20,000
MSRs					7,000

				$	1,022,000

Computation of gain on sale:
Net proceeds				$	995,000
Less allocated cost ($995,000 / $1,022,000 x $1,000,000)					973,581

Recorded gain on sale				$	21,419

Recorded beneficial interest in Trusts ($20,000 / $1,022,000 x $1,000,000)				$	19,570

Recorded value of MSRs ($7,000 / $1,022,000 x $1,000,000)				$	6,849

Recorded liability for recourse obligation				$	4,000