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, 2007


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)		Identification No.)

One H&R Block Way
Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)

(816) 854-3000
(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, 2007 was ~~322,926,550~~324,632,718 shares.


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

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~


	(amounts in 000s, except share amounts)
	January 31, 2007			April 30, 2006
							July 31, 2007			April 30, 2007
	(Unaudited)						(Unaudited)
ASSETS
Cash and cash equivalents	$	1,082,666		$	677,204		$	437,671		$	921,838
Cash and cash equivalents — restricted		432,524			385,623			287,789			332,646
Receivables from customers, brokers, dealers and clearing organizations, net		424,874			496,577
Receivables, less allowance for doubtful accounts of $54,974 and $64,480		2,376,846			482,144
Receivables from customers, brokers, dealers and clearing organizations, less allowance for doubtful accounts of $2,314 and $2,292								404,420			410,522
Receivables, less allowance for doubtful accounts of $95,530 and $99,259								423,450			556,255
Prepaid expenses and other current assets		202,309			152,701			224,834			208,564
Current assets of discontinued operations, held for sale		988,060			594,187			1,110,427			1,024,467

Total current assets		5,507,279			2,788,436			2,888,591			3,454,292

Mortgage loans held for investment, net		1,069,626			—
Property and equipment, at cost less accumulated depreciation and amortization of $645,913 and $627,181		392,706			356,812
Mortgage loans held for investment, less allowance for loan losses of $4,585 and $3,448								1,241,281			1,358,222
Property and equipment, at cost less accumulated depreciation and amortization of $656,335 and $647,151								372,235			379,066
Intangible assets, net		184,290			219,494			173,799			181,413
Goodwill, net		982,598			947,985
Goodwill								1,006,278			993,919
Other assets		386,986			375,395			484,081			454,646
Noncurrent assets of discontinued operations, held for sale		836,493			1,301,013			701,805			722,492

Total assets	$	9,359,978		$	5,989,135		$	6,868,070		$	7,544,050


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Commercial paper and other short-term borrowings	$	2,926,421		$	—		$	1,651,237		$	1,567,082
Current portion of long-term debt		512,333			506,992
Customer banking deposits								1,039,238			1,129,263
Accounts payable to customers, brokers and dealers		684,475			781,303			615,858			633,189
Customer banking deposits		1,632,875			—
Accounts payable, accrued expenses and other current liabilities		496,084			612,181			398,864			519,372
Accrued salaries, wages and payroll taxes		249,243			270,303			131,274			307,854
Accrued income taxes		71,079			505,690			113,739			439,472
Current portion of long-term debt								9,371			9,304
Current liabilities of discontinued operations, held for sale		497,749			216,967			750,782			615,373

Total current liabilities		7,070,259			2,893,436			4,710,363			5,220,909

Long-term debt		416,183			417,539			519,803			519,807
Other noncurrent liabilities		343,362			530,361			556,542			388,835

Total liabilities		7,829,804			3,841,336			5,786,708			6,129,551


Stockholders’ equity:
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, 435,890,796 shares issued at January 31, 2007 and April 30, 2006		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, 2007 and April 30, 2007								4,359			4,359
Additional paid-in capital		662,297			653,053			671,647			676,766
Accumulated other comprehensive income		6,975			21,948
Accumulated other comprehensive income (loss)								2,528			(1,320	)
Retained earnings		3,015,880			3,492,059			2,530,207			2,886,440
Less cost of 113,071,487 and 107,377,858 shares of common stock in treasury		(2,159,337	)		(2,023,620	)
Less cost of 111,344,662 and 112,671,610 shares of common stock in treasury								(2,127,379	)		(2,151,746	)

Total stockholders’ equity		1,530,174			2,147,799			1,081,362			1,414,499

Total liabilities and stockholders’ equity	$	9,359,978		$	5,989,135		$	6,868,070		$	7,544,050


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

~~CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME~~

(Unaudited, amounts in 000s,
except per share amounts)
Three months ended January 31, Nine months ended January 31,
2007 2006 2007 2006

Revenues:

Service revenues $ 758,005 $ 706,159 $ 1,420,029 $ 1,214,895
Other revenues:
Product and other revenues 160,894 135,332 192,064 167,775
Interest income 36,217 18,762 92,429 51,311

955,116 860,253 1,704,522 1,433,981

Operating expenses:

Cost of services 587,873 559,082 1,377,919 1,175,869
Cost of other revenues 69,962 40,281 115,002 59,176
Selling, general and administrative 269,393 297,401 592,155 586,700

927,228 896,764 2,085,076 1,821,745

Operating income (loss) 27,888 (36,511 ) (380,554 ) (387,764 )
Interest expense (12,066 ) (12,211 ) (36,292 ) (37,031 )
Other income, net 3,031 3,708 15,097 13,951

Income (loss) from continuing operations before tax benefit 18,853 (45,014 ) (401,749 ) (410,844 )
Income tax benefit (6,112 ) (14,766 ) (172,726 ) (158,391 )

Net income (loss) from continuing operations 24,965 (30,248 ) (229,023 ) (252,453 )
Net income (loss) from discontinued operations (85,217 ) 42,361 (119,066 ) 155,323

Net income (loss) $ (60,252 ) $ 12,113 $ (348,089 ) $ (97,130 )

Basic earnings (loss) per share:

Net income (loss) from continuing operations $ 0.08 $ (0.09 ) $ (0.71 ) $ (0.77 )
Net income (loss) from discontinued operations (0.27 ) 0.13 (0.37 ) 0.47

Net income (loss) $ (0.19 ) $ 0.04 $ (1.08 ) $ (0.30 )

Basic shares 322,350 327,289 322,588 328,017

Diluted earnings (loss) per share:

Net income (loss) from continuing operations $ 0.08 $ (0.09 ) $ (0.71 ) $ (0.77 )
Net income (loss) from discontinued operations (0.26 ) 0.13 (0.37 ) 0.47

Net income (loss) $ (0.18 ) $ 0.04 $ (1.08 ) $ (0.30 )

Diluted shares 326,048 327,289 322,588 328,017

Dividends per share
$ 0.14 $ 0.13 $ 0.40 $ 0.36

Comprehensive income (loss):

Net income (loss) $ (60,252 ) $ 12,113 $ (348,089 ) $ (97,130 )
Change in unrealized gain on available-for-sale securities, net (14,350 ) (3,002 ) (15,194 ) (32,466 )
Change in foreign currency translation adjustments (268 ) (7,820 ) 221 (2,611 )

Comprehensive income (loss) $ (74,870 ) $ 1,291 $ (363,062 ) $ (132,207 )


Three months ended July 31,	2007			2006

Revenues:
Service revenues	$	321,663		$	302,796
Other revenues:
Interest income		41,838			25,710
Product and other revenues		17,708			14,264

		381,209			342,770


Operating expenses:
Cost of services		383,400			363,525
Cost of other revenues		43,529			18,207
Selling, general and administrative		145,824			149,071

		572,753			530,803


Operating loss		(191,544	)		(188,033	)
Interest expense		(595	)		(12,135	)
Other income, net		8,559			6,194

Loss from continuing operations before tax benefit		(183,580	)		(193,974	)
Income tax benefit		(73,757	)		(76,135	)

Net loss from continuing operations		(109,823	)		(117,839	)
Loss from discontinued operations, net of tax		(192,757	)		(13,538	)

Net loss	$	(302,580	)		(131,377	)


Basic and diluted loss per share:
Net loss from continuing operations	$	(0.34	)	$	(0.36	)
Net loss from discontinued operations		(0.59	)		(0.05	)

Net loss	$	(0.93	)	$	(0.41	)


Basic and diluted shares		323,864			323,671


Dividends per share	$	0.14		$	0.13


Comprehensive income (loss):
Net loss	$	(302,580	)	$	(131,377	)
Change in unrealized gain on available-for-sale securities, net		(463	)		(2,511	)
Change in foreign currency translation adjustments		4,311			818

Comprehensive loss	$	(298,732	)	$	(133,070	)

See Notes to Condensed Consolidated Financial Statements

-2-


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

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~


	(Unaudited, amounts in 000s)
Nine months ended January 31,	2007			2006
Three months ended July 31,							2007			2006

Cash flows from operating activities:
Net loss	$	(348,089	)	$	(97,130	)	$	(302,580	)	$	(131,377	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		119,909			111,396			37,075			34,627
Tax benefits from stock-based compensation		(12,314	)		19,967
Excess tax benefits from stock-based compensation		(2,379	)		—
Change in participation in tax client loans receivable		(1,691,351	)		(843,146	)
Net cash provided by (used in) operating activities of discontinued operations		573,201			(478,015	)
Other, net of acquisitions		(1,417,241	)		(407,464	)
Stock-based compensation expense								7,398			8,179
Changes in assets and liabilities of discontinued operations								115,486			175,207
Other, net of business acquisitions								(289,562	)		(562,695	)

Net cash used in operating activities		(2,778,264	)		(1,694,392	)		(432,183	)		(476,059	)


Cash flows from investing activities:
Mortgage loans originated or purchased for investment, net		(1,073,012	)		—			111,164			(135,161	)
Purchases of property and equipment, net		(129,905	)		(134,328	)		(14,497	)		(34,358	)
Payments made for business acquisitions, net of cash acquired		(24,670	)		(209,816	)		(20,887	)		(4,627	)
Net cash provided by investing activities of discontinued operations		18,322			72,247
Net cash provided by (used in) investing activities of discontinued operations								3,068			(3,871	)
Other, net		30,542			17,625			6,699			1,774

Net cash used in investing activities		(1,178,723	)		(254,272	)
Net cash provided by (used in) investing activities								85,547			(176,243	)


Cash flows from financing activities:
Repayments of commercial paper		(4,901,618	)		(2,632,444	)		(3,463,719	)		(1,034,210	)
Proceeds from issuance of commercial paper		6,397,656			4,678,392			3,622,874			1,223,566
Repayments of other short-term borrowings		(889,722	)		—
Proceeds from other short-term borrowings		2,320,105			550,000
Customer deposits		1,632,875			—
Repayments of lines of credit borrowings								(560,000	)		—
Proceeds from lines of credit borrowings								485,000			—
Customer deposits, net								(90,378	)		404,030
Dividends paid		(128,088	)		(118,665	)		(43,937	)		(40,485	)
Acquisition of treasury shares		(188,562	)		(260,078	)
Excess tax benefits from stock-based compensation		2,379			—
Purchase of treasury shares								—			(180,897	)
Proceeds from exercise of stock options		19,183			95,930			9,788			6,791
Net cash provided by financing activities of discontinued operations		172,301			—
Net cash used in financing activities of discontinued operations								(47,535	)		(100	)
Other, net		(74,060	)		(9,349	)		(49,624	)		(53,549	)

Net cash provided by financing activities		4,362,449			2,303,786
Net cash provided by (used in) financing activities								(137,531	)		325,146


Net increase in cash and cash equivalents		405,462			355,122
Net decrease in cash and cash equivalents								(484,167	)		(327,156	)
Cash and cash equivalents at beginning of the period		677,204			1,072,299			921,838			673,827

Cash and cash equivalents at end of the period	$	1,082,666		$	1,427,421		$	437,671		$	346,671


Supplementary cash flow data:
Income taxes paid	$	378,377		$	224,774		$	9,653		$	190,378
Interest paid		103,252			62,980
Interest paid on borrowings								27,833			15,504
Interest paid on deposits								15,792			3,198

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited amounts in 000s, except per share amounts)

~~(Unaudited)~~

Accumulated
Convertible Additional Other
Common Stock Preferred Stock Paid-in Comprehensive Retained Treasury Stock Total
Shares Amount Shares Amount Capital Income (Loss) Earnings Shares Amount Equity

Balances at April 30, 2006 435,891 $ 4,359 — $ — $ 653,053 $ 21,948 $ 3,492,059 (107,378 ) $ (2,023,620 ) $ 2,147,799
Net loss — — — — — — (131,377 ) — — (131,377 )
Unrealized translation gain — — — — — 818 — — — 818
Change in net unrealized gain on available-for-sale securities — — — — — (2,511 ) — — — (2,511 )
Stock-based compensation — — — — 10,514 — — — — 10,514
Shares issued for:
Option exercises — — — — (746 ) — — 461 8,756 8,010
Nonvested shares — — — — (13,997 ) — — 719 13,687 (310 )
ESPP — — — — 627 — — 253 4,823 5,450
Acquisition of treasury shares — — — — — — — (8,370 ) (186,339 ) (186,339 )
Cash dividends paid — $0.13 per share — — — — — — (40,485 ) — — (40,485 )

Balances at July 31, 2006 435,891 $ 4,359 — $ — $ 649,451 $ 20,255 $ 3,320,197 (114,315 ) $ (2,182,693 ) $ 1,811,569

Balances at April 30, 2007 435,891 $ 4,359 — $ — $ 676,766 $ (1,320 ) $ 2,886,440 (112,672 ) $ (2,151,746 ) $ 1,414,499
Remeasurement of uncertain tax positions upon adoption ofFIN 48
— — — — — — (9,716 ) — — (9,716 )
Net loss — — — — — — (302,580 ) — — (302,580 )
Unrealized translation gain — — — — — 4,311 — — — 4,311
Change in net unrealized gain on available-for-sale securities — — — — — (463 ) — — — (463 )
Stock-based compensation — — — — 9,226 — — — — 9,226
Shares issued for:
Option exercises — — — — (1,431 ) — — 668 12,758 11,327
Nonvested shares — — — — (13,349 ) — �� — 663 12,669 (680 )
ESPP — — — — 400 — — 218 4,161 4,561
Acquisitions — — — — 35 — — 8 151 186
Acquisition of treasury shares — — — — — — — (230 ) (5,372 ) (5,372 )
Cash dividends paid – $0.14 per share — — — — — — (43,937 ) — — (43,937 )

Balances at July 31, 2007 435,891 $ 4,359 — $ — $ 671,647 $ 2,528 $ 2,530,207 (111,345 ) $ (2,127,379 ) $ 1,081,362

~~1. Basis of Presentation~~See Notes to Condensed Consolidated Financial Statements

-4-


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		(Unaudited)

The condensed consolidated balance sheet as of January 31, 2007, the condensed consolidated statements of income and comprehensive income for the three and nine months ended January 31, 2007 and 2006, and the condensed consolidated statements of cash flows for the nine months ended January 31, 2007 and 2006 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
1. Basis of Presentation
The condensed consolidated balance sheet as of July 31, 2007, the condensed consolidated statements of income and comprehensive income for the three months ended July 31, 2007 and 2006, the condensed consolidated statements of cash flows for the three months ended July 31, 2007 and 2006, and the condensed consolidated statement of stockholders’ equity for the three months ended July 31, 2007 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, cash flows and changes in stockholders’ equity at July 31, 2007 and for all periods presented have been made. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

“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.

In March 2006, the Office of Thrift Supervision (OTS) approved the charter of H&R Block Bank (HRB Bank). HRB 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 and HRB Bank were combined in the Consumer Financial Services segment.

On November 6, 2006 we announced we would evaluate strategic alternatives for Option One Mortgage Corporation (OOMC), including a possible sale or other transaction through the public markets. On January 20, 2007, our Board of Directors approved the plan to sell OOMC and its wholly-owned subsidiary, H&R Block Mortgage Corporation (HRBMC). As of January 31, 2007, we met the criteria requiring us to present the assets and liabilities of OOMC and HRBMC, as held-for-sale and the related financial results as discontinued operations in the condensed consolidated financial statements for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles 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, ~~2006~~2007 Annual Report to Shareholders on Form 10-K.

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. Earnings (Loss) Per Share~~Discontinued Operations – Recent Developments

~~Basic~~On April 19, 2007, we entered into an agreement to sell Option One Mortgage Corporation (OOMC). In conjunction with this plan, we also announced we would terminate the operations of H&R Block Mortgage Corporation (HRBMC), a wholly-owned subsidiary of OOMC. During fiscal year 2007, we also committed to a plan to sell two smaller lines of business and ~~diluted loss per share is computed using~~completed the ~~weighted average shares outstanding~~wind-down of one other line of business, all of which were previously reported in our Business Services segment. One of these businesses was sold during ~~each period.~~the three months ended July 31, 2007. Additionally, during fiscal year 2007, we completed the wind-down of our tax operations in the United Kingdom, which were previously reported in Tax Services. As of July 31, 2007, we continued to meet the criteria requiring us to present the related financial results of these businesses as discontinued operations and the assets and liabilities of the business being sold as held-for-sale in the condensed consolidated financial statements. All periods presented have been reclassified to reflect our discontinued operations.

The ~~dilutive effect~~non-prime residential mortgage loan market has been adversely affected by a weakening housing market and increasing rates of ~~potential common shares is included~~delinquencies and defaults. Warehouse lenders have required significant margin calls from non-prime residential mortgage loan originators, including OOMC, due to declining values of non-prime residential mortgage loans and increasing levels of loans held for sale by lenders for longer periods of time due to softening secondary market conditions.

We have been significantly and negatively impacted by the events and conditions impacting the broader non-prime residential mortgage loan market. The softening secondary market conditions expose us to margin calls to cover declining values in ~~diluted earnings per share except~~loans held for sale. In addition, warehouse lenders have discretion over the sale of loans in ~~those~~the secondary market, which may result in losses on sales due to forced sales in depressed market conditions. These exposures are also influenced by loans being held for longer periods ~~with a loss from continuing operations. The computations~~ of ~~basic and diluted earnings (loss) per share from continuing operations are as follows:~~

(in 000s, except per share amounts)
Three months ended January 31, Nine months ended January 31,
2007 2006 2007 2006

Net income (loss) from continuing operations $ 24,965 $ (30,248 ) $ (229,023 ) $ (252,453 )

Basic weighted average common shares 322,350 327,289 322,588 328,017
Potential dilutive shares from stock options and restricted stock 3,696 — — —
Convertible preferred stock 2 — — —

Dilutive weighted average common shares 326,048 327,289 322,588 328,017

Earnings (loss) per share from continuing operations:
Basic $ 0.08 $ (0.09 ) $ (0.71 ) $ (0.77 )
Diluted 0.08 (0.09 ) (0.71 ) (0.77 )
time.

~~-4-~~-5-

~~Diluted earnings~~The declining mortgage market conditions continued in August 2007 and were compounded by illiquidity in the secondary market. In early August 2007, OOMC began only underwriting loan originations to the standards established by Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). These new underwriting guidelines should enhance the overall credit quality of loans offered for sale, but will significantly reduce origination volume. We expect our loan originations will slow to a rate of about $200 million per ~~share excludes~~month beginning in September 2007. Reductions in loan origination volumes and an increasing frequency of selling loans without retaining servicing rights may adversely impact our loan servicing business. OOMC announced reductions in its mortgage lending workforce and retail facilities in August 2007. The cost of these restructuring activities is estimated at $16 million to $20 million, which will be primarily reflected in the ~~impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 28.0 million shares~~consolidated income statement for the ~~nine months~~quarter ended ~~January~~October 31, 2007. It is possible that OOMC may need to commit to additional restructuring activities. If current market conditions fail to improve, we believe there could be further impairments to our residual interests, beneficial interests in Trusts, and loans held for sale in our second quarter, potentially in the range of $150 to $200 million pretax. The actual amount of the second quarter impairment will ultimately depend primarily on market conditions at the end of the second quarter.

While we have taken steps to respond to the rapid and substantial decline in the non-prime residential mortgage loan market, there can be no assurances that such steps will be adequate in the event the non-prime residential loan market experiences additional or sustained market declines. If conditions in the mortgage industry continue to decline, our future operating losses from discontinued operations would continue to be negatively impacted.

We continue to expect to complete the sale of OOMC pursuant to the April 2007 agreement by December 31, 2007. However, we are not currently in compliance with certain closing conditions required by this agreement and do not believe we will be able to regain compliance with such closing conditions or maintain compliance through the anticipated closing date. We are currently in discussions with Cerberus Capital Management to have such conditions either waived or modified. We are also conducting ongoing discussion regarding potentially modifying the agreement, which may include only selling the servicing platform, although we currently believe it is unlikely that the existing agreement will ultimately be changed. Therefore, it is our intention to consummate the transaction under the existing agreement on or before December 31, 2007. If the sale is not consummated, then we would divest the servicing platform and either divest or wind-down the origination business. There are no assurances that the current agreement will be modified or that the transaction will close. Our condensed consolidated financial statements as of July 31, 2007 ~~and 29.3 million shares~~include an impairment charge which reflects our best estimate of ~~stock for~~ the valuation of OOMC based on the terms of the existing agreement. See additional discussion in note 11. If the agreement is modified, we may incur additional impairment losses, which could be significant, beyond those that are provided in our financial statements. However, we are currently unable to estimate the amount of such additional impairment, if any, until the terms of a modified agreement are determined.

2.		Earnings (Loss) Per Share

		Basic 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 per share except in those periods with a loss from continuing operations. 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 31.3 million shares and 32.9 million shares for the three months ended July 31, 2007 and ~~nine months ended January 31,~~ 2006, respectively, as the effect would be antidilutive due to the net loss from continuing operations during each period.

The weighted average shares outstanding for the three ~~and nine~~ months ended ~~January~~July 31, 2007 ~~decreased~~increased to ~~322.4~~323.9 million ~~and 322.6~~from 323.7 million ~~respectively, from 327.3 million and 328.0 million last year,~~at July 31, 2006, primarily due ~~to 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 the ~~nine~~three months ended ~~January~~July 31, 2007 and 2006, we issued ~~2.8~~1.6 million and ~~6.3~~1.4 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 ~~nine~~three months ended ~~January~~July 31, 2007, we acquired ~~8.5~~0.2 million shares of our common stock, which represent shares swapped or surrendered to us in connection with the vesting of nonvested shares and the exercise of stock options, at an aggregate cost of $5.4 million. During the three months ended July 31, 2006, we

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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 ~~$188.6~~$186.3 million.

During the ~~nine~~three 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.

~~3. Receivables~~

~~Receivables consist of the following:~~

(in 000s)
January 31, 2007 January 31, 2006 April 30, 2006

Participation in tax client loans $ 1,733,155 $ 900,230 $ 41,804
Business Services accounts receivable 330,157 312,087 336,532
Receivables for tax-related fees 119,186 115,906 23,154
Loans to franchisees 62,962 60,185 45,062
Royalties from franchisees 68,153 50,575 793
Software receivables 20,662 18,938 17,700
Other 97,545 70,367 81,579

2,431,820 1,528,288 546,624
Allowance for doubtful accounts (54,974 ) (34,144 ) (64,480 )

$ 2,376,846 $ 1,494,144 $ 482,144

~~4. Goodwill and Intangible Assets~~

~~Changes in the carrying amount of goodwill for the nine months ended January~~July 31, 2007, ~~consist~~we granted 4.9 million stock options and 0.9 million nonvested shares and units in accordance with our stock-based compensation plans. The weighted average fair value of options granted was $4.54 for manager and director options and $3.07 for seasonal options. At July 31, 2007, the ~~following:~~total unrecognized compensation cost for options and nonvested shares and units was $27.5 million and $52.2 million, respectively.

(in 000s)
April 30, 2006 Additions Other January 31, 2007

Tax Services $ 376,515 $ 9,902 $ (162 ) $ 386,255
Business Services 397,516 28,619 (3,746 ) 422,389
Consumer Financial Services 173,954 — — 173,954

Total $ 947,985 $ 38,521 $ (3,908 ) $ 982,598

3. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill of continuing operations for the three months ended July 31, 2007 consist of the following:

(in 000s)
April 30, 2007 Additions Other July 31, 2007

Tax Services $ 415,077 $ 12,833 $ 6,367 $ 434,277
Business Services 404,888 925 (7,766 ) 398,047
Consumer Financial Services 173,954 — — 173,954

Total $ 993,919 $ 13,758 $ (1,399 ) $ 1,006,278

We test goodwill for impairment annually at the beginning of our fourth quarter, or more frequently if events occur indicating it is more likely than not the fair value of a reporting unit’s net assets has been reduced below its carrying value. No ~~such events~~impairments of goodwill were identified within any of our operating segments during the ~~nine~~three months ended ~~January~~July 31, 2007. ~~Goodwill totaling $152.5 million is included in assets held for sale on our condensed consolidated balance sheets.~~

~~-5-~~

Intangible assets of continuing operations consist of the following:


	(in 000s)
	January 31, 2007							April 30, 2006																			(in 000s)
															July 31, 2007							April 30, 2007
	Gross							Gross							Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated					Carrying		Accumulated					Carrying		Accumulated
	Amount		Amortization			Net		Amount		Amortization			Net		Amount		Amortization			Net		Amount		Amortization			Net

Tax Services:
Customer relationships	$	30,900	$	(13,602	)	$	17,298	$	27,257	$	(10,842	)	$	16,415	$	43,650	$	(18,042	)	$	25,608	$	39,347	$	(14,654	)	$	24,693
Noncompete agreements		20,329		(18,038	)		2,291		18,879		(17,686	)		1,193		22,925		(18,992	)		3,933		21,237		(18,279	)		2,958
Purchased technology																12,500		(815	)		11,685		12,500		—			12,500
Trade name		25		—			25		—		—			—		1,025		(42	)		983		1,025		—			1,025
Business Services:
Customer relationships		157,129		(91,665	)		65,464		153,844		(81,178	)		72,666		143,263		(91,715	)		51,548		142,315		(90,900	)		51,415
Noncompete agreements		33,460		(16,739	)		16,721		32,534		(14,300	)		18,234		32,271		(15,725	)		16,546		31,352		(15,524	)		15,828
Trade name — amortizing		4,050		(2,849	)		1,201		4,050		(1,823	)		2,227
Trade name — non-amortizing		55,637		(4,868	)		50,769		55,637		(4,868	)		50,769
Trade name – amortizing																3,291		(2,772	)		519		3,290		(2,430	)		860
Trade name – non-amortizing																55,637		(4,868	)		50,769		55,637		(4,868	)		50,769
Consumer Financial Services:
Customer relationships		293,000		(262,479	)		30,521		293,000		(235,010	)		57,990		293,000		(280,792	)		12,208		293,000		(271,635	)		21,365

Total intangible assets	$	594,530	$	(410,240	)	$	184,290	$	585,201	$	(365,707	)	$	219,494	$	607,562	$	(433,763	)	$	173,799	$	599,703	$	(418,290	)	$	181,413

Stock-based compensation expense of $13.7 million and $35.5 million and the related tax benefits of $4.7 million and $12.1 million are included in our results for the three and nine months ended January 31, 2007.

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 $2.4 million as a cash inflow from financing activities rather than as an operating activity for the nine months ended January 31, 2007.

We have four stock-based compensation plans which have been approved by our shareholders. As of January 31, 2007, we had approximately 25.6 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 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 on the closing 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 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.

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.

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~~A summary~~credit (CLOCs) have a maturity date of ~~options~~August 2010 and an annual facility fee in a range of six to fifteen basis points per annum, based on our credit ratings. Market conditions have negatively impacted the availability and term of commercial paper. As a result, subsequent to July 31, 2007 we drew a combined $1.2 billion under our $2.0 billion in available CLOCs. These borrowings under the CLOCs were made to provide a more stable source of funds to support our short-term cash needs. We have $633.8 million in outstanding commercial paper as of August 31, 2007, which we anticipate will be refinanced by funds available through the CLOCs. The CLOCs, among other things, require we maintain at least $650.0 million of Adjusted Net Worth, as defined in the agreement, on the last day of any fiscal quarter. We had Adjusted Net Worth of $1.1 billion at July 31, 2007, representing excess stockholders’ equity of $450.0 million. We believe we will continue to be in compliance for the ~~nine months ended January 31, 2007 is as follows:~~remaining term of the agreement.

(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 5,036 23.84
Exercised (1,246 ) 15.52
Forfeited or expired (4,201 ) 23.82

Outstanding, end of period 25,637 21.77 5 years $ 101,483

Exercisable, end of period 18,821 $ 20.66 4 years $ 97,171
Exercisable and expected to vest 24,535 21.63 5 years 100,784
5. Income Taxes
In June 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) was issued. The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

~~The total intrinsic value~~We adopted the provisions of ~~options exercised during the nine months ended January 31,~~FIN 48 on May 1, 2007 and, ~~2006 was $9.6~~as a result, recognized a $9.7 million ~~and $41.0~~increase in the liability for unrecognized tax benefits resulting in a decrease to retained earnings as of May 1, 2007. Total unrecognized tax benefits as of May 1, 2007 were $133.3 million, ~~respectively. We utilize~~of which $89.0 million were tax positions that, if recognized, would impact 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 forfeitureeffective tax rate. ~~The following assumptions were used to value options during the periods:~~

Nine months ended January 31, 2007 2006

Options — management and director:
Expected volatility 21.70% - 29.06 % 26.40% - 27.81 %
Expected term 4-7 years 5 years
Dividend yield 2.15% - 2.62 % 1.71% - 2.15 %
Risk-free interest rate 4.33% - 5.10 % 3.65% - 4.30 %
Weighted-average fair value $ 5.15 $ 7.39

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 $ 4.20 $ 4.99

~~A summary~~We recognize interest and, if applicable, penalties related to unrecognized tax benefits as a component of ~~nonvested shares and performance nonvested share units~~income tax expense. As of May 1, 2007 we accrued $35.0 million for the ~~nine months ended January 31, 2007 is as follows:~~

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

Outstanding, beginning of period 2,455 $ 25.27
Granted 1,205 23.42
Released (1,040 ) 24.94
Forfeited (306 ) 24.85

Outstanding, end of period 2,314 24.93

potential payment of interest and penalties.

~~The total fair value~~In the first quarter, we accrued an additional $4.1 million of shares vesting during the nine months ended January 31, 2007 and 2006 was $24.6 million and $17.2 million, respectively. Upon the grant of nonvested shares and performance nonvested share units, unearned compensation cost is recorded as an offsetinterest related to ~~additional paid in capital and is amortized as compensation expense over the vesting period.~~our uncertain tax positions. As of ~~January~~July 31, 2007 we had ~~$47.6 million~~unrecognized tax benefits of ~~total unrecognized compensation cost~~$132.2 million. The primary change during the quarter was related to ~~these shares. This cost~~payments made to taxing authorities for settlements of prior year tax positions. We have classified the liability for unrecognized tax benefits, including corresponding accrued interest, as long-term at July 31, 2007, which is ~~expected~~included in other noncurrent liabilities on the condensed consolidated balance sheet. We also reclassified income tax refunds due to ~~be recognized over~~us totaling $44.6 million to other assets from accrued income taxes as of April 30, 2007.

Based upon the expiration of statutes of limitations and other factors in several jurisdictions, we believe it is reasonably possible that the total amount of previously unrecognized tax benefits may decrease by approximately $4 million to $5 million within twelve months of July 31, 2007.

We file a ~~weighted-average period of two years.~~consolidated federal tax return in the United States and income tax returns in various state and foreign jurisdictions. We are no longer subject to U.S. federal income tax audits for years before 1999. The U.S. federal audit for years 1999 through 2003 is in its final stages. The Internal Revenue Service has commenced an audit for the years 2004 and 2005. With respect to our Canadian operations, audits for tax years 1996 through 2001 have been completed and are in the final stages. Tax years 2002 and 2003 are currently under audit. With respect to state and local jurisdictions, with limited exceptions, H&R Block, Inc. and its subsidiaries are no longer subject to income tax audits for years before 1999.

6.		Regulatory Requirements

		Registered Broker-Dealer

		H&R Block Financial Advisors, Inc. (HRBFA) is subject to regulatory requirements intended to ensure the general financial soundness and liquidity of broker-dealers. At July 31, 2007, HRBFA’s net capital of $127.9 million, which was 28.1% of aggregate debit items, exceeded its minimum required net capital of $9.1 million by $118.8 million.

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~~6. Regulatory Requirements~~

~~Registered Broker-Dealer~~

HRBFA is subject to regulatory requirements intended to ensure the general financial soundness and liquidity of broker-dealers. At January 31, 2007, HRBFA’s net capital of $126.1 million, which was 27.7% of aggregate debit items, exceeded its minimum required net capital of $9.1 million by $117.0 million.

Pledged securities at ~~January~~July 31, 2007 totaled ~~$38.7~~$61.7 million, an excess of ~~$2.6~~$7.0 million over the margin requirement.

Banking

~~HRB~~H&R Block Bank is(HRB Bank) and the Company are subject to various regulatory capital guidelines and requirements administered by ~~Federal~~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~~Bank and the consolidated financial statements. All savings associations are subject to the capital adequacy guidelines and the regulatory framework for prompt corrective ~~action,~~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 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. HRB Bank files its regulatory Thrift Financial Report (TFR) on a calendar quarter basis.

Quantitative measures established by regulation to ensure capital adequacy require HRB Bank to maintain minimum amounts and ratios of tangible equity, total risk-based capital ~~to assets. As shown~~and Tier 1 capital, as set forth in the table ~~below, at December 31, 2006, the most recent date of reporting~~below. In addition to ~~Federal banking agencies,~~these minimum ratio requirements, HRB Bank is ~~categorized~~required to continually maintain a 12.0% minimum leverage ratio as a condition of its charter-approval order through fiscal year 2009. This condition was extended through fiscal year 2012 as a result of a Supervisory Directive issued on May 29, 2007. See further discussion of the Supervisory Directive below. As of July 31, 2007, HRB Bank’s leverage ratio was 13.2%.

As of June 30, 2007, our most recent TFR filing with the Office of Thrift Supervision (OTS), HRB Bank was a “well capitalized” ~~for regulatory purposes, which is~~institution under the ~~highest classification.~~prompt corrective action provisions of the Federal Deposit Insurance Corporation (FDIC). The five capital categories are: (1) “well capitalized” (total risk-based capital ratio of 10%, Tier 1 Risk-based capital ratio of 6% and leverage ratio of 5%); (2) “adequately capitalized”; (3) “undercapitalized”; (4) “significantly undercapitalized”; and (5) “critically undercapitalized.” There are no conditions or events since ~~December 31, 2006~~June 30, 2007 that management believes have changed HRB Bank’s category. ~~At January 31,~~

The following table sets forth HRB Bank’s regulatory capital requirements at June 30, 2007, ~~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~~calculated 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.~~most recently filed TFR:

~~HRB Bank’s capital amounts and ratios as of December 31, 2006 are presented in the table below:~~

(dollars in 000s)
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio

Total risk-based capital ratio⁽¹⁾
$ 181,237 23.9 % $ 60,628 8.0 % $ 75,786 10.0 %
Tier 1 risk-based capital ratio⁽²⁾
$ 176,003 23.2 % n/a n/a $ 45,471 6.0 %
Tier 1 capital ratio (leverage)⁽³⁾
$ 176,003 12.3 % $ 171,179 12.0 % $ 71,325 5.0 %
Tangible equity ratio⁽⁴⁾
$ 176,003 12.3 % $ 21,397 1.5 % n/a n/a

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

Amount Ratio Amount Ratio

Tier 1 capital to adjusted total assets (leverage) $ 163,670 17.4 % $ 46,900 5.0 %
Total risk-based capital to total risk-weighted assets $ 165,714 36.0 % $ 46,071 10.0 %

~~Additionally,~~

In conjunction with H&R Block, Inc. ~~is now subject to~~’s application with the OTS for HRB Bank, we made commitments as part of our charter approval order (Master Commitment) which included, but were not limited to: (1) a three percent minimum ratio of adjusted tangible capital to adjusted total assets, as defined by the ~~OTS. As of January 31, 2007 our ratio of adjusted tangible~~OTS; (2) maintain all HRB Bank capital ~~to adjusted total assets was approximately 1%.~~within HRB Bank in accordance with the submitted three-year business plan; and (3) follow federal regulations surrounding intercompany transactions and approvals. We fell below the three percent minimum ~~required~~ ratio ~~due to losses in our mortgage operations and seasonal fluctuations in our consolidated balance sheet.~~at April 30, 2007. We notified the OTS of our failure to meet this requirement, and on May 29, 2007, the OTS ~~requested that we provide~~issued a Supervisory Directive. We submitted a revised capital plan ~~and expected timeframe for regaining compliance. We provided~~to the OTS ~~a corrective action plan stating our belief~~on July 19, 2007, that ~~our noncompliance would be remedied by February 28, 2007. We have agreed to provide the OTS~~projects we will regain compliance with the calculation of this ratio as of February 28, 2007, although it is normally required only at the end of our fiscal quarters. We have not received further requests from the OTS as of the date of this filing. We believe we have the ability to meet the requiredthree percent minimum ~~ratio on an ongoing basis.~~

~~anticipation loan (RAL) participations. This line is subject to various covenants~~2008. The revised capital plan contemplates that ~~are substantially similar to our primary unsecured committed lines of credit (CLOCs), and is secured~~we will meet the minimum capital requirement primarily through earnings generated by our ~~RAL participations.~~normal business operations in fiscal year 2008. The ~~balance outstanding~~OTS has accepted our revised capital plan. We also fell below the three percent minimum ratio during our first quarter, and had adjusted tangible capital of negative $177.6 million, and a requirement of $168.3 million to be in compliance at July 31, 2007. Normal seasonal operating losses of our Tax and Business Services segments, and operating losses of our discontinued mortgage businesses, are also expected to cause us to be in non-compliance until the end of fiscal year 2008.

The Supervisory Directive included additional conditions that we will be required to meet in addition to the Master Commitment. The significant additional conditions included in the Supervisory Directive are as follows: (1) requires HRB Bank to extend its compliance with a minimum 12.0% leverage ratio through fiscal year 2012; (2) requires H&R Block, Inc. to comply with the Master Commitment at all times, except for the projected capital levels and compliance with the three percent minimum ratio, as provided in the fiscal year 2008 and 2009 capital adequacy projections presented to the OTS on ~~this facility~~July 19, 2007; (3) institutes reporting requirements to the OTS quarterly and monthly by the Board of Directors and management, respectively; and (4) requires HRB Bank’s Board of Directors to have an independent chairperson and at ~~January~~least the same number of outside directors as inside directors.

~~We entered into~~could result in the OTS taking further regulatory actions, such as a ~~$300.0 million committed line~~supervisory agreement, cease-and-desist orders and civil monetary penalties. It is possible that the sale of credit agreement with BNP Paribas for the period January 2 through February 23, 2007 to cover our peak liquidity needs. This line is subject to various covenants that are substantially similar to those of our primary unsecured CLOCs. There was no balance outstanding on this line at JanuaryOOMC may not be completed by October 31, 2007. At this time, the financial impact, if any, of additional regulatory actions cannot be determined.

Our Canadian commercial paper issuances are supported by a credit facility provided by one bank in scheduled amounts ranging from $1.0 million to $225.0 million (Canadian) based on anticipated operational needs. The Canadian CLOC was renewed in November 2006 for an additional 364 days.
7. Commitments and Contingencies
Changes in the deferred revenue liability related to our Peace of Mind (POM) program are as follows:

~~Changes in the deferred revenue liability related to our Peace of Mind (POM) program are as follows:~~


	(in 000s)									(in 000s)
Nine months ended January 31,	2007			2006
Three months ended July 31,							2007			2006

Balance, beginning of period	$	141,684		$	130,762		$	142,173		$	141,684
Amounts deferred for new guarantees issued		20,971			20,533			470			511
Revenue recognized on previous deferrals		(59,085	)		(55,932	)		(27,237	)		(28,738	)

Balance, end of period	$	103,570		$	95,363		$	115,406		$	113,457

~~8. Litigation and Related Contingencies~~

~~We have been named as a defendant in numerous lawsuits throughout the country regarding our refund anticipation loan programs (the~~
8. Litigation and Related Contingencies
We have been named as a defendant in numerous lawsuits throughout the country regarding our refund anticipation loan programs (collectively, “RAL Cases”). The RAL Cases have involved a variety of legal theories asserted by plaintiffs. These theories include allegations that, among other things, disclosures in the RAL applications were inadequate, misleading and untimely; the RAL interest rates were usurious and unconscionable; we did not disclose that we would receive part of the finance charges paid by the customer for such loans; untrue, misleading or deceptive statements in marketing RALs; breach of state laws on credit service organizations; breach of contract, unjust enrichment, unfair and deceptive acts or practices; violations of the federal Racketeer Influenced and Corrupt Organizations Act; violations of the federal Fair Debt Collection Practices Act and unfair competition regarding debt collection activities; and that among others, (i) disclosures in the RAL applications were inadequate, misleading and untimely; (ii) the RAL interest rates were usurious and unconscionable; (iii) we did not disclose that we would receive part of the finance charges paid by the customer for 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 regarding debt collection activities; and (ix) 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,~~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 one settlement resulting in a pretax expense of $43.5 million in fiscal year 2003 (the “Texas RAL Settlement”) and ~~the~~other settlements resulting in a combined pretax expense ~~for such settlements~~ in fiscal year 2006 ~~totaling~~of $70.2 ~~million.~~million (the “2006 Settlements”).

Other putative RAL class action cases 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~~aggregate. Likewise, there can be no assurances regarding the ~~associated~~ impact of the RAL Cases on our financial statements. The following is updated information regarding the pending RAL Cases that are attorney general actions or class actions or putative class actions for which there have been significant developments during the fiscal quarter ended July 31, 2007:

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. This case is one of the cases in the 2006 Settlements. On April 19, 2006, we entered into a settlement agreement regarding this case, subject to final court approval. The settlement was approved by the court on August 28, 2006. The settlement is now final.

Sandra J. Basile, et al. v. H&R Block, Inc., et al, April Term 1992 Civil Action No. 3246 in the Court of Common Pleas, First Judicial District Court of Pennsylvania, Philadelphia County, instituted on April 23, 1993. The court decertified the class on December 31, 2003. The Pennsylvania appellate court subsequently reversed the trial court’s decertification decision. On September 26, 2006, the Pennsylvania Supreme Court reversed the appellate court’s reversal of the trial court’s decision to decertify the class. On June 4, 2007, the appellate court affirmed its earlier decision. The Company is currently seeking review of the appellate court’s decision by the Pennsylvania Supreme Court.

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 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

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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 actions are ~~also~~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.

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 Advisors, Inc. The complaint alleged fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the Express IRA product and sought equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. On July 12, 2007, the Supreme Court of the State of New York issued a ruling that dismissed all defendants other than H&R Block Financial Advisors, Inc. and the claims of common law fraud. We intend to defend this case vigorously, but there are no assurances as to its outcome.

In addition to the New York Attorney General action, a number of civil actions were filed against us concerning the Express IRA matter, the first of which was filed on March 17, 2006. Except for two cases pending in state court, all of the civil actions have been consolidated by the panel for Multi-District Litigation into a single action styledIn re H&R Block, Inc. Express IRA Marketing Litigationin the United States District Court for the Western District of Missouri. We intend to defend these cases vigorously, but there are no assurances as to their outcome.

On April 6, 2007, a putative class action styledIn re H&R Block Securities Litigationwas filed against the Company and certain of its officers in the United States District Court for the Western District of Missouri. The complaint alleges, 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 complaint seeks unspecified damages and equitable relief. We intend to defend this litigation vigorously, but there are no assurances as to its outcome.

As reported previously, the NASD brought charges against HRBFA regarding the sale by HRBFA of Enron debentures in 2001. A hearing for this matter was concluded in August 2007, with post-hearing briefs to be submitted in October 2007. 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 McGladrey (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 of taxes. Some of these clients are seeking or may attempt to seek recovery from RSM. There can be no assurance regarding the outcome and resolution of this matter.

RSM EquiCo, Inc., a subsidiary of RSM, is a party to ~~claims, lawsuits~~a putative class action filed on July 11, 2006 and ~~investigations pertaining to our electronic tax return filing services, our Peace of Mind guarantee program, our Express IRA product, tax planning services and~~entitledDo Right’s Plant Growers v. RSM EquiCo, Inc., RSM McGladrey, Inc., H&R Block, Inc. and Does 1-100, inclusive, Case No. 06 CC00137, in the California Superior Court, Orange County. The complaint contains allegations regarding business valuation ~~services.~~services provided by RSM EquiCo, Inc., including fraud, negligent misrepresentation, breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and unfair competition and seeks unspecified

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damages, restitution and equitable relief. There can be no assurance regarding the outcome and resolution of this matter.

We have from time to time been party to investigations, claims and lawsuits not discussed herein arising out of our business operations. These investigations, claims ~~lawsuits~~ and ~~investigations~~lawsuits include actions by state attorneys general, other state regulators, 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 investigations, claims and lawsuits pertain to RALs, the origination and servicing of mortgage loans, the electronic filing of customers’ income tax returns, the POM guarantee program, and our Express IRA program and other investment products and RSM EquiCo, Inc. business valuation services. We believe we have meritorious defenses to each of these claims, and we are defending or intend to ~~continue defending these cases~~defend them vigorously, although there ~~are~~is no ~~assurances~~assurance as to their outcome.

~~We and certain~~ In the event of ~~our current and former directors and officers are party~~an unfavorable outcome, the amounts we may be required to a putative class action alleging violations of certain securities laws. The putative securities class action currently alleges, 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 amount claimedpay in the putative securities class action is substantial, and the ultimate liability is difficult to predict. We intend to continue defending this case vigorously, although there are no assurances as to its outcome.discharge of liabilities or settlements could have a material adverse effect on our consolidated financial statements.

In addition to the aforementioned types of cases, we are parties to claims and lawsuits that we consider to be ordinary, routine ~~disputes~~litigation incidental to our business, ~~(Other Claims and Lawsuits),~~ including claims and lawsuits (Other Claims) concerning investment products, the preparation of customers’ income tax returns, ~~tax planning services,~~ the fees charged customers for various products and services, losses incurred by customers with respect to their investment ~~products,~~accounts, relationships with franchisees, ~~contract~~denials of mortgage loans, contested mortgage foreclosures, other aspects of the mortgage business, intellectual property disputes, employment matters and civil actions, arbitrations, regulatory inquiries and investigations and class actions arising out of our business as a broker-dealer and provider of investment products and as a servicer of mortgage loans.contract disputes. We believe we have meritorious defenses to each of the Other Claims, and ~~Lawsuits and~~we are defending them vigorously. ~~Although~~While we cannot provide assurance that we will ultimately prevail in each instance, we believe ~~that amounts,~~the amount, if any, we are required to ~~be paid~~pay in the discharge of liabilities or settlements ~~pertaining to~~in these 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.~~

~~-11-~~

~~9. Segment Information~~

9.		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,
2007 2006 2007 2006

Revenues:
Tax Services $ 628,051 $ 548,494 $ 776,183 $ 686,498
Business Services 215,895 235,840 650,129 529,491
Consumer Financial Services 107,511 73,176 267,888 211,177
Corporate 3,659 2,743 10,322 6,815

$ 955,116 $ 860,253 $ 1,704,522 $ 1,433,981

Pretax income (loss):
Tax Services $ 59,333 $ (6,332 ) $ (261,257 ) $ (293,702 )
Business Services (1,425 ) (1,035 ) (34,734 ) (9,943 )
Consumer Financial Services 10,959 (7,668 ) 5,572 (23,126 )
Corporate (50,014 ) (29,979 ) (111,330 ) (84,073 )

Income (loss) of continuing operations before taxes $ 18,853 $ (45,014 ) $ (401,749 ) $ (410,844 )

HRB 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 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 and full-service banking through HRB Bank. HRBFA offers 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 accounts. HRB Bank also purchases loans from OOMC, HRBMC and other lenders to hold for investment purposes. All intersegment transactions are eliminated in consolidation.

(in 000s)
Three months ended July 31, 2007 2006

Revenues:
Tax Services $ 69,863 $ 65,658
Business Services 192,823 195,457
Consumer Financial Services 114,372 78,829
Corporate 4,151 2,826

$ 381,209 $ 342,770

Pretax income (loss):
Tax Services $ (172,289 ) $ (153,054 )
Business Services (1,906 ) (6,967 )
Consumer Financial Services 6,206 (3,069 )
Corporate (15,591 ) (30,884 )

Loss from continuing operations before tax benefit $ (183,580 ) $ (193,974 )

As of ~~January~~July 31, 2007, we ~~met~~continued to meet the criteria requiring us to present the related financial results of OOMC, HRBMC and other smaller lines of business as discontinued operations and the assets and liabilities of ~~OOMC and its wholly-owned subsidiary, HRBMC,~~the businesses being sold as held-for-sale ~~and the related financial results as discontinued operations~~ in the condensed consolidated financial ~~statements for all~~statements. All periods ~~presented.~~presented have been reclassified to reflect our discontinued operations. See note 11 for additional information.

~~10. New Accounting Pronouncements~~

10.		New Accounting Pronouncements

		In February 2007, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115,” (SFAS 159), was issued. This standard allows ~~a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on~~ a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a

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contract-by-contract basis, with changes in fair value recognized in earnings. The provisions of this standard are effective as of the beginning of our fiscal year 2009. We are currently evaluating what effect the adoption of SFAS 159 will have on our consolidated financial statements.

In September 2006, Statement of Financial Accounting Standards No. 157, “Fair Value Instruments,” (SFAS 157), was issued. The provisions of this standard include guidelines about the extent to which companies measure assets and liabilities at fair value, the effect of fair value measurements on earnings, ~~risk-adjusted fair value~~ and establishes a fair value hierarchy that prioritizes the information used in developing assumptions used when valuing an asset or liability. The standard also requires increased disclosure of these fair value estimates. The provisions of this standard are effective as of the beginning of our fiscal year 2009. We are currently evaluating what effect the adoption of SFAS 157 will have on our consolidated financial statements.

In September 2006, ~~Staff Accounting Bulleting~~Emerging Issues Task Force Issue No. ~~108, “Considering the Effects~~06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of ~~Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108),~~Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4) was issued. ~~SAB 108 provides guidance on how prior year misstatements should be quantified when determining if current year financial statements are materially misstated. These provisions are effective~~EITF 06-4 requires the recognition of a liability for ~~the current fiscal year,~~an agreement with ~~earlier interim period adoption permitted. We are currently evaluating what effect the adoption of SAB 108 will have on our consolidated financial statements.~~

~~-12-~~

In June 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), was issued. The interpretation requires that a tax position meet a “more-likely-than-not” recognition threshold for the benefit of the uncertain tax positionan employee to ~~be recognized in the financial statements and provides guidance on the measurement of the benefit. The interpretation also requires interim period estimated tax~~provide future postretirement benefits, ~~of uncertain tax positions to be accounted for in the period of change rather than~~ as ~~a component of the annual effective tax rate.~~this obligation is not effectively settled upon entering into an insurance arrangement. The provisions of this standard are effective as of the beginning of our fiscal year ~~2008.~~2009. We are currently evaluating what effect the adoption of ~~FIN 48~~EITF 06-4 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 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~~We adopted SFAS 156 on May 1, 2007. Upon adoption we identified mortgage servicing rights (MSRs) relating to all existing residential mortgage loans as a class of servicing rights and elected to continue to use the “amortization method” for these MSRs. Presently, this ~~standard are effective as of the beginning~~class represents all of our ~~fiscal year 2008. We are currently evaluating what effect the~~MSRs. See note 11 for additional information on our MSRs. The adoption of SFAS 156 ~~will~~did not have a material impact on our condensed 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 all newly acquired 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 required to be bifurcated 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.~~We adopted SFAS 155 on May 1, 2007. Our residual interests typically have interests in derivative instruments embedded within the securitization ~~trusts. If~~trusts, which were previously excluded from evaluation. Concurrent with the adoption of SFAS 155, we ~~elect~~elected to account for ~~our~~all newly-acquired residual interests on a fair value basis as trading securities, with changes in fair value ~~will impact~~recorded in earnings in the period in which the change occurs. ~~We are currently evaluating what effect~~Prior to adoption, we accounted for our residual interests as AFS securities with unrealized gains recorded in other comprehensive income. For residual interests recorded prior to the adoption of SFAS 155, ~~will~~we continue to record unrealized gains as a component of other comprehensive income. The adoption of SFAS 155 did not have a material impact on our condensed consolidated financial statements.

~~11. Discontinued Operations~~ As discussed in note 5, we adopted the provisions of FIN 48 effective May 1, 2007.

~~Financial Statement Presentation~~
11. Discontinued Operations
On April 19, 2007, we entered into an agreement to sell OOMC to Cerberus Capital Management for cash consideration approximately equal to the fair value of the adjusted tangible net assets of OOMC, as defined in the agreement, at closing less $300.0 million. The agreement provides for H&R Block, Inc. to receive one-half of OOMC’s net income from its origination business for the 18 months

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following the closing, up to a maximum of $300.0 million, but no less than zero. The agreement is subject to various closing conditions and may be terminated by either party if the transaction does not close by December 31, 2007. These closing conditions include, among other matters: (1) maintenance of at least $8.0 billion of warehouse lines; (2) existence of at least $2.0 billion of loans in the warehouse facilities at the date of closing, all originated within the prior 60 days; (3) the lack of any material adverse events or conditions; (4) OOMC have servicer ratings of at least RPS2 by Fitch, SQ2 by Moody's and Above Average by S&P; (5) agreed upon regulatory and other approvals and consents be obtained; and (6) we provide audited financial statements of OOMC for the year ended April 30, 2007 by July 31, 2007, with the lack of a going concern explanatory paragraph related to OOMC, except to the extent necessary as a result of specified permitted conditions. We are currently not in compliance with certain closing conditions required by this agreement and do not believe we will be able to regain compliance with such closing conditions or maintain compliance through the anticipated closing date. See additional discussion of recent developments in note 1. In conjunction with this plan, we also announced we would terminate the operations of HRBMC, a wholly-owned subsidiary of OOMC.

~~On November 6, 2006,~~ During fiscal year 2007, we ~~announced we would evaluate strategic alternatives for OOMC, including~~also committed to a ~~possible sale or other transaction through the public markets. On January 20, 2007, our Board of Directors approved the~~ plan to sell ~~OOMC~~two smaller lines of business and ~~its wholly-owned subsidiary, HRBMC.~~completed the wind-down of one other line of business, all of which were previously reported in our Business Services segment. One of these businesses was sold during the three months ended July 31, 2007. Additionally, during fiscal year 2007, we completed the wind-down of our tax operations in the United Kingdom, which were previously reported in Tax Services. As of ~~January~~July 31, 2007, we ~~met~~continued to meet the criteria requiring us to present the related financial results of these businesses as discontinued operations and the assets and liabilities of ~~OOMC and HRBMC~~the businesses being sold as held-for-sale and ~~the related financial results as discontinued operations~~ in the condensed consolidated financial statements. ~~The financial statements for all~~All periods presented have been reclassified to ~~present~~reflect our discontinued ~~operations as well. Based upon non-binding correspondence received from interested parties~~operations.

Financial Statement Presentation

We recorded impairments relating to the disposition of our mortgage business during the three months ended July 31, 2007 of $21.7 million. These amounts primarily relate to the value of fixed assets included in ~~connection with~~assets held-for-sale. We also recorded impairments relating to other discontinued businesses of $1.5 million during the ~~planned sale,~~current quarter. Additionally, during fiscal year 2007 we ~~currently believe we will recover~~recorded impairments relating to the disposition of our ~~recorded investment in net assets held for sale. This process is not complete and~~mortgage businesses of $345.8 million, including the ~~ultimate outcome may differ materially from our current expectations.~~

full impairment of associated goodwill equal to $152.5 million. Overhead costs previously allocated to ~~these~~discontinued businesses, which totaled ~~$3.1~~$1.3 million and ~~$9.4~~$3.0 million for the three ~~and nine~~ months ended ~~January~~July 31, 2007 ~~respectively,~~ and ~~$2.7 million and $7.8 million for the three and nine months ended January 31,~~ 2006, respectively, are now included in continuing operations. ~~OOMC was previously reported in our Mortgage Services segment and HRBMC was reported in our Consumer Financial Services segment.~~

~~-13-~~

The major classes of assets and liabilities reported as held-for-sale are as follows:


	(in 000s)						(in 000s)
	January 31, 2007		April 30, 2006		July 31, 2007		April 30, 2007

Cash and cash equivalents	$	120,454	$	25,600	$	25,702	$	65,019
Cash and cash equivalents – restricted						15,002		43,754
Residual interests in securitizations – trading						27,601		72,691
Mortgage loans held for sale		363,016		236,399		432,173		222,810
Prepaid expenses and other current assets		504,590		332,188
Deferred tax assets, net – current						53,761		53,761
Servicing and related assets						510,157		445,354
Prepaid expenses and other current assets, net						46,031		121,078

Current assets of discontinued operations	$	988,060	$	594,187
Current assets held for sale					$	1,110,427	$	1,024,467


Beneficial interest in Trusts	$	175,220	$	188,014	$	54,450	$	41,057
Residual interests in securitizations		110,594		159,058
Residual interests in securitizations – AFS						62,714		90,283
Mortgage servicing rights		263,140		272,472		232,714		253,067
Mortgage loans held for investment		—		407,538
Goodwill, net		152,467		152,467
Deferred tax assets, net – noncurrent						263,762		245,798
Other assets		135,072		121,464		88,165		92,287

Noncurrent assets of discontinued operations	$	836,493	$	1,301,013
Noncurrent assets held for sale					$	701,805	$	722,492


Accounts payable, accrued expenses and deposits	$	450,553	$	156,324	$	493,165	$	370,226
Other liabilities		47,196		60,643		257,617		245,147

Current liabilities of discontinued operations	$	497,749	$	216,967
Current liabilities directly associated with assets held for sale					$	750,782	$	615,373

Mortgage Banking Activities

~~Trading residuals valued at $231.9 million were securitized~~We originate mortgage loans and sell most non-prime loans the same day the loans are funded to qualifying special purpose entities (QSPEs or Trusts). The Trusts are not consolidated. The sale is recorded in ~~net interest margin (NIM) transactions during~~accordance with Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (SFAS 140). The Trusts purchase the ~~current year, with net~~loans from us using seven warehouse facilities. As a result of the loan sales to the Trusts, we remove the mortgage loans from our balance sheet and record the gain or loss on the sale, cash proceeds, MSRs, repurchase reserves and a beneficial interest in Trusts, which represents our residual interest in the ultimate expected outcome from the disposition of ~~$192.5~~the loans by the Trusts. The total principal amount of mortgage loans held by the Trusts as of July 31, 2007 and April 30, 2007 was $2.1 billion and $1.5 billion, respectively. The beneficial interest in Trusts was $54.5 million ~~received~~and $41.1 million at July 31, 2007 and April 30, 2007, respectively.

The Trusts, in ~~connection with NIM transactions.~~response to the exercise of a put option by the third-party beneficial interest holders, either sell the loans directly to third-party investors or back to us to pool the loans for securitization. The decision of the beneficial interest holders to complete a loan sale or a securitization is dependent on market conditions. If the Trusts execute loan sales, we receive cash for our beneficial interest in Trusts. In a securitization transaction, the ~~prior year,~~Trusts transfer the loans to one of our consolidated bankruptcy remote subsidiaries, and we transfer our beneficial interest in Trusts and the loans to a securitization trust. The securitization trust meets the definition of a QSPE and is therefore not consolidated. The securitization trust issues bonds, which are supported by the cash flows from the pooled loans, to third-party investors. We retain an interest in the loans in the form of a trading ~~residuals valued at $234.5 million were securitized with net~~residual interest and usually assume the first risk of loss for credit losses in the loan pool. As the cash ~~proceeds~~flows of ~~$195.2 million received on~~ the ~~transactions. There were no~~underlying loans and market conditions change, the value of these residual interests may also change, resulting in either additional gains or impairment of the value of the residual interests. These residual interests are classified as trading securities asalong with any newly-acquired residual interests from NIM transactions beginning May 1, 2007. We held $27.6 million of ~~January 31, 2007 or April 30, 2006. Cash received on~~ trading residual interests ~~is included~~as of July 31, 2007 and $72.7 million as of April 30, 2007.

Activity related to trading residual interests in ~~operating activities~~securitizations consists of ~~discontinued operations~~the following:

(in 000s)
Three months ended July 31, 2007 2006

Balance, beginning of period $ 72,691 $ —
Additions (resulting from securitization of mortgage loans) 42,458 63,424
Cash received — (4,546 )
Accretion — 909
Change in fair value (674 ) (461 )

114,475 59,326
Residuals securitized in NIM transactions (114,475 ) —
Additions (resulting from NIM transactions) 41,705 —
Accretion 2,651 —
Change in fair value (16,755 ) —

Balance, end of period $ 27,601 $ 59,326

We adopted SFAS 155 on May 1, 2007 and concurrently elected to account for all newly-acquired residual interests on a fair value basis, with changes in fair value recorded in earnings in the ~~condensed consolidated statements~~period in which the change occurs. Residual interests existing prior to the adoption of ~~cash flows.~~SFAS 155 will continue to be accounted for with unrealized gains recorded in other comprehensive income.

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

(in 000s)
Three months ended July 31, 2007 2006

Balance, beginning of period $ 90,283 $ 159,058
Cash received (487 ) (4,567 )
Accretion 6,283 12,600
Impairments of fair value (32,849 ) (17,266 )
Change in unrealized holding gains arising during the period (516 ) (4,046 )

Balance, end of period $ 62,714 $ 145,779

Cash flows from ~~available-for-sale~~AFS residual interests of ~~$13.1~~$0.5 million and ~~$74.9~~$4.6 million were received from the securitization trusts for the ~~nine~~three months ended ~~January~~July 31, 2007 and 2006, respectively, and isare included in investing activities of discontinued operations in the condensed consolidated statements of cash flows.

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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~~July 31, 2007, 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.

(dollars in 000s)
Residential Mortgage Loans
Available-for-Sale Beneficial Interest
Residuals in Trusts MSRs

Carrying amount/fair value $ 110,594 $ 175,220 $ 263,140
Weighted average remaining life (in years) 3.2 2.2 1.3

Prepayments (including defaults):
Adverse 10% — $impact on fair value $ (7,772 ) $ (5,447 ) $ (21,890 )
Adverse 20% — $impact on fair value (5,687 ) (8,402 ) (41,755 )

Credit losses:
Adverse 10% — $impact on fair value $ (32,323 ) $ (6,302 ) Not applicable
Adverse 20% — $impact on fair value (57,732 ) (11,571 ) Not applicable

Discount rate:
Adverse 10% — $impact on fair value $ (5,522 ) $ (4,491 ) $ (6,869 )
Adverse 20% — $impact on fair value (10,594 ) (8,797 ) (13,444 )

Variable interest rates (LIBOR forward curve):
Adverse 10% — $impact on fair value $ 988 $ (40,717 ) Not applicable
Adverse 20% — $impact on fair value 1,972 (82,550 ) Not applicable

(dollars in 000s)
Residential Mortgage Loans
Beneficial Interest
Residuals in Trusts MSRs
Carrying amount/fair value $ 90,315 $ 54,450 $ 232,714
Weighted average remaining life (in years) 5.9 2.5 1.4

Dollar impact on fair value:
Prepayments (including defaults):
Adverse 10% $ (4,569 ) $ 364 $ (18,790 )
Adverse 20% (1,286 ) 704 (35,717 )

Credit losses:
Adverse 10% $ (23,639 ) $ (2,007 ) Not applicable
Adverse 20% (42,053 ) (3,978 ) Not applicable

Discount rate:
Adverse 10% $ (8,623 ) $ (1,229 ) $ (7,917 )
Adverse 20% (16,018 ) (2,413 ) (15,338 )

Variable interest rates:
Adverse 10% $ 2,512 $ (12,455 ) Not applicable
Adverse 20% 4,882 (24,973 ) Not applicable

-20-

Increases in prepayment rates ~~related to available-for-sale 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. Given the current market volatility, the change in credit losses or discount rate could exceed the ranges in the table above and result in little or no value to the residual interests.

Mortgage loans that have been securitized and mortgage loans held for sale at ~~January~~July 31, 2007 and April 30, ~~2006,~~2007, past due sixty days or more and the related credit losses incurred are presented below:


	(in 000s)
	Total Principal				Principal Amount of
(in 000s)													(in 000s)
	Amount of Loans				Loans 60 Days or				Credit Losses					Total Principal				Principal Amount of
	Outstanding				More Past Due				(net of recoveries)					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					July 31,		April 30,		July 31,		April 30,		Three months ended
	2007		2006		2007		2006		January 31, 2007		April 30, 2006			2007		2007		2007		2007		July 31, 2007		April 30, 2007

Securitized mortgage loans	$	12,445,576	$	10,046,032	$	1,252,052	$	1,012,414	$	41,925	$	35,307		$	20,616,376	$	18,434,940	$	1,957,164	$	1,383,832	$	49,059	$	41,235
Mortgage loans in warehouse Trusts		5,982,538		7,845,834		—		—		—		—			2,062,295		1,456,078		—		—		—		—
Mortgage loans held for sale		432,949		255,224		316,348		98,906		135,924		33,504			547,287		295,208		435,254		202,941		80,825		104,972

Total loans	$	18,861,063	$	18,147,090	$	1,568,400	$	1,111,320	$	177,849	$	68,811		$	23,225,958	$	20,186,226	$	2,392,418	$	1,586,773	$	129,884	$	146,207

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. External market forces impact the probability of commitments being exercised, and therefore, total commitments outstanding do not necessarily represent future cash requirements. Of the $1.7 billion of commitments to fund mortgage loans at July 31, 2007, all but $242.5 million were repriced to higher interest rates before funding in August 2007. We expect the majority of the repriced loans will not be funded.

In the normal course of business, 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. Repurchased loans are normally sold in subsequent sale transactions. The following table summarizes our loan repurchase activity:


(dollars in 000s)																(dollars in 000s)
																	Three months ended July 31,						Fiscal year ended
													(dollars in 000s)				2007			2006			April 30, 2007
	Three months ended						Nine months ended						Fiscal year ended
	January 31,						January 31,						April 30,
	2007			2006			2007			2006			2006

Loans repurchased from loan sales	$	403,502		$	104,774		$	812,293		$	223,258		$	297,606
Loans repurchased⁽¹⁾																	$	193,640		$	92,338		$	989,992
Repurchase reserves added during period	$	111,122		$	13,076		$	251,083		$	49,547		$	64,098			$	157,296		$	92,737		$	388,733
Repurchase reserves added as a percent of originations		1.77	%		0.15	%		1.18	%		0.15	%		0.18	%			4.79	%		1.15	%		1.44	%

A liability has been established ~~a liability,~~ related to the potential loss ~~we expect to incur~~ on repurchase of loans previously sold ~~and premium recapture, totaling $44.8~~of $72.2 million and ~~$33.4~~$38.4 million at ~~January~~July 31, 2007 and April 30, ~~2006,~~2007, respectively. On an ongoing basis, we monitor the adequacy of our repurchase liability, which is established upon the initial sale of the loans, and is included in current liabilities ~~held for sale~~held-for-sale in the condensed consolidated balance sheets. During the ~~nine months~~quarter ended ~~January~~July 31, 2007, we experienced higher early payment defaults, resulting in an increase in actual and 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 subject to contractual repurchase terms will be repurchased, and that 6%approximately 4% of loans previously sold but not yet subject to contractual repurchase terms will be repurchased. Based on historical experience, we assumed ~~10% of~~an average 38% loss severity at July 31, 2007, compared to 26% at April 30, 2007, on all loans werepurchased and expected to be repurchased. The increase in our loan repurchase ~~will cure with no loss incurred, and of those that do not cure, we assumed an average 29%~~liability was primarily due to the increase in our loss severity ~~for loans on balance sheet as of January 31, 2007.~~

During the third quarter, we amended our warehouse facility with Citigroup Global Markets Realty Corp (Citigroup) to split OOMC’s existing warehouse financing arrangement with Citigroup into two separate warehouse facilities, one of which is an on-balance sheet facility with capacity of $500.0 million and the other an off-balance sheet facility. Loans totaling $172.3 million were held on the on-balance sheet line at Januaryassumption. At July 31, 2007, ~~with the related loans and liability reported in assets and liabilities held for sale.~~we had recorded repurchase reserves to cover estimated future losses from loan repurchase obligations on $178.9 million of outstanding loans.

OOMC has guaranteed up to a maximum amount equal to approximately 10% of the aggregate principal balance of mortgage loans held by the Trusts before ultimate disposition of the loans by the Trusts. This obligation can be called upon in the event adequate proceeds are not available from the sale of the mortgage loans to satisfy the current or ultimate payment obligations of the Trusts. ~~No losses~~We have ~~been sustained on~~not funded any amounts under this ~~commitment since its inception.~~guarantee, however we have provided additional margin as the fair value of the loans has declined and subsequently written the beneficial interest in Trusts down to fair value. The total principal amount of Trust obligations outstanding as of ~~January~~July 31, 2007, April 30, ~~2006~~2007 and ~~January~~July 31, 2006 was ~~$5.9~~$2.1 billion, ~~$7.8~~$1.5 billion and ~~$11.2~~$4.2 billion, respectively. The fair value of mortgage loans held by the Trusts as of ~~January~~July 31, 2007, April 30, ~~2006~~2007 and ~~January~~July 31, 2006 was ~~$5.9~~$2.0 billion, ~~$7.9~~$1.5 billion and ~~$11.4~~$4.3 billion, respectively. At July 31, 2007 and April 30, 2007 we recorded liabilities of $15.0 million and $30,000, respectively, for the estimated fair value of this guarantee obligation, which are included in current liabilities held-for-sale in the condensed consolidated balance sheets. Under the warehouse agreements, we may be required to provide funds in the event of declining loan values, but only to the extent of the 10% guaranteed amount. ~~At January~~Funds provided as a result of declining loan values at July 31, 2007 ~~April 30,~~and 2006 totaled $173.0 million and ~~January~~$21.1 million, respectively. Of the amount provided as of July 31, 2007, $169.0 million relates to our off-balance sheet warehouse facilities and is included in the beneficial interest in Trusts while the remaining $4.0 million relates to our on-balance sheet facility. At July 31, 2006, all the funds provided ~~totaled $164.2~~were included in the beneficial interest in Trusts.

-22-

Warehouse Facilities

Substantially all non-prime mortgage loans we originate are sold daily to the Trusts. The Trusts purchase the loans from us using committed off-balance sheet warehouse facilities, arranged by us, totaling $7.5 billion in the aggregate. We also had an on-balance sheet facility with capacity of $500.0 million, ~~$19.7 million~~as discussed below. These facilities are subject to various OOMC performance triggers, limits and ~~$54.6 million, respectively,~~financial covenants, including tangible net worth, income and ~~were applied~~leverage ratios and may be subject to ~~reduce~~margin calls. We hold an interest in the ~~Trusts' payment obligations.~~

Trusts equal to the difference between the fair value of the assets and cash proceeds, adjusted for contractual advance rates, received from the Trusts. In addition to the margin call feature, loans sold to the Trust are subject to repurchase if certain criteria are not met, including loan default provisions. Unfavorable fluctuations in loan value are guaranteed up to 10% of the original fair value. As of ~~January~~July 31, 2007, ~~OOMC did not meet the~~additional uncommitted facilities of $2.0 billion were also potentially available, subject to counterparty approval.

One warehouse line was amended to remove a “minimum net income” financial covenant, ~~contained in eight of its warehouse facilities. This covenant requires~~which required OOMC to maintain a cumulative minimum net income of at least $1 for ~~the~~ four consecutive fiscal ~~quarters ended January~~quarters. As a result, OOMC now has $4.0 billion in committed warehouse facilities available, one without the minimum net income financial covenant and one with a waiver of the minimum net income financial covenant through at least April 25, 2008. At our projected origination levels, we estimate we would only need between $3.0 billion and $4.0 billion of available warehouse capacity at any given time. However, the sale of OOMC is subject to various closing conditions, including that OOMC maintain at least $8.0 billion of total capacity in its warehouse facilities throughout the period to the closing date, of which at least $2.0 billion is to be in the form of unused capacity at the closing date. At July 31, ~~2007. On January 24,~~ 2007, OOMC did not meet the minimum net income financial covenant contained in certain of its committed warehouse facilities. OOMC obtained waivers of the minimum net income financial covenants ~~through April 27, 2007~~ from each of the applicable warehouse facility providers. We anticipate that OOMC will not meet this financial covenant at April 30, 2007, however we believe we will be able to obtain waivers for that date from a sufficient number of warehouse providers to allow OOMC to continue its off-balance sheet financing activities. If OOMC cannot obtain the waivers, warehouse facility providers as needed, to comply with the closing conditions of the sale of OOMC. These waivers extend through various dates as discussed below. If we do not obtain extensions of each facility and waiver that expires before completing the sale of OOMC, or replace existing capacity, we would ~~have the right to terminate their future funding obligations under the applicable~~be in violation of this closing condition.

Committed warehouse facilities ~~terminate OOMC’s right to service the loans remaining in the~~and waivers, where applicable, ~~warehouse or request funding~~ of the ~~10% guarantee mentioned above. While this termination could adversely impact~~minimum net income financial covenant obtained by OOMC expire as follows:

(dollars in 000s)
Facility Expiration Date Waiver Expiration Date Total Capacity Outstanding Loans

October 2, 2007 October 2, 2007 $ 1,000,000 $ 402,068
October 2, 2007 September 30, 2007 500,000 ⁽¹⁾ 9,157
October 31, 2007 N/A⁽²⁾ 250,000 217,388
November 9, 2007 September 30, 2007 1,000,000 277,987
January 15, 2008 January 15, 2008 500,000 314,979
January 18, 2008 October 30, 2007 750,000 95,775
April 25, 2008 April 25, 2008 2,000,000 332,922
June 12, 2008 N/A⁽²⁾ 2,002,000 431,899

$ 8,002,000 $ 2,082,175


⁽¹⁾		Represents $500.0 million related to an on-balance sheet facility, as discussed below.

⁽²⁾		The agreement related to this facility has been amended to remove the minimum net income financial covenant through the facility expiration date.

During fiscal year 2007, we amended our warehouse facility with Citigroup Global Markets Realty Corp (Citigroup) to split OOMC’s ~~ability~~existing warehouse financing arrangement with Citigroup into two separate warehouse facilities, one of which is an on-balance sheet facility with capacity of $500.0 million that may be used to fund ~~new~~delinquent and repurchased loans, ~~we believe~~and the other an off-balance sheet facility. Loans totaling $9.2 million were held on the on-balance sheet facility at July 31, 2007, with the related loans and liability reported in assets and liabilities held-for-sale. OOMC was not in compliance with certain restrictive covenants relative to this ~~risk is mitigated by options available to H&R Block.~~facility and obtained waivers through September 30, 2007.

Restructuring Charge

During fiscal year 2006, we initiated a restructuring plan to reduce costs within our mortgage operations. ~~On November 6, 2006,~~Restructuring activities continued during fiscal year 2007, and we ~~announced an additional restructuring plan, also within~~expect this will continue until the sale or termination of our mortgage operations ~~which will be recorded primarily during our third and fourth quarters.~~is complete. Charges incurred during the current quarter related to ~~the~~an additional restructuring plan announced on May 17, 2007,

-23-

12. ~~Subsequent Event~~

Effective February 5, 2007, we acquired the assets and assumed certain liabilities of a group of commercial tax preparation software providers for an aggregate purchase price of $65.8 million. The purchase price is subject to a post-closing adjustment based upon determination of the final February 5, 2007 net asset value. The assets and liabilities related to this acquisition will be included in our Tax Services segment.

~~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 $500.0 million credit facility entered into in April 2007 and the Senior Notes issued on ~~April 13, 2000 and~~ October 26, ~~2004.~~2004, the CLOCs and other indebtedness from time to time. 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)
Three months ended H&R Block, Inc. BFC Other Consolidated
January 31, 2007 (Guarantor) (Issuer) Subsidiaries Elims H&R Block

Total revenues $ — $ 255,407 $ 703,198 $ (3,489 ) $ 955,116

Cost of services — 46,651 541,254 (32 ) 587,873
Cost of other revenues — 60,453 9,509 — 69,962
Selling, general and administrative — 94,184 177,087 (1,878 ) 269,393

Total expenses — 201,288 727,850 (1,910 ) 927,228

Operating income (loss) — 54,119 (24,652 ) (1,579 ) 27,888
Interest expense — (11,811 ) (255 ) — (12,066 )
Other income, net 18,853 (3,958 ) 6,989 (18,853 ) 3,031

Income (loss) from continuing operations before tax (benefit) 18,853 38,350 (17,918 ) (20,432 ) 18,853
Income tax (benefit) (6,112 ) 28,043 (33,378 ) 5,335 (6,112 )

Net income from continuing operations 24,965 10,307 15,460 (25,767 ) 24,965
Net loss from discontinued operations (85,217 ) (87,293 ) — 87,293 (85,217 )

Net income (loss) $ (60,252 ) $ (76,986 ) $ 15,460 $ 61,526 $ (60,252 )


Condensed Consolidating Income Statements																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, 2007																	(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block

Total revenues	$	—		$	196,137		$	667,754		$	(3,638	)	$	860,253			$	—		$	189,100		$	194,355		$	(2,246	)	$	381,209


Cost of services		—			53,787			505,266			29			559,082				—			61,814			321,553			33			383,400
Cost of other revenues		—			19,655			20,626			—			40,281				—			37,637			5,892			—			43,529
Selling, general and administrative		—			86,186			212,497			(1,282	)		297,401				—			47,184			100,535			(1,895	)		145,824

Total expenses		—			159,628			738,389			(1,253	)		896,764				—			146,635			427,980			(1,862	)		572,753

Operating income (loss)		—			36,509			(70,635	)		(2,385	)		(36,511	)			—			42,465			(233,625	)		(384	)		(191,544	)
Interest expense		—			(11,810	)		(401	)		—			(12,211	)			—			—			(595	)		—			(595	)
Other income, net		(45,014	)		—			3,708			45,014			3,708				(183,580	)		(5	)		8,564			183,580			8,559

Income (loss) from continuing operations before tax (benefit)		(45,014	)		24,699			(67,328	)		42,629			(45,014	)			(183,580	)		42,460			(225,656	)		183,196			(183,580	)
Income tax (benefit)		(14,766	)		10,393			(24,210	)		13,817			(14,766	)			(73,757	)		14,622			(88,225	)		73,603			(73,757	)

Net income (loss) from continuing operations		(30,248	)		14,306			(43,118	)		28,812			(30,248	)			(109,823	)		27,838			(137,431	)		109,593			(109,823	)
Net income from discontinued operations		42,361			40,925			—			(40,925	)		42,361
Net loss from discontinued operations																		(192,757	)		(190,143	)		(2,923	)		193,066			(192,757	)

Net income (loss)	$	12,113		$	55,231		$	(43,118	)	$	(12,113	)	$	12,113
Net loss																	$	(302,580	)	$	(162,305	)	$	(140,354	)	$	302,659		$	(302,580	)


Nine months ended	H&R Block, Inc.			BFC			Other						Consolidated
January 31, 2007	(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block
Three months ended																H&R Block, Inc.			BFC			Other						Consolidated
July 31, 2006																(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block

Total revenues	$	—		$	540,530		$	1,173,192		$	(9,200	)	$	1,704,522		$	—		$	135,703		$	209,685		$	(2,618	)	$	342,770


Cost of services		—			139,531			1,238,387			1			1,377,919			—			47,110			316,383			32			363,525
Cost of other revenues		—			99,040			15,962			—			115,002			—			15,491			2,716			—			18,207
Selling, general and administrative		—			192,512			404,340			(4,697	)		592,155			—			48,526			102,024			(1,479	)		149,071

Total expenses		—			431,083			1,658,689			(4,696	)		2,085,076			—			111,127			421,123			(1,447	)		530,803

Operating income (loss)		—			109,447			(485,497	)		(4,504	)		(380,554	)		—			24,576			(211,438	)		(1,171	)		(188,033	)
Interest expense		—			(35,429	)		(863	)		—			(36,292	)		—			(11,808	)		(327	)		—			(12,135	)
Other income, net		(401,749	)		5			15,092			401,749			15,097			(193,974	)		2,770			3,424			193,974			6,194

Income (loss) from continuing operations before tax (benefit)		(401,749	)		74,023			(471,268	)		397,245			(401,749	)		(193,974	)		15,538			(208,341	)		192,803			(193,974	)
Income tax (benefit)		(172,726	)		45,114			(215,904	)		170,790			(172,726	)		(76,135	)		6,055			(81,732	)		75,677			(76,135	)

Net income (loss) from continuing operations		(229,023	)		28,909			(255,364	)		226,455			(229,023	)		(117,839	)		9,483			(126,609	)		117,126			(117,839	)
Net loss from discontinued operations		(119,066	)		(124,067	)		—			124,067			(119,066	)		(13,538	)		(10,371	)		(3,880	)		14,251			(13,538	)

Net loss	$	(348,089	)	$	(95,158	)	$	(255,364	)	$	350,522		$	(348,089	)	$	(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 $ — $ 406,294 $ 1,038,594 $ (10,907 ) $ 1,433,981

Cost of service revenues — 146,755 1,028,953 161 1,175,869
Cost of other revenues — 30,545 28,631 — 59,176
Selling, general and administrative — 181,419 408,996 (3,715 ) 586,700

Total expenses — 358,719 1,466,580 (3,554 ) 1,821,745

Operating income (loss) — 47,575 (427,986 ) (7,353 ) (387,764 )
Interest expense — (35,431 ) (1,600 ) — (37,031 )
Other income, net (410,844 ) — 13,951 410,844 13,951

Income (loss) from continuing operations before tax (benefit) (410,844 ) 12,144 (415,635 ) 403,491 (410,844 )
Income tax (benefit) (158,391 ) 4,518 (159,996 ) 155,478 (158,391 )

Net income (loss) from continuing operations (252,453 ) 7,626 (255,639 ) 248,013 (252,453 )
Net income from discontinued operations 155,323 150,883 — (150,883 ) 155,323

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, 2007 (Guarantor) (Issuer) Subsidiaries Elims H&R Block

Cash & cash equivalents $ — $ 144,152 $ 293,519 $ — $ 437,671
Cash & cash equivalents – restricted — 286,000 1,789 — 287,789
Receivables from customers, brokers and dealers, net — 404,420 — — 404,420
Receivables, net 76 137,432 285,942 — 423,450
Mortgage loans held for investment — 1,241,281 — — 1,241,281
Intangible assets and goodwill, net — 188,711 991,366 — 1,180,077
Investments in subsidiaries 4,338,269 — 500 (4,338,269 ) 500
Assets held for sale — 1,792,343 19,889 — 1,812,232
Other assets — 125,014 955,630 6 1,080,650

Total assets $ 4,338,345 $ 4,319,353 $ 2,548,635 $ (4,338,263 ) $ 6,868,070

Commercial paper and other short-term borrowings $ — $ 1,651,237 $ — $ — $ 1,651,237
Accts. payable to customers, brokers and dealers — 615,858 — — 615,858
Customer deposits — 1,039,238 — — 1,039,238
Long-term debt — 502,295 17,508 — 519,803
Liabilities held for sale — 748,504 2,278 — 750,782
Other liabilities 2 234,576 975,190 22 1,209,790
Net intercompany advances 3,256,981 (1,426,182 ) (1,830,799 ) — —
Stockholders’ equity 1,081,362 953,827 3,384,458 (4,338,285 ) 1,081,362

Total liabilities and stockholders’ equity $ 4,338,345 $ 4,319,353 $ 2,548,635 $ (4,338,263 ) $ 6,868,070

~~Condensed Consolidating Balance Sheets~~

(in 000s)
H&R Block, Inc. BFC Other Consolidated
January 31, 2007 (Guarantor) (Issuer) Subsidiaries Elims H&R Block

Cash & cash equivalents $ — $ 778,197 $ 304,469 $ — $ 1,082,666
Cash & cash equivalents – restricted — 419,000 13,524 — 432,524
Receivables from customers, brokers and dealers, net — 424,874 — — 424,874
Receivables, net 569 1,845,236 531,041 — 2,376,846
Mortgage loans held for investment — 1,069,626 — — 1,069,626
Intangible assets and goodwill, net — 207,117 959,771 — 1,166,888
Investments in subsidiaries 4,710,589 — 498 (4,710,589 ) 498
Assets held for sale — 1,824,553 — — 1,824,553
Other assets — 243,759 737,737 7 981,503

Total assets $ 4,711,158 $ 6,812,362 $ 2,547,040 $ (4,710,582 ) $ 9,359,978

Short-term borrowings $ — $ 2,909,425 $ 16,996 $ — $ 2,926,421
Accts. payable to customers, brokers and dealers — 684,475 — — 684,475
Customer deposits — 1,632,875 — — 1,632,875
Long-term debt — 398,177 18,006 — 416,183
Liabilities held for sale — 497,749 — — 497,749
Other liabilities 2 778,273 893,790 36 1,672,101
Net intercompany advances 3,180,982 (1,763,237 ) (1,417,716 ) (29 ) —
Stockholders’ equity 1,530,174 1,674,625 3,035,964 (4,710,589 ) 1,530,174

Total liabilities and stockholders’ equity $ 4,711,158 $ 6,812,362 $ 2,547,040 $ (4,710,582 ) $ 9,359,978


	H&R Block, Inc.		BFC			Other						Consolidated		H&R Block, Inc.		BFC			Other						Consolidated
April 30, 2006	(Guarantor)		(Issuer)			Subsidiaries			Elims			H&R Block
April 30, 2007														(Guarantor)		(Issuer)			Subsidiaries			Elims			H&R Block

Cash & cash equivalents	$	—	$	134,407		$	542,797		$	—		$	677,204	$	—	$	165,118		$	756,720		$	—		$	921,838
Cash & cash equivalents – restricted		—		368,999			16,624			—			385,623		—		329,000			3,646			—			332,646
Receivables from customers, brokers and dealers, net		—		496,577			—			—			496,577		—		410,522			—			—			410,522
Receivables, net		161		107,079			374,904			—			482,144		233		154,060			401,962			—			556,255
Mortgage loans held for investment															—		1,358,222			—			—			1,358,222
Intangible assets and goodwill, net		—		234,727			932,752			—			1,167,479		—		197,914			977,418			—			1,175,332
Investments in subsidiaries		5,237,611		—			456			(5,237,611	)		456		4,586,474		—			414			(4,586,474	)		414
Assets held for sale		—		1,895,200			—			—			1,895,200		—		1,720,984			25,975			—			1,746,959
Other assets		—		421,026			463,966			(540	)		884,452		—		129,879			911,976			7			1,041,862

Total assets	$	5,237,772	$	3,658,015		$	2,331,499		$	(5,238,151	)	$	5,989,135	$	4,586,707	$	4,465,699		$	3,078,111		$	(4,586,467	)	$	7,544,050


Commercial paper and other short-term borrowings														$	—	$	1,567,082		$	—		$	—		$	1,567,082
Customer deposits															—		1,129,263			—			—			1,129,263
Accts. payable to customers, brokers and dealers	$	—	$	781,303		$	—		$	—		$	781,303		—		633,189			—			—			633,189
Long-term debt		—		398,001			19,538			—			417,539		—		502,236			17,571			—			519,807
Liabilities held for sale		—		216,967			—			—			216,967		—		610,391			4,982			—			615,373
Other liabilities		2		825,644			1,599,881			—			2,425,527		2		254,906			1,409,929			—			1,664,837
Net intercompany advances		3,089,971		(355,358	)		(2,734,567	)		(46	)		—		3,172,206		(1,341,912	)		(1,830,294	)		—			—
Stockholders’ equity		2,147,799		1,791,458			3,446,647			(5,238,105	)		2,147,799		1,414,499		1,110,544			3,475,923			(4,586,467	)		1,414,499

Total liabilities and stockholders’ equity	$	5,237,772	$	3,658,015		$	2,331,499		$	(5,238,151	)	$	5,989,135	$	4,586,707	$	4,465,699		$	3,078,111		$	(4,586,467	)	$	7,544,050

~~Condensed Consolidating Statements of Cash Flows~~


													(in 000s)
Nine months ended	H&R Block, Inc.			BFC			Other						Consolidated
January 31, 2007	(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block
Condensed Consolidating Statements of Cash Flows																Condensed Consolidating Statements of Cash Flows													(in 000s)
Three months ended																	H&R Block, Inc.			BFC			Other						Consolidated
July 31, 2007																	(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block

Net cash provided by (used in) operating activities:	$	32,882		$	(1,589,010	)	$	(1,222,136	)	$	—		$	(2,778,264	)		$	8,194		$	(107,033	)	$	(333,344	)	$	—		$	(432,183	)

Cash flows from investing:
Mortgage loans originated for investment, net		—			(1,073,012	)		—			—			(1,073,012	)			—			111,164			—			—			111,164
Purchase property & equipment		—			(3,407	)		(126,498	)		—			(129,905	)			—			(5,124	)		(9,373	)		—			(14,497	)
Payments for business acquisitions		—			—			(24,670	)		—			(24,670	)			—			—			(20,887	)		—			(20,887	)
Net intercompany advances		247,754			—			—			(247,754	)		—				24,566			—			—			(24,566	)		—
Investing cash flows from discontinued operations		—			18,322			—			—			18,322				—			(557	)		3,625			—			3,068
Other, net		—			3,955			26,587			—			30,542				—			(295	)		6,994			—			6,699

Net cash provided by (used in) investing activities		247,754			(1,054,142	)		(124,581	)		(247,754	)		(1,178,723	)			24,566			105,188			(19,641	)		(24,566	)		85,547

Cash flows from financing:
Repayments of commercial paper		—			(4,893,093	)		(8,525	)		—			(4,901,618	)			—			(3,463,719	)		—			—			(3,463,719	)
Proceeds from commercial paper		—			6,372,135			25,521			—			6,397,656				—			3,622,874			—			—			3,622,874
Repayments of short-term borrowings		—			(889,722	)		—			—			(889,722	)			—			(560,000	)		—			—			(560,000	)
Proceeds from short-term borrowings		—			2,320,105			—			—			2,320,105				—			485,000			—			—			485,000
Customer deposits		—			1,632,875			—			—			1,632,875				—			(90,378	)		—			—			(90,378	)
Dividends paid		(128,088	)		—			—			—			(128,088	)			(43,937	)		—			—			—			(43,937	)
Acquisition of treasury shares		(188,562	)		—			—			—			(188,562	)
Proceeds from stock options		19,183			—			—			—			19,183
Excess tax benefits on stock-based compensation		2,379			—			—			—			2,379
Proceeds from issuance of common stock																		9,788			—			—			—			9,788
Net intercompany advances		—			(1,413,234	)		1,165,480			247,754			—				—			44,132			(68,698	)		24,566			—
Financing cash flows from discontinued operations		—			172,301			—			—			172,301				—			(47,535	)		—			—			(47,535	)
Other, net		14,452			(14,425	)		(74,087	)		—			(74,060	)			1,389			(9,495	)		(41,518	)		—			(49,624	)

Net cash provided by (used in) financing activities		(280,636	)		3,286,942			1,108,389			247,754			4,362,449				(32,760	)		(19,121	)		(110,216	)		24,566			(137,531	)

Net increase (decrease) in cash		—			643,790			(238,328	)		—			405,462
Net decrease in cash																		—			(20,966	)		(463,201	)		—			(484,167	)
Cash – beginning of period		—			134,407			542,797			—			677,204				—			165,118			756,720			—			921,838

Cash – end of period	$	—		$	778,197		$	304,469		$	—		$	1,082,666			$	—		$	144,152		$	293,519		$	—		$	437,671


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, 2006																(Guarantor)			(Issuer)			Subsidiaries			Elims			H&R Block

Net cash provided by (used in) operating activities:	$	43,228		$	(1,198,372	)	$	(539,248	)	$	—		$	(1,694,392	)	$	16,281		$	245,863		$	(738,203	)	$	—		$	(476,059	)

Cash flows from investing:
Mortgage loans originated for investment, net																	—			(135,161	)		—			—			(135,161	)
Purchase property & equipment		—			1,226			(135,554	)		—			(134,328	)		—			3,610			(37,968	)		—			(34,358	)
Payments for business acquisitions		—			(3,140	)		(206,676	)		—			(209,816	)		—			—			(4,627	)		—			(4,627	)
Net intercompany advances		229,755			—			—			(229,755	)		—			196,279			—			—			(196,279	)		—
Investing cash flows from discontinued operations		—			72,247			—			—			72,247			—			(2,734	)		(1,137	)		—			(3,871	)
Other, net		—			328			17,297			—			17,625			—			(5,222	)		6,996			—			1,774

Net cash provided by (used in) investing activities		229,755			70,661			(324,933	)		(229,755	)		(254,272	)		196,279			(139,507	)		(36,736	)		(196,279	)		(176,243	)

Cash flows from financing:
Repayments of commercial paper		—			(2,610,432	)		(22,012	)		—			(2,632,444	)		—			(1,034,210	)		—			—			(1,034,210	)
Proceeds from commercial paper		—			4,636,188			42,204			—			4,678,392
Proceeds from short-term borrowings		—			550,000			—			—			550,000
Proceeds from issuance of commercial paper																	—			1,223,566			—			—			1,223,566
Dividends paid		(118,665	)		—			—			—			(118,665	)		(40,485	)		—			—			—			(40,485	)
Acquisition of treasury shares		(260,078	)		—			—			—			(260,078	)
Proceeds from common stock		95,930			—			—			—			95,930
Payments to acquire treasury shares																	(180,897	)		—			—			—			(180,897	)
Proceeds from issuance of common stock																	6,791			—			—			—			6,791
Net intercompany advances		—			(1,335,289	)		1,105,534			229,755			—			—			(649,771	)		453,492			196,279			—
Customer deposits																	—			404,030			—			—			404,030
Financing cash flows from discontinued operations																	—			—			(100	)		—			(100	)
Other, net		9,830			5,642			(24,821	)		—			(9,349	)		2,031			(9,808	)		(45,772	)		—			(53,549	)

Net cash provided by (used in) financing activities		(272,983	)		1,246,109			1,100,905			229,755			2,303,786			(212,560	)		(66,193	)		407,620			196,279			325,146

Net increase in cash		—			118,398			236,724			—			355,122
Net increase (decrease) in cash																	—			40,163			(367,319	)		—			(327,156	)
Cash – beginning of period		—			135,069			937,230			—			1,072,299			—			134,407			539,420			—			673,827

Cash – end of period	$	—		$	253,467		$	1,173,954		$	—		$	1,427,421		$	—		$	174,570		$	172,101		$	—		$	346,671

~~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, and 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 primarily in the United States, Canada and Australia. RSM McGladrey Business Services, Inc. (RSM) is a national accounting, tax and business consulting firm primarily serving midsized businesses. Our Consumer Financial Services segment offers investment services through H&R Block Financial Advisors, Inc. (HRBFA) and full-service banking through H&R Block Bank (HRB Bank).

On November 6, 2006 we announced we would evaluate strategic alternatives for Option One Mortgage Corporation (OOMC), including a possible sale or other transaction through the public markets. On January 20, 2007, our Board of Directors approved the plan to sell OOMC and its wholly-owned subsidiary, H&R Block Mortgage Corporation (HRBMC). As of January 31, 2007, we met the criteria requiring us to present the assets and liabilities of OOMC and HRBMC as held-for-sale and the related financial results as discontinued operations in the condensed consolidated financial statements for all periods presented.

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.

Discontinued Operations – Recent Developments.On April 19, 2007, we entered into an agreement to sell Option One Mortgage Corporation (OOMC). In conjunction with this plan, we also announced we would terminate the operations of H&R Block Mortgage Corporation (HRBMC), a wholly-owned subsidiary of OOMC. During fiscal year 2007, we also committed to a plan to sell two smaller lines of business and completed the wind-down of one other line of business, all of which were previously reported in our Business Services segment. One of these businesses was sold during the three months ended July 31, 2007. Additionally, during fiscal year 2007, we completed the wind-down of our tax operations in the United Kingdom, which were previously reported in Tax Services. As of July 31, 2007, we continued to meet the criteria requiring us to present the related financial results of these businesses as discontinued operations and the assets and liabilities of the business being sold as held-for-sale in the condensed consolidated financial statements. All periods presented have been reclassified to reflect our discontinued operations.

The non-prime residential mortgage loan market has been adversely affected by a weakening housing market and increasing rates of delinquencies and defaults. Warehouse lenders have required significant margin calls from non-prime residential mortgage loan originators, including OOMC, due to declining values of non-prime residential mortgage loans and increasing levels of loans held for sale by lenders for longer periods of time due to softening secondary market conditions.

We have been significantly and negatively impacted by the events and conditions impacting the broader non-prime residential mortgage loan market. The softening secondary market conditions expose us to margin calls to cover declining values in loans held for sale. In addition, warehouse lenders have discretion over the sale of loans in the secondary market, which may result in losses on sales due to forced sales in depressed market conditions. These exposures are also influenced by loans being held for longer periods of time.

~~-24-~~-30-

The declining mortgage market conditions continued in August 2007 and were compounded by illiquidity in the secondary market. In early August 2007, OOMC began only underwriting loan originations to the standards established by Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). These new underwriting guidelines should enhance the overall credit quality of loans offered for sale, but will significantly reduce origination volume. We expect our loan originations will slow to a rate of about $200 million per month beginning in September 2007. Reductions in loan origination volumes and an increasing frequency of selling loans without retaining servicing rights may adversely impact our loan servicing business. OOMC announced reductions in its mortgage lending workforce and retail facilities in August 2007. The cost of these restructuring activities is estimated at $16 million to $20 million, which will be primarily reflected in the consolidated income statement for the quarter ended October 31, 2007. It is possible that OOMC may need to commit to additional restructuring activities. If current market conditions fail to improve, we believe there could be further impairments to our residual interests, beneficial interests in Trusts, and loans held for sale in our second quarter, potentially in the range of $150 to $200 million pretax. The actual amount of the second quarter impairment will ultimately depend primarily on market conditions at the end of the second quarter.

We continue to expect to complete the sale of OOMC pursuant to the April 2007 agreement by December 31, 2007. However, we are not currently in compliance with certain closing conditions required by this agreement and do not believe we will be able to regain compliance with such closing conditions or maintain compliance through the anticipated closing date. We are currently in discussions with Cerberus Capital Management to have such conditions either waived or modified. We are also conducting ongoing discussion regarding potentially modifying the agreement, which may include only selling the servicing platform, although we currently believe it is unlikely that the existing agreement will ultimately be changed. Therefore, it is our intention to consummate the transaction under the existing agreement on or before December 31, 2007. If the sale is not consummated, then we would divest the servicing platform and either divest or wind-down the origination business. There are no assurances that the current agreement will be modified or that the transaction will close. Our condensed consolidated financial statements as of July 31, 2007 include an impairment charge which reflects our best estimate of the valuation of OOMC based on the terms of the existing agreement. If the agreement is modified, we may incur additional impairment losses, which could be significant, beyond those that are provided in our financial statements. However, we are currently unable to estimate the amount of such additional impairment, if any, until the terms of a modified agreement are determined.

See discussion of additional risks in Part II, Item 1A.

-31-

TAX SERVICES

This segment primarily consists of our income tax preparation businesses – retail, online and software. Additionally, this segment includes the Commercial Tax Markets Group, which serves CPAs and other tax preparers by providing tax preparation software and educational materials.

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

(in 000s, except average charge)
Period November 1 through January 31, 2007 2006

Clients served:
Company-owned operations 2,507 2,390
Franchise operations 1,485 1,406
Instant Money Advance Loans (IMALs) only⁽¹⁾
344 —

Total retail operations 4,336 3,796
Digital tax solutions 1,279 1,157

5,615 4,953

Net average fee per retail client:⁽²⁾

Company-owned operations $ 169.47 $ 157.48
Franchise operations 147.42 135.51

$ 161.27 $ 149.35

Offices:
Company-owned 6,669 6,387
Company-owned shared locations⁽³⁾
1,488 1,473

Total company-owned offices 8,157 7,860

Franchise 3,784 3,703
Franchise shared locations⁽³⁾
843 602

Total franchise offices 4,627 4,305

12,784 12,165


⁽¹⁾		~~Clients who received an IMAL but have not yet returned for tax preparation and/or e-filing services.~~

⁽²⁾		~~Calculated as net tax preparation fees divided by retail clients served, excluding IMAL-only clients.~~

⁽³⁾		~~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,
	2007		2006			2007			2006
Tax Services – Operating Results															(in 000s)
Three months ended July 31,												2007			2006

Service revenues:
Tax preparation fees	$	437,473	$	389,040		$	507,467		$	452,862		$	24,924		$	25,325
Other services		47,673		32,516			113,912			93,747			37,349			35,012

		485,146		421,556			621,379			546,609			62,273			60,337
Royalties		59,631		53,706			67,012			60,263			2,842			2,923
Loan participation fees and related revenue		55,409		42,616			55,709			42,893
Other		27,865		30,616			32,083			36,733			4,748			2,398

Total revenues		628,051		548,494			776,183			686,498			69,863			65,658


Cost of services:
Compensation and benefits		224,336		189,053			329,479			283,562			46,140			45,583
Occupancy		89,014		79,516			226,841			201,112			74,960			67,580
Depreciation		10,777		11,132			29,740			31,629			8,160			9,251
Other		63,205		55,185			153,607			134,217			55,165			48,172

		387,332		334,886			739,667			650,520			184,425			170,586
Provision for RAL litigation		—		71,700			—			71,700
Other, selling, general and administrative		181,386		148,240			297,773			257,980
Cost of other revenues, selling, general and administrative													57,727			48,126

Total expenses		568,718		554,826			1,037,440			980,200			242,152			218,712

Pretax income (loss)	$	59,333	$	(6,332	)	$	(261,257	)	$	(293,702	)
Pretax loss												$	(172,289	)	$	(153,054	)

Tax preparation fees increased $48.4 million, or 12.4%, for the current quarter. This increase is primarily due to an increase of 7.6% in the net average fee per U.S. retail client served and a 4.9% increase in tax returns prepared and/or e-filed in company-owned offices. Results for our third quarter represent only a small portion of the tax season and are not indicative of the results we expect for the entire fiscal year. We do not expect to maintain this level of client growth throughout the remainder of the tax season.

Other service revenues increased ~~$15.2~~$2.3 million, or ~~46.6%~~6.7%, primarily due to ~~$12.8 million in additional license fees earned from bank products.~~

~~Royalty revenue increased $5.9 million, or 11.0%, due to an 8.8% increase in the net average fee and a 5.6% increase in tax returns prepared and/or e-filed in franchise offices.~~

Loan participation fees and related revenues increased $12.8 million during the current quarter, primarily due to the introduction of our IMAL, an early-season loan product, which increased our participation revenues $12.1 million.

Other revenues decreased $2.8 million, or 9.0%, primarily due to the elimination of revenues associated with our supply sales to franchises. Our franchises now order directly from the supplier, which resulted in a reduction of $12.6 million in revenues in the current quarter. This decline was partially offset by customer fees earned in connection with an agreement with HRB Bank for ~~our new~~the H&R Block Emerald Prepaid MasterCard^® program, under which, this segment shares in the revenues and expenses associated with the program.

Other revenues increased $2.4 million, primarily due to additional revenues from our commercial tax markets group.

Total expenses increased ~~$13.9~~$23.4 million, or ~~2.5%~~10.7%, for the three months ended ~~January~~July 31, 2007. Cost of services increased ~~$52.4~~$13.8 million, or ~~15.7%~~8.1%, from the prior ~~year. Our real estate expansion efforts have contributed to a total increase of $5.0 million across all cost of services categories. Compensation and benefits increased $35.3 million, or 18.7%,~~year, primarily due to higher ~~wages associated with increased revenues, costs associated with our earlier office openings and initiatives addressing operational readiness for the tax season.~~occupancy expenses. Occupancy expenses increased ~~$9.5~~$7.4 million, or ~~11.9%~~10.9%, primarily as a result of higher rent expenses due to a ~~4.8%~~4.1% increase in company-owned offices under lease and a ~~5.6%~~3.7% increase in the average rent. Other cost of services increased ~~$8.0~~$7.0 million, or 14.5%, due to ~~higher claims expenses associated with our POM guarantees.~~$6.2 million in additional corporate shared services, primarily related to information technology projects.

~~Other,~~Cost of other revenues, selling, general and administrative expenses increased ~~$33.1~~$9.6 million, or 22.4%, primarily due to an $18.0 million increase in marketing expenses, $11.9 million in additional corporate shared services and $7.5 million in additional bad debt expenses. These increases were partially offset by a decline of $11.2 million in cost of supply sales to franchises, as previously discussed.

~~Higher overall expenses were partially offset by the $71.7 million of litigation settlement charges and related legal fees recorded in the prior year.~~

~~Pretax income for the three months ended January 31, 2007 totaled $59.3 million, compared to a loss of $6.3 million in the prior year.~~

~~Nine months ended January 31, 2007 compared to January 31, 2006~~

~~Tax Services’ revenues increased $89.7 million, or 13.1%, for the nine months ended January 31, 2007 compared to the prior year.~~

Tax preparation fees increased $54.6 million, or 12.1%, for the current period. This increase is primarily due to an increase of 7.6% in the net average fee per U.S. retail client served and a 4.9% increase in tax returns prepared and/or e-filed in company-owned offices during the current tax season. These results represent only a small portion of the tax season and are not indicative of the results we expect for the entire fiscal year. We do not expect to maintain this level of client growth throughout the remainder of the tax season.

Other service revenues increased $20.2 million, or 21.5%, primarily due to $14.1 million in additional license fees earned from bank products, coupled with an increase in the recognition of deferred fee revenue from our POM guarantees, which resulted from an increase in claims.

Royalty revenue increased $6.7 million, or 11.2%, due to an 8.8% increase in the net average fee and a 5.6% increase in tax returns prepared and/or e-filed in franchise offices during the current tax season.

~~-26-~~

Loan participation fees and related revenues increased $12.8 million during the current year, primarily due to the introduction of our IMAL, an early-season loan product, which increased our participation revenues $12.1 million.

Other revenues decreased $4.7 million, or 12.7%, primarily due to the revenues associated with our supply sales to franchises. Our franchises now order directly from the supplier, which resulted in a reduction of $15.0 million in revenues in the current year, and was partially offset by customer fees earned in connection with an agreement with HRB Bank for our new H&R Block Emerald Prepaid MasterCard program, under which this segment shares in the revenues and expenses associated with the program.

Total expenses increased $57.2 million, or 5.8%, for the nine months ended January 31, 2007. Cost of services increased $89.1 million, or 13.7%, from the prior year. Our real estate expansion efforts have contributed to a total increase of $17.2 million across all cost of services categories. Compensation and benefits increased $45.9 million, or 16.2%, primarily due to higher wages associated with increased revenues, costs associated with our earlier office openings and initiatives addressing operational readiness for the tax season. Occupancy expenses increased $25.7 million, or 12.8%, primarily as a result of higher rent expenses due to a 7.9% increase in company-owned offices under lease and a 4.7% increase in the average rent. Other cost of services increased $19.4 million, or 14.4%, due to increases in claims expenses associated with our POM guarantee, travel expenses and additional corporate shared services for information technology projects.

~~Other, selling, general and administrative expenses increased $39.8 million, or 15.4%~~19.9%, primarily due to an increase of ~~$18.5~~$2.9 million in ~~marketing expenses, coupled with~~corporate wages. Amortization of intangible assets increased $1.7 million over the prior year, and we also experienced smaller increases ~~of $16.0 million, $7.7 million and $5.2 million~~ in corporate shared services, ~~bad debt expense~~marketing and ~~corporate wages, respectively. These increases were partially offset by a decline of $14.8 million in cost of supply sales to franchises, as previously discussed.~~

~~Higher overall expenses were partially offset by $71.7 million of litigation settlement charges and related legal fees recorded in the prior year.~~other expenses.

The pretax loss ~~of $261.3 million~~ for the ~~nine~~three months ended ~~January��~~July 31, 2007 was $172.3 million, compared to a loss of ~~$293.7~~$153.1 million in the prior year.

-32-

~~Business Services – Operating Results~~

Three months ended July 31, 2007 2006
Accounting, tax and consulting:
Chargeable hours 1,039,190 1,063,011
Chargeable hours per person 274 275
Net billed rate per hour $ 144 $ 142
Average margin per person $ 19,225 $ 19,937


										(in 000s)
	Three months ended January 31,						Nine months ended January 31,
	2007			2006			2007			2006
Business Services – Operating Results																(in 000s)
Three months ended July 31,													2007			2006

Service revenues:
Accounting, tax and consulting	$	162,618		$	187,154		$	515,014		$	392,772		$	162,815		$	164,789
Capital markets		6,818			13,567			36,925			44,394			10,842			13,660
Payroll, benefits and retirement services		21,478			8,796			36,880			25,690
Other services		12,584			16,898			28,391			37,893			7,745			7,778

		203,498			226,415			617,210			500,749			181,402			186,227
Other		12,397			9,425			32,919			28,742			11,421			9,230

Total revenues		215,895			235,840			650,129			529,491			192,823			195,457


Cost of services:
Compensation and benefits		107,135			130,490			371,166			297,031			109,852			114,778
Occupancy		18,533			18,339			57,370			37,514			17,862			17,203
Other		29,861			29,519			78,081			59,955			18,420			17,931

		155,529			178,348			506,617			394,500			146,134			149,912
Amortization of intangible assets		6,160			5,157			15,165			12,765			3,626			4,508
Other, selling, general and administrative		55,631			53,370			163,081			132,169
Cost of other revenues, selling, general and administrative														44,969			48,004

Total expenses		217,320			236,875			684,863			539,434			194,729			202,424

Pretax loss	$	(1,425	)	$	(1,035	)	$	(34,734	)		(9,943	)	$	(1,906	)	$	(6,967	)

~~Other service revenues decreased $9.5 million primarily due to a decline in revenue from our financial process outsourcing business.~~

Total expenses increased $145.4 million, or 27.0%, for the nine months ended January 31, 2007 compared to the prior year. Cost of services increased $112.1 million, primarily due to increases in compensation and benefits and occupancy expenses. Compensation and benefits increased $74.1 million, primarily due to the AmexTBS acquisition. Increases in the number of personnel and the average wage per employee, driven by marketplace competition for professional staff, also contributed to the increase. Occupancy expenses and other expenses increased $19.9 million and $18.1 million, respectively, primarily due to the AmexTBS acquisition.

~~Selling, general and administrative expenses increased $30.9 million primarily due to acquisitions and additional costs associated with our business development and marketing initiatives.~~

~~The pretax loss for the nine months ended January 31, 2007 of $34.7 million compares to a pretax loss of $9.9 million in the prior year.~~

CONSUMER FINANCIAL SERVICES

This segment is primarily engaged in offering ~~advice-based~~ brokerage services, ~~and~~along with investment planning and related financial advice through HRBFA and full-service banking through HRB Bank. HRBFA and HRB Bank, our “Block-branded” businesses, are focused on increasing client loyalty and retention by offering expanded financial services to our retail tax clients. HRBFA offers 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. Recruitment and retention of productive financial advisors is critical to the success of HRBFA. 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 accounts. HRBFA utilizes HRB Bank for certain FDIC-insured deposits for its ~~clients and~~clients. HRB Bank has also ~~purchases loans from OOMC, HRBMC and other lenders to hold for investment purposes. In the event that HRB Bank can no longer purchase~~historically purchased loans from OOMC and HRBMC. During the first quarter of fiscal year 2008, HRB Bank stopped purchasing loans from OOMC and HRBMC, and the main source of future loan purchases ~~would be~~is now other third-party loan originators.

Consumer Financial Services – Operating Statistics


	Three months ended January 31,						Nine months ended January 31,
	2007			2006			2007			2006
Three months ended July 31,													2007			2006

Broker-dealer:
Traditional brokerage accounts⁽¹⁾		394,767			426,699			394,767			426,699			383,229			409,147
New traditional brokerage accounts funded by HRB Tax clients		2,270			2,947			7,425			10,871
New traditional brokerage accounts funded by tax clients														3,311			3,188
Cross-service revenue as a percent of total production revenue		14.8	%		14.2	%		16.1	%		15.7	%		18.1	%		17.6	%
Average assets per traditional brokerage account	$	81,774		$	72,914		$	81,774		$	72,914		$	84,775		$	75,311
Average margin balances (millions)	$	390		$	529		$	414		$	554		$	357		$	451
Average client payable balances (millions)	$	630		$	769		$	626		$	801
Average customer payable balances (millions)													$	560		$	647
Number of advisors		911			956			911			956			936			938
Banking:
Efficiency ratio⁽²⁾		36	%		N/A			37	%		N/A			37	%		35	%
Annualized net interest margin⁽³⁾		2.52	%		N/A			2.79	%		N/A			2.08	%		3.65	%
Annualized return on average assets⁽⁴⁾		2.63	%		N/A			1.96	%		N/A
Total assets (millions)	$	1,814			N/A		$	1,814			N/A
Loans purchased from affiliates (millions)	$	278			N/A		$	1,002			N/A
Annualized pretax return on average assets⁽⁴⁾														1.34	%		1.15	%
Total assets (thousands)													$	1,336,705		$	566,792
Loans purchased from affiliates (thousands):
Purchased from affiliates													$	56,341		$	553,502
Put back to affiliates														(96,838	)		—

													$	(40,497	)	$	553,502

Pretax income ~~for Consumer Financial Services~~ for the three months ended ~~January~~July 31, 2007 was ~~$11.0~~$6.2 million compared to the prior year loss of ~~$7.7 million.~~

~~Nine months ended January 31, 2007 compared to January 31, 2006~~

Consumer Financial Services’ revenues, net of interest expense and provision for loan loss reserves, for the nine months ended January 31, 2007 increased $30.8 million, or 14.9%, from the prior year.

Financial advisor production revenue, which consists primarily of fees earned on assets under administration and commissions on client trades, increased $5.4 million, or 3.9%, over the prior year due to higher annuitized revenues, which were partially offset by fewer client trades. The following table summarizes the key drivers of production revenue:

Nine months ended January 31, 2007 2006

Client trades 673,754 715,519
Average revenue per trade $ 124.86 $ 120.94
Ending balance of assets under administration (billions) $ 32.6 $ 31.4
Annualized productivity per advisor $ 207,000 $ 187,000

~~Other service revenues increased $9.0 million, or 36.8%, primarily due to $6.7 million resulting from positive sweep account rate variances, coupled with $1.4 million in underwriting fees.~~

Net interest revenue on banking activities totaled $14.3 million for the nine months ended January 31, 2007. The following table summarizes the key drivers of net interest revenue on banking activities:

(in 000s)
Average Balance Average Rate Earned (Paid)

Loans $ 603,051 6.92 %
Investments $ 65,596 5.24 %
Deposits $ 509,394 (5.01 %)

~~Other revenues increased $5.8 million primarily due to revenues earned from our new H&R Block Emerald Prepaid MasterCard program.~~

~~Total segment expenses increased $2.1 million, or 0.9%, over the prior year. Selling, general and administrative expenses increased $3.6 million, or 5.1%, primarily due to the expenses of HRB Bank.~~

~~Pretax income for Consumer Financial Services for the nine months ended January 31, 2007 was $5.6 million compared to the prior year loss of $23.1~~$3.1 million.

CORPORATE, ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS

The pretax loss recorded in our corporate operations for the three months ended ~~January~~July 31, 2007 was ~~$50.0~~$15.6 million compared to ~~$30.0~~$30.9 million in the prior year. The ~~higher~~lower loss is primarily due to ~~$7.2~~lower interest resulting from refinancing our $500.0 million Senior Notes with a facility at a lower interest rate, along with reduced legal costs. We also recorded $4.2 million of additional operating interest expense resulting from increased borrowings to cover operating losses coupled with higher interest rates, increases in legal, consulting and compensation costs. These increases were also the main drivers of the higher pretax loss for the nine-month period.investment income.

Income taxes for continuing operations included one-time benefits of $13.6 million during the three months ended January 31, 2007. These benefits related to a permanent deduction for our investment in a foreign subsidiary in the amount of $5.7 million, coupled with net adjustments primarily of our prior year estimated tax provision to tax liabilities in the 2005 tax returns as ultimately filed and tax reserves in the amount of $7.9 million. Excluding these one-time benefits, ourOur effective tax rate for continuing operations ~~would have been approximately 40%, consistent with~~was 40.2% and 39.3% for the three months ended July 31, 2007 and 2006, respectively. Our effective tax rate increased primarily due to changes in our ~~expectations~~estimated state tax rate. Our effective tax rate for discontinued operations was 42.5% and 45.2% for the three months ended July 31, 2007 and 2006, respectively. Our effective tax rate for discontinued operations for the full fiscal ~~year.~~year ended April 30, 2007, was 34.5%. Due to the seasonality of our continuing operations, we expect that our effective tax rate for the full year ending April 30, 2008 for discontinued operations will be lower than our interim-period effective tax rate.

~~-31-~~-36-

DISCONTINUED OPERATIONS

Discontinued operations includes OOMC and HRBMC, mortgage businesses primarily engaged in the origination and acquisition of non-prime and prime mortgage loans, the sale and securitization of mortgage loans and residual interests, and the servicing of non-prime loans. Income statement data presented below is net of eliminations of intercompany activities.

~~Discontinued Operations — Operating Statistics~~


Discontinued Operations – Operating Statistics																(in 000s)
Three months ended July 31,													2007			2006

Volume of loans originated:
Wholesale (non-prime)													$	2,973,423		$	7,207,631
Retail:
Prime														85,254			584,426
Non-prime														226,803			259,888

										(in 000s)			$	3,285,480		$	8,051,945
	Three months ended January 31,						Nine months ended January 31,
Loan characteristics:
Weighted average FICO score⁽¹⁾														616			614
Weighted average interest rate for borrowers (WAC)⁽¹⁾														8.64	%		8.68	%
Weighted average loan-to-value⁽¹⁾														80.0	%		82.6	%
	2007			2006			2007			2006

Volume of loans originated:
Non-prime	$	5,991,533		$	8,608,590		$	20,404,065		$	31,287,507
Prime		268,866			343,897			826,917			1,173,417

	$	6,260,399		$	8,952,487		$	21,230,982		$	32,460,924

Loan characteristics:⁽¹⁾
Weighted average FICO score		612			621			612			625
Weighted average interest rate for borrowers (WAC)		8.46	%		8.27	%		8.64	%		7.71	%
Weighted average loan-to-value		82.2	%		80.0	%		82.4	%		80.6	%
Origination margin (% of origination volume):⁽²⁾
Loan sale premium		0.39	%		1.43	%		1.16	%		1.39	%
Origination margin (% of origination volume):
Loan sale premium (discount)														(2.12	%)		1.48	%
Residual cash flows from beneficial interest in Trusts		0.36	%		0.81	%		0.41	%		0.54	%		0.20	%		0.56	%
Gain on derivative instruments		0.57	%		0.06	%		0.10	%		0.28	%		0.68	%		0.16	%
Loan sale repurchase reserves		(1.77	%)		(0.15	%)		(1.18	%)		(0.15	%)		(4.79	%)		(1.15	%)
Retained mortgage servicing rights		0.66	%		0.67	%		0.63	%		0.60	%		0.71	%		0.62	%

		0.21	%		2.82	%		1.12	%		2.66	%		(5.32	%)		1.67	%
Cost of acquisition		(0.19	%)		(0.27	%)		(0.13	%)		(0.39	%)		0.08	%		(0.14	%)
Direct origination expenses		(0.49	%)		(0.69	%)		(0.51	%)		(0.60	%)		(0.62	%)		(0.51	%)

Net gain on sale – gross margin⁽²⁾		(0.47	%)		1.86	%		0.48	%		1.67	%		(5.86	%)		1.02	%
Other cost of origination		(1.56	%)		(1.43	%)		(1.50	%)		(1.32	%)		(2.00	%)		(1.40	%)
Other		(0.37	%)		(0.04	%)		(0.06	%)		(0.01	%)		0.06	%		0.13	%

Net margin		(2.40	%)		0.39	%		(1.08	%)		0.34	%		(7.80	%)		(0.25	%)

Total cost of origination⁽³⁾		2.05	%		2.12	%		2.01	%		1.92	%		2.62	%		1.91	%
Total cost of origination and acquisition		2.24	%		2.39	%		2.14	%		2.31	%		2.54	%		2.05	%

Loan delivery:
Loan sales:
Third-party buyers	$	6,052,256		$	8,924,788		$	20,492,913		$	32,265,319		$	3,115,996		$	7,914,333
HRB Bank		278,486			—			1,001,610			—
HRB Bank, net of repurchases														(40,497	)		553,502

	$	6,330,742		$	8,924,788		$	21,494,523		$	32,265,319		$	3,075,499		$	8,467,835

Execution price⁽⁴⁾		1.23	%		0.51	%		1.45	%		1.68	%		0.27	%		1.31	%

~~Discontinued Operations — Operating Results~~


										(in 000s)
	Three months ended January 31,						Nine months ended January 31,
	2007			2006			2007			2006

Discontinued Operations – Operating Results																(in 000s)
Three months ended July 31,													2007			2006
Components of gains on sales:
Gain on mortgage loans	$	46,533		$	174,475		$	333,317		$	499,466
Gain (loss) on mortgage loans													$	(57,374	)	$	161,366
Gain on derivatives		35,179			5,060			20,372			91,896			22,259			13,243
Loan sale repurchase reserves		(111,122	)		(13,076	)		(251,083	)		(49,547	)		(157,296	)		(92,737	)
Gain on sales of residual interests		7,296			—			7,296			28,675
Impairment of residual interests		(43,557	)		(8,562	)		(73,059	)		(29,175	)		(49,604	)		(17,266	)

														(242,015	)		64,606
		(65,671	)		157,897			36,843			541,315
Interest income		11,928			32,313			41,325			104,027			15,099			15,300
Loan servicing revenue		109,833			106,065			332,336			296,720			97,399			108,924
Other		56			219			256			740			6,127			9,872

Total revenues		56,146			296,494			410,760			942,802			(123,390	)		198,702


Cost of services		77,040			83,076			235,353			215,279			71,617			88,328
Cost of other revenues		79,698			104,499			223,908			343,707			56,070			73,200
Impairments														23,229			—
Selling, general and administrative		61,390			38,497			174,330			126,562			61,091			61,859

Total expenses		218,128			226,072			633,591			685,548			212,007			223,387

Pretax income (loss)	$	(161,982	)	$	70,422		$	(222,831	)	$	257,254
Pretax loss														(335,397	)		(24,685	)
Income tax benefit														(142,640	)		(11,147	)

Net loss													$	(192,757	)	$	(13,538	)

~~To mitigate~~The disruption in the ~~risk~~secondary market, coupled with declining credit quality and increasing early payment defaults, caused investors in our loans to become increasingly more likely to execute on first payment default provisions available to them in loan sale agreements. Investors have also begun performing additional due diligence on loan pools, causing unprecedented numbers of ~~short-term changes~~loans to be excluded from loan pools before the sale. As a result, we continued to experience significant actual and expected loan repurchase activity. We recorded total loss provisions of $157.3 million during the current quarter compared to $92.7 million in ~~market interest rates~~the prior year. The provision recorded in the current quarter consists of $95.5 million recorded on loans sold during the current quarter and $61.8 million related to loans sold in the prior quarter. Loss provisions as a percent of loan volumes increased 364 basis points over the prior quarter. After we repurchased the loans, we experienced higher severity of losses on those loans. Based on historical experience, we assumed an average 38% loss severity at July 31, 2007, compared to 26% at April 30, 2007, on loans repurchased and expected to be repurchased due to default. See additional discussion of our ~~loan~~reserves and repurchase obligations in “Critical Accounting Policies” and in note 11 to our condensed consolidated financial statements.

The value of MSRs recorded in the current quarter ~~decreased~~increased to 6671 basis points from 6762 basis points in the prior ~~year~~year. This increase is due to ~~changes~~an increase in average loan balances and a change in our ~~assumptions used to value MSRs and other factors. This decrease, coupled~~product mix, with a higher concentration of loans with a longer period before the interest rate reset, resulting in lower prepayment speeds. However, this increase was offset by an overall decline in origination volumes, ~~resulted~~resulting in a net decrease ~~of $18.6 million~~ in gains on sales of mortgage ~~loans.~~loans of $26.8 million. See additional discussion of our MSR assumptions in ~~Item 1,~~“Critical Accounting Policies” and in note 11 to the condensed consolidated financial ~~statements and in Item 2, “Critical Accounting Policies.”~~

During the quarter we continued to experience higher early payment defaults, resulting in an increase in actual and expected loan repurchase activity. As a result, we recorded total loss provisions of $111.1 million during the three months ended January 31, 2007 compared to $13.1 million in the prior year. The provision recorded in the current quarter consists of $18.3 million recorded on loans sold during the current quarter and, due primarily to increases in our estimated loss severity assumption, also included $92.8 million related to loans sold in prior quarters. Loss provisions as a percent of loan volumes increased 162 basis points over the prior year. See additional discussion of our reserves and repurchase obligations in note 11 to our condensed consolidated financial statements.

During the current quarter, we recorded impairments of $43.6 million in gains on sales of mortgage assets primarily due to recent market conditions and significant declines in the value of mortgage loans, including the value of non-performing loans. As a result, we performed a detailed evaluation of the underlying collateral. This change resulted in additional impairment of residual interests of $29.2 million for the quarter.

We also recorded favorable pretax mark-to-market adjustments in other comprehensive income, which increased the fair value of our residual interests $6.3 million during the quarter. These adjustments were recorded net of write-downs of $11.6 million and deferred taxes of $2.0 million, and will be accreted into income throughout the remaining life of those residual interests. 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. In the current year we also recorded a $7.3 million gain on the sale of residual interests.

Interest income decreased $20.4 million from the prior year. This decrease is primarily due to lower accretion resulting from the sale of previously securitized residual interests during fiscal year 2006 and lower write-ups to residual interest balances, coupled with the write-off of accrued interest related to delinquent loans.

The following table summarizes the key metrics related to our loan servicing business:


	(dollars in 000s)
Three months ended January 31,	2007			2006
(dollars in 000s)							(dollars in 000s)
Three months ended July 31,								2007			2006

Average servicing portfolio:
With related MSRs	$	63,809,435		$	59,344,676			$	62,565,520		$	63,562,956
Without related MSRs		6,412,788			21,046,638				3,024,082			10,443,256

	$	70,222,223		$	80,391,314			$	65,589,602		$	74,006,212

Ending servicing portfolio:
With related MSRs	$	63,942,819		$	60,787,507			$	61,341,200		$	64,187,360
Without related MSRs		3,589,355			15,994,170				2,929,205			10,333,107

	$	67,532,174		$	76,781,677			$	64,270,405		$	74,520,467


Number of loans serviced		395,390			466,026				363,021			439,707
Average delinquency rate		11.22	%		5.58	%			15.42	%		7.33	%
Weighted average FICO score		621			621				622			621
Weighted average interest rate (WAC) of portfolio		8.14	%		7.63	%			8.35	%		7.93	%
Carrying value of MSRs	$	263,140		$	262,369			$	232,714		$	275,266

The pretax loss for the three months ended ~~January~~July 31, 2007 was ~~$162.0~~$335.4 million compared to ~~income~~a loss of ~~$70.4~~$24.7 million in the prior year.

~~Nine months ended January 31, 2007 compared to January 31, 2006~~

~~Revenues of~~ The loss from discontinued operations ~~decreased $532.0 million, or 56.4%, for the nine months ended January 31, 2007 compared to the prior year.~~

~~The following table summarizes the key drivers of loan origination volumes and related gains on sales of mortgage loans:~~

(dollars in 000s)
Nine months ended January 31, 2007 2006

Application process:
Total number of applications 203,198 290,476
Number of sales associates⁽¹⁾
2,146 3,486
Closing ratio⁽²⁾
50.5 % 61.8 %
Originations:
Total number of loans originated 102,544 179,439
WAC 8.64 % 7.71 %
Average loan size $ 207 $ 181
Total volume of loans originated $ 21,230,982 $ 32,460,924
Direct origination and acquisition expenses, net $ 135,442 $ 321,177
Revenue (loan value):
Net gain on sale – gross margin⁽³⁾
0.48 % 1.67 %


⁽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 and gains on derivative activities decreased $237.7 million from the prior year. This decrease resulted primarily from lower origination volumes and lower loan sale premiums.

Premium on loan sales decreased due to moderating demand by loan buyers and unfavorable interest rates, partially offset by a higher WAC. Market interest rates, based on the two-year swap, increased from an average of 4.45% last year to 5.29% in the current year. Our WAC increased 93 basis points, up to 8.64% from 7.71% in the prior year. These changes caused our premium on loan sales to decrease 23 basis points, to 1.16% from 1.39% last year.

~~During the current year, we recorded a net $20.4 million in gains, compared to $91.9 million in the prior year, related to our various derivative instruments. The decline~~ for the current ~~year was caused by market interest rates, based on the two-year swap, declining 10 basis points compared to an increase~~period of ~~93 basis points during the prior year. See note 11 to the condensed consolidated financial statements.~~

~~The value~~$192.8 million is net of ~~MSRs recorded in the current year increased to 63 basis points from 60 basis points in the prior year due to changes in our assumptions used to value MSRs~~tax benefits of $142.6 million, and other factors. However, this increase was offset by a decline in origination volumes, which resulted in a net decrease of $62.0 million in gains on sales of mortgage loans. See additional discussion of our MSR assumptions in note 11 to the condensed consolidated financial statements and in Item 2, “Critical Accounting Policies.”

~~-35-~~

During the current year 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 $251.1 million during the nine months ended January 31, 2007 compared to $49.5 million in the prior year. The provision recorded in the current year consists of $130.7 million recorded on loans sold during the current period and $120.4 millionprimarily includes income tax benefits related to loans sold in prior periods. Loss provisions as a percent of loan volumes increased 103 basis points over the prior year. See additional discussion of our reserves and repurchase obligations in note 11 to our condensed consolidated financial statements.

During the current year, we recorded impairments of $73.1 million in gains on sales of mortgage assets primarily due to higher credit losses and interest rates. Additionally, recent market conditions resulted in significant declines in the value of mortgage loans, including the value of non-performing loans. As a result, we performed a detailed evaluation of the underlying collateral. This change resulted in additional impairment of residual interests of $29.2 million.

We also recorded favorable pretax mark-to-market adjustments in other comprehensive income, which increased the fair value of our residual interests $18.1 million during the current year. These adjustments were recorded net of write-downs of $15.3 million and deferred taxes of $1.1 million, and will be accreted into income throughout the remaining life of those residual interests. We also recorded gains of $7.3 million and $28.7 million in gains on the sale of residual interests for the nine months ended January 31, 2007 and 2006, respectively.

~~Interest income decreased $62.7 million~~OOMC. Losses from ~~the prior year. This decrease is primarily due to lower accretion resulting from the sale of previously securitized residual interests~~discontinued operations during fiscal year ~~2006 and lower write-ups~~2007 totaled $808.0 million, net of tax benefits of $425.0 million, including tax benefits related to ~~residual interest balances, coupled~~OOMC of $374.6 million. Although the tax position associated with deferred tax benefits of discontinued businesses will more likely than not be sustained, there is a level of uncertainty associated with the ~~write-off~~amount of ~~accrued interest related to delinquent loans.~~

~~The following table summarizes~~benefit. We believe the ~~key metrics related to our loan servicing business:~~

(dollars in 000s)
Nine months ended January 31, 2007 2006

Average servicing portfolio:
With related MSRs $ 63,794,782 $ 54,784,155
Without related MSRs 8,728,890 21,210,097

$ 72,523,671 $ 75,994,252

Ending servicing portfolio:
With related MSRs $ 63,942,819 $ 60,787,507
Without related MSRs 3,589,355 15,994,170

$ 67,532,174 $ 76,781,677

Number of loans serviced 395,390 466,026
Average delinquency rate 9.03 % 4.76 %
Weighted average FICO score 621 621
Weighted average interest rate (WAC) of portfolio 8.04 % 7.51 %
Carrying value of MSRs $ 263,140 $ 262,369

Loan servicing revenues increased $35.6 million, or 12.0%, compared to the prior year. The increase reflects an increase in late fee income on delinquent loans and, to a lesser extent, a higher annualized rate earned on our servicing portfolio. The annualized rate earned on our entire servicing portfolio was 37 basis points for the current year, compared to 34 basis points in the prior year. These increases were partially offset by a decline in our average servicing portfolio, which decreased 4.6%, to $72.5 billion.

~~Total expenses for the nine months ended January~~net deferred tax asset at July 31, 2007 ~~declined $52.0 million, or 7.6%, from the prior year. Cost of services increased $20.1 million primarily as a result of increased amortization of MSRs.~~

~~Cost of other revenues decreased $119.8 million, primarily due to our ongoing restructuring plans.~~

~~Selling, general and administrative expenses increased $47.8 million due primarily to severance and our ongoing restructuring plans, coupled with retention bonuses and higher consulting expenses.~~

~~The pretax loss for the nine months ended January 31, 2007 was $222.8 million compared to income of $257.3 million in the prior year.~~is, more likely than not, realizable.

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.

~~-36-~~

CAPITAL RESOURCES & LIQUIDITY BY SEGMENT

Our sources of capital primarily 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. Our Tax Services and Business Services segments are highly seasonal and therefore require the use of cash to fund operating losses during the period May through December. Our mortgage operations have incurred significant operating losses in recent quarters, also requiring the use of cash and working capital. As a result of off-season operating losses from our Tax Services and Business Services segments, and recent operating losses from our mortgage businesses, our commercial paper outstanding at July 31, 2007 totaled $1.2 billion, compared to $189.4 million at July 31, 2006.

Given the availability of our liquidity options, including our unsecured committed lines of credit (CLOCs), we believe our existing sources of capital at July 31, 2007 are significant and sufficient to meet our operating needs.

Cash From Operations.Cash used in operating activities ~~from continuing operations~~ for the first ~~nine~~three months of fiscal ~~2007~~2008 totaled ~~$2.8 billion,~~$432.2 million, compared with ~~$1.7 billion~~$476.1 million for the same period of the prior fiscal year. The change was due primarily to ~~$882.7 million in additional receivables, resulting from higher RAL and IMAL balances, an increase of $153.6 million in~~lower income tax ~~payments and an increase of $40.3 million in interest~~ payments.

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 ~~$19.2~~$15.3 million and ~~$95.9~~$13.2 million for the ~~nine~~three months ended ~~January~~July 31, 2007 and 2006, respectively.

Dividends.Dividends paid totaled ~~$128.1~~$43.9 million and ~~$118.7~~$40.5 million for the ~~nine~~three months ended ~~January~~July 31, 2007 and 2006, respectively.

Share Repurchases.On June 7, 2006, our Board approved an additional authorization to repurchase 20.0 million shares. During the nine months ended January 31, 2007, we repurchased 8.1 million shares pursuant to this authorization and a prior authorization at an aggregate price of $180.9 million or an average price of $22.22 per share. There are 22.4 million shares remaining under ~~these~~share repurchase authorizations at ~~January~~July 31, 2007. We ~~plan to continue to~~ purchase shares on the open market in accordance with ~~this authorization,~~existing authorizations, 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~~laws restrictions, internally and regulatory targeted capital levels and other investment ~~opportunities available.~~opportunities.

The OTS requires us to maintain a three percent minimum ratio of adjusted tangible capital to adjusted total assets. Due to significant losses in our mortgage operations during fiscal year 2007, we did not meet this minimum capital requirement at April 30, 2007. Due to continued losses in our mortgage operations during the first quarter of fiscal year 2008 and normal seasonal operating losses of our continuing operations during the first eight months of fiscal year 2008, we expect to be non-compliant until the end of fiscal year 2008. We do not expect to be in a position to repurchase shares until fiscal year 2009.

Debt.~~We plan to refinance our~~In April 2007, we obtained a $500.0 million incredit facility to provide funding for the $500.0 million of 8¹/2% Senior Notes which ~~are~~were due April 16, 2007. This facility matures on December 20, 2007, at which time it will most likely be refinanced.

Commercial paper borrowings outstanding at July 31, 2007 totaled $1.2 billion and were primarily used to fund working capital needs. Subsequent to July 31, 2007, we drew on our CLOCs due to disruptions in ~~April 2007.~~the commercial paper market. See additional discussion in “Commercial Paper

-41-

Business Services.Business Services funding requirements are largely related to receivables for completed work and “work in process.” We provide funding sufficient to cover their working capital needs. This segment provided ~~$30.3~~$47.8 million in operating cash flows during the first ~~nine~~three months of the ~~year.~~year as a result of favorable changes in working capital, primarily the collection of accounts receivable. Business Services used ~~$24.1~~$10.7 million in investing activities primarily related to capital expenditures and ~~acquisitions and used $12.4 million in financing activities primarily due to payments on acquisition debt.~~acquisitions.

Consumer Financial Services.In the first ~~nine~~three months of fiscal year ~~2007,~~2008, Consumer Financial Services ~~used $64.3~~provided $46.8 million in cash from its operating activities primarily due to the timing of cash deposits that are restricted for the benefit of its broker-dealer ~~clients.~~clients and net income generated during the quarter. The segment also ~~used $1.1 billion~~provided $112.2 million in investing activities primarily ~~for the purchase of~~from mortgage loans held for investment and ~~provided $1.6 billion~~used $176.0 million in financing activities due primarily to FDIC-insured deposits held at HRB Bank.

HRB Bank is a member of the ~~FHLB~~Federal Home Loan Bank (FHLB) of Des Moines, which extends credit to member banks based on eligible collateral. At ~~January~~July 31, 2007, HRB Bank had FHLB advance capacity of ~~$594.0~~$499.3 million, and ~~no amount~~there was $104.0 million outstanding balance on this facility.

~~We believe the funding sources~~ Mortgage loans held for 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 clients.investment of $1.2 billion were pledged as collateral on these advances.

Discontinued Operations.These operations primarily generate cash as a result of the sale and securitization of mortgage loans and residual interests, and as residual interests begin to cash flow. Our discontinued operations ~~provided $454.1~~used $77.3 million in cash from operating activities primarily due to ~~loan sales exceeding loan originations~~losses during the ~~nine~~three months ended ~~January~~July 31, 2007. ~~Cash flows provided by investing activities consist primarily of $38.3 million in cash receipts on available-for-sale residual interests.~~ Operating cash flows of discontinued operations in the table above includes the net loss from discontinued operations of ~~$119.1~~$192.8 million.

~~To finance our prime mortgage loan originations, we utilize~~ Cash used in financing activities of $47.5 million reflects the repayment of an on-balance sheet ~~warehouse facility with capacity up~~securitization.

Due to ~~$25 million. As~~market conditions, OOMC had significant borrowings on its line of ~~January 31, 2007 and April 30, 2006, the balance outstanding under this facility was $4.7~~credit from BFC. BFC provides a line of credit of at least $150 million ~~and $1.6 million, respectively.~~for working capital needs. There is no commitment to fund any further operations of OOMC.

See discussion of changes in the off-balance sheet arrangements of our discontinued operations below.

-43-

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

During the three months ended ~~January~~July 31, 2007, total committed off-balance sheet warehouse capacity was ~~increased~~decreased from ~~$16.0~~$8.8 billion to ~~$16.5~~$7.5 billion. Also during the third quarter, as reported in current report on Form 8-K dated January 31, 2007, we amended our warehouse facility with Citigroup Global Markets Realty Corp (Citigroup) to split OOMC’s existing warehouse financing arrangement with Citigroup into two separate warehouse facilities, one of which isWe also had an on-balance sheet facility with capacity of $500.0 ~~million~~million. As of July 31, 2007, additional uncommitted facilities of $2.0 billion were also potentially available, subject to counterparty approval.

One warehouse line was amended to remove a “minimum net income” financial covenant, which required OOMC to maintain a cumulative minimum net income of at least $1 for four consecutive fiscal quarters. As a result, OOMC now has $4.0 billion in committed warehouse facilities available, one without the minimum net income financial covenant and one with a waiver of the ~~other an off-balance sheet facility.~~minimum net income financial covenant through at least April 25, 2008. At our projected origination levels, we estimate we would only need between $3.0 billion and $4.0 billion of available warehouse capacity at any given time. However, the sale of OOMC is subject to various closing conditions, including that OOMC maintain at least $8.0 billion of total capacity in its warehouse facilities throughout the period to the closing date, of which at least $2.0 billion is to be in the form of unused capacity at the closing date. At July 31, 2007, OOMC did not meet the minimum net income financial covenant contained in certain of its committed warehouse facilities. OOMC obtained waivers of the minimum net income financial covenants from warehouse facility providers as needed, to comply with the closing conditions of the sale of OOMC. These waivers extend through various dates as discussed below. If we do not obtain extensions of each facility and waiver that expires before completing the sale of OOMC, or replace existing capacity, we would be in violation of this closing condition.

Committed warehouse facilities and waivers, where applicable, of the minimum net income financial covenant obtained by OOMC expire as follows:


⁽¹⁾		Represents $500.0 million related to an on-balance sheet facility, as discussed below.

⁽²⁾		The agreement related to this facility has been amended to remove the minimum net income financial covenant through the facility expiration date.

If a warehouse facility with a balance were to expire or a waiver were not granted, the loans on that facility would be moved to another facility with excess capacity.

Loans totaling ~~$172.3~~$9.2 million were held on ~~the~~our on-balance sheet ~~line~~facility at ~~January~~July 31, 2007, with the related loans and liability reported in assets and liabilities ~~held for sale. At January 31, 2007, our total off-balance sheet capacity was $16.0 billion, $14.5 billion of which was committed.~~

As of January 31, 2007, OOMC did not meet the “minimum net income” financial covenant contained in eight of its committed warehouse facilities. This covenant requires OOMC to maintain a cumulative minimum net income of at least $1 for the four consecutive fiscal quarters ended January 31, 2007. On January 24, 2007, OOMC obtained waivers of the minimum net income financial covenants through April 27, 2007 from each of the applicable warehouse facility providers. The parties to the waivers were OOMC, Option One Mortgage Capital Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2001-1A; Option One Owner Trust 2001-2; Option One Owner Trust 2003-4, Option One Owner Trust 2003-5; Option One Owner Trust 2005-6; Option One Owner Trust 2005-7; Option One Owner Trust 2005-8; Option One Owner Trust 2005-9; Wells Fargo Bank National Association (as indenture trustee) and each of the following warehouse facility providers: Bank of America, N.A.; JPMorgan Chase Bank, N.A.; Park Avenue Receivables Company LLC; Falcon Asset Securitization Company LLC; JPMorgan Chase Bank, N.A.; Citigroup Global Markets Realty Corp.; DB Structured Products, Inc.; Gemini Securitization Corp., LLC; Greenwich Capital Financial Products, Inc.; HSBC Securities (USA) Inc.; HSBC Bank USA, N.A.; Lehman Brothers Bank; and Merrill Lynch Bank USA.

~~-38-~~

Certain parties to the warehouse facilities have other relationships with us. Each of the warehouse facility providers (or their affiliates) are lending parties pursuant to credit facilities maintained by Block Financial Corporation (BFC), as borrower, and H&R Block, Inc., as guarantor, with various lenders. In addition, certain of the HSBC warehouse facility providers and their affiliates are parties to various agreements with us which (i) an HSBC affiliate originates RALs and IMALs and issues RACs to eligible clients of H&R Block company-owned and franchise offices and clients who utilize tax preparation products or services through other H&R Block distribution channels, (ii) BFC purchases participation interests in RALs and IMALs originated by certain HSBC affiliates, (iii) certain HSBC affiliates service RALs and IMALs in which BFC purchases participation interests and (iv) an HSBC affiliate provides a revolving credit facility to BFC for funding BFC’s purchases of participation interests in RALs.

We anticipate that OOMC will not meet this financial covenant at April 30, 2007, however we believe we will be able to obtain waivers for that date from a sufficient number of warehouse providers to allow OOMC to continue its off-balance sheet financing activities. If OOMC can not obtain the waivers, warehouse facility providers would have the right to terminate their future funding obligations under the applicable warehouse facilities, terminate OOMC’s right to service the loans remaining in the applicable warehouse or request funding of the 10% guarantee. See note 11 to our condensed consolidated financial statements. While this termination could adversely impact OOMC’s ability to fund new loans, we believe this risk is mitigated by options available to H&R Block.held-for-sale.

Other than the changes outlined above, there have been no material changes in our off-balance sheet financing arrangements from those reported at April 30, ~~2006~~2007 in our Annual Report on Form 10-K.

COMMERCIAL PAPER ISSUANCE AND SHORT-TERM BORROWINGS

The following chart provides the debt ratings for BFC as of July 31, 2007:

Short-term

Long-term

Outlook

Fitch

A-

Negative

Moody’s⁽¹⁾

Negative

S&P⁽²⁾

BBB+

Negative

DBRS⁽³⁾

R-1 (low)

Stable


⁽¹⁾		Long-term rating of Baa1 effective August 21, 2007.

⁽²⁾		Short-term rating of A3 and long-term rating of BBB- effective August 31, 2007.

⁽³⁾		All ratings have an outlook of “Under Review with Negative Implications” effective August 31, 2007.

-44-

At July 31, 2007, we maintained $2.0 billion in back-up credit facilities to support the commercial paper program and for general corporate purposes. The CLOCs have a maturity date of August 2010 and an annual facility fee in a range of six to fifteen basis points, based on our credit rating. We ~~entered into a $3.0~~have $633.8 million in outstanding commercial paper as of August 31, 2007, which we anticipate will be refinanced by funds available through the CLOCs. The CLOCs, among other things, require we maintain at least $650.0 million of Adjusted Net Worth, as defined in the agreement, on the last day of any fiscal quarter. We had Adjusted Net Worth of $1.1 billion ~~line~~at July 31, 2007, representing excess stockholders’ equity of ~~credit agreement with HSBC Finance effective January 2, 2007 for use as an alternate funding source~~$450.0 million. We believe we will continue to be in compliance for the ~~purchase~~remaining term of RAL participations. This line is subject to various covenants that are substantially similar to our primary unsecured committed lines of credit (CLOCs), and is secured by our RAL participations. The balance outstanding on this facility at January 31, 2007 was $1.4 billion.

~~We entered into a $300.0 million committed line of credit agreement with BNP Paribas for~~ the period January 2 through February 23, 2007 to cover our peak liquidity needs. This line is subject to various covenants that are substantially similar to our primary unsecured CLOCs. There was no balance outstanding on this line at January 31, 2007.

Other than the changes outlined above, there have been no material changes in our commercial paper program and short-term borrowings from those reported at April 30, ~~2006~~2007 in our Annual Report on Form 10-K.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

~~There~~We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) on May 1, 2007. Total unrecognized tax benefits as of May 1, 2007 were $133.3 million, of which $89.0 million were tax positions that, if recognized, would impact the effective tax rate. We have classified the liability for unrecognized tax benefits as long term in the condensed consolidated balance sheet. We are unable to determine when, and if, unrecognized tax positions will result in obligations requiring future cash payments. See note 5 to the condensed consolidated financial statements for additional information.

Other than the change outlined above, there have been no material changes in our contractual obligations and commercial commitments from those reported at April 30, ~~2006~~2007 in our Annual Report on Form 10-K.

REGULATORY ENVIRONMENT

In March 2006, the OTS approved the federal savings bank charter of HRB Bank. HRB 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 banks are subject to extensive regulation and examination by the OTS, their primary federal regulator, as well as the ~~Federal Deposit Insurance Corporation (FDIC). HRB Bank is subject to various OTS capital requirements and~~FDIC. In conjunction with H&R Block, Inc. ~~is now subject to~~’s application with the OTS for HRB Bank, we made commitments as part of our charter approval order (Master Commitment) which included, but were not limited to: (1) a three percent minimum ratio of adjusted tangible capital to adjusted total assets, as defined by the ~~OTS. As of January 31, 2007, our ratio of adjusted tangible~~OTS; (2) maintain all HRB Bank capital ~~to adjusted total assets was approximately 1%.~~within HRB Bank in accordance with the submitted three-year business plan; and (3) follow federal regulations surrounding intercompany transactions and approvals. We fell below the three percent minimum ~~required~~ ratio ~~due to losses in our mortgage~~

~~-39-~~

Supervisory Directive are as follows: (1) requires HRB Bank to extend its compliance with a minimum 12.0% leverage ratio through fiscal year 2012; (2) requires H&R Block, Inc. to comply with the Master Commitment at all times, except for ~~regaining compliance.~~the projected capital levels and compliance with the three percent minimum ratio, as provided in the fiscal year 2008 and 2009 capital adequacy projections presented to the OTS on July 19, 2007; (3) institutes reporting requirements to the OTS quarterly and monthly by the Board of Directors and management, respectively; and (4) requires HRB Bank’s Board of Directors to have an independent chairperson and at least the same number of outside directors as inside directors.

We have ~~provided a corrective plan and indicated that we believed our noncompliance would be remedied by February 28, 2007. We have agreed to provide the OTS~~maintained compliance with the ~~calculation~~Supervisory Directive in fiscal year 2008. However, operating losses of ~~this ratio as~~our discontinued operations for the first quarter of ~~February 28, 2007, although it is normally required only on~~fiscal year 2008 were higher than projected in our revised capital plan that was submitted to the OTS. As a ~~quarterly basis. We have not received further requests from the OTS as of the date of this filing.~~

~~A banking institution’s capital category depends upon where its~~result, our capital levels are lower than those projections. Based on our current operating plan, we still expect to be in ~~relation~~compliance by April 30, 2008, the original date projected in the capital plan. In order to ~~relevant capital measures, which include~~meet the three percent minimum ratio at April 30, 2008, we do not expect to be in a ~~risk-based capital measure,~~position to repurchase treasury shares until fiscal year 2009. If we are not in a ~~leverage ratio capital measure,~~position to cure deficiencies and if operating results are below our plan, a ~~tangible equity ratio measure, and certain other factors. See note 6~~resulting failure could impair our ability to ~~the condensed consolidated financial statements for additional discussion~~repurchase shares of ~~regulatory capital requirements and classifications.~~our common stock, acquire businesses or pay dividends.

~~HRB Bank is an indirect wholly-owned subsidiary~~Achievement of the capital plan depends on future events and circumstances, the outcome of which cannot be assured. Failure to meet the conditions under the Master Commitment and the Supervisory Directive, including capital levels of H&R Block, Inc. and completion of a planned sale of OOMC by October 31, 2007, could result in the OTS taking further regulatory actions, such as a supervisory agreement, cease-and-desist orders and civil monetary penalties. It is ~~insured~~possible that the sale of OOMC may not be completed by October 31, 2007. At this time, the ~~FDIC. If an insured institution fails, claims for administrative expenses~~financial impact, if any, of ~~the receiver and for deposits~~additional regulatory actions cannot be determined. See additional discussion related to this requirement 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.Part II, Item 1A, under “Regulatory Environment - Banking.”

Other than the items discussed above, there have been no material changes in our regulatory environment from those reported at April 30, ~~2006~~2007 in our Annual Report on Form 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.~~2007. 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 $ 999,000
Cash received (4,000 )

Less recourse obligation $ 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

~~-40-~~

Variations in the assumptions we use affect the estimated fair values and the reported net gains on sales. Gains on sales of mortgage loans totaled ~~$333.3 million and $499.5~~a negative $57.4 million for ~~nine~~the three months ended ~~January~~July 31, 2007 and ~~2006, respectively.~~$161.4 million for the three months ended July 31, 2006.

Our ~~recourse obligation relates~~repurchase reserves relate 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~~Loans are repurchased due to a combination of factors, including delinquency and other violations of representations and warranties. In whole loan ~~repurchases or indemnification for losses occurs within nine months from~~sale transactions, we guarantee 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~~first payment to the ~~recourse liability, while actual~~purchaser. If this payment is not collected, it is referred to as an early payment default.

For early payment default-related 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~~repurchase reserves will increase or decrease. See note 11 to our condensed consolidated financial statements under “Commitments and Contingencies.”

-46-

~~During the nine months ended January 31, 2007, we experienced higher~~Declining credit quality, coupled with increasing early payment defaults, ~~resulting~~caused investors in ~~an increase~~our loans to become increasingly more likely to execute on first payment default provisions available to them in loan sale agreements. Investors have also begun performing additional due diligence on loans pools, causing unprecedented numbers of loans to be excluded from loan pools before the sale. As a result, we continued to experience significant actual and expected loan repurchase activity. ~~As a result, we~~We recorded total loss provisions of ~~$251.1~~$157.3 million during the ~~nine months ended January 31, 2007~~current quarter compared to ~~$49.5~~$92.7 million in the prior year. ~~Loss provisions~~The provision recorded in the current ~~year consist~~quarter consists of ~~$130.7~~$95.5 million recorded on loans sold during the current ~~year~~quarter and ~~$120.4~~$61.8 million related to loans sold in the prior ~~periods.~~quarter. At ~~January~~July 31, 2007, we assumed that substantially all loans that failed to make timely payments according to contractual early payment default provisions will be repurchased, and that 6%approximately 4% 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 10% of all loans we repurchase from whole loan sale transactions will cure with no loss incurred, and of those that do not cure, we assumed an average ~~17%~~38% loss severity, ~~for~~up from 26% at April 30, 2007, on all loans ~~on which we hold a first lien position. During~~repurchased and expected to be repurchased as of July 31, 2007. The increase in our loan repurchase liability was primarily due to the ~~three months ended January 31, 2007, we increased~~increase in our ~~estimated~~ loss severity for on-balance sheet loans from an average of 17% to 29%. We recorded $92.8 million in reserves related to loans sold in prior quarters due to higher severity assumptions, higher loss frequency and a decrease in our estimated cure rate.assumption.

Based on our analysis as of ~~January~~July 31, 2007, we estimated our liability for recourse obligations to be ~~$44.8~~$72.2 million. The sensitivity of the recourse liability to 10% and 20% adverse changes in loss assumptions is ~~$4.5~~$7.2 million and ~~$9.0~~$14.4 million, respectively.

Valuation of MSRs

MSRs are recorded when we sell loans 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

~~-41-~~

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 back-testing 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.

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 rates 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 May 1, 2005 to the current quarter ended January 31, 2007, 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~~
~~Prepayment rates~~	~~Further stratification of~~	~~$4,428 or~~	~~January 31, 2007~~
	~~prepayment rates~~	~~8 basis points~~

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

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

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

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During the period ended January 31, 2007 we updated our assumptions related to loan prepayment rates to further stratify by vintage year, loan type, and loans with and without prepayment penalties. We also updated assumptions surrounding investor remittances during the current period. The net impact of the changes outlined above and other less significant changes made during the current quarter was an increase of approximately 4 basis points for MSRs initially recorded in the current quarter. During the period 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 January 31, 2006 to January 31, 2007 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 ~~$263.1~~$232.7 million are included in our condensed consolidated balance sheet at ~~January~~July 31, 2007. 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		(8	%)
Adverse 20% –— % impact on fair value		(1615	%)

Discount rate:
Adverse 10% –— % impact on fair value		(3	%)
Adverse 20% –— %$impact on fair value		(57	%)

Ancillary Fees and Income:
Adverse 10% –— %impact on fair value		(4	%)
Adverse 20% –— % impact on fair value		(89	%)

Costs to service:
Adverse 10% –— % impact on fair value		(45	%)
Adverse 20% –— % impact on fair value		(9	%)

Valuation of Residual Interests

We use discounted cash flow models to determine the estimated fair values of our residual interests. We develop our assumptions for expected credit losses, prepayment speeds, discount rates and interest rates based on historical experience. Variations in our assumptions could materially affect the estimated fair values, which may require us to record impairments. In addition, variations will also affect the amount of residual interest accretion recorded on a monthly basis.

We recorded impairments totaling $49.6 million in our condensed consolidated income statements for the three months ended July 31, 2007. During the quarter, we increased our discount rate assumption from 25% to 47% as a result of continued uncertainty and volatility in the market and higher investor yield requirements. See note 11 to our condensed consolidated financial statements and Part I, Item 3 for additional discussion.

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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.

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION

We report our financial results in accordance with generally accepted accounting principles (GAAP). However, we believe certain non-GAAP performance measures and ratios used in managing the business may provide additional meaningful comparisons between current year results and prior periods. Reconciliations to GAAP financial measures are provided below. These non-GAAP financial measures should be viewed in addition to, not as an alternative for, our reported GAAP results.

Banking Ratios (dollars in 000s)
Three months ended July 31, 2007 2006

Efficiency Ratio:
Total Consumer Financial Services expenses $ 108,166 $ 81,898
Less: Interest and non-banking expenses (104,043 ) (80,564 )

Non-interest banking expenses $ 4,123 $ 1,334

Total Consumer Financial Services revenues $ 114,372 $ 78,829
Less: Non-banking revenues and interest expense (103,323 ) (74,988 )

Banking revenue — net of interest expense $ 11,049 $ 3,841

37 % 35 %

Net Interest Margin (annualized):
Net banking interest revenue $ 7,503 $ 3,729
Net banking interest revenue (annualized) $ 30,012 $ 14,916

Divided by average assets $ 1,442,299 $ 408,117

2.08 % 3.65 %

Return on Average Assets (annualized):
Total Consumer Financial Services pretax income $ 6,206 $ (3,069 )
Less: Non-banking pretax income (loss) 1,364 (4,238 )

Pretax banking income $ 4,842 $ 1,169

Pretax banking income (annualized) $ 19,368 $ 4,676

Divided by average assets $ 1,442,299 $ 408,117

1.34 % 1.15 %

Discontinued Operations - Origination Margin (dollars in 000s)
Three months ended July 31, 2007 2006

Total expenses $ 212,007 $ 223,387
Add: Expenses netted against gain on sale revenues 17,727 52,566
Less:
Cost of services 71,617 88,328
Cost of acquisition (2,603 ) 10,924
Allocated support departments 2,183 6,818
Other 72,568 16,480

$ 85,969 $ 153,403

Divided by origination volume $ 3,285,480 $ 8,051,945
Total cost of origination 2.62 % 1.91 %

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~~Banking Ratios~~

(dollars in 000s)
Three months ended Nine months ended
January 31, 2007 January 31, 2007

Efficiency Ratio:
Total Consumer Financial Services expenses $ 96,552 $ 262,316
Less: Interest and non-banking expenses (91,983 ) (254,572 )

Non-interest banking expenses $ 4,569 $ 7,744

Total Consumer Financial Services revenues $ 107,511 $ 267,888
Less: Non-banking revenues and interest expense (94,800 ) (246,714 )

Banking revenue – net of interest expense $ 12,711 $ 21,174

36 % 37 %

Net Interest Margin (annualized):
Net banking interest revenue $ 6,188 $ 14,309
Net banking interest revenue (annualized) $ 24,752 $ 19,079

Divided by average assets $ 982,633 $ 682,798

2.52 % 2.79 %

Return on Average Assets (annualized):
Total Consumer Financial Services pretax income $ 10,959 $ 5,572
Less: Non-banking pretax income (loss) 4,505 (15,614 )

Pretax banking income $ 6,454 $ 10,042

Pretax banking income (annualized) $ 25,816 $ 13,389

Divided by average assets $ 982,633 $ 682,798

2.63 % 1.96 %

~~Origination Margin~~

(dollars in 000s)
Three months ended January 31, Nine months ended January 31,
2007 2006 2007 2006

Total expenses $ 218,128 $ 226,072 $ 633,591 $ 685,548
Add: Expenses netted against gain on sale revenues 42,288 85,974 135,442 321,177
Less:
Cost of services (77,040 ) (83,076 ) (235,353 ) (215,279 )
Cost of acquisition (12,005 ) (24,305 ) (28,809 ) (127,201 )
Allocated support departments (3,883 ) (3,581 ) (12,034 ) (9,799 )
Other (38,874 ) (11,291 ) (66,819 ) (29,891 )

$ 128,613 $ 189,793 $ 426,018 $ 624,555

Divided by origination volume $ 6,260,399 $ 8,952,487 $ 21,230,982 $ 32,460,924
Total cost of origination 2.05 % 2.12 % 2.01 % 1.92 %

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 7A of our Annual Report on Form 10-K for fiscal year 2007 presents discussions of market risks that may impact our future results. The following risk factors should be read in conjunction with that discussion.

Interest Rate Risk and Credit Spreads — Non-prime Originations.Interest rate changes and credit spreads impact the value of the loans underlying our beneficial interest in Trusts, on our balance sheet or in our origination pipeline, as well as residual interests in securitizations and MSRs.

As a result of loan sales to the Trusts, we remove the mortgage loans from our balance sheet and record the gain or loss on sale, cash proceeds, MSRs, repurchase reserves and a beneficial interest in Trusts, which represents our residual interest in the ultimate expected outcome from the disposition of the loans by the Trusts. See Part I, Item 2, “Off-Balance Sheet Financing Arrangements.” At July 31, 2007, there were $2.1 billion of loans held in the Trusts and the value of our beneficial interest in Trusts was $54.5 million. At July 31, 2007, we had $432.2 million of mortgage loans held for sale on our balance sheet. Approximately half of these loans were repurchased from whole loan investors or the Trusts. Changes in interest rates and other market factors including credit spreads may result in a change in value of our beneficial interest in Trusts and mortgage loans held for sale.

We are impacted by changes in loan sale prices including interest rates, credit spreads and other factors. We are exposed to interest rate risk and credit spreads associated with commitments to fund approved loan applications of $1.7 billion, subject to conditions and loan contract verification. Of the $1.7 billion of commitments to fund mortgage loans at July 31, 2007, all but $242.5 million were repriced to higher interest rates before funding in August 2007. We expect the majority of the repriced loans will not be funded.

During the current quarter, we used forward loan sale commitments, interest rate swaps and put options on Eurodollar futures to reduce our interest rate risk associated with our commitment to fund non-prime loans. During August 2007, we discontinued our use of interest rate swaps and put options. We continue to use forward loan sale commitments to reduce our exposure to interest rate risk and credit spreads. Changes in credit spread are derived from investor demand and competition for available funds. Investor demand can be impacted by sector performance and loan collateral performance. Sector performance factors include the stability of the industry and individual competitors. Uncertainty regarding the ability of the industry as a whole to meet repurchase obligations could impact credit spread demands by investors. Loan collateral performance or anticipated performance can be driven by actual performance of the collateral or by market-related factors impacting the industry as a whole. Credit spread risk can be reduced using forward loan sale commitments. However, locking into these commitments eliminates the potential for price adjustments.

Forward loan sale commitments represent our obligation to sell a non-prime loan at a specific price in the future and increase in value as rates rise and decrease as rates fall. The Trusts may fulfill these obligations in response to the exercise of a put option by the third-party beneficial interest holders. At July 31, 2007, we had forward loan sale commitments totaling $628.1 million. Forward loan sale commitments lock in the execution price on the loans that will be ultimately delivered into a loan sale.

Residual Interests.Relative to modeled assumptions, an increase or decrease in interest rates would impact the value of our residual interests. Residual interests bear the interest rate risk embedded within the securitization due to an initial fixed-rate period on the loans versus a floating-rate funding cost. Residual interests also bear the ongoing risk that the floating interest rate earned after the fixed period on the mortgage loans is different from the floating interest rate on the bonds sold in the securitization.

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ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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 and procedures. The controls evaluation was done under the supervision and with the participation of ~~management.~~management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, we have concluded that our disclosure controls and procedures were ~~not~~ effective as of the end of the period covered by this Quarterly Report on Form 10-Q due to a material weakness in internal controls in financial reporting identified related to the valuation of certain residual interests in securitizations. We believe this material weakness has been remediated as of March 12, 2007, and that the remediation is reflected in the information contained in this Form 10-Q.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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 8 to our condensed consolidated financial statements.

RAL ~~LITIGATION~~Litigation.

We reported in our annual report on Form 10-K for the year ended ~~April~~Aril 30, ~~2006,~~2007, certain events and information regarding lawsuits ~~throughout the country~~ regarding the RAL Cases. The RAL Cases have involved a variety of legal theories asserted by plaintiffs. These theories include allegations that, among other things, disclosures in the RAL applications were inadequate, misleading and untimely; the RAL interest rates were usurious and unconscionable; we did not disclose that we would receive part of the finance charges paid by the customer for such loans; untrue, misleading or deceptive statements in marketing RALs; breach of state laws on credit service organizations; breach of contract, unjust enrichment, unfair and deceptive acts or practices; violations of the federal Racketeer Influenced and Corrupt Organizations Act; violations of the federal Fair Debt Collection Practices Act and unfair competition regarding 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, 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 one settlement resulting in a pretax expense of $43.5 million in fiscal year 2003 (the “Texas RAL Settlement”) and other settlements resulting in a combined pretax expense in fiscal year 2006 of $70.2 million (the “2006 Settlements”).

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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. 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:~~actions for which there have been significant developments during the fiscal quarter ended July 31, 2007:

Lynne A. Carnegie, et al. v. Household International, Inc., H&R Block, Inc., et alal.,~~., (formerly~~(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. This case ~~constitutes~~is one of the cases in the 2006 Settlements. On April 19, 2006, we entered into a settlement agreement regarding this case, subject to final court approval. The settlement was approved by the court on August 28, 2006. ~~One objector filed an appeal, which was dismissed on March 1, 2007. Unless a Petition for Certiorari is filed by the objector and granted by the United States Supreme Court, the~~The settlement is now final.

~~-46-~~

Sandra J. Basile, et al. v. H&R Block, Inc., et al, April Term 1992 Civil Action No. 3246 in the Court of Common Pleas, First Judicial District Court of Pennsylvania, Philadelphia County, instituted on April 23, 1993. The court decertified the class on December 31, 2003. The Pennsylvania appellate court subsequently reversed the trial court’s decertification decision. On September 26, 2006, the Pennsylvania Supreme Court reversed the appellate court’s reversal of the trial court’s decision to decertify the class. On June 4, 2007, the appellate court affirmed its earlier decision. The ~~plaintiff~~Company is currently seeking ~~further~~ review of the appellate court’s decision by the ~~appellate court.~~Pennsylvania Supreme Court .

~~Deadra D. Cummins, et al. v. H&R Block, Inc., et al~~~~., Case No. 03-C-134 in the Circuit Court~~Peace of ~~Kanawha County, West Virginia, instituted on January 22, 2003. The court approved the settlement of this case on June 8, 2006, and the settlement is now final.~~

~~PEACE OF MIND LITIGATION~~Mind Litigation.

Lorie J. Marshall, et al. v. H&R Block Tax Services, Inc., et alal.,., 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.~~(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, although plaintiffs have indicated that they plan to seek a trial in July 2007.~~set.

We believe the claims in the POM 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.

~~EXPRESS~~Express IRA ~~LITIGATION~~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 Advisors, Inc.The complaint alleged fraudulent business practices, deceptive acts and practices, common law fraud and breach of

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In addition to the New York Attorney General action, a number of civil actions were filed against us concerning the Express IRA matter, the first of which was filed on March 17, 2006. ~~All~~Except for two cases pending in state court, all of the civil actions ~~pending in federal court~~ have been consolidated by the panel for Multi-District Litigation into a single action styledIn re H&R Block, Inc. Express IRA Marketing Litigationin the United States District Court for the Western District of Missouri. We intend to defend these cases vigorously, but there are no assurances as to their outcome.

~~SECURITIES AND SHAREHOLDER DERIVATIVE LITIGATION~~Securities Litigation.

On ~~March 17, 2006, the first of three~~April 6, 2007, a putative class ~~actions alleging violations of certain securities laws are were~~action styledIn re H&R Block Securities Litigationwas filed against the Company and certain of its ~~current and former~~ officers ~~and directors (the “Securities Class Action Cases”). In addition, on April 5, 2006,~~in the ~~first~~United States District Court for the Western District of nine shareholder derivative actions purportedly brought on behalf of the Company (which is named as a “nominal defendant”) were filed against certain of the Company’s current and former directors and officers (the “Derivative Cases”).Missouri. The ~~Securities Class Action Cases alleged,~~complaint alleges, 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~~complaint seeks unspecified damages and equitable relief. The Derivative Cases generally involved allegations of breach of fiduciary duty, abuse of control, gross mismanagement, waste and unjust enrichment pertaining to (i) the Company’s restatement of financial results due to errors in determining the Company’s state effective income tax rate and (ii) certain of the Company’s products and other business activities. On September 20, 2006, the United States District Court for the Western District of Missouri ordered all of the Securities Class Action Cases and the Derivative Cases consolidated into a single action styled~~In re H&R Block Securities Litigation. The court will appoint a lead plaintiff who will then file a consolidated complaint.~~ We intend to defend this litigation vigorously, but there are no assurances as to its outcome.

~~OTHER CLAIMS AND LITIGATION~~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~~was concluded in ~~May 2006, was recessed until~~August 2007, with post-hearing briefs to be submitted in October ~~2006 and is scheduled to continue through August~~ 2007. 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 of taxes. Some of these clients are seeking or may attempt to seek recovery from RSM. There can be no assurance regarding the outcome and resolution of this matter.

RSM EquiCo, Inc., a subsidiary of RSM, is a party to a putative class action filed on July 11, 2006 and entitledDo Right’s Plant Growers v. RSM EquiCo, Inc., RSM McGladrey, Inc., H&R Block, Inc. and Does 1-100, inclusive, Case No. 06 CC00137, in the California Superior Court, Orange County. The complaint contains allegations regarding business valuation services provided by RSM EquiCo, Inc. including fraud, negligent misrepresentation, breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and unfair competition and seeks unspecified damages, restitution and equitable relief. There can be no assurance regarding the outcome and resolution of this matter.

We have from time to time been party to investigations, claims and lawsuits not discussed herein arising out of our business operations. These investigations, claims and lawsuits include actions by state attorneys general, other state regulators, 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 investigations, claims and lawsuits pertain to RALs, the origination and servicing of mortgage loans, the electronic filing of customers’ income tax returns, the POM guarantee program, and our Express IRA program and other investment products and RSM EquiCo, Inc. business valuation services. 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 the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material adverse effect on our consolidated financial statements.

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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) 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.

ITEM 1A. RISK FACTORS

Item 1A of our Annual Report on Form 10-K for fiscal year 2007 presents risk factors that may impact our future results. In light of recent developments in the mortgage, housing and secondary markets, the following risk factors should be read in conjunction with that discussion.

~~Consumer Financial Services.~~Potential Sale Transaction.In fiscal year 2007, we entered into an agreement to sell OOMC. The purchase price to be received in connection with the sale of OOMC will consist of payments based on the fair value of the adjusted tangible net assets of OOMC, as defined in the agreement, as of the date of sale less $300.0 million. Because the final sale price will be based on third-party bids and valuations received at closing as well as the ultimate value received upon disposition of certain assets after closing, and because market conditions have changed and may change significantly during the period prior to closing, the value of the adjusted tangible net assets of the business at closing may be significantly different than the value as of July 31, 2007. In addition, the transaction is subject to various closing conditions, including: (1) maintenance of at least $8.0 billion of warehouse lines; (2) existence of at least $2.0 billion of loans in the warehouse facilities at the date of closing, all originated within the prior 60 days; (3) the lack of any material adverse events or conditions; (4) OOMC have servicer ratings of at least RPS2 by Fitch, SQ2 by Moody’s and Above Average by S&P, (5) agreed upon regulatory and other approvals and consents be obtained; and (6) we provide audited financial statements of OOMC for the year ended April 30, 2007 by July 31, 2007, with the lack of a going concern explanatory paragraph related to OOMC, except to the extent necessary as a result of specified permitted conditions.

We continue to expect to complete the sale of OOMC pursuant to the April 2007 agreement by December 31, 2007. However, we are not currently in compliance with certain closing conditions required by this agreement and do not believe we will be able to regain compliance with such closing conditions or maintain compliance through the anticipated closing date. We are currently in discussions with Cerberus Capital Management to have such conditions either waived or modified. We are also conducting ongoing discussion regarding potentially modifying the agreement, which may include only selling the servicing platform, although we currently believe it is unlikely that the existing agreement will ultimately be changed. Therefore, it is our intention to consummate the transaction under the existing agreement on or before December 31, 2007. If the sale is not consummated, then we would divest the servicing platform and either divest or wind-down the origination business. There are no assurances that the current agreement will be modified or that the transaction will close. Our condensed consolidated financial statements as of July 31, 2007 include an impairment charge which reflects our best estimate of the valuation of OOMC based on the terms of the existing agreement. See additional discussion in note 11. If the agreement is modified, we may incur additional impairment losses, which could be significant, beyond those that are provided in our financial statements. However, we are currently unable to estimate the amount of such additional impairment, if any, until the terms of a modified agreement are determined.

See discussion of warehouse facilities and related waivers in note 11 to the condensed consolidated financial statements and in Part I, Item 2 under “Off-Balance Sheet Financing Arrangements.” If the closing conditions are not satisfied by the requisite time, the sale could be terminated. Failure to complete this transaction could adversely affect the market price of our stock. If conditions in the non-prime mortgage industry, particularly in home appreciation, continue to decline, our operating results, capital levels and liquidity could be negatively impacted during the periods we continue to own OOMC.

Liquidity and Capital.We are dependent on the use of our off-balance sheet arrangements to fund our daily non-prime mortgage loan originations, and depend on the secondary market to securitize and sell mortgage loans and residual interests. Our off-balance sheet arrangements are subject to certain covenants, including a “minimum net income” financial covenant.

-54-

at least $8.0 billion of total capacity in its warehouse facilities throughout the period to the closing date (of which at least $2.0 billion is to be in the form of unused capacity at the closing date). At July 31, 2007, OOMC did not meet the minimum net income financial covenant contained in certain of its committed warehouse facilities. OOMC obtained waivers of the minimum net income financial covenants from warehouse facility providers as needed, to comply with the closing conditions of the sale of OOMC. These waivers extend through various dates. If we do not obtain extensions of each facility and waiver that expires before completing the sale of OOMC, or replace existing capacity, we would be in violation of this closing condition. See additional discussion in note 11 to the condensed consolidated financial statements.

Market Risks.Our day-to-day operating activities of originating and selling mortgage loans have many aspects of interest rate risk. Additionally, the valuation of our retained residual interests and mortgage servicing rights includes many estimates and assumptions made by management surrounding interest rates, prepayment speeds and credit losses. Variation in interest rates or the factors underlying our assumptions could affect our results of operations.

Conditions in the non-prime mortgage industry continued to be challenging into fiscal year 2008. Our mortgage operations, as well as the entire industry, were impacted by deteriorating conditions in the secondary market, where reduced investor demand for loan purchases, higher investor yield requirements and increased estimates for future losses reduced the value of non-prime loans. Under these conditions non-prime originators generally reported significant increases in losses and many were unable to meet their financial obligations. As a result, during our first quarter our mortgage operations originated mortgage loans that, by the time we sold them in the secondary market, were valued at less than par. Conditions in the non-prime mortgage industry resulted in significant losses in our mortgage operations during the first quarter of fiscal year 2008. The mortgage industry in August 2007 continued to be extremely volatile, which we believe will likely result in further significant impairments to our residual interests, beneficial interest in Trusts and loans held for sale in our second quarter, potentially in the range of $150 to $200 million. To the extent that market conditions remain volatile, or fail to improve, our mortgage business may continue to incur operating losses and asset impairments. See additional discussion of the performance of our mortgage operations in Part I, Item 2, under “Discontinued Operations.” If conditions in the non-prime mortgage industry do not improve, it could adversely affect the results of our mortgage operations.

Regulatory Environment — Banking.H&R Block, Inc. is subject to a ~~savings~~three percent minimum ratio of adjusted tangible capital to adjusted total assets, as defined by the OTS. We fell below the three percent minimum ratio at April 30, 2007. We notified the OTS of our failure to meet this requirement, and ~~loan holding company,~~on May 29, 2007, the OTS issued a Supervisory Directive. We submitted a revised capital plan to the OTS on July 19, 2007, that projects we will regain compliance with the three percent minimum capital requirement by April 30, 2008. The revised capital plan contemplates that we will meet the minimum capital requirement primarily through earnings generated by our normal business operations in fiscal year 2008. The OTS has accepted our revised capital plan. We also fell below the three percent minimum ratio during our first quarter, and had adjusted tangible capital of negative $177.6 million, and a requirement of $168.3 million to be in compliance at July 31, 2007. Normal seasonal operating losses of our Tax and Business Services segments, and operating losses of our discontinued mortgage businesses, are also expected to cause us to be in non-compliance until the end of fiscal year 2008.

The Supervisory Directive included additional conditions that we will be required to meet in addition to the Master Commitment. The significant additional conditions included in the Supervisory Directive are as follows: (1) requires HRB Bank isto extend its compliance with a ~~federal savings bank, which is subject~~minimum 12.0% leverage ratio through fiscal year 2012; (2) requires H&R Block, Inc. to ~~regulation~~comply with the Master Commitment at all times, except for the projected capital levels and compliance with the three percent minimum ratio, as provided in the fiscal year 2008 and 2009 capital adequacy projections presented to the OTS on July 19, 2007; (3) institutes reporting requirements to the OTS quarterly and monthly by the ~~OTS~~Board of Directors and ~~FDIC. Federal~~management, respectively; and ~~state laws~~(4) requires HRB Bank’s Board of Directors to have an independent chairperson and ~~regulations govern numerous matters including: changes~~at least the same number of outside directors as inside directors.

-55-

We have maintained compliance with the Supervisory Directive in fiscal year 2008. However, operating losses of our discontinued operations for the first quarter of fiscal year 2008 were higher than projected in our revised capital plan that was submitted to the OTS. As a result, our capital levels are lower than those projections. Based on our current operating plan, we still expect to be in compliance by April 30, 2008, the original date projected in the ~~ownership or control of banks and bank holding companies; maintenance of adequate~~ capital ~~and~~plan. In order to meet 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. Ifthree percent minimum ratio at April 30, 2008, we do not ~~comply with these regulations, it~~expect to be in a position to repurchase treasury shares until fiscal year 2009. If we are not in a position to cure deficiences, and if operating results are below our plan, a resulting failure could impair our ability to repurchase shares of our common stock, acquire businesses or pay dividends.

Achievement of the capital plan depends on future events and circumstances, the outcome of which cannot be assured. Failure to meet the conditions under the Master Commitment and the Supervisory Directive, including capital levels of H&R Block, Inc. and completion of a planned sale of OOMC by October 31, 2007, could result in the OTS taking further regulatory actions, such as a supervisory agreement, cease-and-desist orders and ~~negative publicity, which could adversely affect our results~~civil monetary penalties. It is possible that the sale of ~~operations.~~OOMC may not be completed by October 31, 2007. At this time, the financial impact, if any, of additional regulatory actions cannot be determined. See note 6 to the condensed consolidated financial statements for additional information.

Other than the items discussed above, there have been no material changes in our risk factors from those reported at April 30, ~~2006~~2007 in our ~~Annual~~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 ~~2007~~2008 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 65 $ 23.20 — 22,352
December 1 – December 31 2 $ 23.71 — 22,352
January 1 – January 31 19 $ 23.38 — 22,352

(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 5 $ 22.89 — 22,352
June 1 - June 30 8 $ 23.29 — 22,352
July 1 - July 31 217 $ 23.34 — 22,352


⁽¹⁾		We purchased ~~86,092~~230,235 shares in connection with the funding of employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on nonvested shares.

⁽²⁾		On June 9, 2004, our Board of Directors approved the repurchase of 15.0 million shares of H&R Block, Inc. common stock. On June 7, 2006, our Board approved an additional authorization to repurchase 20.0 million shares. These authorizations have no expiration date.

ITEM 5. OTHER INFORMATION

As previously disclosed in a Form 8-K filed on August 22, 2007 (the “2005 8-K”), Block Financial Corporation (BFC), a wholly-owned subsidiary of the Company is a party to a $1.0 billion Five-Year Credit and Guarantee Agreement dated August 10, 2005 and a $1.0 billion Amended and Restated Five-Year Credit and Guarantee Agreement dated August 10, 2005 (collectively, the “BFC Credit Facilities”).

On August 31, 2007, BFC drew a combined $200.0 million under the BFC Credit Facilities, and on September 7, 2007, BFC will draw a combined $350.0 million under the BFC Credit Facilities. The $200.0 million draw will be repaid with proceeds from the $350.0 million draw. The draws provide a more stable source of funds to support BFC’s short-term needs in light of recent market conditions that have negatively impacted the availability and term of commercial paper. The August 31 draw bears interest at the Alternate Base Rate (as defined in the BFC Credit Facilities). The $350.0 million draw will bear interest at the Eurodollar Rate (as defined in the BFC Credit Facilities) plus an applicable margin and is subject to adjustments as set forth in the BFC Credit Facilities. The amounts borrowed under the BFC Credit Facilities become due and payable on August 10, 2010.

The BFC Credit Facilities contain representations, warranties, covenants and events of default customary for financings of this type. One such covenant requires the Company to maintain a

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certain level of Adjusted Net Worth, which currently is at least $650.0 million at the last day of any fiscal quarter (Adjusted Net Worth of $1.0 billion reduced by the Company’s repurchases of its own Capital Stock subsequent to April 30, 2005 in an aggregate amount not exceeding $350.0 million). The BFC Credit Facilities also include, without limitation covenants restricting the Company’s and BFC’s ability to incur additional debt, incur liens, merge or consolidate with other companies, sell or dispose of their respective assets (including equity interests), liquidate or dissolve, make investments, loans, advances, guarantees and acquisitions, and engage in certain transactions with affiliates.

In the event of a default by the Company or BFC under the BFC Credit Facilities, the Administrative Agent may, or at the direction of the requisite lenders shall, terminate the applicable Credit Facility and declare the loans then outstanding, together with any accrued interest thereon and all fees and other obligations of the Company and BFC under such Credit Facility, to be due and payable immediately.

ITEM 6. EXHIBITS

	10.1		~~Omnibus Amendment~~License Agreement effective August 1, 2007, between H&R Block Services, Inc. and Consent Agreement dated as of December 29, 2006 among Option One Owner Trust 2001-1A, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Loan Warehouse Corporation, Wells Fargo National Bank, National AssociationSears, Roebuck and ~~Greenwich Capital Financial Products, Inc.~~Co.*

	10.2		Amendment Number ~~Five~~Eleven dated June 29, 2007 to ~~Second~~the Amended and Restated ~~Sale and Servicing Agreement~~Indenture dated as of ~~September 7, 2006, among~~November 25, 2003, between Option One Owner Trust 2001-2 ~~Option One Loan Warehouse Corporation, Option One Mortgage Corporation~~ and Wells Fargo Bank N.A.

	10.3		Amendment Number Nine to the Amended and Restated ~~Indenture dated as of December 15, 2006, among Option One Owner Trust 2001-2 and Wells Fargo Bank, N.A.~~

	~~10.4~~		~~Omnibus Amendment and Consent~~Note Purchase Agreement dated as of ~~December 29, 2006~~November 25, 2003 among Option One Owner Trust 2001-2, Option One ~~Mortgage Corporation, Option One Mortgage Capital Corporation, Option One~~ Loan Warehouse ~~Corporation, Wells Fargo National Bank, National Association and Bank of America N.A.~~

~~-49-~~

	~~10.5~~		Waiver and Amendment dated January 24, 2007, among Option One Owner Trust 2001-2, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Loan Warehouse Corporation, Well Fargo Bank, National AssociationLLC, and Bank of America, N.A.

	~~10.6~~		~~Second Amended and Restated Sale and Servicing Agreement dated as of January 19, 2007, among Option One Mortgage Corporation, Option One Owner Trust 2002-3 and Wells Fargo Bank N.A.~~

	~~10.7~~		~~Second Amended and Restated Note Purchase Agreement dated as of January 19, 2007, among Option One Loan Warehouse Corporation, Option One Owner Trust 2002-3 and UBS Real Estate Securities, Inc.~~

	~~10.8~~		~~Indenture dated as of January 19, 2007 between Option One Owner Trust 2002-3 and Wells Fargo Bank, N.A.~~

	~~10.9~~		Omnibus Amendment and Consent Agreement dated as of December 29, 2006 among Option One Owner Trust 2003-4, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Loan Warehouse Corporation, Wells Fargo National Bank, National Association, Falcon Asset Securitization Company LLC, Park Avenue Receivables Company LLC and JPMorgan Chase Bank N.A.

	~~10.10~~10.4		Waiver dated January 24, 2007, among Option One Owner Trust 2003-4, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Loan Warehouse Corporation, Wells Fargo Bank, National Association, Falcon Asset Securitization Company LLC, Park Avenue Receivables Company LLC and ~~JPMorgan Chase Bank N.A.~~

	~~10.11~~		Amendment Number Two to Amended and Restated Sale and Servicing Agreement dated ~~as of November 10, 2006, among Option One Owner Trust 2003-5, Option One Loan Warehouse Corporation, Option One Mortgage Corporation~~July 19, 2007 by and ~~Wells Fargo Bank, N.A.~~

	~~10.12~~		~~Amendment Number Two to Note Purchase Agreement dated as of November 10, 2006, among Option One Owner Trust 2003-5, Option One Loan Warehouse Corporation and Citigroup Global Markets Realty Corp.~~

	~~10.13~~		~~Omnibus Amendment and Consent Agreement dated as of December 29, 2006~~ among Option One Owner Trust 2003-5, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Loan Warehouse ~~Corporation, Wells Fargo National Bank, National Association and Citigroup Global Markets Realty Corp.~~

	~~10.14~~		~~Omnibus Amendment dated as of January 1, 2007, among Option One Owner Trust 2003-5, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Loan Warehouse Corporation,~~LLC, Wells Fargo Bank, National Association, and Citigroup Global Markets Realty Corp.

	~~10.15~~		Omnibus Amendment Number Four dated as of July 12, 2006, among Option One Owner Trust 2005-6, Option One Loan Warehouse Corporation, Option One Mortgage Corporation, Wells Fargo Bank, N.A. and Lehman Brothers Bank.

	~~10.16~~		Omnibus Amendment and Consent Agreement dated as of December 29, 2006, among Option One Owner Trust 2005-6, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Loan Warehouse Corporation, Wells Fargo Bank, National Association and Lehman Brothers Bank.

	~~10.17~~		Omnibus Amendment and Consent Agreement dated as of December 29, 2006, among Option One Owner Trust 2005-7, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Loan Warehouse Corporation, Wells Fargo National Bank, National Association, HSBC Bank USA, N.A., Bryant Park Funding LLC and HSBC Securities (USA) Inc.

	~~10.18~~		Omnibus Amendment and Consent Agreement dated as of December 29, 2006, among Option One Owner Trust 2005-8, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Loan Warehouse Corporation, Wells Fargo National Bank, National Association and Merrill Lynch Bank USA.

	~~10.19~~		~~Omnibus Amendment and Consent Agreement dated as of December 29, 2006, among Option One Owner Trust 2005-9, Option One Mortgage Corporation, Option One Mortgage Capital~~

~~-50-~~

			Corporation, Option One Loan Warehouse Corporation, Wells Fargo National Bank, National Association, DB Structured Products, Inc., Gemini Securitization Corp., LLC, Aspen Funding Corp. and Newport Funding Corp.

	~~10.20~~		~~Supplemental Indenture No. 2 dated as of January 16, 2007, between Option One Owner Trust 2005-9 and Wells Fargo Bank, N.A.~~

	~~10.21~~		Amendment Number One to Sale and Servicing Agreement dated as of January 16, 2007, among Option One Owner Trust 2005-9, Option One Loan Warehouse Corporation, Option One Mortgage Corporation and Wells Fargo Bank, N.A.

	~~10.22~~		Sale and Servicing Agreement dated as of January 1, 2007, among Option One Loan Warehouse Corporation, Option One Mortgage Corporation, Option One Mortgage Capital Corporation, Option One Owner Trust 2007-5A and Wells Fargo Bank, N.A.

	~~10.23~~		~~Note Purchase Agreement dated as of January 1, 2007, among Option One Loan Warehouse Corporation, Option One Owner Trust 2007-5A and Citigroup Global Markets Realty Corp.~~

	~~10.24~~		~~Indenture dated as of January 1, 2007, between Option One Owner Trust 2007-5A and Wells Fargo Bank, N.A.~~

	~~10.25~~		Joinder and First Amendment to Program Contracts dated as of November 10, 2006, among HSBC Bank USA, National Association; HSBC Trust Company (Delaware), N.A.; HSBC Taxpayer Financial Services Inc.; Beneficial Franchise Company Inc.; Household Tax Masters Acquisition Corporation; H&R Block Services, Inc.; H&R Block Tax Services, Inc.; H&R Block Enterprises, Inc.; H&R Block Eastern Enterprises, Inc.; H&R Block Digital Solutions, LLC; H&R Block and Associates, L.P.; HRB Royalty, Inc.; HSBC Finance Corporation; H&R Block, Inc.; and Block Financial Corporation.*

	~~10.26~~		Second Amendment to Program Contracts dated as of November 13, 2006, among HSBC Bank USA, National Association; HSBC Trust Company (Delaware), N.A.; HSBC Taxpayer Financial Services Inc.; Beneficial Franchise Company Inc.; H&R Block Services, Inc.; H&R Block Tax Services, Inc.; H&R Block Enterprises, Inc.; H&R Block Eastern Enterprises, Inc.; H&R Block Digital Solutions, LLC; H&R Block and Associates, L.P.; HRB Royalty, Inc.; HSBC Finance Corporation; and H&R Block, Inc.*

	~~10.27~~		First Amended and Restated HSBC Refund Anticipation Loan and IMA Participation Agreement dated as of November 13, 2006 among Block Financial Corporation; HSBC Bank USA, National Association; HSBC Trust Company (Delaware), National Association; and HSBC Taxpayer Financial Services, Inc.*

	~~10.28~~		First Amended and Restated HSBC Settlement Products Servicing Agreement dated as of November 13, 2006, among HSBC Bank USA, National Association; HSBC Taxpayer Financial Services, Inc.; HSBC Trust Company (Delaware), N.A.; and Block Financial Corporation.*

	~~10.29~~		Credit and Guarantee Agreement dated January 2, 2007, among Block Financial Corporation, H&R Block, Inc. and HSBC Finance Corporation.*

	~~10.30~~		~~First Amendment dated as of November 28, 2006 to Five-Year Credit and Guarantee Agreement among Block Financial Corporation, H&R Block, Inc., JPMorgan Chase Bank and various financial institutions.~~

	~~10.31~~		First Amendment dated as of November 28, 2006 to Amended and Restated Five-Year Credit and Guarantee Agreement among Block Financial Corporation, H&R Block, Inc., JPMorgan Chase Bank and various financial institutions.

	~~10.32~~		Separation and Release Agreement between HRB Management, Inc. and Nicholas J. Spaeth.**

	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.

**		Indicates management contract, compensatory plan or arrangement.

~~-51-~~-57-


	Page
PART I Financial Information

Item 1. Condensed Consolidated Balance Sheets ~~January~~July 31, 2007 and April 30, ~~2006~~2007		1

Condensed Consolidated Statements of Income and Comprehensive Income Three ~~and Nine~~ Months Ended ~~January~~July 31, 2007 and 2006		2

Condensed Consolidated Statements of Cash Flows ~~Nine~~Three Months Ended ~~January~~July 31, 2007 and 2006		3

Condensed Consolidated Statement of Stockholders’ Equity July 31, 2007 and April 30, 2007		4

Notes to Condensed Consolidated Financial Statements		45

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		2430

Item 3. Quantitative and Qualitative Disclosures about Market Risk		4549

Item 4. Controls and Procedures		4651

PART II Other Information

Item 1. Legal Proceedings		4651

Item 1A. Risk Factors		4954

Item 2. Unregistered Sales of Equity Securities		4956

Item 5. Other Information		56

Item 6. Exhibits		4957

SIGNATURES		5258
~~Omnibus Amendment and Consent~~License Agreement
Amendment ~~Number Five~~No.11 to the ~~Second~~Amended and Restated Indenture
Amendment No.9 to Amended and Restated Note Purchase Agreement
waiver and Amendment No. 2 to Amended and Restated Sale and Servicing Agreement
~~Amendment Number Nine to the Amended and Restated Indenture~~302 Certification of Chief Executive Officer
~~Omnibus Amendment and Consent Agreement~~302 Certification of Chief Financial Officer
~~Waiver and Amendment~~906 Certification of Chief Executive Officer
~~Second Amended and Restated Sale and Servicing Agreement~~
~~Second Amended and Restated Note Purchase Agreement~~
~~Indenture~~
~~Omnibus Amendment and Consent Agreement~~
~~Waiver~~
~~Amendment Number Two to the Amended and Restated Sale and Servicing Agreement~~
~~Amendment Number Two to the Note Purchase Agreement~~
~~Omnibus Amendment and Consent Agreement~~
~~Omnibus Agreement~~
~~Omnibus Amendment Number Four~~
~~Omnibus Amendment and Consent Agreement~~
~~Omnibus Amendment and Consent Agreement~~
~~Omnibus Amendment and Consent Agreement~~
~~Omnibus Amendment and Consent Agreement~~
~~Supplemental Indenture No. 2~~
~~Amendment Number One to the Sale and Servicing Agreement~~
~~Sale and Servicing Agreement~~
~~Note Purchase Agreement~~
~~Indenture~~
~~Joinder and First Amendment to Program Contracts~~
~~Second Amendment to Program Contracts~~
~~First Amended and Restated HSBC Refund Anticipation Loan~~
~~First Amended and Restated HSBC Settlement Products Servicing Agreement~~
~~Credit and Guarantee Agreement~~
~~First Amendment to the Five-Year Credit and Guarantee Agreement~~
~~First Amendment to the Amended and Restated Five-Year Credit and Guarantee Agreement~~
~~Separation and Release Agreement~~
906 Certification of ~~CEO Pursuant to Section 302~~
~~Certification of CFO Pursuant to Section 302~~
~~Certification of CEO Pursuant to Section 906~~
~~Certification of CFO Pursuant to Section 906~~Chief Financial Officer


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

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

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


Basic and diluted earnings (loss) per share:
As reported	$	0.04		$	(0.30	)
Pro forma		0.03			(0.32	)


	(in 000s)						(in 000s)
As of	January 31, 2007		April 30, 2006		July 31, 2007		April 30, 2007

Commitment to fund Franchise Equity Lines of Credit	$	82,203	$	75,909	$	79,424	$	79,628
Media advertising purchase obligation		48,006		—		37,749		37,749
Contingent business acquisition obligations		16,319		24,482		19,691		19,891


	(in 000s)
Nine months ended January 31,	2007		2006

Residual interest mark-to-market	$	2,861	$	38,930
Additions to residual interests		39,379		39,378


Nine months ended January 31,	2007			2006
Three months ended July 31,							2007			2006

Estimated credit losses		3.24	%		2.85	%		6.36	%		3.51	%
Discount rate		21.91	%		20.34	%		28.00	%		18.00	%
Variable returns to third-party beneficial interest holders	LIBOR forward curve at closing date						LIBOR forward curve at closing date


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY		(unaudited amounts in 000s, except per share amounts)


												Accumulated
					Convertible				Additional			Other
	Common Stock				Preferred Stock				Paid-in			Comprehensive				Retained			Treasury Stock						Total
	Shares		Amount		Shares		Amount		Capital			Income (Loss)				Earnings			Shares			Amount			Equity

Balances at April 30, 2006		435,891	$	4,359		—	$	—	$	653,053		$	21,948			$	3,492,059			(107,378	)	$	(2,023,620	)	$	2,147,799
Net loss		—		—		—		—		—			—				(131,377	)		—			—			(131,377	)
Unrealized translation gain		—		—		—		—		—			818				—			—			—			818
Change in net unrealized gain on available-for-sale securities		—		—		—		—		—			(2,511	)			—			—			—			(2,511	)
Stock-based compensation		—		—		—		—		10,514			—				—			—			—			10,514
Shares issued for:
Option exercises		—		—		—		—		(746	)		—				—			461			8,756			8,010
Nonvested shares		—		—		—		—		(13,997	)		—				—			719			13,687			(310	)
ESPP		—		—		—		—		627			—				—			253			4,823			5,450
Acquisition of treasury shares		—		—		—		—		—			—				—			(8,370	)		(186,339	)		(186,339	)
Cash dividends paid — $0.13 per share		—		—		—		—		—			—				(40,485	)		—			—			(40,485	)

Balances at July 31, 2006		435,891	$	4,359		—	$	—	$	649,451		$	20,255			$	3,320,197			(114,315	)	$	(2,182,693	)	$	1,811,569


Balances at April 30, 2007		435,891	$	4,359		—	$	—	$	676,766		$	(1,320	)		$	2,886,440			(112,672	)	$	(2,151,746	)	$	1,414,499
Remeasurement of uncertain tax positions upon adoption ofFIN 48		—		—		—		—		—			—				(9,716	)		—			—			(9,716	)
Net loss		—		—		—		—		—			—				(302,580	)		—			—			(302,580	)
Unrealized translation gain		—		—		—		—		—			4,311				—			—			—			4,311
Change in net unrealized gain on available-for-sale securities		—		—		—		—		—			(463	)			—			—			—			(463	)
Stock-based compensation		—		—		—		—		9,226			—				—			—			—			9,226
Shares issued for:
Option exercises		—		—		—		—		(1,431	)		—				—			668			12,758			11,327
Nonvested shares		—		—		—		—		(13,349	)		—		��		—			663			12,669			(680	)
ESPP		—		—		—		—		400			—				—			218			4,161			4,561
Acquisitions		—		—		—		—		35			—				—			8			151			186
Acquisition of treasury shares		—		—		—		—		—			—				—			(230	)		(5,372	)		(5,372	)
Cash dividends paid – $0.14 per share		—		—		—		—		—			—				(43,937	)		—			—			(43,937	)

Balances at July 31, 2007		435,891	$	4,359		—	$	—	$	671,647		$	2,528			$	2,530,207			(111,345	)	$	(2,127,379	)	$	1,081,362

1.		Basis of Presentation

		The condensed consolidated balance sheet as of July 31, 2007, the condensed consolidated statements of income and comprehensive income for the three months ended July 31, 2007 and 2006, the condensed consolidated statements of cash flows for the three months ended July 31, 2007 and 2006, and the condensed consolidated statement of stockholders’ equity for the three months ended July 31, 2007 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, cash flows and changes in stockholders’ equity at July 31, 2007 and for all periods presented have been made. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.


								(in 000s)
	April 30, 2006		Additions		Other			January 31, 2007

Tax Services	$	376,515	$	9,902	$	(162	)	$	386,255
Business Services		397,516		28,619		(3,746	)		422,389
Consumer Financial Services		173,954		—		—			173,954

Total	$	947,985	$	38,521	$	(3,908	)	$	982,598

3.		Goodwill and Intangible Assets

		Changes in the carrying amount of goodwill of continuing operations for the three months ended July 31, 2007 consist of the following:

4.		Borrowings

		HRB Bank is a member of the Federal Home Loan Bank (FHLB) of Des Moines, which extends credit to member banks based on eligible collateral. At July 31, 2007, HRB Bank had FHLB advance capacity of $499.3 million, and there was $104.0 million outstanding on this facility. Mortgage loans held for investment of $1.2 billion were pledged as collateral on these advances.


	(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		5,036			23.84
Exercised		(1,246	)		15.52
Forfeited or expired		(4,201	)		23.82

Outstanding, end of period		25,637			21.77	5 years	$	101,483

Exercisable, end of period		18,821		$	20.66	4 years	$	97,171
Exercisable and expected to vest		24,535			21.63	5 years		100,784

5.		Income Taxes

		In June 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) was issued. The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.


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

Outstanding, beginning of period		2,455		$	25.27
Granted		1,205			23.42
Released		(1,040	)		24.94
Forfeited		(306	)		24.85

Outstanding, end of period		2,314			24.93


											(dollars in 000s)
											To Be Well Capitalized
						For Capital Adequacy Under					Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total risk-based capital ratio⁽¹⁾	$	181,237		23.9	%	$	60,628		8.0	%	$	75,786		10.0	%
Tier 1 risk-based capital ratio⁽²⁾	$	176,003		23.2	%		n/a		n/a		$	45,471		6.0	%
Tier 1 capital ratio (leverage)⁽³⁾	$	176,003		12.3	%	$	171,179		12.0	%	$	71,325		5.0	%
Tangible equity ratio⁽⁴⁾	$	176,003		12.3	%	$	21,397		1.5	%		n/a		n/a


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

	Amount		Ratio			Amount		Ratio

Tier 1 capital to adjusted total assets (leverage)	$	163,670		17.4	%	$	46,900		5.0	%
Total risk-based capital to total risk-weighted assets	$	165,714		36.0	%	$	46,071		10.0	%


⁽¹⁾		Total risk-based capital divided by risk-weighted assets.

⁽²⁾		Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets.

⁽³⁾		Tier 1 (core) capital divided by adjusted total assets.

⁽⁴⁾		Tangible capital divided by tangible assets.

7.		Commitments and Contingencies

		Changes in the deferred revenue liability related to our Peace of Mind (POM) program are as follows:

8.		Litigation and Related Contingencies

		We have been named as a defendant in numerous lawsuits throughout the country regarding our refund anticipation loan programs (collectively, “RAL Cases”). The RAL Cases have involved a variety of legal theories asserted by plaintiffs. These theories include allegations that, among other things, disclosures in the RAL applications were inadequate, misleading and untimely; the RAL interest rates were usurious and unconscionable; we did not disclose that we would receive part of the finance charges paid by the customer for such loans; untrue, misleading or deceptive statements in marketing RALs; breach of state laws on credit service organizations; breach of contract, unjust enrichment, unfair and deceptive acts or practices; violations of the federal Racketeer Influenced and Corrupt Organizations Act; violations of the federal Fair Debt Collection Practices Act and unfair competition regarding debt collection activities; and that among others, (i) disclosures in the RAL applications were inadequate, misleading and untimely; (ii) the RAL interest rates were usurious and unconscionable; (iii) we did not disclose that we would receive part of the finance charges paid by the customer for 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 regarding debt collection activities; and (ix) we owe, and breached, a fiduciary duty to our customers in connection with the RAL program.

11.		Discontinued Operations

		On April 19, 2007, we entered into an agreement to sell OOMC to Cerberus Capital Management for cash consideration approximately equal to the fair value of the adjusted tangible net assets of OOMC, as defined in the agreement, at closing less $300.0 million. The agreement provides for H&R Block, Inc. to receive one-half of OOMC’s net income from its origination business for the 18 months


	July 31, 2007			April 30, 2007

Estimated credit losses – residual interests		5.13	%		5.04	%
Discount rate – residual interests		47.00	%		24.82	%
Discount rate – MSRs		20.00	%		20.00	%
Variable returns to third-party beneficial interest holders	LIBOR forward curve at valuation date


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

Adjustable rate mortgage loans:
With prepayment penalties		31	%		71	%		38	%		27	%		70	%		28	%
Without prepayment penalties		37	%		54	%		34	%		36	%		51	%		24	%
Fixed rate mortgage loans:
With prepayment penalties		29	%		45	%		34	%		25	%		40	%		22	%


	Mortgage Loans Securitized in Fiscal Year
																						Mortgage Loans Securitized in Fiscal Year
	Prior to 2002			2002			2003			2004			2005			2006			2007			Prior to 2002			2003			2004			2005			2006			2007			2008

As of:
January 31, 2007		5.12	%		2.41	%		2.12	%		2.35	%		2.21	%		3.59	%		3.26	%
July 31, 2007																							5.11	%		2.57	%		3.45	%		5.48	%		6.79	%		6.41	%		6.36	%
April 30, 2007																							5.11	%		2.57	%		3.45	%		5.48	%		6.79	%		6.41	%		—
April 30, 2006		4.75	%		2.69	%		2.13	%		2.18	%		2.48	%		3.05	%		—			4.22	%		2.13	%		2.18	%		2.48	%		3.05	%		—			—
April 30, 2005		4.52	%		2.53	%		2.08	%		2.30	%		2.83	%		—			—			4.01	%		2.08	%		2.30	%		2.83	%		—			—			—
April 30, 2004		4.46	%		3.58	%		4.35	%		3.92	%		—			—			—


	(dollars in 000s)
	Residential Mortgage Loans
	Available-for-Sale			Beneficial Interest
	Residuals			in Trusts			MSRs

Carrying amount/fair value	$	110,594		$	175,220		$	263,140
Weighted average remaining life (in years)		3.2			2.2			1.3

Prepayments (including defaults):
Adverse 10% — $impact on fair value	$	(7,772	)	$	(5,447	)	$	(21,890	)
Adverse 20% — $impact on fair value		(5,687	)		(8,402	)		(41,755	)

Credit losses:
Adverse 10% — $impact on fair value	$	(32,323	)	$	(6,302	)	Not applicable
Adverse 20% — $impact on fair value		(57,732	)		(11,571	)	Not applicable

Discount rate:
Adverse 10% — $impact on fair value	$	(5,522	)	$	(4,491	)	$	(6,869	)
Adverse 20% — $impact on fair value		(10,594	)		(8,797	)		(13,444	)

Variable interest rates (LIBOR forward curve):
Adverse 10% — $impact on fair value	$	988		$	(40,717	)	Not applicable
Adverse 20% — $impact on fair value		1,972			(82,550	)	Not applicable


⁽¹⁾		Amounts include $96.8 million and $11.2 million in loans repurchased from HRB Bank for the three months ended July 31, 2007 and the year ended April 30, 2007, respectively. OOMC did not repurchase any loans from HRB Bank during the three months ended July 31, 2006.


(dollars in 000s)
Facility Expiration Date	Waiver Expiration Date	Total Capacity			Outstanding Loans

October 2, 2007	October 2, 2007	$	1,000,000		$	402,068
October 2, 2007	September 30, 2007		500,000	⁽¹⁾		9,157
October 31, 2007	N/A⁽²⁾		250,000			217,388
November 9, 2007	September 30, 2007		1,000,000			277,987
January 15, 2008	January 15, 2008		500,000			314,979
January 18, 2008	October 30, 2007		750,000			95,775
April 25, 2008	April 25, 2008		2,000,000			332,922
June 12, 2008	N/A⁽²⁾		2,002,000			431,899

		$	8,002,000		$	2,082,175


Condensed Consolidating Balance Sheets												(in 000s)
	H&R Block, Inc.		BFC			Other						Consolidated
July 31, 2007	(Guarantor)		(Issuer)			Subsidiaries			Elims			H&R Block

Cash & cash equivalents	$	—	$	144,152		$	293,519		$	—		$	437,671
Cash & cash equivalents – restricted		—		286,000			1,789			—			287,789
Receivables from customers, brokers and dealers, net		—		404,420			—			—			404,420
Receivables, net		76		137,432			285,942			—			423,450
Mortgage loans held for investment		—		1,241,281			—			—			1,241,281
Intangible assets and goodwill, net		—		188,711			991,366			—			1,180,077
Investments in subsidiaries		4,338,269		—			500			(4,338,269	)		500
Assets held for sale		—		1,792,343			19,889			—			1,812,232
Other assets		—		125,014			955,630			6			1,080,650

Total assets	$	4,338,345	$	4,319,353		$	2,548,635		$	(4,338,263	)	$	6,868,070


Commercial paper and other short-term borrowings	$	—	$	1,651,237		$	—		$	—		$	1,651,237
Accts. payable to customers, brokers and dealers		—		615,858			—			—			615,858
Customer deposits		—		1,039,238			—			—			1,039,238
Long-term debt		—		502,295			17,508			—			519,803
Liabilities held for sale		—		748,504			2,278			—			750,782
Other liabilities		2		234,576			975,190			22			1,209,790
Net intercompany advances		3,256,981		(1,426,182	)		(1,830,799	)		—			—
Stockholders’ equity		1,081,362		953,827			3,384,458			(4,338,285	)		1,081,362

Total liabilities and stockholders’ equity	$	4,338,345	$	4,319,353		$	2,548,635		$	(4,338,263	)	$	6,868,070


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


			(in 000s, except average charge)
Period November 1 through January 31,	2007		2006

Clients served:
Company-owned operations		2,507		2,390
Franchise operations		1,485		1,406
Instant Money Advance Loans (IMALs) only⁽¹⁾		344		—

Total retail operations		4,336		3,796
Digital tax solutions		1,279		1,157

		5,615		4,953

Net average fee per retail client:⁽²⁾
Company-owned operations	$	169.47	$	157.48
Franchise operations		147.42		135.51

	$	161.27	$	149.35


Offices:
Company-owned		6,669		6,387
Company-owned shared locations⁽³⁾		1,488		1,473

Total company-owned offices		8,157		7,860

Franchise		3,784		3,703
Franchise shared locations⁽³⁾		843		602

Total franchise offices		4,627		4,305

		12,784		12,165


⁽¹⁾		Includes only accounts with a positive balance.

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

⁽³⁾		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.


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


			(in 000s)
	Average Balance		Average Rate Earned (Paid)

Loans	$	603,051		6.92	%
Investments	$	65,596		5.24	%
Deposits	$	509,394		(5.01	%)


⁽¹⁾		Represents non-prime production.

⁽²⁾		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.

⁽³⁾		See “Reconciliation of Non-GAAP Financial Information” at the end of Part I, Item 2.

⁽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).


⁽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.


	(in 000s)
Acquisition cost of underlying mortgage loans	$	1,000,000


Fair values:
Net proceeds	$	999,000
Cash received		(4,000	)

Less recourse obligation	$	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