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SECURITIES AND EXCHANGE COMMISSION

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FORM 10-Q

OR

Commission file number 1-6089

H&R BLOCK, INC.

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

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

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

Yes x      No o

The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on November 28, 2003 was 178,278,294 shares.

 

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PART I — FINANCIAL INFORMATION
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED INCOME STATEMENTS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
		MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
		CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
SIGNATURES
Exhibit Index
EX-10.1 Separation Agreement
EX-10.2 2003 Long-Term Executive Compensation Plan
EX-31.1 Certification-Chief Executive Officer
EX-31.2 Certification-Principal Accounting Officer
EX-32.1 Certification-Chief Executive Officer
EX-32.2 Certification-Principal Accounting Officer

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

See Notes to Condensed Consolidated Financial Statements

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

See Notes to Condensed Consolidated Financial Statments

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

See Notes to Condensed Consolidated Financial Statements

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1.

Basis of Presentation

The condensed consolidated balance sheet as of October 31, 2003, the condensed consolidated income statements for the three and six months ended October 31, 2003 and 2002, and the condensed consolidated statements of cash flows for the six months ended October 31, 2003 and 2002 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 October 31, 2003 and for all periods presented have been made.

Financial results for the three months ended July 31, 2003 have been restated as a result of the adoption of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). See note 13 to the condensed consolidated financial statements for additional information.

Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These reclassifications had no effect on the results of operations or stockholders’ equity as previously reported.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s April 30, 2003 Annual Report to Shareholders on Form 10-K.

Operating revenues of the U.S. Tax Operations, Business Services and International Tax Operations 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.

The Company files its Federal and state income tax returns on a calendar year basis. The condensed consolidated income statements reflect the effective tax rates expected to be applicable for the respective full fiscal years.

2.

Business Combinations

During the six months ended October 31, 2003, cash payments of $118,828 were made or accrued related to the acquisition of assets in the franchise territories of ten former major franchisees. See discussion related to litigation involving major franchisees in note 11 to the condensed consolidated financial statements.

Results related to the ten former major franchise territories, from the dates company-owned operations commenced, have been included in the accompanying condensed consolidated financial statements.

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Due to pending litigation, the purchase price allocations have not been finalized. The preliminary allocation of the purchase price to assets acquired is as follows: property and equipment of $4,168; goodwill of $83,267; customer relationships of $21,362 and noncompete agreements of $10,031. The customer relationships and noncompete agreements will be amortized over ten years and three years, respectively, and the weighted average life of the intangible assets is approximately eight years. Goodwill recognized in these transactions is included in the U.S. Tax Operations segment and all but $3,304 is deductible for tax purposes. The preliminary purchase price allocations will be adjusted upon determination of the final purchase price.

3.

Earnings (Loss) Per Share

Basic earnings (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. The computations of basic and diluted earnings (loss) per share are as follows:

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Diluted earnings per share excludes the impact of shares of common stock issuable upon the exercise of options to purchase 6.5 million shares of stock as of October 31, 2003, as the options’ exercise prices were greater than the average market price of the common shares and therefore, the effect would be antidilutive. Diluted loss per share as of October 31, 2002 excludes the impact of 19.0 million shares issuable upon the exercise of stock options and the conversion of 1,216 shares of preferred stock to common stock, as they are antidilutive.

The weighted average shares outstanding for the three and six months ended October 31, 2003 decreased to 177.8 million and 178.6 million, respectively, from 178.9 million and 180.0 million last year, respectively, primarily due to the purchase of treasury shares by the Company. The effect of these purchases was partially offset by the issuance of treasury shares related to the Company’s stock-based compensation plans.

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During the six months ended October 31, 2003, the Company issued 2.2 million shares of common stock pursuant to the exercise of stock options, employee stock purchases and awards of restricted shares, in accordance with the Company’s stock-based compensation plans. During the six months ended October 31, 2002, the Company issued 3.6 million shares of common stock pursuant to the exercise of stock options, employee stock purchases and awards of restricted shares.

During the six months ended October 31, 2003, the Company acquired 4.2 million shares of its common stock at an aggregate cost of $178,847. During the six months ended October 31, 2002, the Company acquired 6.5 million shares of its common stock at an aggregate cost of $313,603.

4.

Receivables

Receivables consist of the following:

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5.

Mortgage Banking Activities

Activity related to residual interests in securitizations for the six months ended October 31, 2003 and 2002 and the twelve months ended April 30, 2003 consists of the following:

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The Company sold $11,631,790 and $7,813,332 of mortgage loans in whole loan sales to third-party trusts (Trusts) during the six months ended October 31, 2003 and 2002, respectively, with gains totaling $424,034 and $320,517, respectively, recorded on these sales.

Residual interests valued at $199,021 and $136,766 were securitized in net interest margin (NIM) transactions during the respective six-month periods. Net cash proceeds of $147,107 and $136,013 were received from the NIM transactions for the six months ended October 31, 2003 and 2002, respectively. Additional cash proceeds of $50,100 were received as a result of the secured financing, as described below. Total net additions to residual interests from NIM transactions for the six months ended October 31, 2003 and 2002 were $1,814 and $753, respectively.

In the second quarter of fiscal year 2004, the Company completed a NIM transaction with a special purpose entity (SPE) that did not qualify as a qualifying special purpose entity (QSPE), and therefore the SPE has been consolidated and the transaction is being accounted for as a secured financing (on-balance sheet securitization). As a result of the on-balance sheet securitization, the condensed consolidated balance sheet includes a residual interest of $40,196, which is held as collateral for the related financing, and an interest rate cap, which is a derivative instrument. The residual interest is accounted for as a trading security. The interest rate cap of $9,904 is included in other assets. Additionally, a liability for the principal balance of the bonds issued by the NIM trust of $50,100 has been included in other noncurrent liabilities on the condensed consolidated balance sheet.

The residual interest and interest rate cap underlying the bonds are owned by the NIM trust and are not available to the Company’s creditors. As such, the bondholders have no recourse to the Company for the failure of the underlying mortgage loan borrowers to pay when due. The

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interest rate cap is held for the benefit of the underlying bondholders of the NIM bonds to mitigate risk associated with the residual cash flows.

Cash flows of $68,850 and $103,885 were received from the securitization trusts for the six months ended October 31, 2003 and 2002, respectively. Cash received on residual interests is included in investing activities in the condensed consolidated statements of cash flows.

Residual interests are classified as either available-for-sale (AFS) or trading securities and are therefore reported at fair market value (based on discounted cash flow models). Unrealized holding gains represent the write-up of AFS residual interests as a result of actual or estimated lower interest rates, loan losses or loan prepayments than previously projected in the Company’s valuation models. Trading securities are marked-to-market through the income statement.

Aggregate net unrealized gains on residual interests, which had not yet been accreted into income, totaled $120,903 at October 31, 2003 and $98,089 at April 30, 2003. 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.

In connection with securitization transactions, the Company, as servicer, has a 10% call option, whereby the Company, at its discretion, may repurchase the outstanding loans in the securitization once the current value of the loans is 10% or less of their original value. During the quarter ended July 31, 2003, the Company, as servicer, exercised its 10% call option on a residual interest originally recorded in 1996. The remaining outstanding loans were repurchased from the securitization trust, and the proceeds were used to pay off the remaining bondholders. These repurchased loans may be included in future sale transactions. At the time the call option was exercised, the book value of the residual interest was $2,603.

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

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The key assumptions the Company utilized to originally estimate the cash flows and values of residual interests for securitizations during the three months ended October 31, 2003 are as follows:

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The following table illustrates key assumptions the Company utilizes to estimate the cash flows and values of residual interests and MSRs at October 31, 2003:

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At October 31, 2003, the sensitivities of the current fair value of the residual interests and MSRs to 10% and 20% adverse changes in the above key assumptions are as follows:

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These sensitivities are hypothetical and should be used with caution. As the table indicates, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be

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linear. Also in this table, the effect of a variation of a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions. It is likely that changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

6.

Intangible Assets and Goodwill

Intangible assets consist of the following:

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Amortization of intangible assets for the three and six months ended October 31, 2003 was $12,861 and $23,977, respectively. Amortization of intangible assets for the three and six months ended October 31, 2002 was $10,966 and $22,285, respectively. Estimated amortization of intangible assets for fiscal years 2004 through 2008 is $51,384, $50,556, $49,559, $42,988 and $41,218, respectively.

Changes in the carrying amount of goodwill for the six months ended October 31, 2003, consist of the following:

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Additions to goodwill for U.S. Tax Operations include $83,267 related to asset acquisitions involving former major franchise businesses and other acquisitions of $5,625. Additions to goodwill for Business Services primarily result from the last contingent payment related to the acquisition of the non-attest assets of McGladrey & Pullen, LLP of approximately $25,000.

The Company tests goodwill for impairment annually, or more frequently if events occur which indicate a potential reduction in the fair value of a reporting unit’s net assets below its carrying value. During the six months ended October 31, 2002, a goodwill impairment charge of $24,000 was recorded for the Investment Services segment. No such impairment or events indicating potential impairment have been identified within any of the Company’s segments during the six months ended October 31, 2003.

7. Derivative Instruments

The Company, in the normal course of business, enters into commitments with its customers to fund mortgage loans for specified periods of time at “locked-in” interest rates. These financial instruments represent commitments (rate-lock equivalent) to fund loans. The estimated fair value of these rate-lock equivalents is determined based on the difference in the value of the commitments to fund loans between the date of commitment and the date of valuation, taking into consideration the probability of the commitments being exercised and changes in other market conditions. At October 31, 2003 and April 30, 2003, the Company recorded assets totaling $13,144 and $12,531, respectively, in prepaid expenses and other current assets on the condensed consolidated balance sheets related to these commitments.

The NIM Trust, in the normal course of business, enters into interest rate caps to mitigate interest rate risk to the underlying bondholders of the NIM bonds. The interest rate cap is owned by the NIM Trust, which is normally not consolidated by the Company. As a result of the secured financing completed in October 2003, an interest rate cap of $9,904 has been included in other assets on the condensed consolidated balance sheet at October 31, 2003. The interest rate cap will be marked-to-market monthly through the income statement. There are no adjustments to the interest rate cap included in the consolidated income statements for the three and six months ended October 31, 2003.

The Company entered into an agreement with Household Tax Masters, Inc. (Household) during fiscal year 2003, whereby the Company waived its right to purchase any participation interests in and receive license fees relating to RALs during the period January 1 through April 30, 2003. In consideration for waiving these rights, the Company received a series of payments from Household, subject to certain adjustments based on delinquency rates on RALs made by Household through December 31, 2003. The adjustment to the payments will be paid in January 2004. This adjustment is a derivative and will be marked-to-market monthly through December 31, 2003. During the three and six months ended October 31, 2003, the Company recognized $1,446 and $5,560, respectively, of revenues related to this instrument. A receivable of $10,731 and $5,171 is included on the condensed consolidated balance sheet as of October 31, 2003 and April 30, 2003, respectively.

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8.

Comprehensive Income

The Company’s comprehensive income is comprised of net income (loss), the change in net unrealized gain on marketable securities and foreign currency translation adjustments. The components of comprehensive income (loss) for the three and six months ended October 31, 2003 and 2002 were:

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9.

Stock-Based Compensation

Prior to fiscal year 2004, the Company accounted for stock-based compensation plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Effective May 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123, under the prospective transition method as described in Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (SFAS 148). Had compensation cost for all stock-based compensation plan grants been determined in accordance with the fair value accounting method prescribed under SFAS 123, the Company’s net income (loss) and earnings (loss) per share for the three and six months ended October 31, 2003 and 2002 would have been as follows:

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10.

Supplemental Cash Flow Information

During the six months ended October 31, 2003, the Company paid $170,826 and $42,724 for income taxes and interest, respectively. During the six months ended October 31, 2002, the Company paid $124,844 and $39,927 for income taxes and interest, respectively.

During the six months ended October 31, 2003 and 2002, the Company treated the following as non-cash investing activities:

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11.

Commitments, Contingencies, Litigation and Risks

Commitments and Contingencies

The Company offers separately priced guarantees under its Peace of Mind guarantee program to tax clients whereby the Company will assume the cost of additional tax assessments attributable to tax return preparation error. The Company defers the revenue and expenses associated with these guarantees, and recognizes these amounts over the term of the guarantee based upon historical claims data. The related current asset and liability are included in prepaid expenses and other current assets and accounts payable, accrued expenses and other, respectively, on the

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condensed consolidated balance sheets. The related noncurrent asset and liability are included in other assets and other noncurrent liabilities, respectively, on the condensed consolidated balance sheets. During the three months ended October 31, 2003, the Company adopted EITF 00-21 and recorded a cumulative effect of a change in accounting principle as of May 1, 2003. See further discussion in note 13. Changes in the deferred revenue liability for the six months ended October 31, 2003 and 2002 and the twelve months ended April 30, 2003 are as follows:

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Option One Mortgage Corporation provides a guarantee up to a maximum amount equal to approximately 10% of the aggregate principal balance of mortgage loans held by the Trusts (qualifying special purpose entities) before ultimate disposition of the loans by the Trusts. This guarantee would be called upon in the event adequate proceeds were 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 October 31, 2003 and April 30, 2003 was $3,811,085 and $2,176,286, respectively. The fair value of mortgage loans held by the Trusts as of October 31, 2003 and April 30, 2003 was approximately $3,960,000 and $2,273,000, respectively. At October 31, 2003 and April 30, 2003, a liability, which represents the estimated value of the 10% guarantee, of $10,256 and $6,175, respectively, was recorded in accounts payable, accrued expenses and other on the condensed consolidated balance sheets.

The Company manages its interest rate risk by entering into forward loan sale commitments to be settled at a future date. The Company had commitments to sell loans of $5,310,000 and $1,470,031 as of October 31, 2003 and April 30, 2003, respectively.

The Company has entered into whole loan sale agreements with investors in the normal course of business, which include standard representations and warranties customary to the mortgage banking industry. Violations of these representations and warranties may require the Company to repurchase loans previously sold. A liability has been established related to the potential loss on repurchase of loans previously sold of $28,682 and $18,859 at October 31, 2003 and April 30, 2003, respectively. This liability is included in accounts payable, accrued expenses and other on the condensed consolidated balance sheets. Repurchased loans are normally sold in subsequent sale transactions.

The Company and its subsidiaries have various contingent purchase price obligations in connection with prior acquisitions. In many cases, contingent payments to be made in

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connection with these acquisitions are not subject to a stated limit. The Company estimates the potential payments (undiscounted) total approximately $8,750 and $52,290 as of October 31, 2003 and April 30, 2003, respectively. The Company’s estimate is based on current financial conditions. Should actual results differ materially from the Company’s assumptions, the potential payments will differ from the above estimate. Such payments, if and when paid, would be recorded as additional goodwill.

The Company has contractual commitments to fund certain franchises requesting draws on Franchise Equity Lines of Credit (FELCs). The commitment to fund FELCs as of October 31, 2003 and April 30, 2003 totaled $60,307 and $56,070, respectively, with a related receivable balance of $39,370 and $33,341, respectively, included on the condensed consolidated balance sheets. The receivable represents the amount drawn on the FELCs as of October 31, 2003 and April 30, 2003.

The Company and its subsidiaries also routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees. Other guarantees and indemnifications of the Company and its subsidiaries include obligations to protect counter parties 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 the Company’s 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 the Company or its subsidiaries and the ultimate liability related to any such claims, if any, is difficult to predict. While management cannot provide assurance the Company and its subsidiaries will ultimately prevail in the event any such claims are asserted, management believes the fair value of these guarantees and indemnifications is not material as of October 31, 2003.

Litigation

In November 2002, the Company and a major franchisee of a subsidiary of the Company, reached an agreement with the plaintiff class in the class action lawsuit entitled Ronnie and Nancy Haese, et al. v. H&R Block, Inc. et al., Case No. CV96-423, in the District Court of Kleberg County, Texas, related to RALs. The settlement provides a five-year package of coupons class members can use to obtain a variety of tax preparation and tax planning services from the Company’s subsidiaries. The Company’s major franchisee, which operates more than half of all H&R Block offices in Texas, will share a portion of the total settlement cost. As a result, the Company recorded a liability and pretax expense of $41,672, during the second quarter of fiscal year 2003, which, at the time, represented the Company’s best estimate of its share of the settlement cost for plaintiff class legal fees and expenses, tax products and associated mailing expenses. The settlement was approved by the court as a part of a final judgment entered on June 24, 2003. No appeals of the judgment and award were filed. The Company paid the award of $49,900 of attorneys’ fees and expenses to class counsel on August 22, 2003. In addition to the liability that has already been recorded and/or paid, the Company will reduce revenues associated with tax

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preparation services as the coupons are redeemed each year. Distribution of the settlement coupons was made following the end of the second quarter.

The Company has been involved in a number of other putative RAL class action cases since 1990 and has successfully defended many cases. In order to avoid the uncertainty of litigation and the diversion of resources and personnel resulting from the lawsuits, the Company, the lending bank, and the plaintiffs in the case Joel E. Zawikowski, et al. v. Beneficial National Bank, H&R Block, Inc., et al. (renamed Lynne A. Carnegie, et al. v. H&R Block, Inc., et al.), Case No. 98-C-2178 in the United States District Court for Northern Illinois, had agreed to a settlement class and a settlement of RAL-related claims on a nationwide basis. Under that settlement, the Company and the lending bank agreed to each pay $12,500 toward a $25,000 settlement fund for the benefit of the class members. The settlement was approved by the District Court in February 2001 and the defendants paid the $25,000 into an escrow fund. Certain class members who had objected to the settlement appealed the order approving the settlement to the Seventh Circuit Court of Appeals. In April 2002, the Court of Appeals reversed the District Court’s order approving the settlement and remanded the matter back to the District Court for further consideration of the fairness and adequacy of the proposed settlement by a new District Court judge. In April 2003, the District Court judge declined to approve the $25,000 settlement, finding that counsel for the settlement plaintiffs had been inadequate representatives of the plaintiff class and failed to sustain their burden of showing that the settlement was fair. The judge appointed new counsel for the plaintiffs in the first quarter of fiscal year 2004 and named their client, Lynne A. Carnegie, as lead plaintiff. The new counsel for the plaintiffs have since filed an amended complaint and a motion for partial summary judgment. The defendants have filed a motion to dismiss, a brief in response to allegations in the plaintiffs’ amended complaint relating to class certification, and responses to plaintiffs’ motion for partial summary judgment. The Company recorded a receivable in the amount of its $12,500 share of the settlement fund in the fourth quarter of fiscal year 2003 and recorded a reserve in such quarter of $12,500 consistent with the existing settlement authority of the Board of Directors. The defendants requested the release of the escrowed settlement fund and the $12,500 was received during the second quarter of fiscal year 2004. The Company intends to defend the case and the remaining RAL class action litigation vigorously and there are no assurances that any of the matters will result in settlements or as to the amount of any settlement.

The Company and certain of its current and former officers and directors are named defendants in litigation entitled Paul White, et al. v. H&R Block, et al., consolidated Case Numbers 02CV8965, 02CV9661, 02CV9682 and 02CV9830 pending in the United States District Court for the Southern District of New York since the third quarter of fiscal year 2003. The respective named plaintiffs seek to represent a class of shareholders who purchased the Company’s stock between November 8, 1997 and November 6, 2002, and allege that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by failing to disclose to shareholders various cases in which the Company had been sued regarding the RAL program, by failing to set adequate reserves for those cases, and by failing to disclose the supposed implications of those cases for the future of the RAL program. The four securities law cases were all assigned to the same judge and consolidated for pre-trial matters. A consolidated complaint was filed in March 2003 and the defendants responded by filing a motion to dismiss in

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April 2003. In response to defendants’ motion to dismiss, the plaintiffs informed defendants that they wished further to amend their complaint. Defendants consented to the filing of an amended complaint as a pleading matter, the plaintiffs filed the amended complaint, and the defendants filed a motion to dismiss it in August 2003. The Company believes the claims in these actions are without merit, and intends to defend them vigorously.

The Company is a named defendant in litigation entitled William R. Smith, Inc., et al. v. H&R Block, Inc., et al., Case No. 99-CV-206379, pending in the Circuit Court of Jackson County, Missouri (previously known as Armstrong Business Services, Inc., et al. v. H&R Block, Inc., et al.). The action was filed by “major” franchisees against the Company and certain of its subsidiaries relating to alleged breaches of contract and other matters. The Company’s subsidiary, HRB Royalty, Inc., the franchisor under the applicable franchise agreements, filed a counterclaim and subsequently a motion for summary judgment seeking a declaration that HRB Royalty, Inc. could elect not to renew the major franchise agreements when the then current five-year terms came to an end. Such motion for summary judgment was granted in March 2001 and upheld on appeal. HRB Royalty notified the plaintiff major franchisees in 2000 that it did not intend to renew their franchise agreements at the expiration of the then current renewal terms and that the agreements would terminate at those times. The renewal dates varied among the franchisees. Pursuant to the franchise agreements, HRB Royalty must pay a “fair and equitable price” to the franchisee for the franchisee’s franchise business, and such price must be no less than 80% of the franchisee’s revenues for the most recent 12 months ended April 30, plus the value of equipment and supplies, and certain off-season expenses. The Circuit Court ruled in May 2003 that major franchise agreements with renewal terms scheduled to expire prior to July 1, 2003, will expire on July 1, 2003, and other major franchise agreements will expire as the renewal terms expire commencing in September 2003 and ending in fiscal year 2005. The Court ordered defendants to pay for the franchise businesses as provided in the franchise agreements on the applicable dates of expiration. During the six months ended October 31, 2003, franchise agreements of twelve major franchisees expired and subsidiaries of the Company acquired and began operating tax preparation businesses as company-owned operations in the franchise territories of ten former major franchisees. With respect to the two other franchisees with expired franchise agreements, one franchisee entered into a new franchise agreement with a limited term and one franchisee continued litigation challenging the expiration of the franchise agreement. Cash payments of $118,828 were made or accrued related to these former major franchises during the six months ended October 31, 2003.

In Smith, plaintiffs’ claims against the Company and its subsidiaries remain in the trial court. In their second amended petition, the plaintiffs seek in excess of $20,000 in actual damages, punitive damages, unspecified statutory damages, declaratory, injunctive and other relief, including attorneys’ fees under allegations of breach of contract, breach of the covenant of good faith and fair dealing, unfair business practices, state anti-trust violations, breach of fiduciary duty, prima facie tort, violations of various state franchise statutes, fraud and misrepresentation, waiver and estoppel, ambiguity and reformation, relief with respect to a post-termination covenant not to compete in the franchise agreements, and a request for a fair and equitable payment upon nonrenewal of the franchise agreements. The major franchisees allege, among other things, that the sale of TaxCut® income tax return preparation software and online tax

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services and the purchase of accounting firms encroached on their exclusive franchise territories. The defendants believe that the allegations against them are without merit and continue to defend the case vigorously. Management believes that amounts, if any, required to be paid by the Company and its subsidiaries in the discharge of liabilities or settlements relating to these claims of the plaintiffs in this litigation will not have a material adverse effect on the Company’s consolidated results of operations, cash flows or financial position.

In August 2003, a subsidiary of the Company entered into a transaction with one of the former major franchisees whose franchise agreements expired in the first quarter, pursuant to which such subsidiary acquired the stock of the franchisee and the franchisee released the Company and its affiliates from any further liability regarding additional payments under the major franchise agreements. With the exceptions of the former franchisee that executed a release and the franchisee that entered into a new franchise agreement, the court will determine if any additional payments are required for these franchise businesses.

The first trial involving one of the plaintiffs in the Smith litigation was held in October 2003. At the conclusion of this trial, the jury rendered a verdict and the court entered a judgment requiring the Company to make an additional payment of $3,197 for the franchise business. As of October 31, 2003, the Company recorded this liability in accounts payable, accrued expenses and other on the condensed consolidated balance sheet. The original payment for the franchise business made in the first quarter of fiscal year 2004 was $4,955. This trial also involved the issues relating to that plaintiff’s claims for damages against the Company. The jury rendered a verdict of $921 in favor of the plaintiff on the plaintiff’s claims against the Company. The outcome of the trial is subject to post-trial motions and possible appeals. The next trial to take place as a part of the Smith litigation is scheduled for May 2004.

In addition to the aforementioned cases, the Company and its subsidiaries have from time to time been party to claims and lawsuits arising out of such subsidiaries’ business operations, including other claims and lawsuits relating to RALs, and claims and lawsuits concerning the preparation of customers’ income tax returns, the electronic filing of income tax returns, the fees charged customers for various services, the Peace of Mind guarantee program associated with income tax return preparation services, relationships with franchisees and contract disputes. Such lawsuits include actions by individual plaintiffs, as well as cases in which plaintiffs seek to represent a class of similarly situated customers. The amounts claimed in these claims and lawsuits are substantial in some instances, and the ultimate liability with respect to such litigation and claims is difficult to predict. The Company’s management considers these cases to be ordinary, routine litigation incidental to its business, believes the Company and its subsidiaries have meritorious defenses to each of them and is defending, or intends to defend, them vigorously. While management cannot provide assurance the Company and its subsidiaries will ultimately prevail in each instance, management believes that amounts, if any, required to be paid by the Company and its subsidiaries in the discharge of liabilities or settlements will not have a material adverse effect on the Company’s consolidated results of operations, cash flows or financial position. Regardless of outcome, claims and litigation can adversely affect the Company and its subsidiaries due to defense costs, diversion of management and publicity related to such matters.

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It is the Company’s policy to accrue for amounts related to legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable. Many of the various legal proceedings are covered in whole, or in part, by insurance.

12.

Segment Information

Information concerning the Company’s operations by reportable operating segment for the three and six months ended October 31, 2003 and 2002 is as follows:

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Results for the quarter ended July 31, 2003 have been restated for the adoption of EITF 00-21.

13.

New Accounting Pronouncements

SFAS 149
In April 2003, Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149) was issued. SFAS 149 amends and clarifies the accounting for derivative instruments and incorporates many of the implementation issues cleared as a result of the Derivatives Implementation Group process. The provisions of this standard are effective for contracts entered into or modified after June 30, 2003. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

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FIN 46
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 provides guidance with respect to the consolidation of certain variable interest entities (VIEs) whereby a VIE must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among parties involved. The primary beneficiary is one who absorbs a majority of the expected losses, residual returns, or both as a result of holding variable interests. FIN 46 also requires disclosures for both the primary beneficiary of a VIE and other parties with significant variable interests in the entity.

The provisions of FIN 46 apply immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. In October 2003, the FASB issued a staff position delaying the effective date of the consolidation requirements of FIN 46 under certain circumstances to periods ending on or after December 15, 2003 for entities created before February 1, 2003.

The Mortgage Operations segment has an interest in certain QSPEs it currently does not consolidate, which are exempt from the provisions of FIN 46. The Company is continuing its evaluation of interests in potential VIEs, and will continue to monitor additional guidance as provided by the FASB on this standard.

EITF 00-21
In August 2003, the Company adopted EITF 00-21. EITF 00-21 requires consideration received in connection with arrangements involving multiple revenue generating activities be measured and allocated to each separate unit of accounting in the arrangement. Revenue recognition is determined separately for each unit of accounting within the arrangement. EITF 00-21 impacts revenue and expense recognition related to tax preparation in the Company’s premium tax offices where Peace of Mind (POM) guarantees are included in the price of a completed tax return. Prior to the adoption of EITF 00-21, revenues and expenses related to POM guarantees at premium offices were recorded in the same period as tax preparation revenues. Beginning May 1, 2003, revenues and direct expenses related to POM guarantees are now initially deferred and recognized over the guarantee period in proportion to POM claims paid. As a result of the adoption of EITF 00-21, the Company recorded a cumulative effect of a change in accounting principle of $6,359, net of taxes of $4,031, as of May 1, 2003. The Company’s results of operations for the three months ended July 31, 2003 have been restated to reflect the cumulative effect of a change in accounting principle as of May 1, 2003 and to reflect the recognition of deferred revenues and expenses for the three months ended July 31, 2003.

Restated results for the three months ended July 31, 2003 and pro forma results, as if EITF 00-21 had been applied during each period, for the three months ended July 31, 2002 and October 31, 2002 and the six months ended October 31, 2002 are as follows:

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Revenues recognized during the three months ended July 31, 2003 and October 31, 2003 and the six months ended October 31, 2003, which were initially recognized in prior periods and reversed as part of the cumulative effect of a change in accounting principle, totaled $10,847, $9,578 and $20,425, respectively.

Exposure Draft — Amendment of SFAS 140
The FASB has decided to reissue its exposure draft, “Qualifying Special Purpose Entities and Isolation of Transferred Assets, an Amendment of FASB Statement No. 140,” during the first quarter of calendar year 2004. The purpose of the proposal is to provide more specific guidance on the accounting for transfers of financial assets to a QSPE.

Provisions in the first exposure draft, if adopted, may have required the Company to consolidate its current QSPEs (the Trusts) established in its Mortgage Operations segment. As of October 31, 2003, the Trusts had assets and liabilities of $3,811,085. The provisions of the exposure draft are subject to FASB due process and are subject to change. The Company will continue to

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monitor the status of the exposure draft, and consider changes to current structures to comply with the proposed rules.

14.

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 October 21, 1997 and April 13, 2000. 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

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Condensed Consolidating Balance Sheets

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Condensed Consolidating Statements of Cash Flows

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15.

Subsequent Event

On November 25, 2003, the Company declared a cash dividend of $.20 per share to shareholders of record as of December 12, 2003, payable on January 2, 2004.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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     H&R Block, Inc. (the Company) is a diversified company with subsidiaries primarily engaged in the business of providing financial services including tax services, investment and mortgage products and services, and accounting and consulting services. For nearly 50 years, the Company has been developing relationships with millions of tax clients and its strategy is to expand on these relationships.

H&R Block’s Mission:

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

H&R Block’s Vision:

To be the world’s leading provider of financial services
through tax and accounting-based advisory relationships.

Key to achieving the Company’s mission and vision is enhancing client experiences through consistent delivery of valuable services and advice. The Company believes offering advice facilitates a financial partnership and increases client satisfaction and retention. New products and services are continually introduced to bring additional value to the overall experience and allow clients to reach their financial objectives. Operating in multiple lines of business allows the Company to serve the changing financial needs of all its customers. The Company carries out its mission and vision through the following reportable operating segments:

U.S. Tax Operations: This segment primarily consists of the Company’s income tax preparation businesses. Retail tax offices served 16.5 million taxpayers in fiscal year 2003 — more than any other personal tax services company. This segment also served 2.1 million clients through TaxCut tax preparation software (includes only federal e-filings) and online tax preparation in fiscal year 2003. By offering professional and do-it-yourself tax preparation options, the Company can serve its clients how they choose to be served.

Mortgage Operations: This segment is primarily engaged in the origination of non-prime mortgage loans, the sale and securitization of mortgage assets (which includes mortgage loans and residual interests), and the servicing of non-prime loans. A key focus of Mortgage Operations is to optimize cash flows from its operations. The Company believes offering mortgage products to other segments’ clients results in added value to the total client experience.

Business Services: This segment is engaged in providing accounting, tax, consulting, payroll, employee benefits and capital markets services to business clients and tax, financial and estate planning, wealth management and insurance services to individuals. The Company continues to focus on establishing core service relationships with middle-market clients by adding non-traditional business and personal services to enhance these client relationships. In doing so, the

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Company intends to develop Business Services as a leading provider of middle-market professional services.

Investment Services: This segment is primarily engaged in offering investment services and securities products. Investment Services also offers these services and products to U.S. Tax and Mortgage Operations clients, bringing additional value to the overall client experience.

International Tax Operations: This segment is primarily engaged in providing local tax return preparation, filing and related services in Canada, Australia and the United Kingdom. In addition, International Tax Operations includes Overseas operations, which consists of company-owned and franchise offices preparing tax returns for U.S. citizens living abroad.

The analysis that follows should be read in conjunction with the tables below and the condensed consolidated income statements found on page 2.

Consolidated H&R Block, Inc.

Consolidated H&R Block, Inc. — Three-Month Results

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Results for the quarter ended July 31, 2003 have been restated for the adoption of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21).

Overview

A summary of the Company’s results for the three months ended October 31, 2003 is as follows:

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Net income was $10.4 million, compared to a net loss of $37.3 million in the prior year.

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•

Revenues grew $108.5 million, or 23.0%, over the prior year.

•

U.S. Tax Operations’ revenues increased $13.8 million, or 41.2%, primarily due to increased Peace of Mind revenues related to the adoption of EITF 00-21, while expenses decreased 4.1%, primarily as a result of a litigation reserve recorded in the prior year.

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Mortgage Operations’ revenues and pretax earnings increased $76.6 million and $30.5 million, respectively, over the prior year and $48.3 million and $20.2 million, respectively, over the preceding quarter.

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Mortgage originations totaled $6.3 billion, an increase of 63.5% over the prior year and 19.4% over the preceding quarter. Execution pricing on sales of mortgage assets declined to 3.87% from 4.78% in the prior year and 4.42% in the preceding quarter.

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Investment Services’ pretax results improved 45.1% due primarily to a $6.0 million goodwill impairment charge recorded in the prior year.

Consolidated H&R Block, Inc. — Six-Month Results

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Overview

A summary of the Company’s results for the six months ended October 31, 2003 is as follows:

•

Net income was $15.5 million, compared to a net loss of $46.9 million in the prior year.

•

Revenues grew $182.8 million, or 20.2%, over the prior year.

•

U.S. Tax Operations’ revenues increased $31.0 million, or 54.7%, primarily due to increased Peace of Mind revenues related to the adoption of EITF 00-21.

•

Mortgage Operations’ revenues and pretax earnings increased $129.2 million and $47.3 million, respectively, over the prior year.

•

Mortgage originations totaled $11.7 billion, an increase of 60.7% over the prior year.

•

Investment Services’ pretax results improved 52.1% due primarily to a $24.0 million goodwill impairment charge recorded in the prior year.

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U.S. Tax Operations

This segment is primarily engaged in providing tax return preparation, filing and related services in the United States. Segment revenues include fees earned for tax-related services performed at company-owned tax offices, royalties from franchise offices, sales of tax preparation and other software, fees from online tax preparation, and payments related to refund anticipation loan (RAL) participations.

TaxCut from H&R Block enables do-it-yourself users to prepare their federal and state tax returns easily and accurately. Several versions of the software are available to suit the needs of individual users, including TaxCut Standard, TaxCut Deluxe (includes free state and electronic filing), TaxCut Platinum for more complex returns and TaxCut Home & Business for small business owners. Other personal productivity software packages are also offered, including H&R Block Deduction Pro, WillPower and Home & Business Attorney.

Clients also have the option of online do-it-yourself tax preparation, online professional tax review, online tax advice and online tax preparation through a tax professional (whereby the client completes an online tax organizer and sends it to a tax professional for preparation) through the hrblock.com website. The Company participates in the Free File Alliance, formed in fiscal year 2003. This alliance was created by the industry and the Internal Revenue Service (IRS), and allows qualified lower-income filers to prepare and file their federal return online at no charge.

During the six months ended October 31, 2003, subsidiaries of the Company began operating income tax return preparation businesses in the franchise territories previously operated by ten of its former major franchisees. As a result of these operations, the company expects to have 476 more company-owned and 238 more regular franchise offices for the upcoming tax season. The final purchase prices are pending litigation or settlement. Preliminary purchase price allocations have been made and will be adjusted upon determination of the final purchase price. The results for the three and six months ended October 31, 2003 include compensation, occupancy, legal, amortization and other expenses related to the commencement of company-owned operations in the former franchise territories totaling $12.8 million and $13.2 million, respectively.

Financial results for the three months ended July 31, 2003 have been restated as a result of the adoption of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21), as it relates to the Peace of Mind (POM) guarantee program. See note 13 to the condensed consolidated financial statements for additional information.

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U.S. Tax Operations — Three-Month Results

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Three months ended October 31, 2003 compared to October 31, 2002

U.S. Tax Operations’ revenues increased $13.8 million, or 41.2%, for the three months ended October 31, 2003, compared to the three months ended October 31, 2002.

Tax preparation and related fees decreased $0.6 million, or 4.3%, for the three months ended October 31, 2003. This decrease is primarily due to a 2.6% decrease in the average charge, net of discounts, offset by a 7.3% increase in tax returns prepared. The net average charge decreased to $185.47 in the current quarter compared to $190.37 last year. Average charge is calculated as tax preparation and filing fees, less discounts if applicable, divided by the number of clients served. Tax returns prepared in company-owned offices during the current quarter were 75 thousand, compared to 70 thousand in the prior year.

During fiscal year 2003, the Company entered into an agreement with Household Tax Masters, Inc. (Household), whereby the Company waived its right to purchase any participation interests in and receive license fees for RALs during the period January 1 through April 30, 2003. In consideration for waiving these rights the Company received a series of payments from Household in fiscal year 2003, subject to certain adjustments in fiscal year 2004 based on delinquency rates. During the three months ended October 31, 2003 the Company recorded

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additional revenues of $1.4 million based on projected delinquency rates through December 31, 2003. The waiver agreement with Household was a one-year agreement. The final payment is expected to be received in January 2004, based on actual delinquency rates as of December 31, 2003. The Company intends to participate in RALs during the upcoming tax season.

POM revenues for the three months ended October 31, 2003 increased $10.9 million, or 160.6%, due to the adoption of EITF 00-21. Prior to the adoption of EITF 00-21, revenues related to POM guarantees in premium offices were recorded within tax preparation revenues. With the adoption of EITF 00-21, the revenues are deferred and recognized over the guarantee period. The increase over the prior year is a result of the amortization of larger deferred revenue balances established as part of the cumulative effect of a change in accounting principle.

Total expenses for the three months ended October 31, 2003 were $178.1 million, down $7.6 million, or 4.1%, from the prior year. The decrease from the prior year is a result of a litigation settlement recorded in the prior year and effective off-season cost controls. These decreases were partially offset by additional costs from the commencement of company-owned operations in former major franchise territories. Legal expenses declined $34.8 million, or 75.8%, primarily due to the Texas RAL litigation reserve of $41.7 million recorded in the previous year, partially offset by legal costs incurred related to other open litigation. Occupancy and equipment costs increased $7.0 million over the prior year, due to increases of 215 in company-owned offices under lease and offices related to the former major franchise territories. Depreciation and amortization expenses increased in conjunction with additional equipment purchased for new office locations opened during the period. Amortization of intangible assets increased $1.7 million due to the acquisition of assets from former major franchisees. Other expenses in the current quarter increased $10.7 million over last year. The increase was primarily due to $5.6 million of additional POM expenses related to the adoption of EITF 00-21. Additionally, travel and consulting expenses increased by $1.6 million and $1.2 million, respectively. Information technology expenses increased $4.4 million, or 23.7%, for the quarter ended October 31, 2003, primarily due to additional technology projects.

The pretax loss of $130.9 million for the three months ended October 31, 2003, represents a 14.0% improvement over the prior year loss of $152.3 million.

Due to the seasonal nature of this segment’s business, operating results for the three months ended October 31, 2003 are not comparable to the three months ended July 31, 2003 and are not indicative of the expected results for the entire fiscal year.

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U.S. Tax Operations — Six-Month Results

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Six months ended October 31, 2003 compared to October 31, 2002

U.S. Tax Operations’ revenues increased $31.0 million, or 54.7%, for the six months ended October 31, 2003, compared to the six months ended October 31, 2002.

Tax preparation and related fees increased slightly for the six months ended October 31, 2003, as a result of a 2.2% increase in the average charge, net of discounts, and a 1.7% increase in tax returns prepared. The net average charge increased to $171.36 in the current period compared to $167.68 last year. Tax returns prepared in company-owned offices during the current period were 162 thousand, compared to 159 thousand in the prior year.

During the six months ended October 31, 2003 the Company recorded revenues of $5.6 million in conjunction with the RAL waiver agreement with Household based on projected delinquency rates through December 31, 2003.

POM revenues for the six months ended October 31, 2003 increased $23.2 million, or 162.2%, principally due to the adoption of EITF 00-21.

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Total expenses for the six months ended October 31, 2003 were $311.8 million, up $8.8 million, or 2.9%, from the prior year. The increase over the prior year is primarily a result of the costs of additional offices and the commencement of company-owned operations in former major franchise territories. These increased costs were offset by lower legal expenses as a result of a prior year litigation settlement, and effective off-season cost controls. Occupancy and equipment costs increased $10.1 million due to increases of 215 in company-owned offices under lease and offices related to the former major franchise territories. Depreciation and amortization expenses increased in conjunction with additional equipment purchased for new office locations opened during the period. Amortization of intangible assets increased $1.7 million due to the acquisition of assets from former major franchisees. Other expenses in the current period increased $20.5 million over last year. The increase was primarily due to $11.8 million of additional POM expenses related to the adoption of EITF 00-21, and $4.2 million of additional interest accretion related to a legal settlement. Additionally, consultant fees and travel expenses increased $3.0 million and $1.4 million, respectively. Information technology expenses increased $8.3 million, or 24.4%, for the six months ended October 31, 2003, primarily due to additional technology projects. Offsetting these increases, legal expenses declined $33.4 million, or 69.2%, primarily due to the Texas RAL litigation reserve of $41.7 million recorded in the previous year, partially offset by legal costs incurred related to other open litigation.

The pretax loss of $224.1 million for the six months ended October 31, 2003, represents a 9.0% improvement over the prior year loss of $246.3 million.

Mortgage Operations

This segment is primarily engaged in the origination of non-prime mortgage loans, sales and securitizations of mortgage assets and servicing of non-prime loans. Revenues consist of proceeds from sales and securitizations of loans and related assets, accretion on residual interests, loan servicing fees and interest received on loans.

Substantially all non-prime mortgage loans originated are sold daily to qualifying special purpose entities (Trusts). The Company removes the mortgage loans from its balance sheet and records the gain on the sale, cash and a receivable which represents the ultimate expected outcome from the disposition of the loans by the Trusts. The Trusts, as directed by the third-party beneficial interest holders, either sell the loans directly to third-party investors or back to the Company’s securitization entity to pool the loans for securitization, depending on market conditions.

In a securitization transaction, the Trusts transfer the loans to a special purpose entity, which is a consolidated subsidiary of the Company, and the Company simultaneously transfers the loans and its receivable, and the right to receive all payments on the loans, to a securitization trust. The securitization trust meets the definition of a qualifying special purpose entity (QSPE) and is therefore not consolidated by the Company. The securitization trust issues bonds, which are supported by cash flows from the pooled loans, to third-party investors. The Company retains an interest in the loans in the form of a residual interest (including overcollateralization (OC) accounts and uncertificated interests) and usually assumes first risk of loss for credit losses in the loan pool. As the cash flows of the underlying loans and market conditions change, the value of

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the Company’s residual interests may also change, resulting in either additional unrealized gains or impairment of the residual interests.

To accelerate cash flows from its residual interests, the Company securitizes the majority of its residual interests in net interest margin (NIM) transactions. In a NIM transaction, residual interests are normally transferred to another QSPE (NIM trust), which then issues bonds to third-party investors. In the second quarter of fiscal year 2004, the Company completed a NIM transaction with a special purpose entity (SPE) that did not qualify as a QSPE and, therefore the SPE has been consolidated and the transaction was accounted for as a secured financing (on-balance sheet securitization).

Proceeds from the bonds are returned to the Company as payment for the residual interests. The bonds are secured by pooled residual interests and are obligations of the NIM trust. The Company retains a subordinated interest in the NIM trust, and receives cash flows on its residual interest generally after the bonds issued to the third-party investors are paid in full. Residual interests retained from NIM securitizations may also be bundled and sold in a subsequent securitization.

Substantially all non-prime loans originated and subsequently sold or securitized are transferred with servicing rights retained. Servicing activities include processing of mortgage loan payments and the administration of mortgage loans, with loan servicing fees received monthly over the life of the mortgage loans. The Company has traditionally received a servicing fee of 50 basis points per annum on the outstanding principal balance of loans sold or securitized, as well as the right to receive certain ancillary income including, but not limited to, late fees. In recent transactions, step-servicing fee structures have been implemented. The purpose of step-servicing is to better match the stream of incoming servicing revenues against the related servicing expenses. Generally, the cost to service a pool of loans is lower immediately after origination and increases as the related loan pool ages. Recent step-servicing fee structures provide the company with a servicing fee of 30 basis points per annum for the first 10 months of servicing, 40 basis points per annum for the next 20 months of servicing and 65 basis points for the remainder of the servicing term.

Prime mortgage loans are sold in whole loan sales, servicing rights released, to third-party buyers.

Market interest rates have begun to increase after a sustained period of declining rates. In a rising interest rate environment the Company expects its profit margins will narrow from their historically high levels due to less favorable loan execution pricing. Actual execution pricing on sales of mortgage assets declined to 3.87% during the three months ended October 31, 2003 compared to 4.78% in the prior year. As such, growth in pretax income for the mortgage operations segment is expected to be more moderate or perhaps decline from results (excluding a $130.9 million gain on sale of NIM residual interests) for the fiscal year ended April 30, 2003.

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Mortgage Operations — Three-Month Statistics

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

Mortgage Operations — Three-Month Results

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Three months ended October 31, 2003 compared to October 31, 2002

Mortgage Operations’ revenues increased $76.6 million, or 27.9%, for the three months ended October 31, 2003 compared to the prior year. Revenue increased primarily as a result of higher production volumes.

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

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(1)		Includes all direct sales and back office sales support associates.
(2)		Percentage of loans funded divided by total applications.
(3)		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).

Gains on sales of mortgage loans and related assets increased $65.6 million for the three months ended October 31, 2003. The increase over last year is a result of a significant increase in loan origination volume, partially offset by a decrease in loan sale execution pricing and an increase in loan origination expenses. During the second quarter, the Company originated $6.3 billion in mortgage loans compared to $3.9 billion last year, an increase of 63.5%. The execution price on mortgage loans originated and sold decreased to 3.87% for the current quarter compared to 4.78% last year, primarily as a result of a decrease in the average interest rate during the period.

Impairments of residual interests in securitizations of $0.4 million were recognized in the current period, compared to $3.7 million for the three months ended October 31, 2002.

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

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Loan servicing revenues increased $10.3 million, or 25.0%, compared to the prior year. The increase reflects a higher loan servicing portfolio. The average servicing portfolio for the three-month period ended October 31, 2003 increased $10.7 billion, or 40.9%, to $36.8 billion.

Total accretion of residual interests of $36.8 million for the three months ended October 31, 2003 represents a decrease of $17.2 million from prior year accretion of $54.1 million. This decline is due to a lower average balance of related residuals, resulting primarily from the sale of previously securitized residual interests (NIM residuals) during the third quarter of fiscal year 2003.

During the second quarter of fiscal year 2004, the Company’s residual interests continued to perform better than expected compared to internal valuation models, primarily due to sustained low interest rates and more favorable prepayment and loss rates. As a result of these items, the Company recorded pretax mark-to-market write-ups, which increased the fair value of its residual interests $20.9 million during the quarter. These write-ups were recorded, net of write-downs of $10.4 million and deferred taxes of $4.0 million, in other comprehensive income 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. Additionally, sales of NIM residual interests would result in decreases to accretion income in future periods.

Interest income increased $14.4 million, or 52.6%, for the quarter ended October 31, 2003, primarily due to an increase in the average balance on loans held by the Trusts. This increase was offset by lower interest margin earned. Interest margin is the difference between the rate on the underlying loans and the financing costs of the Trusts. The interest margin decreased to 5.39% for the three months ended October 31, 2003, from 5.64% a year ago.

Total expenses for the three months ended October 31, 2003, increased $46.1 million, or 38.0%, over the year-ago quarter. This increase is primarily due to $14.9 million in increased compensation and benefits as a result of a 23.5% increase in sales associates needed to support higher loan production volumes. Servicing and processing expenses increased by $10.0 million as a result of a higher average servicing portfolio during the three months ended October 31, 2003. Occupancy and equipment charges increased $2.2 million due to nine additional branch offices opened since the prior year quarter ended, continued expansion of the second servicing center that opened in August 2002 and additional administrative office space. Bad debt expense increased $8.9 million primarily due to more whole loan sales than securitizations in the current year, for which higher reserves are set up at the time of sale for estimated repurchases. Whole loan sales accounted for 79% of total loan sales, compared to 72% in the prior year. Other expenses increased by $10.0 million to $38.6 million for the current quarter, primarily due to $2.0 million in increased marketing expenses and $4.5 million in increased allocated corporate and shared costs. Allocated costs increased as a result of additional insurance costs and the expensing of stock-based compensation.

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Pretax income increased $30.5 million to $184.0 million for the three months ended October 31, 2003.

Three months ended October 31, 2003 compared to July 31, 2003

Mortgage Operations’ revenues increased $48.3 million, or 15.9%, for the three months ended October 31, 2003, compared to the preceding quarter.

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

(1)		Includes all direct sales and back office sales support associates.
(2)		Percentage of loans funded divided by total applications.
(3)		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).

Gains on sales of mortgage loans and related assets for both wholesale and retail increased $17.3 million to $220.7 million for the current quarter. This increase from the preceding quarter is primarily a result of a 19.4% increase in loans originated, which was partially offset by a decrease in execution price on loan sales as a result of the rising interest rate environment. The execution price on loan sales for the quarter decreased to 3.87% from 4.42% for the three months ended July 31, 2003.

Impairments of residual interests in securitizations of $0.4 million were recognized during the second quarter, compared to $10.7 million for the three months ended July 31, 2003. The first quarter impairments resulted from a decline in value of older residuals based on loan performance.

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

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Loan servicing revenues increased $3.3 million, or 6.9%, compared to the first quarter of fiscal year 2004. The increase reflects a higher loan-servicing portfolio. The average servicing portfolio for the three months ended October 31, 2003 increased $4.1 billion, or 12.4%, to $36.8 billion.

Accretion of residual interests of $36.8 million represents an increase of 8.2% from the preceding quarter accretion of $34.1 million, primarily due to write-ups taken during the first quarter of fiscal year 2004.

Interest income increased $14.6 million, or 53.5%, for the quarter ended October 31, 2003, due to an increase in the average balance on loans held by the Trusts. This increase was offset by lower interest margin earned. The interest margin decreased to 5.39% during the three months ended October 31, 2003, from 5.51% in the first quarter.

Total expenses increased $28.1 million, or 20.2%, primarily due to increased compensation and benefit costs associated with the increase in sales associates. Bad debt expense increased $2.7 million primarily due to more whole loan sales than securitizations in the current quarter, which requires higher reserves to be set up at the time of sale for estimated repurchases. Whole loan sales accounted for 79% of total loan sales, compared to 57% in the first quarter. Other expenses also increased $11.3 million due to $2.7 million of additional marketing expenses, $2.3 million in additional consulting expenses and $1.2 million of additional depreciation and amortization. Allocated corporate and shared costs also increased $2.5 million, primarily due to increased insurance costs and the expensing of stock-based compensation.

Pretax income increased $20.2 million, or 12.3%, for the three months ended October 31, 2003 compared to the preceding quarter.

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Mortgage Operations — Six-Month Statistics

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

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Mortgage Operations — Six-Month Results

Six months ended October 31, 2003 compared to October 31, 2002

Mortgage Operations’ revenues increased $129.2 million, or 24.6%, for the six months ended October 31, 2003 compared to the prior year. Revenue increased primarily as a result of higher production volumes.

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

(1)		Includes all direct sales and back office sales support associates.
(2)		Percentage of loans funded divided by total applications.
(3)		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).

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Gains on sales of mortgage loans and related assets increased $103.5 million for the six months ended October 31, 2003. The increase over last year is a result of a significant increase in loan origination volume, partially offset by a decrease in loan sale execution pricing and increased loan origination expenses. During the current year, the Company originated $11.7 billion in mortgage loans compared to $7.3 billion last year, an increase of 60.7%. The execution price on mortgage loans originated and sold decreased to 4.18% for the current period compared to 4.83% last year, primarily as a result of a decrease in the average interest rate during the period.

Impairments of residual interests in securitizations of $11.1 million were recognized in the six months ended October 31, 2003, due to a decline in value of older residuals based on loan performance. Impairments of residuals for the six months ended October 31, 2002 totaled $24.1 million.

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

Loan servicing revenues increased $19.7 million, or 24.5%, this year. The increase reflects a higher loan servicing portfolio. The average servicing portfolio for the six months ended October 31, 2003 increased $9.2 billion, or 35.7%, to $34.9 billion.

Total accretion of residual interests of $70.9 million for the six months ended October 31, 2003 represents a decrease of $21.9 million from prior year accretion of $92.9 million. This decline is due to a lower average balance of related residuals, resulting primarily from the sale of NIM residuals during the third quarter of fiscal year 2003.

The Company recorded pretax mark-to-market write-ups on its residual interests, which increased the fair value $78.4 million during the period. These write-ups were recorded, net of write-downs of $14.3 million and deferred taxes of $24.4 million, in other comprehensive income 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. Additionally, sales of NIM residual interests would result in decreases to accretion income in future periods.

Interest income increased $14.9 million, or 27.4%, for the six months ended October 31, 2003, due to an increase in the average balance on loans held by the Trusts. This increase was offset by lower interest margin earned. The interest margin decreased to 5.45% during the six months ended October 31, 2003, from 5.85% a year ago.

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Total expenses for the six months ended October 31, 2003, increased $81.9 million, or 36.5% over the year-ago period. This increase is primarily due to a $27.4 million increase in compensation and benefits as a result of a 23.5% increase in sales associates needed to support higher loan production volumes. Servicing and processing expenses increased by $20.2 million as a result of a higher average servicing portfolio during the six months ended October 31, 2003. Occupancy and equipment charges increased $6.2 million due to nine additional branch offices opened since October 2002, continued expansion of the second servicing center that opened in August 2002 and additional administrative office space. Bad debt expense increased $12.6 million primarily as a result of the increase in whole loan sales compared to securitizations, for which higher reserves are set up at the time of sale for estimated repurchases. Other expenses increased by $15.4 million to $65.8 million for the current period, primarily due to $4.4 million in increased marketing expenses and $5.9 million in increased allocated corporate and shared costs. Allocated costs increased due to higher insurance costs and the expensing of stock-based compensation.

Pretax income increased $47.3 million to $347.9 million for the six months ended October 31, 2003.

Business Services

This segment is engaged in providing accounting, tax, consulting, payroll, employee benefits and capital markets services to business clients and tax, financial and estate planning, wealth management and insurance services to individuals. Business Services provides accounting, payroll and human resources services to McGladrey & Pullen LLP (M&P) in exchange for a management fee. The Company also has commitments to fund M&P’s operations.

A substantial portion of Business Services’ business is generated by one-time projects or extended services. Improvements in the current business environment have caused clients to begin cautiously spending money on discretionary projects. Results in the Company’s consulting services remain weak while other service revenues are seeing improvement.

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Business Services — Three-Month Results

Three months ended October 31, 2003 compared to October 31, 2002

Business Services’ revenues for the three months ended October 31, 2003 increased $11.1 million, or 11.4%, from the prior year. This increase was primarily due to a $7.3 million increase in capital markets revenues, resulting from a higher number of business valuation projects. Traditional accounting revenues also increased $3.2 million due to more billable hours during the quarter for tax services.

Total expenses increased $10.1 million, or 9.9%, for the three months ended October 31, 2003 compared to the prior year. Compensation and benefits costs increased $9.7 million, primarily as a result of the increased activity in the capital markets business. Additionally, other expenses increased $1.6 million, primarily due to increased employee recruiting costs.

The pretax loss for the three months ended October 31, 2003 was $2.7 million compared to a loss of $3.8 million in the prior year.

Due to the seasonal nature of this segment’s business, operating results for the three months ended October 31, 2003 are not comparable to the three months ended July 31, 2003 and are not indicative of the expected results for the entire fiscal year.

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Business Services — Six-Month Results

Six months ended October 31, 2003 compared to October 31, 2002

Business Services’ revenues for the six months ended October 31, 2003 increased $14.3 million, or 7.4%, from the prior year. This increase was primarily due to a $14.0 million increase in capital markets revenues, resulting from a higher number of business valuation projects. Other revenues also increased $2.6 million due to improved performance in the outsourced services area. These increases were partially offset by a slight decline in traditional accounting revenues.

Total expenses increased $15.7 million, or 7.8%, for the six months ended October 31, 2003 compared to the prior year. Compensation and benefits costs increased $11.0 million, primarily as a result of the increased activity in the capital markets business. Additionally, other expenses increased $3.5 million, primarily due to increased recruiting and insurance costs.

The pretax loss for the six months ended October 31, 2003 was $9.4 million compared to a loss of $8.1 million in the prior year.

Investment Services

This segment is primarily engaged in offering investment services and securities products through H&R Block Financial Advisors, Inc. (HRBFA), a full-service securities broker-dealer and a registered investment advisor. Products and services offered to Investment Services’ customers include: equities, annuities, fixed income products, mutual funds, margin accounts, money market funds with sweep provisions for settlement of customer transactions, checking privileges, account access/review via the internet, online trading, fee-based accounts, individual retirement accounts, dividend reinvestment and option accounts, equity research and focus lists, model portfolios, asset allocation strategies, economic commentaries and other investment tools and information. In addition, clients of the Company’s U.S. Tax Operations segment are given the opportunity to open an Express IRA through HRBFA as a part of the income tax return preparation process.

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Key to the future success of the Investment Services segment is retention of its financial advisors and recruitment of new advisors. One of the Company’s key initiatives is to build revenues through the addition of experienced financial advisors. More than 100 new advisors have been recruited through the second quarter, which was offset by attrition of primarily less experienced advisors. The retention and recruitment of experienced advisors continues to be a key initiative for fiscal year 2004.

Investment Services — Three-Month Statistics

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(1)		Includes both trades on which commissions are earned (“commissionable trades”) and trades for which no commission is earned (“fee-based trades”). Excludes open-ended mutual fund redemptions.
(2)		Calculated as total commissions divided by commissionable trades.

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Investment Services — Three-Month Results

(1)

Total revenues, less interest expense.

Three months ended October 31, 2003 compared to October 31, 2002

Investment Services’ revenues, net of interest expense, for the three months ended October 31, 2003 increased $4.1 million, or 8.4%, to $52.5 million compared to prior year revenues of $48.4 million. The increase is primarily due to higher annuitized revenues, which are based on customer assets rather than transactions.

Transactional revenue, which is based on transaction or trade quantities, rose $0.3 million, or 1.1%, from the prior year due to an increase in trading activity, partially offset by a decline in the average revenue per trade. Annuitized revenues increased $5.7 million, or 70.5%, due to increased sales of annuities and mutual funds.

Margin interest revenue declined 17.4% from the prior year to $8.1 million, which is primarily a result of a 13.4% decline in interest rates and an 8.1% decrease in average margin balances. Margin balances have declined from an average of $560.0 million for the three months ended October 31, 2002 to $514.4 million in the current period, due to weak investor confidence.

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Interest expense for the second quarter of fiscal year 2004 declined 87.0% to $0.2 million compared to $1.6 million in the second quarter of fiscal year 2003.

Total expenses decreased $8.5 million, or 11.2%, to $67.8 million primarily as a result of the $6.0 million goodwill impairment charge recorded in the prior year. Other expenses decreased primarily as a result of consulting fees incurred in the prior year related to the conversion to a new back-office system.

The pretax loss for Investment Services for the second quarter of fiscal year 2004 was $15.3 million compared to the prior year loss of $27.9 million.

Three months ended October 31, 2003 compared to July 31, 2003

Investment Services’ revenues, net of interest expense, for the three months ended October 31, 2003 declined $3.9 million, or 6.9%, to $52.5 million compared to the preceding quarter.

Production revenue decreased $1.6 million, or 4.2%, primarily due to the continued shift to fee-based products.

Margin interest revenue fell $0.5 million, or 5.5%, to $8.1 million for the quarter ended October 31, 2003, which is primarily a result of lower interest rates.

Total expenses decreased $2.3 million from the preceding quarter. The $1.6 million decrease in commission expense is primarily due to the decline in production revenues. In addition, other expenses declined $1.2 million primarily as a result of first quarter postage costs related to customer mailings.

The pretax loss for the Investment Services segment was $15.3 million, compared to a loss of $13.8 million in the first quarter of fiscal year 2004.

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Investment Services — Six-Month Statistics

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(1)		Includes both trades on which commissions are earned (“commissionable trades”) and trades for which no commission is earned (“fee-based trades”). Excludes open-ended mutual fund redemptions.
(2)		Calculated as total commissions divided by commissionable trades.

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Investment Services — Six-Month Results

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(1)

Total revenues, less interest expense.

Six months ended October 31, 2003 compared to October 31, 2002

Investment Services’ revenues, net of interest expense, for the six months ended October 31, 2003 improved $3.5 million, or 3.3%, to $108.9 million compared to prior year revenues of $105.4 million. The increase is primarily due to higher annuitized revenue.

Transactional revenue declined $2.7 million, or 5.2%, from the prior year due to the continued shift to fee-based products. Annuitized revenues increased $8.8 million, or 50.7%, due to increased sales of annuities and mutual funds.

Margin interest revenue declined 20.8% from the prior year to $16.6 million, which is primarily a result of lower margin balances. Margin balances have declined from an average of $640.0 million for the six months ended October 31, 2002 to $507.7 million in the current period. Interest expense for the first half of fiscal year 2004 declined 75.1% to $0.8 million compared to $3.3 million in the first half of fiscal year 2003.

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Total expenses decreased $28.2 million, or 17.0%, to $138.0 million primarily as a result of the $24.0 million goodwill impairment charge recorded in the prior year. Other expenses decreased $5.9 million primarily as a result of consulting fees incurred in the prior year related to the conversion to a new back-office system. Depreciation and amortization declined by $3.0 million as a result of the consolidation of field offices and the related asset sales. Commissions and other variable expenses increased as a result of higher production revenues.

The pretax loss for Investment Services for the first half of fiscal year 2004 was $29.1 million compared to the prior year loss of $60.7 million.

International Tax Operations

This segment is primarily engaged in providing local tax return preparation, filing and related services in Canada, Australia and the United Kingdom. In addition, International Tax Operations includes Overseas operations, which consists of company-owned and franchise offices in eight countries that prepare U.S. tax returns for U.S. citizens living abroad. This segment served 2.3 million taxpayers in fiscal year 2003.

Tax-related service revenues include fees from company-owned tax offices and royalties from franchise offices. The Canadian tax season is from January to April, the Australian tax season is from July to October and the United Kingdom’s tax season is from August to March.

Operations in this segment of the Company are transacted in the local currencies of the countries in which it operates, therefore the results can be affected by the translation into U.S. dollars. The weakening of the U.S. dollar during the quarter had the impact of increasing reported revenues, income and losses.

International Tax Operations — Three-Month Results

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Three months ended October 31, 2003 compared to October 31, 2002

International Tax Operations’ revenues for the three months ended October 31, 2003 increased $3.8 million, or 24.6%, compared to the three months ended October 31, 2002. This improvement is primarily due to results in Australia, where tax returns prepared in the current quarter increased 3.2% compared to the prior year. Additionally, the average charge per return increased 1.3%.

Pretax income of $0.6 million for the quarter ended October 31, 2003, was an improvement of $0.8 million compared to the loss recorded in the second quarter last year. This improvement is due primarily to strong performance in the Australian tax season. This improvement was partially offset by unfavorable exchange rates in Canada.

Due to the seasonal nature of this segment’s business, operating results for the three months ended October 31, 2003 are not comparable to the three months ended July 31, 2003 and are not indicative of the expected results for the entire fiscal year.

International Tax Operations — Six-Month Results

Six months ended October 31, 2003 compared to October 31, 2002

International Tax Operations’ revenues for the six months ended October 31, 2003 increased $4.9 million, or 25.2%, compared to the six months ended October 31, 2002. This improvement is primarily due to results in Australia, where tax returns prepared in the current period increased 3.5% compared to the prior year and the average charge per return increased 1.4%. Canadian revenues also improved, due to increases of 6.1% in both the number of off-season returns and average charge per return.

The pretax loss of $5.9 million for the six months ended October 31, 2003, was an improvement of $0.8 million compared to the loss recorded in the prior year. Results in Australia improved as a result of better performance in the Australian tax season.

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Corporate Operations

This segment consists primarily of corporate support departments, which provide services to the Company’s operating segments. These support departments consist of marketing, information technology, facilities, human resources, executive, legal, finance, government relations and corporate communications. These support department costs are largely allocated to the Company’s operating segments. The Company’s captive insurance and franchise financing subsidiaries are also included within this segment.

Corporate Operations — Three-Month Results

Three months ended October 31, 2003 compared to October 31, 2002

Compensation and benefits decreased primarily as a result of $2.1 million of additional expenses related to deferred compensation plans in the prior year. The decrease in interest expense on acquisition debt is attributable to lower financing costs and a $45.1 million payment on acquisition debt in August 2003. Other expenses declined as a result of lower allocations of support department costs to Corporate Operations.

Information technology department expenses increased $4.4 million, or 19.6%, primarily due to an increase in headcount and related facilities. Stock-based compensation expenses increased as a result of the expensing of all stock-based compensation, which began on May 1, 2003.

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The pretax loss was $18.4 million, compared with last year’s second quarter loss of $31.5 million.

Due to the nature of this segment, the three months ended October 31, 2003 are not comparable to the three months ended July 31, 2003 and are not indicative of the expected results for the entire fiscal year.

Corporate Operations — Six-Month Results

Six months ended October 31, 2003 compared to October 31, 2002

Operating revenues increased $2.7 million as a result of a write-down of investments in the prior year.

Compensation and benefits decreased as a result of $5.5 million of additional expenses related to deferred compensation plans in the prior year. The decrease in interest expense on acquisition debt is attributable to lower financing costs and a $45.1 million payment on acquisition debt in August 2003. Other expenses decreased as a result of lower allocations to Corporate Operations.

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Information technology department expenses increased $8.7 million, or 21.0%, primarily due to an increase in headcount and related facilities. Stock-based compensation expenses increased as a result of the expensing of all stock-based compensation, which began on May 1, 2003.

The pretax loss was $43.4 million, compared with last year’s first quarter loss of $56.9 million.

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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.

The Company’s liquidity needs are met primarily through a combination of operating cash flows, commercial paper (CP) issuance and off-balance sheet financing arrangements.

OPERATING CASH FLOWS & LIQUIDITY BY SEGMENT

Operating cash requirements totaled $463.4 million and $349.8 million for the six months ended October 31, 2003 and 2002, respectively. A condensed consolidating statement of cash flows by segment for the six months ended October 31, 2003 follows. Generally, interest is not charged on intercompany activities between segments.

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Net intercompany activities are excluded from the investing and financing activities within the segment cash flows. The Company believes that by excluding the intercompany activities, the cash flows by segment more clearly depict the cash generated and used by each segment. Had the intercompany activities been included, those segments in a net lending situation would have been included in investing activities, and those in a net borrowing situation would have been included in financing activities.

U.S. Tax Operations: U.S. Tax Operations has historically been the largest provider of annual operating cash flows to the Company. This segment generally operates at a loss during the first two quarters of the fiscal year due to off-season costs and preparation activities for the upcoming tax season. The seasonal nature of U.S. Tax Operations generally results in a large positive operating cash flow in the fourth quarter. U.S. Tax Operations had total cash requirements of $389.3 million for the six months ended October 31, 2003.

Mortgage Operations: This segment generates cash as a result of loan sales and securitizations, NIM transactions, sales of NIM residual interests and as its residual interests mature. Mortgage Operations generated $28.0 million in cash from operating activities primarily from the sale and securitization of mortgage loans. This segment also generated $61.2 million in cash from investing activities primarily from cash received on residual interests, and $50.1 million in cash from financing activities as a result of the on-balance sheet securitization completed during the quarter.

Gains on sales of mortgage loans and related assets totaled $412.9 million, of which 77% was received as cash. The cash was recorded as operating activities.

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Gains on sales of mortgage assets consist of the following:

Cash received on residual interests in securitizations totaled $68.9 and $103.9 for the six months ended October 31, 2003 and 2002, respectively.

The mortgage segment regularly sells loans as a source of liquidity for its prime and non-prime mortgages. Whole loan sales to the Trusts through October 31, 2003 were $11.6 billion compared with $7.8 billion for the same period in fiscal year 2003. Additionally, Block Financial Corporation (BFC) provides the mortgage segment a $150 million line of credit for working capital needs.

In order to finance its prime originations, the Company utilizes a warehouse facility with capacity up to $50 million, which expires in June 2004. The facility bears interest at one-month LIBOR plus 64 to 175 basis points. As of October 31, 2003, the balance outstanding under this facility was $1.6 million and is included in accounts payable, accrued expenses and other on the condensed consolidated balance sheets.

Management believes the sources of liquidity available to the Mortgage Operations segment are predictable and sufficient for its needs. Risks to the stability of these sources include external events impacting the asset-backed securities market. The liquidity available from the NIM transactions is also subject to external events impacting this market. These external events include, but are not limited to, adverse changes in the perception of the non-prime industry or in the regulation of non-prime lending and, to a lesser degree, reduction in the availability of third parties that provide credit enhancement. Performance of the securitizations will also impact the segment’s future participation in these markets. The four warehouse facilities used by the Trusts are subject to annual renewal, each at a different time during the year, in April, August, December and February and any of the above events could lead to difficulty in renewing the lines. These risks are mitigated by the availability of whole loan sales and financing provided by the Company, and to a lesser extent, by staggered renewal dates related to these lines.

Business Services: Business Services funding requirements are largely related to working capital needs. Funding is available from the Company sufficient to cover these needs. This

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segment generated $13.3 million in cash from operating activities primarily related to the collections of receivables in the first half of fiscal year 2004. Business Services used $45.4 million in financing activities, primarily as a result of payments on acquisition debt.

Investment Services: Investment Services used $56.2 million in cash from operating activities during the quarter, primarily due to the timing of cash deposits that are restricted for the benefit of customers.

Investment Services, through HRBFA, is subject to regulatory requirements intended to ensure the general financial soundness and liquidity of broker-dealers. HRBFA is required to maintain minimum net capital as defined under Rule 15c3-1 of the Securities Exchange Act of 1934 and complies with the alternative capital requirement, which requires a broker-dealer to maintain net capital equal to the greater of $250 thousand or 2% of the combined aggregate debit balances arising from customer transactions. The net capital rule also provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than the greater of 5% of combined aggregate debit items or 120% of the minimum required net capital. As of October 31, 2003, HRBFA’s net capital of $120.3 million, which was 18.9% of aggregate debit items, exceeded its minimum required net capital of $12.7 million by $107.6 million. Although HRBFA has always exceeded its minimum net capital requirements, during the six months ended October 31, 2003 the Company contributed $32.0 million of additional capital to HRBFA.

To manage short-term liquidity, HRBFA maintains a $300 million unsecured credit facility with BFC, its indirect corporate parent. As of October 31, 2003 there were no outstanding balances on this facility.

Liquidity needs relating to client trading and margin-borrowing activities are met primarily through cash balances in client brokerage accounts and working capital. Management believes these sources of funds will continue to be the primary sources of liquidity for Investment Services. Stock loans have historically been used as a secondary source of funding and could be used in the future, if warranted.

Securities borrowed and securities loaned transactions are generally reported as collateralized financings. These transactions require the Company to deposit cash and/or collateral with the lender. Securities loaned consist of securities owned by customers, which were purchased on margin. When loaning securities, the Company receives cash collateral approximately equal to the value of the securities loaned. The amount of cash collateral is adjusted, as required, for market fluctuations in the value of the securities loaned. Interest rates paid on the cash collateral fluctuate as short-term interest rates change.

To satisfy the margin deposit requirement of client option transactions with the Options Clearing Corporation (OCC), Investment Services pledges customers’ margined securities. Pledged securities as of October 31, 2003 totaled $73.8 million, an excess of $18.6 million over the margin requirement.

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

International Tax Operations: International Tax Operations provided $16.3 million in cash from operating activities during the quarter primarily due to higher earnings during the Australian tax season and collections of receivables from Revenue Canada related to its discounted return program.

International Tax Operations are generally self-funded. Cash balances are held in Canada, Australia and the United Kingdom independently in local currencies. H&R Block Canada has a commercial paper program up to $125 million (Canadian). At October 31, 2003, there was no commercial paper outstanding.

CAPITAL RESOURCES

Cash used in operating activities totaled $463.4 million for the six months ended October 31, 2003, compared with $349.8 million for the six months ended October 31, 2002.

Cash expenditures during the six months ended October 31, 2003 relating to investing and financing activities include the purchase of property and equipment ($43.6 million), payments on acquisition debt ($45.1 million), payment of dividends ($68.1 million), payments related to business acquisitions ($123.3 million) and the acquisition of treasury shares ($178.8 million).

Cash and cash equivalents — restricted totaled $571.2 million at October 31, 2003. HRBFA held $527.1 million of this total segregated in a special reserve account for the exclusive benefit of customers pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934. Restricted cash held by Mortgage Operations totaled $32.6 million at October 31, 2003 as a result of cash held for outstanding commitments to fund mortgage loans. Restricted cash of $11.5 million at October 31, 2003 held by Business Services is related to funds held to pay payroll taxes on behalf of its clients.

On September 12, 2001, the Company’s Board of Directors authorized the repurchase of 15 million shares of common stock. On June 11, 2003 the Company’s Board of Directors approved an authorization to repurchase up to 20 million additional shares of its common stock. During the first half of fiscal year 2004, the Company purchased 4.1 million shares pursuant to these authorizations at an aggregate price of $177.6 million, or an average price of $42.99 per share. There are approximately 17.8 million shares remaining under the June 2003 authorization at October 31, 2003. The Company plans to continue to purchase its shares on the open market in accordance with this authorization, subject to various factors including the price of the stock, the ability to maintain progress toward a capital structure that will support a single A rating, the availability of excess cash, the ability to maintain liquidity and financial flexibility, compliance with securities laws and other investment opportunities available.

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OFF-BALANCE SHEET FINANCING ARRANGEMENTS

The Company has commitments to fund mortgage loans in its pipeline of $3.2 billion at October 31, 2003, subject to contract verification. External market forces impact the probability of loan commitments being closed, and therefore, total commitments outstanding do not necessarily represent future cash requirements. If the loan commitments are exercised, they will be funded through the Company’s off-balance sheet arrangements.

For the six months ended October 31, 2003, the final disposition of loans was 33% securitizations and 67% third-party whole loan sales. For the six months ended October 31, 2002, the final disposition of loans was 43% securitizations and 57% third-party whole loan sales.

In the second quarter of fiscal year 2004, the warehouse facilities utilized by the Trusts were increased to $5.0 billion. An additional $1.0 billion facility was added that expires in August 2004 and bears interest at one-month LIBOR plus 50 to 60 basis points. This facility is subject to similar performance triggers, limits and financial covenants as the other facilities. In November 2003, two of the existing $1.5 billion facilities were increased to $2.0 billion each, which increased the total warehouse facilities to $6.0 billion.

The Financial Accounting Standards Board (FASB) has decided to reissue its exposure draft, “Qualifying Special Purpose Entities and Isolation of Transferred Assets, an Amendment of FASB Statement No. 140,” during the first quarter of calendar year 2004. The purpose of the proposal is to provide more specific guidance on the accounting for transfers of financial assets to a QSPE.

Provisions in the first exposure draft, if adopted, may have required the Company to consolidate its current QSPEs (the Trusts) established in its Mortgage Operations segment. As of October 31, 2003, the Trusts had assets and liabilities of $3.8 billion. The provisions of the exposure draft are subject to FASB due process and are subject to change. The Company will continue to monitor the status of the exposure draft, and consider changes to current structures to comply with the proposed rules.

There have been no other material changes in the Company’s off-balance sheet financing arrangements from those reported at April 30, 2003 in the Company’s Annual Report on Form 10-K.

COMMERCIAL PAPER ISSUANCE

The Company participates in the United States and Canadian commercial paper markets to meet daily cash needs. Commercial paper is issued by BFC and H&R Block Canada, Inc., wholly owned subsidiaries of the Company.

The Company incurs short-term borrowings throughout the year primarily to fund seasonal working capital needs, dividend payments and purchases of treasury stock. Because of the seasonality of its businesses, the Company has historically had short-term borrowings throughout

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the year. Borrowings of $124.6 million were outstanding at October 31, 2003, compared with $481.6 million at October 31, 2002.

U.S. commercial paper issuances are supported by an unsecured committed line of credit (CLOC) from a consortium of twenty-four banks. The $2.0 billion CLOC is subject to annual renewal in August 2004 and has a one-year term-out provision with a maturity date in August 2005. This line is subject to various affirmative and negative covenants. This CLOC includes $1.5 billion for CP back-up and general corporate purposes and $500 million for working capital use, general corporate purposes and CP back-up. The CLOC was undrawn at October 31, 2003.

The Canadian issuances are supported by a credit facility provided by one bank in an amount not to exceed $125 million (Canadian). This line is subject to a minimum net worth covenant. The Canadian CLOC is subject to annual renewal in December 2003. The CLOC was undrawn at October 31, 2003.

Management believes the commercial paper market is stable. Risks to the stability of the Company’s commercial paper market participation would be a short-term rating downgrade, adverse changes in the Company’s financial performance, non-renewal or termination of the CLOCs, adverse publicity and operational risk within the commercial paper market. Management believes if any of these events were to occur, the CLOCs, to the extent available, could be used for an orderly exit from the commercial paper market, though at a higher cost to the Company. Additionally, the Company could turn to other sources of liquidity, including cash, debt issuance under the existing shelf registration and asset sales or securitizations.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

In fiscal year 2000, HRB Royalty, Inc. (HRB Royalty), a wholly owned subsidiary of the Company, placed most of its major franchises on notice that it would not be renewing their respective franchise agreements as of the next renewal date. The agreements have expired or will expire on varying dates in fiscal years 2004 and 2005. Pursuant to the terms of the applicable franchise agreements, HRB Royalty must pay the major franchisee a “fair and equitable price” for the franchise business and such price shall not be less than eighty percent of the franchisee’s revenues for the most recent twelve months ended April 30, plus the value of equipment and supplies, and certain off-season expenses.

During the six months ended October 31, 2003, franchise agreements of twelve major franchisees expired and subsidiaries of the Company began operating tax preparation businesses as company-owned operations in the franchise territories of ten former major franchisees. With respect to the two other franchisees with expired franchise agreements, one franchisee entered into a new franchise agreement with a limited term and one franchisee continued litigation challenging the expiration of the franchise agreement. Cash payments of $118.8 million were made or accrued related to these former major franchises during the six months ended October 31, 2003.

In August 2003, a subsidiary of the Company entered into a transaction with one of the former major franchisees whose franchise agreements expired in the first quarter, pursuant to which such subsidiary acquired the stock of the franchisee and the franchisee released the Company and its

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affiliates from any further liability regarding additional payments under the major franchise agreements. With the exceptions of the former franchisee that executed a release and the franchisee that entered into a new franchise agreement, the court will determine if any additional payments are required for these franchise businesses. The first trial relating to one major franchisee was held in October 2003. At the conclusion of this trial, the jury rendered a verdict and the court entered a judgment requiring the Company to make an additional payment of $3.2 million for the franchise business. As of October 31, 2003, the Company recorded this liability in accounts payable, accrued expenses and other on the condensed consolidated balance sheet. The original payment for the franchise business made in the first quarter of fiscal year 2004 was $5.0 million. The outcome of the trial is subject to post-trial motions and possible appeals.

In light of the continuing litigation and possible negotiation with the former major franchisees, there is no certainty regarding the ultimate amount of payments or that subsidiaries of the Company will commence operations in all of the remaining former major franchise territories. Moreover, it is possible that HRB Royalty and certain former franchisees could agree to other arrangements, some of which may not require payments for the franchise businesses or any related assets.

There have been no other material changes in the Company’s contractual obligations and commercial commitments from those reported at April 30, 2003 in the Company’s Annual Report on Form 10-K.

REGULATORY ENVIRONMENT

Certain state laws restrict or prohibit prepayment penalties on mortgage loans, and the Company relied on the federal Alternative Mortgage Transactions Parity Act (Parity Act) and related rules issued in the past by the Office of Thrift Supervision (OTS) to preempt state limitations on prepayment penalties. The Parity Act was enacted to extend to financial institutions, other than federally chartered depository institutions, the federal preemption that federally chartered depository institutions enjoy. However, in September 2002, the OTS released a new rule that reduced the scope of the Parity Act preemption effective July 1, 2003 and, as a result, the Company can no longer rely on the Parity Act to preempt state restrictions on prepayment penalties. The elimination of this federal preemption requires compliance with state restrictions on prepayment penalties. These restrictions prohibit the Company from charging any prepayment penalty in six states and restrict the amount or duration of prepayment penalties that the Company may impose in an additional eleven states. This places the Company at a competitive disadvantage relative to financial institutions that continue to enjoy federal preemption of such state restrictions. Such institutions can charge prepayment penalties without regard to state restrictions and, as a result, may be able to offer loans with interest rate and loan fee structures that are more attractive than the interest rate and loan fee structures that the Company is able to offer. It is estimated that the net impact to Mortgage Operations will be a reduction in revenues of approximately $35.0 million in fiscal year 2004 as a result of the elimination of prepayment penalties.

The United States, various state, local, provincial and foreign governments and some self-regulatory organizations have enacted statutes and ordinances, and/or adopted rules and

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regulations, regulating aspects of the businesses in which the Company’s subsidiaries are involved, including, but not limited to, commercial income tax return preparers, income tax courses, the electronic filing of income tax returns, the facilitation of refund anticipation loans, loan originations and assistance in loan originations, mortgage lending, privacy, consumer protection, franchising, sales methods, brokers, broker-dealers and various aspects of securities transactions, financial planners, investment advisors, accountants and the accounting practice. The Company’s subsidiaries seek to determine the applicability of such statutes, ordinances, rules and regulations (collectively, Laws) and comply with those Laws that apply to their activities. From time to time in the ordinary course of business, the Company and its subsidiaries receive inquiries from governmental and self-regulatory agencies regarding the applicability of Laws to the products and services offered by the Company’s subsidiaries. In response to past inquiries, the Company’s subsidiaries have agreed to comply with such Laws, convinced the authorities that such Laws were not applicable or that compliance already exists, and/or modified such subsidiaries’ activities in the applicable jurisdiction to avoid the application of all or certain parts of such Laws. The Company’s management believes that the past resolution of such inquiries and its ongoing compliance with Laws have not had a material adverse effect on the consolidated financial statements of the Company and its subsidiaries. The Company cannot predict what effect future Laws, changes in interpretations of existing Laws, or the results of future regulator inquiries with respect to the applicability of Laws may have on the Company’s subsidiaries, the consolidated financial statements of the Company and its subsidiaries.

FORWARD-LOOKING INFORMATION

The information contained in this Form 10-Q and the exhibits hereto may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based upon current information, expectations, estimates and projections regarding the Company, the industries and markets in which the Company operates, and management’s assumptions and beliefs relating thereto. Words such as “will,” “plan,” “expect,” “remain,” “intend,” “estimate,” “approximate,” and variations thereof and similar expressions are intended to identify such forward-looking statements. 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 that are difficult to predict. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in such forward-looking statements. Such differences could be caused by a number of factors including, but not limited to, the uncertainty of laws, legislation, regulations, supervision and licensing by Federal, state and local authorities and self-regulatory organizations and their impact on any lines of business in which the Company’s subsidiaries are involved; unforeseen compliance costs; the uncertainty that the Company will achieve or exceed its revenue, income and earnings per share growth goals and expectations for fiscal year 2004; the uncertainty that actual fiscal year 2004 financial results will fall within the guidance provided by the Company; the uncertainty that the growth rate for mortgage originations in the Mortgage Operations segment will equal or exceed the growth rate experienced in fiscal year 2003 or the first and second quarters of fiscal year 2004; the uncertainty as to the effect on the consolidated financial statements of the adoption of accounting pronouncements; risks associated with sources of liquidity for each of the lines of business of the Company; changes in interest rates; changes in economic, political or regulatory environments; changes in competition and the effects of such

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changes; the inability to implement the Company’s strategies; changes in management and management strategies; the Company’s inability to successfully design, create, modify and operate its computer systems and networks; the uncertainty of assumptions utilized to estimate cash flows from residual interests in securitizations and mortgage servicing rights; the uncertainty of assumptions and criteria used in the testing of goodwill and long-lived assets for impairment; litigation involving the Company and its subsidiaries; the uncertainty as to the outcome of any litigation; the uncertainty as to the timing or cost of commencement of operations in former major franchise territories or the fair and equitable price to be paid for any major franchise business; and risks described from time to time in reports and registration statements filed by the Company and its subsidiaries with the Securities and Exchange Commission. Readers should take these factors into account in evaluating any such forward-looking statements. The Company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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There have been no material changes in market risk from those reported at April 30, 2003 in the Company’s Annual Report on Form 10-K.

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Disclosure controls and procedures are controls and other procedures that are designed to ensure information required to be disclosed in reports filed or submitted under the Securities Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosures.

In conjunction with management, including the Chief Executive Officer and Principal Accounting Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, the Chief Executive Officer and Principal Accounting Officer have concluded these controls and procedures are effective. There have been no significant changes in internal controls, or in other factors, which would significantly affect these controls subsequent to the date of evaluation.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

RAL Litigation

The Company reported in current reports on Forms 8-K, previous quarterly reports on Form 10-Q and in its annual report on Form 10-K for the year ended April 30, 2003, certain events and information relating to class action litigation and putative class action litigation involving its

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subsidiaries’ refund anticipation loan programs (collectively, “RAL Cases”). The Company has defended numerous class action and putative class action lawsuits filed against it involving the RAL program and a variety of legal theories asserted by plaintiffs. The amounts claimed in these lawsuits have been substantial in some instances. Of the cases that are no longer pending, some were dismissed on the Company’s motions for dismissal or summary judgment, some were dismissed voluntarily by the plaintiffs after a denial of class certification, and some were settled. Two RAL Cases involving statewide classes (discussed below) had final trial court approvals of settlements during the first six months of fiscal year 2004 and two other RAL Cases were dismissed in August 2003 in connection with one of those settlements. One new putative class action RAL Case was filed in August 2003. The Company continues to believe it has meritorious defenses to the RAL Cases and intends to defend the remaining RAL Cases vigorously. However, there can be no assurances as to the outcome of the pending RAL Cases individually or in the aggregate, and there can be no assurances on and the impact of the RAL Cases on the Company’s financial position. The following is updated information regarding the pending RAL Cases in which developments occurred during or after the three months ended October 31, 2003:

Ronnie and Nancy Haese, et al. v. H&R Block Inc., et al., Case No. CV96-4213, District Court of Kleberg County, Texas, (“Haese I”) and Ronnie and Nancy Haese, et al. v. H&R Block Inc., et al., Case No. CV-99-314-D, District Court of Kleberg County, Texas (“Haese II”), filed originally as one action on July 30, 1996. On November 19, 2002, the Company announced that a settlement had been reached pursuant to which the Company and its major franchisee will issue coupons to class members that may be redeemed over a five-consecutive-year period following final approval of the settlement and once all appeals have been exhausted. Each class member will receive a packet containing 15 coupons under the settlement. Three coupons will be redeemable each year — one for a $20 rebate on tax preparation or electronic filing services at Block offices, one that may be redeemed for TaxCut Platinum tax preparation software (or a product of equivalent value), and one that may be redeemed for Tax Planning Advisor, a tax planning book (or a product of equivalent value). The settlement also provides that defendants will be responsible for the payment of court-approved legal fees up to $49 million and expenses of class counsel up to $900,000. As a result of the settlement announcement, the Company recorded a liability and pretax expense of $41.7 million during the second quarter of fiscal year 2003, which represented, at that time, the Company’s best estimate of its share of the settlement cost for plaintiff class attorneys’ fees and expenses, tax products and associated mailing expenses. The Company paid the award of $49.9 million of attorneys’ fees and expenses to class counsel on August 22, 2003. During the fourth quarter of fiscal year 2003 and prior to the filing of the final settlement agreement with the court and any motions for approval of the settlement and legal fees and expenses of class counsel, the plaintiffs had filed a motion asking the Texas court to direct that $26 million of awarded class counsel fees be paid to the plaintiff class members. A hearing on the final approval of the settlement agreement was held on June 24, 2003, and the judge entered a final judgment on June 24, 2003 fully and finally approving the settlement agreement, finding it fair, adequate and reasonable and that it protects the rights of the class, is in the best interests of the settlement class and meets all criteria required by Texas law. As a part of the final judgment, the court also (1) dismissed with prejudice the claims of class members who obtained RALs in Texas during the period from 1992 through 1996; (2) granted defendants’ Supplemental Motion for Summary Judgment as to class members who only

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obtained RALs from 1988 through 1991, and ordered that such defendants take nothing on their claims against the defendants; (3) granted defendants’ Motion to Compel Arbitration as to those members of the class who obtained a RAL for the first time from 1997 to 2002, and dismissed the claims of those class members without prejudice as to those members’ rights to pursue those claims through binding arbitration; (4) vacated its January 30, 1998 Order pertaining to arbitration clauses and contacts with the class; and (5) withdrew its rulings as to fiduciary duty, breach or the nature of the breach thereof, and for forfeiture as reflected in the Court’s November 6, 2002 letter. In a separate Order dated June 24, 2003, the Court found that the awarding of attorneys’ and expenses was appropriate and ordered that class counsel and objectors’ class counsel be awarded attorneys’ fees in the amount of $49.0 million on condition that, upon payment of the fees to class counsels’ trust account, class counsel shall pay $26.0 million of the attorneys’ fees to the class members pursuant to an approved distribution plan. The Order also provided that $100,000 from the award of attorneys’ fees be used to create a cy pres fund pursuant to an approved cy pres plan and specified the manner in which the remaining award of attorneys’ fees was to be distributed among the class counsel and objectors’ class counsel. There were no appeals of such final judgment and Order relating to attorneys’ fees and expenses. In addition to the liability that has already been recorded and/or paid, the Company will reduce revenues associated with tax preparation services as the coupons are redeemed each year. Distribution of the settlement coupons was made following the end of the second quarter.

Haese II arose from plaintiffs’ splitting off some claims from Haese I and, in connection with the settlement of Haese I, the case was dismissed on August 20, 2003.

Veronica I. Martinez, et al. v. H&R Block, Inc., et al., Case No. 02-3629-E in the District Court of Nueces County, Texas, was dismissed on August 20, 2003, in accordance with the settlement agreement involved in the settlement of Haese I.

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. On April 15, 2003, the District Court judge declined to approve a $25 million settlement of this matter, finding that counsel for the settlement plaintiffs had been inadequate representatives of the plaintiff class and failed to sustain their burden of showing that the settlement was fair. The judge appointed new counsel for the plaintiffs in May 2003 and named their client, Lynne Carnegie, as lead plaintiff. The new counsel for the plaintiffs filed an amended complaint and a motion for partial summary judgment during the quarter ended July 31, 2003. The defendants filed a motion to dismiss, a brief in response to allegations in the plaintiffs’ amended complaint relating to class certification, and responses to plaintiffs’ motion for partial summary judgment. Extensive discovery is proceeding. In the fourth quarter of fiscal year 2003, the Company recorded a receivable in the amount of its $12.5 million share of the settlement fund and recorded a reserve of $12.5 million consistent with the existing settlement authority of the Board of Directors. The defendants requested the release of the escrowed settlement fund and the Company’s $12.5 million share of such fund was received during the second quarter of fiscal year 2004. The Company intends to defend the case vigorously and there are no assurances that the matter will result in a settlement or as to the amount of any settlement.

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Belinda Peterson, et al. v. H&R Block Tax Services, Inc., Case No. 95CH2389, in the Circuit Court of Cook County, Illinois. A settlement was reached in April 2003 involving an estimated maximum total amount of $295,000. As a part of the settlement, class members who submit a claim will receive $25 in cash, with a guaranteed minimum total payout of $40,000 and a maximum total payout of $55,000. Class counsel will receive $220,000, the named class representative will receive $5,000, and it is expected that it will cost up to $15,000 to administer the settlement. Preliminary approval of the settlement was granted on June 12, 2003 and notices of the settlement and claim forms have been sent to the class. The settlement was approved and a judgment entered after a final fairness hearing held in October 2003.

Levon and Geral Mitchell, et al. v. H&R Block and Ruth R. Wren, Case No. CV-95-2067, in the Circuit Court of Mobile County, Alabama. The court granted plaintiffs’ motion for class certification during the quarter ended July 31, 2003, and the defendants filed their notice of appeal regarding such certification on August 14, 2003.

Roy Carbajal, et al. v. H&R Block Tax Services, Inc., et al., Case No. 00C-0626 in the United States District Court for the Northern District of Illinois. The defendants’ motion to compel arbitration was granted on September 16, 2003, and the case was dismissed. Plaintiffs have appealed.

Abby Thomas, et al. v. Beneficial National Bank, H&R Block, Inc., et al., Case No. 4:03-CV-00775 GTE in the United States District Court for the Eastern District of Arkansas, Western Division, was originally filed in the Circuit Court for Phillips County, Arkansas on August 12, 2003, and was subsequently removed to federal court. It is a putative class action alleging fraudulent misrepresentation, fraudulent concealment, dual agency, breach of fiduciary duty, violation of Arkansas Deceptive and Unconscionable Trade Practices Law, violation of Arkansas’ Secret Payments or Allowance of Rebates and Refunds Law, unjust enrichment, breach of contract and deceit in connection with the RAL program. The complaint requests that the court certify a nationwide class of all persons who obtained a RAL from September 1987 through December 1997, who do not have an arbitration provision in their contract. It also seeks a subclass of class members who are 60 years of age or older, or who are Disabled Persons under Arkansas Statutes section 4-88-201. Plaintiffs seek an unspecified amount of damages, restitution, equitable relief, attorneys’ fees, and costs of court. Defendants have moved to dismiss and compel arbitration. Plaintiffs thereafter filed an amended complaint and a motion to remand the case to state court. On December 8, 2003, the federal court denied plaintiffs’ motion to remand.

Dennis J. Smith v. H&R Block, et al., Case No. 3:03CV7181 in the United States District Court for the Northern District of Ohio, Western Division. The Company was not served with the original complaint filed in the matter. The Company was served with an amended complaint in November 2003, alleging RICO violations, fraud, breach of fiduciary duties, negligence, conversion, and violation of Ohio consumer fraud statutes as a result of the wrongful deprivation of all or part of plaintiff’s tax refunds under the “Rapid Refund” program. The complaint generally alleges violations of the Fair Debt Collection Practices Act and appears to relate to the

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cross-collection of prior RAL debt by banks involved in the RAL program or the refund anticipation check program. The amended complaint does not include any class allegations.

Shareholder Matter

Paul White, et al. v. H&R Block, et al., consolidated Case Numbers 02CV8965, 02CV9661, 02CV9682 and 02CV9830, respectively, in the United States District Court for the Southern District of New York, involves four cases in which the respective named plaintiffs seek to represent a class of shareholders who purchased the Company’s stock between November 8, 1997 and November 6, 2002, and allege that the Company and certain of its current and former officers and directors violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by failing to disclose to shareholders various cases in which the Company had been sued regarding the RAL program, by failing to set adequate reserves for those cases, and by failing to disclose the supposed implications of those cases for the future of the RAL program. The four securities law cases were all assigned to the same judge and consolidated for pre-trial matters. A consolidated complaint was filed in March 2003 and the defendants responded by filing a motion to dismiss in April 2003. In response to defendants’ motion to dismiss, plaintiffs informed defendants that they desired further to amend their complaint. Defendants consented to the filing of an amended complaint as a pleading matter, the plaintiffs filed the amended complaint, and the defendants filed a motion to dismiss it in August 2003. The Company believes the claims in these actions are without merit and intends to defend them vigorously.

Peace of Mind Litigation

Lorie J. Marshall, et al. v. H&R Block Tax Services, Inc., et al., Civil Action 2002L000004, in the Circuit Court of Madison County, Illinois, is a class action case filed on January 18, 2002, as to which the court granted plaintiffs’ first amended motion for class certification on August 27, 2003. Plaintiffs’ claims consist of five counts relating to the defendants’ Peace of Mind program under which the applicable tax return preparation subsidiary assumes liability for the cost of additional tax assessments attributable to tax return preparation error. The plaintiffs allege that defendants’ sale of its Peace of Mind guarantee constitutes statutory fraud by selling insurance without a license, an unfair trade practice, by omission and by “cramming’ (i.e., charging customers for the guarantee even though they did not request it and/or did not want it), and constitutes a breach of fiduciary duty. A hearing on the motion to certify both a nationwide plaintiff class and a nationwide defendant class was held on August 14, 2003, and, on August 27, 2003, the court certified the following plaintiff classes: (1) all persons who were charged a separate fee for Peace of Mind by “H&R Block” or a defendant H&R Block class member from January 1, 1997 to final judgment; (2) all persons who reside in certain class states and who were charged a separate fee for Peace of Mind by “H&R Block,” or a defendant H&R Block class member, and that was not licensed to sell insurance, from January 1, 1997 to final judgment; and (3) all persons who had an unsolicited charge for Peace of Mind posted to their bills by “H&R Block” or a defendant H&R Block class member from January 1, 1997, to final judgment. Among those excluded from the plaintiff classes are all persons who received the Peace of Mind guarantee through an H&R Block Premium office and all persons who reside in Texas and Alabama. The court also certified a defendant class consisting of any entity with the names

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“H&R Block” or “HRB” in its name, or otherwise affiliated or associated with H&R Block Tax Services, Inc., and which sold or sells the Peace of Mind product. Defendants have filed a motion asking the trial court to certify the class certification issues for interlocutory appeal.

There are two other putative class actions pending against the Company in Texas and Alabama that involve the Peace of Mind guarantee. The Texas case involves the same attorneys for the plaintiffs as are involved in the Marshall litigation in Illinois and substantially similar allegations. The Alabama case involves allegations of selling insurance without of license in connection with the Peace of Mind program, the erroneous preparation of income tax returns that subjected plaintiffs to audits, failure to provide assistance in responding to auditors’ requests, failure to pay the penalties, interest, and additional taxes under Block’s standard guarantee and Peace of Mind programs, unjust enrichment, and breach of contract. No classes have been certified in either of these two cases. The Company believes the claims in these Peace of Mind actions are without merit and intends to defend them vigorously. However, there can be no assurances as to the outcome of these pending actions individually or in the aggregate, and there can be no assurances on the impact of these actions on the Company’s financial condition.

Franchise Litigation

The Company is a named defendant in litigation entitled William R. Smith, Inc., et al. v. H&R Block, Inc., et al., Case No. 99-CV-206379, pending in the Circuit Court of Jackson County, Missouri (previously known as Armstrong Business Services, Inc., et al. v. H&R Block, Inc., et al.). The action was filed by certain “major” franchisees against the Company and certain of its subsidiaries relating to alleged breaches of contract and other matters. The Company’s subsidiary, HRB Royalty, Inc., the franchisor under the applicable franchise agreements, filed a counterclaim and subsequently a motion for summary judgment seeking a declaration that HRB Royalty, Inc. could elect not to renew the major franchise agreements when their present five-year terms came to an end. Such motion for summary judgment was granted in March 2001 and upheld on appeal. HRB Royalty notified the plaintiff major franchisees in 2000 that it did not intend to renew their franchise agreements at the expiration of the current renewal terms and that the agreements would terminate at that time. The renewal dates vary among the franchisees. Pursuant to the franchise agreements, HRB Royalty must pay a “fair and equitable price” to the franchisee for franchisee’s franchise business, and such price must be no less than 80% of the franchisee’s revenues for the most recent 12 months ended April 30, plus the value of equipment and supplies, and certain off-season expenses. The Circuit Court ruled in May 2003 that major franchise agreements with renewal terms scheduled to expire prior to July 1, 2003, will expire on July 1, 2003, and other major franchise agreements will expire as their renewal terms expire commencing in September 2003 and ending in fiscal year 2005. The Court ordered defendants to pay for the franchise businesses as provided in the franchise agreements on the applicable dates of expiration. During the six months ended October 31, 2003, franchise agreements of twelve major franchisees expired and subsidiaries of the Company began operating tax preparation businesses as company-owned operations in the franchise territories previously operated by ten former major franchisees. Cash payments of $118.8 million were made or accrued related to these former major franchise businesses during the six months ended October 31, 2003. In August 2003, a subsidiary of the Company entered into a transaction with one of the major franchisees whose franchise agreements had expired in the first quarter, pursuant to which such

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subsidiary acquired the stock of the franchisee and the franchisee released the Company and its affiliates from any further liability regarding additional payments under the major franchise agreements. In addition, during the first quarter of fiscal year 2004, a Company subsidiary and one major franchise entered into a new franchise agreement with a limited term and a release of the Company and its affiliates from any liability in the litigation, including any liability regarding payments for the franchise business under the prior major franchise agreement. With the exception of the franchisees that have executed releases and the franchisee that entered into a new franchise agreement, the court will determine if any additional payments are required for these franchise businesses. There is no certainty as to the timing and final cost of commencement of operations in the former major franchise territories or the payments of fair and equitable prices for the franchise businesses.

In Smith, plaintiffs’ claims against the Company and its subsidiaries remain in the trial court. In their second amended petition, the plaintiffs seek in excess of $20 million in actual damages, punitive damages, unspecified statutory damages, declaratory, injunctive and other relief, including attorneys’ fees under allegations of breach of contract, breach of the covenant of good faith and fair dealing, unfair business practices, state anti-trust violations, breach of fiduciary duty, prima facie tort, violations of various state franchise statutes, fraud and misrepresentation, waiver and estoppel, ambiguity and reformation, relief with respect to a post-termination covenant not to compete in the franchise agreements, and a request for a fair and equitable payment upon nonrenewal of the franchise agreements. The major franchisees allege, among other things, that the sale of TaxCut income tax return preparation software and online tax services and the purchase of accounting firms encroached on their exclusive franchise territories. The defendants believe that the allegations against them are without merit and continue to defend the case vigorously. Management believes that amounts, if any, required to be paid by the Company and its subsidiaries in the discharge of liabilities or settlements relating to these claims of the plaintiffs in this litigation will not have a material adverse effect on the Company’s consolidated results of operations, cash flows or financial position.

The trial involving one of the plaintiffs in the Smith litigation took place in October 2003 and involved the issues relating to that plaintiff’s claims against the Company and to determine if any additional payments are required to provide the former franchisee with a fair and equitable price for the franchise business. The jury rendered a verdict of $0.9 million in favor of the plaintiff on the plaintiff’s claims against the Company and a verdict of $3.2 million with respect to additional payments for the franchise business. A subsidiary of the Company had made a payment of $5.0 million to such plaintiff as payment for the franchise business in the first quarter of fiscal year 2004. The outcome of the trial is subject to post-trial motions and possible appeals. The next trial to take place as part of the Smith litigation is scheduled for May 2004.

Other Claims and Litigation

The Company and its subsidiaries have from time to time been party to claims and lawsuits not discussed herein arising out of its business operations, including additional claims and lawsuits concerning RALs and the Peace of Mind guarantee program, and claims and lawsuits concerning the preparation of customers’ income tax returns, the electronic filing of customers’ tax returns, the fees charged customers for various products and services, losses incurred by customers with

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respect to their investment accounts, relationships with franchisees, denials of mortgage loans, contested mortgage foreclosures, other aspects of the mortgage business, intellectual property disputes, and contract disputes. Such lawsuits include actions by individual plaintiffs, as well as cases in which plaintiffs seek to represent a class of similarly situated customers. The amounts claimed in these claims and lawsuits are substantial in some instances and the ultimate liability with respect to such litigation and claims is difficult to predict. The Company’s management considers these cases to be ordinary, routine litigation incidental to its business, believes and Company and its subsidiaries have meritorious defenses to each of them, and is defending, or intends to defend, them vigorously. While management cannot provide assurance that the Company and its subsidiaries will ultimately prevail in each instance, management believes that amounts, if any, required to be paid by the Company and its subsidiaries in the discharge of liabilities or settlements in these other matters will not have a material adverse effect on the Company’s consolidated results of operations or financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The annual meeting of shareholders of the registrant was held on September 10, 2003. At such meeting, three Class II directors were elected to serve three-year terms. In addition, the proposals set forth below were submitted to a vote of shareholders. With respect to the election of directors and the adoption of each proposal, the number of votes cast for, against or withheld, the number of abstentions, and the number of no votes (if applicable) were as follows:

At the close of business on July 8, 2003, the record date for the annual meeting of shareholders, there were 180,313,591 shares of Common Stock of the registrant outstanding and entitled to vote at the meeting. There were 156,432,481 shares represented at the annual meeting of shareholders held on September 10, 2003.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

a) Exhibits

b) Reports on Form 8-K

The registrant filed a current report on Form 8-K dated August 27, 2003, reporting under Item 12 thereof its issuance of a press release announcing the results of operations for its first quarter ending July 31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Exhibit Index

 

                                                                    EXHIBIT 10.1

                              TERMINATION AGREEMENT

         THIS TERMINATION AGREEMENT (the "Agreement") is entered into as of the
3rd day of September, 2003, by and between HRB Management, Inc., a Missouri
corporation ("HRB"), and Frank J. Cotroneo ("Cotroneo").

                                   ARTICLE ONE

                            TERMINATION OF EMPLOYMENT

         1. Mutual Agreement to Terminate Employment Agreement. HRB and Cotroneo
acknowledge and agree that they are parties to an Employment Agreement dated
January 26, 2000 (the "Employment Agreement"), and that they desire to terminate
Cotroneo's employment under the Employment Agreement by this Agreement. The
parties agree that such termination of employment is mutual and shall not be
considered a termination for or without "cause" or for "good reason" (as such
terms are defined in the Employment Agreement), except as noted for the sole
purpose described in Section 4(a)(iii) of this Agreement. Such employment and
the Employment Agreement will terminate effective as of the close of business on
October 31, 2003, or such earlier date as is mutually agreed upon by the parties
in writing (the "Termination Date"). By this Agreement, the parties agree to
waive any notice of termination required by the Employment Agreement.

         2. Surviving Obligations. Notwithstanding the above, the termination of
Cotroneo's employment will not affect the following provisions of the Employment
Agreement which, by their express terms as set forth therein, impose continuing
obligations on one or more of the parties following termination of the
Employment Agreement:

              o   Article Two, "Confidentiality," Sections 2.01, 2.02

              o   Article Three, "Non-Hiring; No Conflicts; Noncompetition,"
                  Sections 3.01, 3.02, 3.04, 3.05

              o   Article Four, "Miscellaneous," Section 4.06.

         3. Resignation as Officer.

         (a) Cotroneo will resign (i) as Senior Vice President and Chief
Financial Officer of H&R Block, Inc. ("Block") and (ii) from any and all officer
and director positions held with HRB and all other subsidiaries of Block (all
such other subsidiaries of Block, collectively "Affiliates" and individually an
"Affiliate"). Such resignations will be effective as of the Termination Date,
except as provided in Section 3(b) of this Agreement. Cotroneo will execute
resignations in the form attached hereto as Exhibit A contemporaneously with his
execution of this Agreement.

         (b) Cotroneo acknowledges that Block is undertaking a search for a new
Chief Financial Officer and, in the event Block is prepared to elect a new Chief
Financial Officer prior to the Termination Date, Cotroneo agrees to accelerate
his resignation as Senior Vice President and Chief Financial Officer of Block
and execute a new resignation effective as of the date Block elects such new
Chief Financial Officer. Such accelerated resignation shall have no effect on
Cotroneo's continued employment with HRB through the Termination Date


                                       1


and shall not provide grounds for Cotroneo to terminate the Employment Agreement
for "good reason."

         4. Continued Employment: Compensation and Benefits.

         (a) In consideration of Cotroneo's promises herein, HRB agrees to
continue to employ Cotroneo through the Termination Date, and that Cotroneo will
be paid his base salary (at the rate of $389,000 per year) and benefits as of
the date of this Agreement through the Termination Date. Upon Cotroneo's
execution of the release agreement attached hereto as Exhibit B (the "Release
Agreement") on the Termination Date, HRB will agree to provide the
compensation and benefits as follows and as described in the Release Agreement
on the terms described therein:

                  (i) In further consideration for Cotroneo's promises herein,
         HRB will pay to Cotroneo $301,476 (which amount represents an aggregate
         of one-half of Cotroneo's (A) annual base salary and (B) target
         short-term incentive compensation for HRB's fiscal year 2004, each
         determined as of the date of this Agreement) over the 6-month period
         beginning on the Termination Date in semi-monthly equal installments of
         $25,123 (less required tax withholdings and elected benefit
         withholdings). Such payments shall not encompass payment to Cotroneo
         for any unused vacation or other paid time off accrued as of the
         Termination Date, payment for which will be made in accordance with
         HRB's policy as soon as administratively feasible after the Termination
         Date.

                  (ii) Cotroneo will remain eligible to participate in those
         health and welfare plans maintained by HRB offering medical, dental,
         vision, employee assistance, flexible spending account, life insurance,
         and accidental death and dismemberment insurance benefits during the
         6-month period beginning on the Termination Date on the same basis as
         employees of HRB, after which Cotroneo may be eligible to continue
         coverage of those benefits provided under group health plans in
         accordance with his rights under Section 4980B of the Internal Revenue
         Code.

                  (iii) For the limited purpose of permitting Cotroneo to
         exercise those stock options to purchase shares of Block's common stock
         granted to Cotroneo by Block ("Stock Options") that are outstanding and
         exercisable as of the Termination Date, for the first 3 months after
         the Termination Date, HRB agrees to characterize Cotroneo's termination
         of employment as a termination of employment by HRB without "cause."
         Such characterization shall have no effect on the number of Stock
         Options outstanding and exercisable as of the Termination Date. A list
         of the Stock Options existing and exercisable as of the date of this
         Agreement is attached hereto as Exhibit C.

         (b) The compensation and benefits described in Section 4(a) of this
Agreement will cease and no further compensation and benefits will be provided
to Cotroneo under the Release Agreement if Cotroneo knowingly violates any of
his post-employment obligations as set forth in Sections 2 and 6 of this
Agreement. If Cotroneo unknowingly violates any of his post-employment
obligations as set forth in Sections 2 and 6 of this Agreement, Cotroneo agrees
to take such actions as are necessary to correct the violation(s) once he is
made aware of the violation(s).

                                       2


         (c) The parties agree that, in accordance with Section 1.06(c) of the
Employment Agreement, HRB shall have no further financial obligations to
Cotroneo under the Employment Agreement and no further payments of base salary
or other compensation or benefits shall be payable by HRB to Cotroneo, except
(i) as required by the express terms of any written benefit plans or written
arrangements maintained by HRB and applicable to Cotroneo as of the Termination
Date, (ii) as may be required by law, or (iii) as have been mutually agreed upon
between the parties in this Agreement.

         (d) Upon Cotroneo's execution of the Release Agreement on the
Termination Date, HRB, on behalf of itself, Block, and Affiliates, will on the
Termination Date also execute the Release Agreement as provided for therein.

         5. Business Expenses: Commitments. HRB will promptly pay directly, or
reimburse Cotroneo for, all business expenses to the extent such expenses are
paid or incurred by Cotroneo during the term of the Employment Agreement in
accordance with HRB's policy in effect from time to time and to the extent such
expenses were reasonable and necessary to the conduct by Cotroneo of HRB's
business. During the period from the date of this Agreement through the
Termination Date and at all times thereafter, Cotroneo will not initiate, make,
renew, confirm or ratify any contracts or commitments for or on behalf of Block,
HRB or any Affiliate without Block's prior written consent.

         6. Cotroneo's Responsibilities.

         (a) During the period from the date of this Agreement through the
Termination Date, Cotroneo will act in a manner consistent with the standards of
conduct and performance he has observed during his employment with HRB and will
cooperate with management of Block, HRB and any Affiliate as requested in
providing information regarding areas of his expertise and experience with
Block. Cotroneo acknowledges that his employment responsibilities may be reduced
prior to the Termination Date at HRB's sole discretion and that any such
reduction in employment responsibilities shall not provide grounds for Cotroneo
to terminate the Employment Agreement for "good reason."

         (b) After the Termination Date and for a period of one year thereafter,
in the event a (i) claim is asserted against Block, HRB or any Affiliate and/or
their respective employees, agents, officers, or directors or (ii) a government
investigation is commenced with respect to Block, HRB or any Affiliate and/or
their respective employees, agents, officers, or directors, Cotroneo will,
without compensation, except for reimbursement for any out-of-pocket expenses,
provide reasonable assistance and cooperation with Block, HRB and Affiliates in
connection with such a claim or government investigation. Thereafter Cotroneo
will similarly assist and cooperate with Block, HRB and/or Affiliates, for which
he will be reimbursed for his costs and paid reasonable compensation for his
time, as agreed upon by the parties, except in litigation matters where Cotroneo
is a named party. In such cases Cotroneo will continue to provide reasonable
cooperation, as requested, and will receive reimbursement for his costs, but
receive no compensation for his time.

         (c) Cotroneo will not at any time or in any manner (i) defame Block,
HRB, or any Affiliate or their respective past or present directors and
employees, (ii) make disparaging statements to the media, or to any employee or
contractor of Block, HRB or any other Affiliate, concerning Block, HRB or any
Affiliate, their respective past or present directors


                                       3


and employees concerning any matter related to his employment or non-employment,
or (iii) do any deliberate act designed primarily to injure the business or
reputation of Block, HRB or any Affiliate. Nothing in this provision shall be
construed to prevent Cotroneo from responding to a subpoena or other lawfully
issued summons, or from providing truthful information to any law enforcement or
administrative agency or prospective employer; or from making appropriate
disclosures to counsel for Block, HRB, or any Affiliate, to Block's external
auditors, or to the Audit Committee of the Board of Directors of Block, as to
any subject within the scope of Cotroneo's employment. Cotroneo agrees that any
information permitted to be provided to a prospective employer pursuant to the
prior sentence will not include information required to be held confidential in
accordance with his post-employment obligations set forth in Section 2 of this
Agreement.

          7. HRB's Responsibilities. Neither HRB, Block, any Affiliates, nor any
of their senior executive officers or directors will at any time or in any
manner (i) defame Cotroneo, (ii) make disparaging statements to the media or to
any employee or contractor of HRB, Block or Affiliates regarding Cotroneo, his
performance, character, status or any other personal or professional matter, or
(iii) do any deliberate act designed in whole or in part to injure, embarrass or
damage Cotroneo's reputation, or interfere with his ability to obtain new
employment. HRB and Cotroneo agree that HRB will respond to inquiries from
Cotroneo's prospective new employers by providing the letter attached hereto as
Exhibit D, and will otherwise only act consistently with its then-current
practice of providing certain limited information to prospective employers of
former employees. Cotroneo agrees that furnishing such letter and complying with
such practice shall not constitute interference with his ability to obtain new
employment. Nothing in this provision shall be construed to prevent HRB, Block,
or any Affiliates from responding to a subpoena or other lawfully issued
summons, or from providing truthful information to any law enforcement or
administrative agency.

         8. Third-Party Beneficiary. The parties hereto agree that Block is a
third-party beneficiary as to the obligations imposed upon Cotroneo under the
Employment Agreement and this Agreement and as to the rights and privileges to
which HRB is entitled pursuant to the Employment Agreement and this Agreement,
and that Block is entitled to all of the rights and privileges associated with
such third-party-beneficiary status.

         9. Successors and Assigns. This Agreement and each of its provisions
will be binding upon Cotroneo and the heirs, executors, successors and
administrators of Cotroneo or his estate and property, and will inure to the
benefit of HRB, Block and their successors and assigns. Cotroneo may not assign
or transfer to others the obligation to perform his duties hereunder.

         10. Specific Performance. The parties acknowledge that money damages
alone will not adequately compensate HRB, Block or Cotroneo for breach of any of
the covenants and agreements herein and, therefore, in the event of the breach
or threatened breach of any such covenant or agreement by either party, in
addition to all other remedies available at law, in equity or otherwise, a
wronged party will be entitled to injunctive relief compelling specific
performance of (or other compliance with) the terms hereof.

         11. Disputes. In the event that after the parties have executed this
Agreement, there is a dispute or disagreement between the pates as to the
interpretation, implementation or enforcement of any aspect of this Agreement,
the parties agree to submit

                                       4


such dispute or disagreement to non-binding mediation. In the event any such
dispute or disagreement is not resolved by mediation, the prevailing party in
any subsequent litigation shall be entitled to reimbursement for reasonable
legal fees that party expended in the mediation and litigation.

         12. Entire Agreement. This Agreement, the Release Agreement (if such
Release Agreement is fully executed), and the surviving post-termination
obligations of the Employment Agreement constitute the entire agreement and
understanding between HRB and Cotroneo concerning the subject matter hereof. No
modification, amendment, termination, or waiver of this Agreement will be
binding unless in writing and signed by Cotroneo and a duly authorized officer
of HRB. Failure of HRB, Block or Cotroneo to insist upon strict compliance with
any of the terms, covenants, or conditions hereof will not be deemed a waiver of
such terms, covenants, and conditions.

         13. Notices. Notices hereunder will be deemed delivered five days
following deposit thereof in the United States mail (postage prepaid) addressed
to Cotroneo at 11709 High Drive, Leawood, Kansas 66211; and to HRB at 4400 Main
Street, Kansas City, Missouri 64111; Attn: Mark A. Ernst, with a copy to James
H. Ingraham, Esq., H&R Block, Inc., 4400 Main Street, Kansas City, Missouri
64111; or to such other address and/or person designated by any party in writing
to the other parties.

         14. Counterparts. This Agreement may be signed in counterparts and
delivered by facsimile transmission confirmed promptly thereafter by actual
delivery of executed counterparts.

          Executed as a sealed instrument under, and to be governed by,
construed and enforced in accordance with, the laws of the State of Missouri.


/s/ Frank J. Cotroneo
- ---------------------
Frank J. Cotroneo

Dated:   9/4/03
       ----------

HRB Management, Inc.
a Missouri corporation


By: /s/ Mark A. Ernst
    ------------------
    Mark A. Ernst
    President and Chief Executive Officer

Dated: 4 Sept. 03
       ----------

                                       5


                                    EXHIBIT A

                                   RESIGNATION


TO: The Board of Directors of [Name of Company]:
                              -----------------
         Effective October 31, 2003, I hereby resign as [position] of [Name of
Company], a [Name of State] corporation.


Dated:
       --------------------------                 ------------------------------
                                                  Frank J. Cotroneo



                                      A-1


                                    EXHIBIT B

                                RELEASE AGREEMENT

         THIS RELEASE AGREEMENT ("this Release Agreement") is entered into as of
the 31st day of October 2003, by and between HRB Management, Inc., a Missouri
corporation ("HRB"), and Frank J. Cotroneo ("Cotroneo").

         WHEREAS, HRB and Cotroneo are parties to an Agreement dated as of
September 3, 2003, under which the parties mutually agreed to terminate the
Employment Agreement dated January 26, 2000, by and between HRB and Cotroneo
(the "Employment Agreement"), and Cotroneo's employment thereunder (the
"Termination Agreement").

          NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the sufficiency of which is hereby acknowledged, the
pates agree as follows:

         1. Release by Cotroneo. In consideration of HRB's promise to Cotroneo
of the compensation and benefits specified in Section 5 of this Release
Agreement and Section 4 of the Termination Agreement, Cotroneo for himself and
for his relations, heirs, legal representatives, and assigns unconditionally
releases and forever discharges H&R Block, Inc. ("Block"), HRB and each other
subsidiary of Block (each such other subsidiary an "Affiliate"), their
respective present and past directors, officers, employees, agents,
predecessors, successors, and assigns of and from any and all claims, demands,
actions, causes of action and suits of any kind whatsoever, whether under
federal or state statute, local regulation or at common law or which thereafter
arise from any matter, fact, circumstance, event, happening or thing whatsoever
occurring or failing to occur prior to the date of this Release Agreement
involving Cotroneo's employment by HRB or any Affiliate, including, without
limitation, Cotroneo's hiring, compensation earned as of or before the date of
this Release Agreement, the termination of Cotroneo's responsibilities as an
officer of Block and as a director and/or officer of HRB and each Affiliate,
Cotroneo's termination as an employee of HRB, other obligations of Block, HRB or
any Affiliate (except for those obligations expressly stated in this Release
Agreement, the post-termination provisions of the Employment Agreement or
applicable benefit plans), and further including, but not limited to, any claims
for race, sex or age discrimination under the Age Discrimination in Employment
Act, as amended ("ADEA"), Title VII of the Civil Rights Act of 1964, the 1991
amendments of such Civil Rights Act, the Americans with Disabilities Act, as
amended, and all other federal and state statutes and common law doctrines.

         2. Release by HRB.

         (a) Except as provided in Section 2(b) of this Release Agreement, HRB
for itself and for its present and past directors, officers, employees,
predecessors, successors, assigns and Affiliates hereby unconditionally releases
and forever discharges Cotroneo, his relations, assigns, heirs, legal
representatives, of and from any and all claims, demands, actions, causes of
action and suits of any kind whatsoever, whether under federal or state statute,
local regulation or at common law or which thereafter arise from any matter,
fact, circumstance, event, happening or thing whatsoever occurring or failing to
occur prior to the date of this


                                      B-1


Release Agreement involving Cotroneo's employment by HRB or any Affiliate, and
the performance of his responsibilities under the Employment Agreement.

         (b) The release described in Section 2(a) of this Release Agreement
does not include a release of (i) Cotroneo's obligations under that certain
letter dated March 31, 2003, addressed to James H. Ingraham attached hereto as
Exhibit I, and (ii) any claims, demands, actions, causes of action and suits of
any kind whatsoever involving acts of fraud, or embezzlement, whether known or
unknown as of the date of this Release Agreement. The Company expressly
represents that it has no knowledge or belief at this time that Cotroneo engaged
in any such conduct.

         3. Consideration of Release of ADEA Claims. With regard to the
waiver/release of rights or claims under the ADEA, Cotroneo acknowledges and
understands that this is a legal document and that he is legally entitled to,
and has been offered, a period of twenty-one (21) days (the "Consideration
Period") to consider the waiver/release of such rights or claims under this
Release Agreement before signing it. After signing this Release Agreement,
Cotroneo may revoke the waiver/release of rights or claims under the ADEA by
giving written notice ("Revocation Notice") to Mark A. Ernst, 4400 Main Street,
Kansas City, Missouri 64111, within seven (7) days after the date of signing
(such seven (7) day period, the "Revocation Period" and such date of signing,
the "Signing Date"). For such revocation to be effective, the Revocation Notice
must be received no later than 5:00 p.m., Kansas City, Missouri time, on the
seventh (7th) day after the Signing Date. If Cotroneo provides the Revocation
Notice to HRB, this Release Agreement will be null, void and unenforceable by
either party, and HRB will have no obligation to make any payments or provide
any benefits to Cotroneo hereunder.

         4. Acknowledgements. COTRONEO ALSO ACKNOWLEDGES THAT HRB HAS ADVISED
HIM TO CONSULT WITH AN ATTORNEY PRIOR TO SIGNING THIS RELEASE AGREEMENT OR
BEFORE THE EXPIRATION OF THE REVOCATION PERIOD. COTRONEO SPECIFICALLY
ACKNOWLEDGES AND AGREES THAT EITHER THE FULL TWENTY-ONE (21) DAY CONSIDERATION
PERIOD HAS LAPSED OR HE HAS BEEN OFFERED SUCH TWENTY-ONE (21) DAY CONSIDERATION
PERIOD BUT HAS ELECTED TO WAIVE AND FOREGO ALL OF THE APPLICABLE DAYS WHICH HAVE
NOT YET LAPSED IN SUCH TWENTY-ONE (21) DAY CONSIDERATION PERIOD. COTRONEO
ACKNOWLEDGES AND AGREES THAT UPON SUCH CONSIDERATION HE HAS DECIDED TO WAIVE AND
RELEASE ANY CLAIMS HE MAY HAVE UNDER THE ADEA, PURSUANT TO THE TERMS OF THIS
RELEASE AGREEMENT.

         5. Compensation and Benefits. The parties agree that Cotroneo will
receive the compensation and benefits from HRB after the Termination Date
provided for in Sections 4 (a) and (if) of the Termination Agreement.

         6. Termination of Compensation and Benefits. The compensation and
benefits described in Section 4 of the Termination Agreement will cease and no
further compensation and benefits will be provided to Cotroneo under this
Release Agreement if Cotroneo knowingly violates any of his obligations under
Sections 2 and 6 of the Termination Agreement. If Cotroneo unknowingly violates
any of his obligations under Sections 2 and 6 of the Termination Agreement,
Cotroneo agrees to take such actions as are necessary to correct the
violation(s) once he is made aware of the violation(s).

         7. This Release Agreement shall not affect the rights and obligations
of the parties under the Termination Agreement.


                                      B-2


         8. Successors and Assigns. This Release Agreement and each of its
provisions will be binding upon Cotroneo and the heirs, executors, successors,
and administrators of Cotroneo or his estate and property, and shall inure to
the benefit of HRB, Block and their successors and assigns. Cotroneo may not
assign or transfer to others the obligation to perform his duties hereunder.
Executed as a sealed instrument under, and to be governed by, construed and
enforced in accordance with, the laws of the State of Missouri.




- -----------------------------------------
Frank J. Cotroneo

Dated:
       --------------


HRB Management, Inc.
a Missouri corporation


By:
    -------------------------------------
    Mark A. Ernst
    President and Chief Executive Officer

Dated:
       -------------


                                      B-3


                                    EXHIBIT I


James H. Ingraham
Senior Vice President and General Counsel
H&R Block, Inc.
4400 Main Street
Kansas City, MO 64111

Re: Undertaking

Dear Mr. Ingraham:

I understand that the Board of Directors of H&R Block, Inc. (the "Company") has
determined to indemnify me, to the fullest extent permissible under Missouri law
and the Company's Bylaws, in connection with the recently-filed securities class
action naming me as a co-defendant, including White v. H&R Block, Inc. et al,
Smith v. H&R Block, Inc. et al, Rodney v. H&R Block, Inc., et al, McCormack v.
H&R Block, Inc. et al, and any other related case (collectively, the "RAL
Disclosure Litigation"). I also understand that the Company will pay, on my
behalf and as they accrue, all expenses incurred in defending the RAL Disclosure
Litigation prior to its final disposition.

I hereby undertake to repay such amounts advanced by the Company on my behalf
unless it shall ultimately be determined (whether by the Board of Directors or
otherwise) that I am entitled to be indemnified because I acted in good faith
and in a manner I reasonably believed to be in, or not opposed, to the best
interests of the Company.


Very truly yours,


/s/ FRANK J. COTRONEO
- ---------------------
Frank J. Cotroneo


Dated: 3/31/03
       -------




                                    EXHIBIT C

OPTIONEE STATEMENT                                               H&R BLOCK. INC.

                           EXERCISABLE AS OF 9/3/2003



FRANK J. COTRONEO




                                                        OPTIONS                 OPTIONS/DATE
 GRANT      EXPIRATION                GRANT           GRANTED OR       OPTION    TRANSFERRED    OPTIONS         OPTIONS
  DATE        DATE      PLAN ID       TYPE          TRANSFERRED TO      PRICE        OUT      OUTSTANDING     EXERCISABLE
 -----      ----------  -------       ----          --------------     ------   ------------  -----------     -----------

                                                                                   
2/21/2000   2/21/2010    84 1       Incentive            14,856        $20.1875                 14,856      14,856    CURRENT
2/21/2000   2/21/2010    84 1       Non-Qualified        25,144        $20.1875                 25,144       25,14    CURRENT
6/30/2000   6/30/2010    84 1       Incentive                 1        $16.1875                      1           1    CURRENT
6/30/2000   6/30/2010    84 1       Non-Qualified        69,999        $16.1875                 23,333      23,333    CURRENT
6/30/2001   6/30/2011    84 1       Incentive             3,098        $32.2750                  3,098           0    CURRENT
                                                                                                             3,098 on 06/30/2006
6/30/2001   6/30/2011    84 1       Non-Qualified        66,902        $32.2750                 43,570           0    CURRENT
                                                                                                            23,334 on 06/30/2005
                                                                                                            20,236 on 06/30/2006
6/30/2002   6/30/2012    84 1       Incentive             4,332        $46.1500                  4,332           0    CURRENT
                                                                                                             2,166 on 06/30/2004
                                                                                                             2,166 on 06/30/2005
6/30/2002   6/30/2012    84 1       Non-Qualified        50,668        $46.1500                 50,638           0    CURRENT
                                                                                                            16,171 on 06/30/2004
                                                                                                            16,165 on 06/30/2005
                                                                                                            18,332 on 06/30/2006
6/30/2003   6/30/2013    84 1       Non-Qualified        45,000        $43.2500                 45,000           0    CURRENT
                                                                                                            15,000 on 06/30/2004
                                                                                                            15,000 on 06/30/2005
                                                                                                            16,000 on 06/30/2008

Optionee Totals                                         280,000                                210,002      63,334





                                    EXHIBIT D

                                REFERENCE LETTER

To Whom It May Concern:

         Frank Cotroneo was Senior Vice-President and Chief Financial Officer of
H&R Block from February 21, 2000 to October 31, 2003. During his tenure, Mr.
Cotroneo was an integral member of our management team. Frank left to pursue
other opportunities, and his departure was amicable. We wish him well.


                                         Sincerely yours,


                                         Mark A. Ernst

                                                                    EXHIBIT 10.2

                                 H&R BLOCK, INC.

                   2003 LONG-TERM EXECUTIVE COMPENSATION PLAN
                         (AS AMENDED SEPTEMBER 10, 2003)

         1. PURPOSES. The purposes of this 2003 Long-Term Executive Compensation
Plan are to provide incentives and rewards to those employees largely
responsible for the success and growth of H&R Block, Inc. and its subsidiary
corporations, and to assist all such corporations in attracting and retaining
executives and other key employees with experience and ability.

         2. DEFINITIONS.

         (a) AWARD means one or more of the following: shares of Common Stock,
Restricted Shares, Stock Options, Incentive Stock Options, Stock Appreciation
Rights, Performance Shares, Performance Units and any other rights which may be
granted to a Recipient under the Plan.

         (b) COMMITTEE means the Compensation Committee described in Section 3.

         (c) COMMON STOCK means the Common Stock, without par value, of the
Company.

         (d) COMPANY means H&R Block, Inc., a Missouri corporation, and, unless
the context otherwise requires, includes its "subsidiary corporations" (as
defined in Section 424(f) of the Internal Revenue Code) and their respective
divisions, departments and subsidiaries and the respective divisions,
departments and subsidiaries of such subsidiaries.

         (e) INCENTIVE STOCK OPTION means a Stock Option which meets all of the
requirements of an "incentive stock option" as defined in Section 422(b) of the
Internal Revenue Code.

         (f) INTERNAL REVENUE CODE means the Internal Revenue Code of 1986, as
now in effect or hereafter amended.

         (g) PERFORMANCE PERIOD means that period of time specified by the
Committee during which a Recipient must satisfy any designated performance goals
in order to receive an Award.

         (h) PERFORMANCE SHARE means the right to receive, upon satisfying
designated performance goals within a Performance Period, shares of Common
Stock, cash, or a combination of cash and shares of Common Stock, based on the
market value of shares of Common Stock covered by such Performance Shares at the
close of the Performance Period.

         (i) PERFORMANCE UNIT means the right to receive, upon satisfying
designated performance goals within a Performance Period, shares of Common
Stock, cash, or a combination of cash and shares of Common Stock.

         (j) PLAN means this 2003 Long-Term Executive Compensation Plan, as the
same may be amended from time to time.

         (k) RECIPIENT means an employee of the Company who has been granted an
Award under the Plan.

                                      C-1


         (l) RESTRICTED SHARE means a share of Common Stock issued to a
Recipient hereunder subject to such terms and conditions, including, without
limitation, forfeiture or resale to the Company, and to such restrictions
against sale, transfer or other disposition, as the Committee may determine at
the time of issuance.

         (m) STOCK APPRECIATION RIGHT means the right to receive, upon exercise
of a stock appreciation right granted under this Plan, shares of Common Stock,
cash, or a combination of cash and shares of Common Stock, based on the increase
in the market value of the shares of Common Stock covered by such stock
appreciation right from the initial day of the Performance Period for such stock
appreciation right to the date of exercise.

         (n) STOCK OPTION means the right to purchase, upon exercise of a stock
option granted under this Plan, shares of the Company's Common Stock.

         3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee which shall consist of directors of the Company, to be appointed by
and to serve at the pleasure of the Board of Directors of the Company. A
majority of the Committee members shall constitute a quorum and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee, shall be valid acts of
the Committee, however designated, or the Board of Directors of the Company if
the Board has not appointed a Committee.

         The Committee shall have full power and authority to construe,
interpret and administer the Plan and, subject to the powers herein specifically
reserved to the Board of Directors and subject to the other provisions of this
Plan, to make determinations which shall be final, conclusive and binding upon
all persons including, without limitation, the Company, the shareholders of the
Company, the Board of Directors, the Recipients and any persons having any
interest in any Awards which may be granted under the Plan. The Committee shall
impose such additional conditions upon the grant and exercise of Awards under
this Plan as may from time to time be deemed necessary or advisable, in the
opinion of counsel to the Company, to comply with applicable laws and
regulations. The Committee from time to time may adopt rules and regulations for
carrying out the Plan and written policies for implementation of the Plan. Such
policies may include, but need not be limited to, the type, size and terms of
Awards to be made to Recipients and the conditions for payment of such Awards.

         4. ABSOLUTE DISCRETION. The Committee may, in its sole and absolute
discretion (subject to the Committee's power to delegate certain authority in
accordance with the second paragraph of this Section 4), at any time and from
time to time during the continuance of the Plan, (i) determine which employees
of the Company shall be granted Awards under the Plan, (ii) grant to any
employee so selected such an Award, (iii) determine the type, size and terms of
Awards to be granted (subject to Sections 6, 10 and 11 hereof), (iv) establish
objectives and conditions for receipt of Awards, (v) place conditions or
restrictions on the payment or exercise of Awards, and (vi) do all other things
necessary and proper to carry out the intentions of this Plan; provided,
however, that, in each and every case, those Awards which are Incentive Stock
Options shall contain and be subject to those requirements specified in Section
422 of the Internal Revenue Code and shall be granted only to those employees
eligible thereunder to receive the same.

         The Committee may at any time and from time to time delegate to the
Chief Executive Officer of the Company authority to take any or all of the
actions that may be taken by the Committee as specified in this Section 4 or in
other sections of the Plan in connection with the determination of Recipients,
types, sizes, terms and conditions of Awards under the Plan and the grant of any
such Awards, provided that any authority so delegated (a) shall apply only to
Awards to employees of the Company that are not officers of


                                      C-2


Company under Regulation Section 240.16a-1(f) promulgated pursuant to Section 16
of the Securities Exchange Act of 1934, and (b) shall be exercised only in
accordance with the Plan and such rules, regulations, guidelines, and
limitations as the Committee shall prescribe.

         5. ELIGIBILITY. Awards may be granted to any employee of the Company.
No member of the Committee (other than any ex officio member) shall be eligible
for grants of Awards under the Plan. An employee may be granted multiple forms
of Awards under the Plan. Incentive Stock Options may be granted under the Plan
to a Recipient during any calendar year only if the aggregate fair market value
(determined as of the date the Incentive Stock Option is granted) of Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by such Recipient during any calendar year under the Plan and any
other "incentive stock option plans" (as defined in the Internal Revenue Code)
maintained by the Company does not exceed the sum of $100,000.

         6. STOCK SUBJECT TO THE PLAN. The total number of shares of Common
Stock issuable under this Plan may not at any time exceed 5,000,000 shares,
subject to adjustment as provided herein. All of such shares may be issued or
issuable in connection with the exercise of Incentive Stock Options. Shares of
Common Stock not actually issued pursuant to an Award shall be available for
future Awards. Shares of Common Stock to be delivered or purchased under the
Plan may be either authorized but unissued Common Stock or treasury shares. The
total number of shares of Common Stock that may be subject to one or more Awards
granted to any one Recipient during a calendar year may not exceed 500,000,
subject to adjustment as provided in Section 16 of the Plan.

         7. AWARDS.

         (a) Awards under the Plan may include, but need not be limited to,
shares of Common Stock, Restricted Shares, Stock Options, Incentive Stock
Options, Stock Appreciation Rights, Performance Shares and Performance Units.
The amount of each Award may be based upon the market value of a share of Common
Stock. The Committee may make any other type of Award which it shall determine
is consistent with the objectives and limitations of the Plan.

         (b) The Committee may establish performance goals to be achieved within
such Performance Periods as may be selected by it using such measures of the
performance of the Company as it may select as a condition to the receipt of any
Award.

         8. VESTING REQUIREMENTS. The Committee may determine that all or a
portion of an Award or a payment to a Recipient pursuant to an Award, in any
form whatsoever, shall be vested at such times and upon such terms as may be
selected by it.

         9. DEFERRED PAYMENTS AND DIVIDEND AND INTEREST EQUIVALENTS.

         (a) The Committee may determine that the receipt of all or a portion of
an Award or a payment to a Recipient pursuant to an Award, in any form
whatsoever, shall be deferred. Deferrals shall be for such periods and upon such
terms as the Committee may determine.

         (b) The Committee may provide, in its sole and absolute discretion,
that a Recipient to whom an Award is payable in whole or in part at a future
time in shares of Common Stock shall be entitled to receive an amount per share
equal in value to the cash dividends paid per share on issued and outstanding
shares as of the dividend record dates occurring during the period from the date
of the Award to the date of delivery of such share to the Recipient. The
Committee may also authorize, in its sole and absolute discretion, payment of an
amount which a Recipient


                                      C-3


would have received in interest on (i) any Award payable at a future time in
cash during the period from the date of the Award to the date of payment, and
(ii) any cash dividends paid on issued and outstanding shares as of the dividend
record dates occurring during the period from the date of an Award to the date
of delivery of shares pursuant to the Award. Any amounts provided under this
subsection shall be payable in such manner, at such time or times, and subject
to such terms and conditions as the Committee may determine in its sole and
absolute discretion.

         10. STOCK OPTION PRICE. The purchase price per share of Common Stock
under each Stock Option shall be determined by the Committee, but shall not be
less than market value (as determined by the Committee) of one share of Common
Stock on the date the Stock Option or Incentive Stock Option is granted. Payment
for exercise of any Stock Option granted hereunder shall be made (a) in cash, or
(b) by delivery of Common Stock having a market value equal to the aggregate
option price, or (c) by a combination of payment of cash and delivery of Common
Stock in amounts such that the amount of cash plus the market value of the
Common Stock equals the aggregate option price.

         11. STOCK APPRECIATION RIGHT VALUE. The base value per share of Common
Stock covered by an Award in the form of a Stock Appreciation Right shall be the
market value of one share of Common Stock on the date the Award is granted.

         12. CONTINUATION OF EMPLOYMENT. The Committee shall require that a
Recipient be an employee of the Company at the time an Award is paid or
exercised. The Committee may provide for the termination of an outstanding Award
if a Recipient ceases to be an employee of the Company and may establish such
other provisions with respect to the termination or disposition of an Award on
the death or retirement of a Recipient as it, in its sole discretion, deems
advisable. The Committee shall have the sole power to determine the date of any
circumstances which shall constitute a cessation of employment and to determine
whether such cessation is the result of retirement, death or any other reason.

         13. REGISTRATION OF STOCK. Each Award shall be subject to the
requirement that if at any time the Committee shall determine that qualification
or registration under any state or federal law of the shares of Common Stock,
Restricted Shares, Stock Options, Incentive Stock Options, or other securities
thereby covered or the consent or approval of any governmental regulatory body
is necessary or desirable as a condition of or in connection with the granting
of such Award or the purchase of shares thereunder, the Award may not be paid or
exercised in whole or in part unless and until such qualification, registration,
consent or approval shall have been effected or obtained free of any conditions
the Committee, in its discretion, deems unacceptable.

         14. EMPLOYMENT STATUS. No Award shall be construed as imposing upon the
Company the obligation to continue the employment of a Recipient. No employee or
other person shall have any claim or right to be granted an Award under the
Plan.

         15. ASSIGNABILITY. No Award granted pursuant to the Plan shall be
transferable or assignable by the Recipient other than by will or the laws of
descent and distribution and during the lifetime of the Recipient shall be
exercisable or payable only by or to him or her.

         16. DILUTION OR OTHER ADJUSTMENTS. In the event of any changes in the
capital structure of the Company, including but not limited to a change
resulting from a stock dividend or split-up, or combination or reclassification
of shares, the Board of Directors shall make such equitable adjustments with
respect to Awards or any provisions of this Plan as it deems necessary and
appropriate, including, if necessary, any adjustment in the maximum number of
shares of

                                      C-4


Common Stock subject to the Plan, the maximum number of shares that may be
subject to one or more Awards granted to any one Recipient during a calendar
year, or the number of shares of Common Stock subject to an outstanding Award.

         17. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. If the
Company shall become a party to any corporate merger, consolidation, major
acquisition of property for stock, reorganization, or liquidation, the Board of
Directors shall make such arrangements it deems advisable with respect to
outstanding Awards, which shall be binding upon the Recipients of outstanding
Awards, including, but not limited to, the substitution of new Awards for any
Awards then outstanding, the assumption of any such Awards and the termination
of or payment for such Awards.

         18. WITHHOLDING TAXES. The Company shall have the right to deduct from
all Awards hereunder paid in cash any federal, state, local or foreign taxes
required by law to be withheld with respect to such Awards and, with respect to
Awards paid in other than cash, to require the payment (through withholding from
the Recipient's salary or otherwise) of any such taxes. Subject to such
conditions as the Committee may establish, Awards payable in shares of Common
Stock, or in the form of an Incentive Stock Option or Stock Option, may provide
that the Recipients thereof may elect, in accordance with any applicable
regulations, to satisfy all or any part of the tax required to be withheld by
the Company in connection with such Award, or the exercise of such Incentive
Stock Option or Stock Option, by electing to have the Company withhold a number
of shares of Common Stock awarded, or purchased pursuant to such exercise,
having a fair market value on the date the tax withholding is required to be
made equal to or less than the amount required to be withheld.

         19. COSTS AND EXPENSES. The cost and expenses of administering the Plan
shall be borne by the Company and not charged to any Award or to any Recipient.

         20. FUNDING OF PLAN. The Plan shall be unfunded. The Company shall not
be required to establish any special or separate fund or to make any other
segregation of assets to assure the payment of any Award under the Plan.

         21. AWARD CONTRACTS. The Committee shall have the power to specify the
form of Award contracts to be granted from time to time pursuant to and in
accordance with the provisions of the Plan and such contracts shall be final,
conclusive and binding upon the Company, the shareholders of the Company and the
Recipients. No Recipient shall have or acquire any rights under the Plan except
such as are evidenced by a duly executed contract in the form thus specified. No
Recipient shall have any rights as a holder of Common Stock with respect to
Awards hereunder unless and until certificates for shares of Common Stock or
Restricted Shares are issued to the Recipient.

         22. GUIDELINES. The Board of Directors of the Company shall have the
power to provide guidelines for administration of the Plan by the Committee and
to make any changes in such guidelines as from time to time the Board deems
necessary.

         23. AMENDMENT AND DISCONTINUANCE. The Board of Directors of the Company
shall have the right at any time during the continuance of the Plan to amend,
modify, supplement, suspend or terminate the Plan, provided that in the absence
of the approval of the holders of a majority of the shares of Common Stock of
the Company present in person or by proxy at a duly constituted meeting of
shareholders of the Company, no such amendment, modification or supplement shall
(i) increase the aggregate number of shares which may be issued under the Plan,
unless such increase is by reason of any change in capital structure referred to
in Section 16


                                      C-5


hereof, (ii) change the termination date of the Plan provided in Section 24,
(iii) delete or amend the market value restrictions contained in Sections 10 and
11 hereof, (iv) materially modify the requirements as to eligibility for
participation in the Plan, or (v) materially increase the benefits accruing to
participants under the Plan, and provided further, that no amendment,
modification or termination of the Plan shall in any manner affect any Award of
any kind theretofore granted under the Plan without the consent of the Recipient
of the Award, unless such amendment, modification or termination is by reason of
any change in capital structure referred to in Section 16 hereof or unless the
same is by reason of the matters referred to in Section 17 hereof.

         24. TERMINATION. The Committee may grant Awards at any time prior to
July 1, 2013, on which date this Plan will terminate except as to Awards then
outstanding hereunder, which Awards shall remain in effect until they have
expired according to their terms or until July 1, 2023, whichever first occurs.
No Incentive Stock Option shall be exercisable later than 10 years following the
date it is granted.

         25. APPROVAL. This Plan shall take effect July 1, 2003, contingent upon
prior approval by the shareholders of the Company.


                                      C-6

                                                                    EXHIBIT 31.1

                            CERTIFICATION PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Mark A. Ernst, Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of H&R Block, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.


Date: December 10, 2003                                /s/ MARK A. ERNST
                                                       -------------------------
                                                       Mark A. Ernst
                                                       Chief Executive Officer
                                                       H&R Block, Inc.

                                                                    EXHIBIT 31.2

                            CERTIFICATION PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Melanie K. Coleman, Principal Accounting Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of H&R Block, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.


Date: December 10, 2003                         /s/ MELANIE K. COLEMAN
                                                --------------------------------
                                                Melanie K. Coleman
                                                Principal Accounting Officer
                                                H&R Block, Inc.

                                                                    EXHIBIT 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the quarterly report of H&R Block, Inc. (the
"Company") on Form 10-Q for the period ending October 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Mark A.
Ernst, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:

         (1)      The Report fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (2)      The information contained in the Report fairly presents, in
                  all material respects, the financial condition and results of
                  operations of the Company.



                                               /s/ MARK A. ERNST
                                               ---------------------------------
                                               Mark A. Ernst
                                               Chief Executive Officer
                                               H&R Block, Inc.
                                               December 10, 2003

                                                                    EXHIBIT 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the quarterly report of H&R Block, Inc. (the
"Company") on Form 10-Q for the period ending October 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Melanie
K. Coleman, Principal Accounting Officer of the Company, certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

         (1)      The Report fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (2)      The information contained in the Report fairly presents, in
                  all material respects, the financial condition and results of
                  operations of the Company.


                                               /s/ MELANIE K. COLEMAN
                                               ---------------------------------
                                               Melanie K. Coleman
                                               Principal Accounting Officer
                                               H&R Block, Inc.
                                               December 10, 2003