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 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                     

H&R Block, Inc.

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

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

Yes þ No o

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 filer þ          Accelerated filer o          Non-accelerated filer o

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

Yes o No þ

The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on February 28, 2007 was 322,926,550 shares.

 

 

Form 10-Q for the Period Ended January 31, 2007

Table of Contents

		Page
PART I            Financial Information
Item 1. Condensed Consolidated Balance Sheets January 31, 2007 and April 30, 2006			1
Condensed Consolidated Statements of Income and Comprehensive Income Three and Nine Months Ended January 31, 2007 and 2006			2
Condensed Consolidated Statements of Cash Flows Nine Months Ended January 31, 2007 and 2006			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			45
Item 4. Controls and Procedures			46
PART II Other Information
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities			49
Item 6. Exhibits			49
SIGNATURES			52
Omnibus Amendment and Consent Agreement
Amendment Number Five to the Second Amended and Restated Sale and Servicing Agreement
Amendment Number Nine to the Amended and Restated Indenture
Omnibus Amendment and Consent Agreement
Waiver and Amendment
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
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

		(amounts in 000s, except share amounts)
		January 31, 2007				April 30, 2006
		(Unaudited)
ASSETS
Cash and cash equivalents		$	1,082,666			$	677,204
Cash and cash equivalents — restricted			432,524				385,623
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
Prepaid expenses and other current assets			202,309				152,701
Current assets of discontinued operations, held for sale			988,060				594,187
Total current assets			5,507,279				2,788,436
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
Intangible assets, net			184,290				219,494
Goodwill, net			982,598				947,985
Other assets			386,986				375,395
Noncurrent assets of discontinued operations, held for sale			836,493				1,301,013
Total assets		$	9,359,978			$	5,989,135
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Commercial paper and other short-term borrowings		$	2,926,421			$	—
Current portion of long-term debt			512,333				506,992
Accounts payable to customers, brokers and dealers			684,475				781,303
Customer banking deposits			1,632,875				—
Accounts payable, accrued expenses and other current liabilities			496,084				612,181
Accrued salaries, wages and payroll taxes			249,243				270,303
Accrued income taxes			71,079				505,690
Current liabilities of discontinued operations, held for sale			497,749				216,967
Total current liabilities			7,070,259				2,893,436
Long-term debt			416,183				417,539
Other noncurrent liabilities			343,362				530,361
Total liabilities			7,829,804				3,841,336
Stockholders’ equity:
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, 435,890,796 shares issued at January 31, 2007 and April 30, 2006			4,359				4,359
Additional paid-in capital			662,297				653,053
Accumulated other comprehensive income			6,975				21,948
Retained earnings			3,015,880				3,492,059
Less cost of 113,071,487 and 107,377,858 shares of common stock in treasury			(2,159,337	)			(2,023,620	)
Total stockholders’ equity			1,530,174				2,147,799
Total liabilities and stockholders’ equity		$	9,359,978			$	5,989,135

See Notes to Condensed Consolidated Financial Statements

		(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	)

See Notes to Condensed Consolidated Financial Statements

		(Unaudited, amounts in 000s)
Nine months ended January 31,		2007				2006
Cash flows from operating activities:
Net loss		$	(348,089	)		$	(97,130	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			119,909				111,396
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	)
Net cash used in operating activities			(2,778,264	)			(1,694,392	)
Cash flows from investing activities:
Mortgage loans originated or purchased for investment, net			(1,073,012	)			—
Purchases of property and equipment, net			(129,905	)			(134,328	)
Payments made for business acquisitions, net of cash acquired			(24,670	)			(209,816	)
Net cash provided by investing activities of discontinued operations			18,322				72,247
Other, net			30,542				17,625
Net cash used in investing activities			(1,178,723	)			(254,272	)
Cash flows from financing activities:
Repayments of commercial paper			(4,901,618	)			(2,632,444	)
Proceeds from issuance of commercial paper			6,397,656				4,678,392
Repayments of other short-term borrowings			(889,722	)			—
Proceeds from other short-term borrowings			2,320,105				550,000
Customer deposits			1,632,875				—
Dividends paid			(128,088	)			(118,665	)
Acquisition of treasury shares			(188,562	)			(260,078	)
Excess tax benefits from stock-based compensation			2,379				—
Proceeds from exercise of stock options			19,183				95,930
Net cash provided by financing activities of discontinued operations			172,301				—
Other, net			(74,060	)			(9,349	)
Net cash provided by financing activities			4,362,449				2,303,786
Net increase in cash and cash equivalents			405,462				355,122
Cash and cash equivalents at beginning of the period			677,204				1,072,299
Cash and cash equivalents at end of the period		$	1,082,666			$	1,427,421
Supplementary cash flow data:
Income taxes paid		$	378,377			$	224,774
Interest paid			103,252				62,980

See Notes to Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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 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 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

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. 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	)

     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 28.0 million shares for the nine months ended January 31, 2007 and 29.3 million shares of stock for the three and nine months ended January 31, 2006, 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 31, 2007 decreased to 322.4 million and 322.6 million, respectively, from 327.3 million and 328.0 million last year, 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 months ended January 31, 2007 and 2006, we issued 2.8 million and 6.3 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 months ended January 31, 2007, we acquired 8.5 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 million. During the nine months ended January 31, 2006, we acquired 9.2 million shares of our common stock, of which 9.0 million shares were purchased from third parties with the remaining shares swapped or surrendered to us, at an aggregate cost of $260.1 million.

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 31, 2007 consist of the following:

														(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

     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 were identified within any of our segments during the nine months ended January 31, 2007. Goodwill totaling $152.5 million is included in assets held for sale on our condensed consolidated balance sheets.

     Intangible assets consist of the following:

		(in 000s)
		January 31, 2007												April 30, 2006
		Gross												Gross
		Carrying				Accumulated								Carrying				Accumulated
		Amount				Amortization				Net				Amount				Amortization				Net
Tax Services:
Customer relationships		$	30,900			$	(13,602	)		$	17,298			$	27,257			$	(10,842	)		$	16,415
Noncompete agreements			20,329				(18,038	)			2,291				18,879				(17,686	)			1,193
Trade name			25				—				25				—				—				—
Business Services:
Customer relationships			157,129				(91,665	)			65,464				153,844				(81,178	)			72,666
Noncompete agreements			33,460				(16,739	)			16,721				32,534				(14,300	)			18,234
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
Consumer Financial Services:
Customer relationships			293,000				(262,479	)			30,521				293,000				(235,010	)			57,990
Total intangible assets		$	594,530			$	(410,240	)		$	184,290			$	585,201			$	(365,707	)		$	219,494

     Amortization of intangible assets for the three and nine months ended January 31, 2007 was $16.4 million and $45.7 million, respectively. Amortization of intangible assets for the three and nine months ended January 31, 2006 was $16.7 million and $47.3 million, respectively. Estimated amortization of intangible assets for fiscal years 2007 through 2011 is $58.3 million, $40.9 million, $17.7 million, $15.1 million and $13.6 million, respectively.

     In October 2005, we acquired all outstanding common stock of American Express Tax and Business Services, Inc. for an aggregate purchase price of $190.7 million. The purchase price is subject to certain contractual post-closing adjustments, which may or may not reduce the final purchase price. These adjustments have not been finalized and any future adjustment would be made to goodwill. During the nine months ended January 31, 2007, we adjusted deferred tax balances initially recorded in connection with this acquisition resulting in an increase of $17.7 million to goodwill.

5. Stock-Based Compensation

Beginning May 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123R) under the modified prospective approach. Under SFAS 123R, we continue to measure and recognize the fair value of stock-based compensation consistent with our past practice under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” which we adopted on May 1, 2003 under the prospective transition method. The adoption of SFAS 123R did not have a material impact on our consolidated financial statements.

     The following is a comparison of reported and pro forma results had compensation cost for all stock-based compensation grants been determined in accordance with SFAS 123 for the three and nine months ended January 31, 2006.

		(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	)

     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.

     A summary of options for the nine months ended January 31, 2007 is as follows:

		(in 000s, except per share amounts)
										Weighted Average
						Weighted Average				Remaining				Aggregate
		Shares				Exercise Price				Contractual Term				Intrinsic Value
Outstanding, beginning of period			26,048			$	21.40
Granted			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

     The total intrinsic value of options exercised during the nine months ended January 31, 2007 and 2006 was $9.6 million and $41.0 million, respectively. We utilize the Black-Scholes option pricing model to value our options on the grant date. We estimated the expected volatility using our historical stock price data. We also used historical exercise and forfeiture behaviors to estimate the options expected term and our forfeiture rate. The following assumptions were used to value options during the periods:

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 of nonvested shares and performance nonvested share units 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

     The total fair value 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 offset to additional paid in capital and is amortized as compensation expense over the vesting period. As of January 31, 2007, we had $47.6 million of total unrecognized compensation cost related to these shares. This cost is expected to be recognized over a weighted-average period of two years.

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 31, 2007 totaled $38.7 million, an excess of $2.6 million over the margin requirement.

Banking

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

     Quantitative measures established by regulation to ensure capital adequacy require HRB Bank to maintain minimum amounts and ratios of capital to assets. As shown in the table below, at December 31, 2006, the most recent date of reporting to Federal banking agencies, HRB Bank is categorized as “well capitalized” for regulatory purposes, which is the highest classification. There are no conditions or events since December 31, 2006 that management believes have changed HRB Bank’s category. At January 31, 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 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.

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

		(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, H&R Block, Inc. is now subject to a three percent minimum ratio of adjusted tangible capital to adjusted total assets, as defined by the OTS. As of January 31, 2007 our ratio of adjusted tangible capital to adjusted total assets was approximately 1%. We fell below the minimum required ratio due to losses in our mortgage operations and seasonal fluctuations in our consolidated balance sheet. We notified the OTS of our failure to meet this requirement and the OTS requested that we provide a plan and expected timeframe for regaining compliance. We provided the OTS a corrective action plan stating our belief that our noncompliance would be remedied by February 28, 2007. We have agreed to provide the OTS 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 required minimum ratio on an ongoing basis.

7. Commitments and Contingencies

We entered into a $3.0 billion line of credit agreement with HSBC Finance Corporation (HSBC Finance) effective January 2, 2007 for use as an alternate funding source for the purchase of refund

anticipation loan (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 those of our primary unsecured CLOCs. There was no balance outstanding on this line at January 31, 2007.

     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.

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

		(in 000s)
Nine months ended January 31,		2007				2006
Balance, beginning of period		$	141,684			$	130,762
Amounts deferred for new guarantees issued			20,971				20,533
Revenue recognized on previous deferrals			(59,085	)			(55,932	)
Balance, end of period		$	103,570			$	95,363

     The following table summarizes certain of our other contractual obligations and commitments:

		(in 000s)
As of		January 31, 2007				April 30, 2006
Commitment to fund Franchise Equity Lines of Credit		$	82,203			$	75,909
Media advertising purchase obligation			48,006				—
Contingent business acquisition obligations			16,319				24,482

     On November 1, 2006 we entered into an agreement to purchase $57.2 million in media advertising between November 1, 2006 and June 30, 2009. During our third quarter, we purchased $9.2 million in advertising for our retail tax business, leaving a remaining commitment of $48.0 million at January 31, 2007. We expect to make payments totaling $19.4 million, $20.6 million and $17.2 million during fiscal years 2007, 2008 and 2009, respectively.

     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 January 31, 2007, HRB Bank had FHLB advance capacity of $594.0 million, and there was no outstanding balance on this facility.

     We routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees, including obligations to protect counterparties from losses arising from the following: (a) tax, legal and other risks related to the purchase or disposition of businesses; (b) penalties and interest assessed by Federal and state taxing authorities in connection with tax returns prepared for clients; (c) indemnification of our directors and officers; and (d) third-party claims relating to various arrangements in the normal course of business. Typically, there is no stated maximum payment related to these indemnifications, and the term of indemnities may vary and in many cases is limited only by the applicable statute of limitations. The likelihood of any claims being asserted against us and the ultimate liability related to any such claims, if any, is difficult to predict. While we cannot provide assurance that such claims will not be successfully asserted, we believe the fair value of these guarantees and indemnifications is not material as of January 31, 2007.

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 “RAL Cases”). The RAL Cases have involved a variety of legal theories asserted by plaintiffs. These theories include allegations 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, 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 and the combined pretax expense for such settlements in fiscal year 2006 totaling $70.2 million.

     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 the associated impact on our financial statements.

     We are also a party to claims, lawsuits and investigations pertaining to our electronic tax return filing services, our Peace of Mind guarantee program, our Express IRA product, tax planning services and RSM EquiCo business valuation services. These claims, lawsuits and investigations include actions by state attorneys general, individual plaintiffs, and cases in which plaintiffs seek to represent a class of similarly situated customers. The amounts claimed in these claims and lawsuits are substantial in some instances, and the ultimate liability with respect to such litigation and claims is difficult to predict. We intend to continue defending these cases vigorously, although there are no assurances as to their outcome.

     We and certain of our current and former directors and officers are party 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 claimed 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.

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

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.

     As of January 31, 2007, we met the criteria requiring us to present the assets and liabilities of OOMC and its wholly-owned subsidiary, HRBMC, as held-for-sale and the related financial results as discontinued operations in the condensed consolidated financial statements for all periods presented. See note 11 for additional information.

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 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 when valuing an asset or liability. 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 No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108), 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 for the current fiscal year, with earlier interim period adoption permitted. We are currently evaluating what effect the adoption of SAB 108 will have on our consolidated financial statements.

     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 position to be recognized in the financial statements and provides guidance on the measurement of the benefit. The interpretation also requires interim period estimated tax benefits of uncertain tax positions to be accounted for in the period of change rather than as a component of the annual effective tax rate. The provisions of this standard are effective as of the beginning of our fiscal year 2008. We are currently evaluating what effect the adoption of FIN 48 will have on our consolidated financial statements.

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

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

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

11. Discontinued Operations

Financial Statement Presentation

On November 6, 2006, we announced we would evaluate strategic alternatives for 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, 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. The financial statements for all periods presented have been reclassified to present discontinued operations as well. Based upon non-binding correspondence received from interested parties in connection with the planned sale, we currently believe we will recover our recorded investment in net assets held for sale. This process is not complete and the ultimate outcome may differ materially from our current expectations.

     Overhead costs previously allocated to these businesses, which totaled $3.1 million and $9.4 million for the three and nine months ended January 31, 2007, respectively, and $2.7 million and $7.8 million for the three and nine months ended January 31, 2006, respectively, are included in continuing operations. OOMC was previously reported in our Mortgage Services segment and HRBMC was reported in our Consumer Financial Services segment.

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

		(in 000s)
		January 31, 2007				April 30, 2006
Cash and cash equivalents		$	120,454			$	25,600
Mortgage loans held for sale			363,016				236,399
Prepaid expenses and other current assets			504,590				332,188
Current assets of discontinued operations		$	988,060			$	594,187
Beneficial interest in Trusts		$	175,220			$	188,014
Residual interests in securitizations			110,594				159,058
Mortgage servicing rights			263,140				272,472
Mortgage loans held for investment			—				407,538
Goodwill, net			152,467				152,467
Other assets			135,072				121,464
Noncurrent assets of discontinued operations		$	836,493			$	1,301,013
Accounts payable, accrued expenses and deposits		$	450,553			$	156,324
Other liabilities			47,196				60,643
Current liabilities of discontinued operations		$	497,749			$	216,967

     The financial results of discontinued operations are as follows:

		(in 000s)
		Three months ended January 31,								Nine months ended January 31,
		2007				2006				2007				2006
Revenue		$	56,146			$	296,494			$	410,760			$	942,802
Income (loss) before income tax (benefit)			(161,982	)			70,422				(222,831	)			257,254
Income tax (benefit)			(76,765	)			28,061				(103,765	)			101,931
Net income (loss) from discontinued operations		$	(85,217	)		$	42,361			$	(119,066	)		$	155,323

Mortgage Banking Activities

Trading residuals valued at $231.9 million were securitized in net interest margin (NIM) transactions during the current year, with net cash proceeds of $192.5 million received in connection with NIM transactions. In the prior year, trading residuals valued at $234.5 million were securitized with net cash proceeds of $195.2 million received on the transactions. There were no residual interests classified as trading securities as of January 31, 2007 or April 30, 2006. Cash received on trading residual interests is included in operating activities of discontinued operations in the condensed consolidated statements of cash flows.

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

     The following transactions were treated as non-cash investing activities in the condensed consolidated statement of cash flows:

		(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

     Aggregate unrealized gains on available-for-sale residual interests not yet accreted into income totaled $19.3 million at January 31, 2007 and $44.1 million at April 30, 2006. These unrealized gains are recorded net of deferred taxes in other comprehensive income, and may be recognized in income in future periods either through accretion or upon further securitization or sale of the related residual interest.

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

		(in 000s)
Nine months ended January 31,		2007				2006
Balance, beginning of period		$	272,472			$	166,614
Additions			134,216				196,245
Amortization and impairment of fair value			(143,548	)			(100,490	)
Balance, end of period		$	263,140			$	262,369

     Estimated amortization of MSRs for fiscal years 2007 through 2011 is $44.1 million, $121.7 million, $58.3 million, $25.4 million and $9.0 million, respectively.

     The key weighted average assumptions we used to estimate the cash flows and values of the residual interests initially recorded during the nine months ended January 31, 2007 and 2006 are as follows:

Nine months ended January 31,		2007				2006
Estimated credit losses			3.24	%			2.85	%
Discount rate			21.91	%			20.34	%
Variable returns to third-party beneficial interest holders		LIBOR forward curve at closing date

     The key weighted average assumptions we used to estimate the cash flows and values of the residual interests and MSRs at January 31, 2007 and April 30, 2006 are as follows:

		January 31, 2007				April 30, 2006
Estimated credit losses			3.22	%			3.07	%
Discount rate — residual interests			24.32	%			21.98	%
Discount rate — MSRs			18.00	%			18.00	%
Variable returns to third-party beneficial interest holders		LIBOR forward curve at valuation date

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

						Months Outstanding After
		Prior to Initial				Initial Rate Reset Date
		Rate Reset Date				Zero - 3				Remaining Life
Adjustable rate mortgage loans:
With prepayment penalties			31	%			71	%			38	%
Without prepayment penalties			37	%			54	%			34	%
Fixed rate mortgage loans:
With prepayment penalties			29	%			45	%			34	%

     For fixed rate mortgages without prepayment penalties, we use an average prepayment rate of 30% over the life of the loans. Prepayment rate is projected based on actual paydown including voluntary, involuntary and scheduled principal payments.

     Expected static pool credit losses are as follows:

		Mortgage Loans Securitized in Fiscal Year
		Prior to 2002				2002				2003				2004				2005				2006				2007
As of:
January 31, 2007			5.12	%			2.41	%			2.12	%			2.35	%			2.21	%			3.59	%			3.26	%
April 30, 2006			4.75	%			2.69	%			2.13	%			2.18	%			2.48	%			3.05	%			—
April 30, 2005			4.52	%			2.53	%			2.08	%			2.30	%			2.83	%			—				—
April 30, 2004			4.46	%			3.58	%			4.35	%			3.92	%			—				—				—

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

     At January 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

     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.

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

		(in 000s)
		Total Principal								Principal Amount of
		Amount of Loans								Loans 60 Days or								Credit Losses
		Outstanding								More Past Due								(net of recoveries)
		January 31,				April 30,				January 31,				April 30,				Three months ended
		2007				2006				2007				2006				January 31, 2007				April 30, 2006
Securitized mortgage loans		$	12,445,576			$	10,046,032			$	1,252,052			$	1,012,414			$	41,925			$	35,307
Mortgage loans in warehouse Trusts			5,982,538				7,845,834				—				—				—				—
Mortgage loans held for sale			432,949				255,224				316,348				98,906				135,924				33,504
Total loans		$	18,861,063			$	18,147,090			$	1,568,400			$	1,111,320			$	177,849			$	68,811

Derivative Instruments

A summary of our derivative instruments as of January 31, 2007 and April 30, 2006, and gains or losses incurred during the three and nine months ended January 31, 2007 and 2006 is as follows:

																						(in 000s)
		Asset (Liability) Balance at								Gain (Loss) for the Three								Gain (Loss) for the Nine
		January 31,				April 30,				Months Ended January 31,								Months Ended January 31,
		2007				2006				2007				2006				2007				2006
Rate-lock equivalents		$	(3,563	)		$	(317	)		$	(9,237	)		$	34			$	(5,207	)		$	(705	)
Forward loan sale commitments			—				1,961				(2,493	)			—				—				—
Put options on Eurodollar futures			2,119				3,282				400				—				(1,657	)			—
Prime short sales			(301	)			777				(131	)			(1,266	)			864				221
Interest rate swaps			6,262				8,831				46,640				6,292				26,372				91,578
Interest rate caps			—				—				—				—				—				802
		$	4,517			$	14,534			$	35,179			$	5,060			$	20,372			$	91,896

     The notional amount of interest rate swaps to which we were a party at January 31, 2007 and April 30, 2006 was $7.7 billion and $8.8 billion, respectively, with a weighted average duration at each date of 1.9 years. At January 31, 2007 we had no forward loan sale commitments. At April 30, 2006 the notional value and the contract value of our forward loan sale commitments was $3.1 billion.

     None of our derivative instruments qualify for hedge accounting treatment as of January 31, 2007 or April 30, 2006.

Commitments and Contingencies

The following table summarizes certain of our contractual obligations and commitments related to our discontinued operations:

						(in 000s)
As of		January 31, 2007				April 30, 2006
Commitment to fund mortgage loans		$	3,558,184			$	4,032,045
Commitment to sell mortgage loans			—				3,052,688

     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)
		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
Repurchase reserves added during period		$	111,122			$	13,076			$	251,083			$	49,547			$	64,098
Repurchase reserves added as a percent of originations			1.77	%			0.15	%			1.18	%			0.15	%			0.18	%

     We established a liability, related to the potential loss we expect to incur on repurchase of loans previously sold and premium recapture, totaling $44.8 million and $33.4 million at January 31, 2007 and April 30, 2006, 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 in the condensed consolidated balance sheets. During the nine months ended January 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% of loans previously sold but not yet subject to contractual repurchase terms will be repurchased. Based on historical experience, we assumed 10% of all loans we repurchase will cure with no loss incurred, and of those that do not cure, we assumed an average 29% 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 January 31, 2007, with the related loans and liability reported in assets and liabilities held for sale.

     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 have been sustained on this commitment since its inception. The total principal amount of Trust obligations outstanding as of January 31, 2007, April 30, 2006 and January 31, 2006 was $5.9 billion, $7.8 billion and $11.2 billion, respectively. The fair value of mortgage loans held by the Trusts as of January 31, 2007, April 30, 2006 and January 31, 2006 was $5.9 billion, $7.9 billion and $11.4 billion, respectively. 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 31, 2007, April 30, 2006 and January 31, 2006 funds provided totaled $164.2 million, $19.7 million and $54.6 million, respectively, and were applied to reduce the Trusts' payment obligations.

     As of January 31, 2007, OOMC did not meet the “minimum net income” financial covenant contained in eight of its 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. 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 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 mentioned above. 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.

Restructuring Charge

During fiscal year 2006, we initiated a restructuring plan to reduce costs within our mortgage operations. On November 6, 2006, we announced an additional restructuring plan, also within our mortgage operations, which will be recorded primarily during our third and fourth quarters. Charges incurred during the current quarter related to the additional restructuring plan totaled $6.5 million and are included in “other adjustments” in the table below. Changes in our restructuring charge liability during the nine months ended January 31, 2007 are as follows:

														(in 000s)
		Accrual Balance				Cash				Other				Accrual Balance as of
		as of April 30, 2006				Payments				Adjustments				January 31, 2007
Employee severance costs		$	1,737			$	(3,626	)		$	3,179			$	1,290
Contract termination costs			5,821				(3,864	)			5,709				7,666
		$	7,558			$	(7,490	)		$	8,888			$	8,956

     The remaining liability related to this restructuring charge is included in liabilities held for sale on our condensed consolidated balance sheet and relates to lease obligations for vacant space resulting from branch office closings and employee severance costs.

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 Senior Notes issued on April 13, 2000 and October 26, 2004. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company’s investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholder’s equity and other intercompany balances and transactions.

Condensed Consolidating Income Statements

																		(in 000s)
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	)