UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended: April 30, 2007

OR

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

For the transition period from                      to                     

Commission File Number: 1-6089

H&R Block, Inc.

(Exact name of registrant as specified in its charter)

MISSOURI		44-0607856
(State or other jurisdiction of		(I.R.S. Employer Identification Number)
incorporation or organization)

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

(816) 854-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, without par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the registrant’s Common Stock (all voting stock) held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold on October 31, 2006, was $7,009,044,680.

Number of shares of registrant’s Common Stock, without par value, outstanding on May 31, 2007: 323,406,988.

Documents incorporated by reference

     The definitive proxy statement relating to the registrant’s Annual Meeting of Shareholders, to be held September 6, 2007, is incorporated by reference in Part III to the extent described therein.

 

 

2007 FORM 10-K AND ANNUAL REPORT

TABLE OF CONTENTS

Introduction and Forward Looking Statements			3
PART I
Item 1. Business			3
Item 1A. Risk Factors			15
Item 1B. Unresolved Staff Comments			19
Item 2. Properties			20
Item 3. Legal Proceedings			20
Item 4. Submission of Matters to a Vote of Security Holders			22
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			23
Item 6. Selected Financial Data			24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			49
Item 8. Financial Statements and Supplementary Data			53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			97
Item 9A. Controls and Procedures			97
Item 9B. Other Information			97
PART III
Item 10. Directors and Executive Officers of the Registrant			98
Item 11. Executive Compensation			99
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			99
Item 13. Certain Relationships and Related Transactions			99
Item 14. Principal Accounting Fees and Services			99
PART IV
Item 15. Exhibits and Financial Statement Schedules			99
Signatures			101
Exhibit Index			102
Form of 2003 Long-Term Executive Compensation Plan Award Agreement
Severance Plan
Amendment to the Severance Plan
Employment Agreement
Bridge Credit and Guarantee Agreement
Supplemental Indenture
Amendment to Amended and Restated Sale and Servicing Agreement
Amendment to Amended and Restated Sale and Servicing Agreement
Amendment to the Amended and Restated Note Purchase Agreement
Amendment to the Amended and Restated Indenture
Amendment to the Pricing Side Letter
Amendment to the Amended and Restated Indenture
Amended and Restated Pricing Side Letter
Amendment to the Pricing Letter
Computation of Ratio of Earnings to Fixed Charges
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Certification
Certification
Certification
Certification

INTRODUCTION AND FORWARD LOOKING STATEMENTS

Specified portions of our proxy statement, which will be filed in July 2007, are listed as “incorporated by reference” in response to certain items. Our proxy statement will be printed within our Annual Report and mailed to shareholders in July 2007 and will also be available on our website at www.hrblock.com.

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

PART I

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF BUSINESS –

H&R Block, Inc. is a financial services company with subsidiaries providing tax, investment, mortgage, and accounting and business consulting services and products. Our Tax Services segment provides income tax return preparation and other services and products related to tax return preparation to the general public in the United States, Canada and Australia. Our Business Services segment is a national accounting, tax and business consulting firm primarily serving mid-sized businesses under the RSM McGladrey name. Our Consumer Financial Services segment offers brokerage services, along with investment planning and related financial advice through H&R Block Financial Advisors and full-service banking through H&R Block Bank. Our mortgage operations offer a full range of home mortgage services through Option One Mortgage Corporation and H&R Block Mortgage Corporation. See additional discussion of our plans to dispose of our mortgage operations in “Recent Developments.”

H&R BLOCK’S MISSION –

“To help our clients achieve their financial

objectives by serving as their tax

and financial partner.”

     We serve our clients’ financial needs through the consistent high quality delivery of a variety of tax and financial services. Operating through multiple lines of business allows us to better meet the changing financial needs of our clients.

     H&R Block, Inc. was organized as a corporation in 1955 under the laws of the State of Missouri, and is a holding company with operating subsidiaries providing financial services and products to the general public. “H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context. A complete list of our subsidiaries can be found in Exhibit 21.

     RECENT DEVELOPMENTS – H&R Block Bank (HRB Bank) commenced operations on May 1, 2006, at which time H&R Block, Inc. became a savings and loan holding company. At that time, we also realigned certain segments of our business to reflect a new management reporting structure. The previously reported Investment Services segment and HRB Bank have been combined in the Consumer Financial Services segment. See “Description of Business” for additional information on this new segment.

     Conditions in the non-prime mortgage industry were challenging throughout fiscal year 2007, and particularly in our fourth quarter. Our mortgage operations, as well as the entire industry, were impacted by deteriorating conditions in the secondary market, where reduced investor demand for loan purchases, higher investor yield requirements and increased estimates for future losses reduced the value of non-prime loans. Under these conditions non-prime originators generally reported significant increases in losses and many were unable to meet their financial obligations. During the fourth quarter we tightened our underwriting standards, which had the effect of reducing our loan origination volumes, but we expect will result in the origination of higher quality loans with better pricing in the secondary markets.

     Our discontinued operations reported a pretax loss of $1.2 billion, which includes losses of $50.2 million from our Business Services and Tax Services discontinued operations, with the remainder from our mortgage business. The results of our mortgage operations include $388.7 million in loss provisions and repurchase reserves, impairments of residual interests of $168.9 million and impairments of other assets totaling $345.8 million.

     If conditions in the industry, particularly in home appreciation, continue to decline, our future results would continue to be negatively impacted. See additional discussion of the performance of our mortgage operations in Item 7, under “Discontinued Operations.”

     DISCONTINUED OPERATIONS. On November 6, 2006 we announced we would evaluate strategic alternatives for Option One Mortgage Corporation (OOMC), including a possible sale or other transaction through the public markets. On April 19, 2007, we entered into an agreement to sell OOMC for cash consideration approximately equal to the fair value of the adjusted tangible net assets of OOMC (as defined by the agreement) at closing less $300.0 million. The agreement provides for us to receive one-half of OOMC’s cumulative net income from its origination business for the 18 months following the closing, up to a maximum of $300.0 million, but no less than zero. The OOMC agreement is subject to various closing conditions and may be terminated by either party if the transaction does not close by December 31, 2007. In conjunction with this plan, we also announced we would terminate the operations of H&R Block Mortgage Corporation (HRBMC). We recorded impairments relating to the disposition of our mortgage businesses during the fourth quarter of fiscal year 2007 of $345.8 million, including the full impairment of goodwill of $152.5 million. Because the final sale price will be based on third-party bids and valuations received at closing, and because market conditions may change significantly during the period prior to closing, the value of the adjusted tangible net assets of the business at closing may be significantly different than the value as of April 30, 2007. Any such changes could impact the final impairment amount recorded at closing. We expect the sale of OOMC to close during the second quarter of fiscal year 2008. See discussion of additional conditions of the sale in Item 1A, under “Potential Sale Transaction.”

     During fiscal year 2007, we committed to a plan to sell and/or completed the wind-down of three smaller lines of business previously reported in our Business Services segment, as well as our tax operations in the United Kingdom previously reported in Tax Services. We recorded an additional impairment of $5.0 million related to these businesses.

     During fiscal year 2007, we met the criteria requiring us to present the related financial results of these businesses as discontinued operations and the assets and liabilities of all of the businesses being sold as held-for-sale in the consolidated financial statements. All periods presented have been reclassified to reflect our discontinued operations.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS –

See discussion below and in Item 8, note 21 to our consolidated financial statements.

DESCRIPTION OF BUSINESS –

TAX SERVICES

GENERAL – Our Tax Services segment is primarily engaged in providing tax return preparation and related services and products in the United States and its territories, Canada and Australia. Revenues include fees earned for services performed at company-owned retail tax offices, royalties from franchise retail tax offices, sales of Peace of Mind (POM) guarantees, sales of tax preparation and other software, fees from online tax preparation, and participation in refund anticipation loans (RALs) and Instant Money Advance Loans (IMALs). Segment revenues constituted 66.8% of our consolidated revenues of continuing operations for fiscal year 2007, 68.5% for 2006, and 74.9% for 2005.

     Retail income tax return preparation and related services are provided by tax professionals via a system of retail offices operated directly by us or by franchisees. We also offer our services through seasonal offices located inside major retailers.

     We offer a number of digital tax preparation alternatives. TaxCut® from H&R Block enables do-it-yourself users to prepare their federal and state tax returns easily and accurately. Our software products may be purchased through third-party retail stores, direct mail or online.

     We also offer our clients many online options: multiple versions of do-it-yourself tax preparation, professional tax review, tax advice and tax preparation through a tax professional, whereby the client completes a tax organizer and sends it to a tax professional for preparation and/or signature.

     By offering professional and do-it-yourself tax preparation options through multiple channels, we can serve our clients in the manner in which they choose to be served.

     We also offer clients a number of options for receiving their income tax refund, including a check directly from the Internal Revenue Service (IRS), an electronic deposit directly to their bank account, a refund anticipation check or a RAL.

     The following are some of the services we offer with our tax preparation service:

     PEACE OF MIND GUARANTEE – The POM guarantee is offered to U.S. clients, whereby we (1) represent our clients if audited by the IRS, and (2) assume the cost, subject to certain

limits, of additional taxes owed by a client resulting from errors attributable to one of our tax professionals’ work. The POM program has a per client cumulative limit of $5,000 in additional taxes assessed with respect to the federal, state and local tax returns we prepared for the taxable year covered by the program.

     RALs – RALs are offered to our U.S. clients by a designated bank primarily through a contractual relationship with HSBC Holdings plc (HSBC). An eligible, electronic filing client may apply for a RAL at one of our offices. After meeting certain eligibility criteria, clients are offered the opportunity to apply for a loan from HSBC in amounts up to $9,999 based upon their anticipated federal income tax refund. We simultaneously transmit the income tax return information to the IRS and the lending bank. Within a few days or less after the filing date, the client receives a check or direct deposit in the amount of the loan, less the bank’s transaction fee, our tax return preparation fee and other fees for client-selected services. Additionally, qualifying electronic filing clients are eligible to receive their RAL proceeds, less applicable fees, in approximately one hour after electronic filing using the Instant Money service. For a RAL to be repaid, the IRS directly deposits the participating client’s federal income tax refund into a designated account at the lending bank. See related discussion in “Loan Participations” below.

     RACs – Refund Anticipation Checks (RACs) are offered to U.S. clients who would like to either (1) receive their refund faster and do not have a bank account for the IRS to direct deposit their refund or (2) have their tax preparation fees paid directly out of their refund. A RAC is not a loan and is provided through a contractual relationship with HSBC.

     IMALs – IMALs are early-season loans offered to U.S. clients, beginning in November 2006, allowing them to take out a loan from HSBC in amounts up to $2,500 based upon their anticipated federal income tax refund. See related discussion in “Loan Participations” below.

     H&R BLOCK PREPAID EMERALD MASTERCARD^® – The H&R Block Prepaid Emerald MasterCard® allows a client to receive a tax refund from the IRS directly on a prepaid debit card, or to direct RAL or RAC proceeds to the card to avoid high-cost check-cashing fees. The card can be used for everyday purchases, bill payments, and ATM withdrawals anywhere MasterCard® is accepted. Additional funds can be added to the card account year-round though direct deposit, or at participating retail locations.

     EASY SAVINGS, EASY IRA – Traditional savings and individual retirement accounts insured by the Federal Deposit Insurance Corporation (FDIC) are offered to U.S. clients as savings and tax-advantaged retirement savings tools. The accounts are held at HRB Bank.

     TAX RETURN PREPARATION COURSES – We offer income tax return preparation courses to the public, which teach students how to prepare income tax returns and provide us with a source of trained tax professionals.

     SOFTWARE PRODUCTS – We develop and market TaxCut® income tax preparation software, Kiplinger’s Home and Business Attorney and Kiplinger’s WILLPower^SM software products.

     TaxCut® offers a simple step-by-step tax preparation interview, data imports from money management software and tax preparation software, calculations, completion of the appropriate tax forms, checking for errors and, for an additional charge, electronic filing.

     During fiscal year 2007, we acquired TaxWorks LLC and its affiliated entities, a provider of commercial tax preparation software targeting the independent tax preparer market. The primary software product, TaxWorks®, is designed for small to mid-sized CPA firms that file taxes for individuals and businesses. The initial cash purchase price was $24.8 million, with a payment of $10.0 million due in May 2007 and a payment of $23.6 million due in May 2012. The $10.0 million payment due in May 2007 was paid on April 30, 2007. See Item 8, note 2 to our consolidated financial statements.

     ONLINE TAX PREPARATION – We offer a comprehensive range of tax services, from tax advice to complete professional and do-it-yourself tax return preparation and electronic filing, through our websites at www.hrblock.com, www.taxcut.com, www.taxnet.com and www.taxengine.com. These websites allow clients to prepare their federal and state income tax returns using the TaxCut Online Tax Program and other platforms, access tax tips, advice and tax-related news and use calculators for tax planning.

     We participate in the Free File Alliance (FFA). This alliance was created by the tax return preparation industry and the IRS, and allows qualified filers with adjusted gross incomes less than $52,000 to prepare and file their federal return online at no charge. We feel that this program provides a valuable public service and increases our visibility with new clients, while also providing an opportunity to offer our state return preparation services to these new clients at our regular prices.

     CASHBACK PROGRAM – We offer a refund discount (CashBack) program to our customers in Canada. Canadian law specifies the procedures we must follow in conducting the program. In accordance with current Canadian regulations, if a customer’s tax return indicates the customer is entitled to a tax refund, we issue a check to the client. The client assigns to us the full amount of the tax refund to be issued by the Canada Revenue Agency (CRA) and the refund check is then sent by the CRA directly to us. In accordance with the law, the discount is deemed

to include both the tax return preparation fee and the fee for tax refund discounting. This program is financed by short-term borrowings. The number of returns discounted under the CashBack program in fiscal year 2007 was approximately 670,000, compared to 653,000 in 2006 and 581,000 in 2005.

     CLIENTS SERVED – We, together with our franchisees, served approximately 22.9 million clients worldwide during fiscal year 2007, up from 21.9 million in 2006 and 21.4 million in 2005. See discussion of the Canadian tax season extension under “Seasonality of Business.” We served 20.3 million clients in the U.S. during fiscal year 2007, up from 19.5 million in 2006 and 19.1 million in 2005. “Clients served” includes taxpayers for whom we prepared income tax returns in offices, federal software units sold, online completed and paid federal returns, paid state returns when no federal return was purchased, taxpayers for whom we provided only paid electronic filing services and clients who received IMALs but did not return for tax preparation and/or e-filing services. Our U.S. clients served constituted 16.1% of an IRS estimate of total individual income tax returns filed as of April 30, 2007, compared to 15.7% in 2006 and 15.6% in 2005.

     OWNED AND FRANCHISED OFFICES – A summary of our company-owned and franchise offices is as follows:

April 30,		2007				2006				2005
U.S. OFFICES –
Company-owned offices			6,669				6,387				5,811
Company-owned shared locations (1)			1,488				1,473				1,296
Total company-owned offices			8,157				7,860				7,107
Franchise offices			3,784				3,703				3,528
Franchise shared locations (1)			843				602				526
Total franchise offices			4,627				4,305				4,054
			12,784				12,165				11,161
INTERNATIONAL OFFICES –
Canada			1,070				1,011				912
Australia			360				362				378
Other			—				10				10
			1,430				1,383				1,300

     Offices in shared locations at April 30, 2007 include 1,146 offices operated in Wal-Mart stores and 760 offices in Sears stores operated as “H&R Block at Sears.” The Wal-Mart agreement expires in May 2007 and is in the process of being renegotiated. The Sears license agreement was renewed in June 2007 and expires in July 2010. The Sears agreement is subject to standard termination rights by either party which include change in control, bankruptcy, material misuse of intellectual property, unauthorized disclosure of confidential information, failure to pay required fees, failure to comply with the agreement, or failure to carry required insurance by the other party.

     We offer franchises as a way to expand our presence in the market. Our franchise arrangements provide us with certain rights designed to protect our brand. Most of our franchisees receive signs, designated equipment, specialized forms, local advertising, initial training, and supervisory services, and pay us a percentage of gross tax return preparation and related service revenues as a franchise royalty.

     From time to time, we have acquired the territories of existing franchisees and other tax return preparation businesses, and will continue to do so if future conditions warrant and satisfactory terms can be negotiated. During fiscal year 2007, we acquired ExpressTax, a national franchisor of tax preparation businesses, for an aggregate cash purchase price of $5.7 million. This acquisition added 249 offices to our network, which continue to operate under the ExpressTax name.

     LOAN PARTICIPATIONS – Since July 1996, we have been a party to agreements with HSBC and its predecessors to participate in RALs provided by a lending bank to H&R Block tax clients. During fiscal year 2006, we signed a new agreement with HSBC in which we obtained the right to purchase a 49.9% participation interest in all RALs obtained through our retail offices. We received a signing bonus from HSBC during the prior year in connection with this agreement, which was recorded as deferred revenue and is earned over the contract term. The new agreement is effective through June 2011. Our purchases of the participation interests are financed through short-term borrowings, and we bear all of the credit risk associated with our participation interests in the RALs. Revenue from our participation is calculated as the rate of participation multiplied by the fee paid by the borrower to the lending bank. Our RAL participation revenue was $192.4 million, $177.9 million and $182.8 million in fiscal years 2007, 2006 and 2005, respectively.

     During the current year, our RAL contract was amended to include participation in IMALs. We obtained the right to purchase a 75.0% participation interest in IMALs obtained through our retail offices in 22 states. Our IMAL participation revenue was $17.6 million in fiscal year 2007. While this amendment is also effective through 2011, HSBC has elected not to offer these early-season loans next year.

     SEASONALITY OF BUSINESS – Because most of our clients file their tax returns during the period from January through April of each year, substantially all of our revenues from income tax return preparation and related services and products are received during this period. As a result, our tax segment generally operates at a loss through the first eight months of the fiscal year. Additionally, the tax business is affected by economic

conditions and unemployment rates. Peak revenues occur during the applicable tax season, as follows:

United States and Canada		January – April
Australia		July – October

     In fiscal year 2006, the CRA extended the Canadian tax season to May 1, 2006. Clients served in our Canadian operations in fiscal year 2006 includes approximately 41,400 returns in both company-owned and franchise offices which were accepted by the client on May 1, 2006. The revenues related to these returns were recognized in fiscal year 2007. In fiscal year 2005, the Canadian tax season was extended to May 2, 2005. Clients served in our Canadian operations in fiscal year 2005 includes approximately 47,500 returns in both company-owned and franchise offices which were accepted by the client on May 1 and 2, 2005. The revenues related to these returns were recognized in fiscal year 2006. In fiscal year 2007, the Canadian tax season ended April 30, 2007.

     COMPETITIVE CONDITIONS – The retail tax services business is highly competitive. There are a substantial number of tax return preparation firms and accounting firms offering tax return preparation services. Many tax return preparation firms and many firms not otherwise in the tax return preparation business are involved in providing electronic filing, RAL and IMAL services to the public. Commercial tax return preparers and electronic filers are highly competitive with regard to price and service. In terms of the number of offices and personal tax returns prepared and electronically filed in offices, online and via our software, we are the largest company providing direct tax return preparation and electronic filing services in the U.S. We also believe we operate the largest tax return preparation businesses in Canada and Australia.

     Our digital tax solutions businesses compete with a number of companies. Intuit, Inc. is the largest supplier of tax preparation software and is also our primary competitor in the online tax preparation market. There are many smaller competitors in the online market, as well as free state-sponsored online filing programs. Price and marketing competition for tax preparation services increased in recent years.

     GOVERNMENT REGULATION – Federal legislation requires income tax return preparers to, among other things, set forth their signatures and identification numbers on all tax returns prepared by them, and retain all tax returns prepared for three years. Federal laws also subject income tax return preparers to accuracy-related penalties in connection with the preparation of income tax returns. Preparers may be prohibited from further acting as income tax return preparers if they continuously and repeatedly engage in specified misconduct.

     The federal government regulates the electronic filing of income tax returns in part by requiring electronic filers to comply with all publications and notices of the IRS applicable to electronic filing. We are also required to provide certain electronic filing information to the taxpayer, comply with advertising standards for electronic filers, and be subjected to possible monitoring by the IRS, penalties for disclosure or use of income tax return preparation and other preparer penalties, and suspension from the electronic filing program.

     The Gramm-Leach-Bliley Act and Federal Trade Commission (FTC) regulations adopted thereunder require income tax preparers to adopt and disclose consumer privacy policies, and provide consumers a reasonable opportunity to “opt-out” of having personal information disclosed to unaffiliated third parties for marketing purposes. Some states have adopted or proposed strict “opt-in” requirements in connection with use or disclosure of consumer information.

     Federal statutes and regulations also regulate an electronic filer’s involvement in RALs. Electronic filers must clearly explain the RAL is a loan and not a substitute for or a quicker way of receiving an income tax refund. Federal laws place restrictions on the fees an electronic filer may charge in connection with RALs. In addition, some states and localities have enacted laws and adopted regulations for RAL facilitators and/or the advertising of RALs.

     Certain states have regulations and requirements relating to offering income tax courses. These requirements include licensing, bonding and certain restrictions on advertising.

     As noted above under “Owned and Franchised Offices,” many of the income tax return preparation offices operating in the U.S. under the name “H&R Block” are operated by franchisees. Our franchising activities are subject to the rules and regulations of the FTC, and various state laws regulating the offer and sale of franchises. The FTC and various state laws require that we furnish to prospective franchisees a franchise offering circular containing prescribed information. A number of states in which we are currently franchising regulate the sale of franchises and require registration of the franchise offering circular with state authorities and the delivery of a franchise offering circular to prospective franchisees. We are currently operating under exemptions from registration in several of these states based upon our net worth and experience. Substantive state laws regulating the franchisor/franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor/franchisee relationship in certain respects. The state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a

franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. From time to time, we may have to make appropriate amendments to our franchise offering circular used to comply with our disclosure obligations under federal and state law.

     We also seek to determine the applicability of all government and self-regulatory organization statutes, ordinances, rules and regulations in the international countries in which we operate (collectively, Foreign Laws) and to comply with these Foreign Laws. In addition, the Canadian government regulates the refund-discounting program in Canada. These laws have not materially affected our international operations.

     See discussion in Item 1A, “Risk Factors” for additional information.

BUSINESS SERVICES

GENERAL – Our Business Services segment offers middle-market companies accounting, tax and business consulting services, wealth management and capital markets services. Segment revenues constituted 23.2% of our consolidated revenues of continuing operations for fiscal years 2007 and 2006 and 17.4% for 2005.

     This segment consists primarily of RSM McGladrey, Inc. (RSM), which provides accounting, tax, and business consulting services in 97 cities in 25 states and offers services in 18 of the top 25 U.S. markets.

     From time to time, we have acquired businesses, and will continue to do so if future conditions warrant and satisfactory terms can be negotiated. During fiscal year 2006, we paid $190.7 million to acquire all the outstanding common stock of American Express Tax and Business Services, Inc. (AmexTBS), which has been merged into RSM. During fiscal year 2007, we finalized purchase price adjustments relating to this acquisition resulting in a $10.1 million reduction in purchase price, which was recorded primarily as a reduction of goodwill.

     During fiscal year 2007, we committed to a plan to sell and/or completed the wind-down of three smaller lines of business. As of April 30, 2007, we met the criteria requiring us to present the related financial results of these businesses as discontinued operations and the assets and liabilities of all of the businesses being sold as held-for-sale in the consolidated financial statements for all periods presented. See additional discussion in Item 8, note 20 to our consolidated financial statements.

     RELATIONSHIP WITH ATTEST FIRMS – By regulation, we cannot provide audit and attest services. McGladrey & Pullen LLP (M&P) and other public accounting firms, including those public accounting firms previously associated with AmexTBS, with whom we do business (collectively, “the Attest Firms”) provide audit and review services and other services in which the Attest Firms issue written reports on client financial statements. Through a number of agreements, including agreements with these Attest Firms, we lease accounting personnel and provide accounting, payroll, human resources and other administrative services to the Attest Firms and receive a management fee for these services. We also have a cost-sharing arrangement with the Attest Firms, whereby they reimburse us for the costs of certain items, mainly supplies and for the use of RSM-owned or leased real estate, property and equipment. The Attest Firms are limited liability partnerships with their own management committees, legal and business advisors, professional liability insurance and risk management policies. Accordingly, the Attest Firms are separate legal entities and not affiliates. Some partners and employees of the Attest Firms are also employees of RSM.

     SEASONALITY OF BUSINESS – Revenues for this segment are largely seasonal in nature, with peak revenues occurring during January through April.

     COMPETITIVE CONDITIONS – The accounting, tax and consulting business is highly competitive. The principal methods of competition are price, service and reputation for quality. There are a substantial number of accounting firms offering similar services at the international, national, regional and local levels. As our focus is on middle-market businesses, our principal competition is with national and regional accounting firms. We believe we have a competitive advantage in the geographic areas in which we are currently located based on the breadth of services we can offer to these clients above and beyond what a traditional accounting firm can offer.

     GOVERNMENT REGULATION – Many of the same federal and state regulations relating to tax preparers and the information concerning tax reform discussed previously in Tax Services apply to the Business Services segment as well. However, accountants are not subject to the same prohibition on the use or disclosure of certain income tax return information as tax professionals. Accounting firms are also subject to state and federal regulations governing accountants, auditors and financial planners.

     Auditor independence rules of the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) apply to the Attest Firms as public accounting firms. In applying its auditor independence rules, the SEC views us and the Attest Firms as a single entity and requires that the SEC independence rules for the Attest Firms apply to us and that we be independent of any SEC audit client of

the Attest Firms. The SEC regards any financial interest or prohibited business relationship we have with a client of the Attest Firms as a financial interest or prohibited business relationship between the Attest Firms and the client for purposes of applying its auditor independence rules.

     We and the Attest Firms have jointly developed and implemented policies, procedures and controls designed to ensure the Attest Firms’ independence and integrity as an audit firm in compliance with applicable SEC regulations and professional responsibilities. These policies, procedures and controls are designed to monitor and prevent violations of applicable independence rules and include, among other things, (1) informing our officers, directors and other members of senior management concerning auditor independence matters, (2) procedures for monitoring securities ownership, (3) communicating with SEC audit clients regarding the SEC’s interpretation and application of relevant independence rules and guidelines, and (4) requiring RSM employees to comply with the Attest Firms’ independence and relationship policies (including the Attest Firms’ independence compliance questionnaire procedures).

     See discussion in Item 1A, “Risk Factors” for additional information.

CONSUMER FINANCIAL SERVICES

GENERAL – Our Consumer Financial Services segment is primarily engaged in offering brokerage services, along with investment planning and related financial advice through H&R Block Financial Advisors, Inc. (HRBFA) and full-service banking through HRB Bank. HRBFA and HRB Bank, our “Block-branded” businesses, are focused on increasing retail tax client loyalty and retention by offering expanded financial services. Segment revenues constituted 9.7% of our consolidated revenues of continuing operations for fiscal year 2007, 8.1% for 2006 and 7.6% for 2005.

     H&R BLOCK FINANCIAL ADVISORS - HRBFA offers our clients traditional brokerage services, as well as annuities, insurance, fee-based accounts, online account access, equity research and focus lists, model portfolios, asset allocation strategies, and other investment tools and information to clients in the U.S.

     HRBFA is a registered broker-dealer with the SEC and is a member of the New York Stock Exchange (NYSE), other national securities exchanges, Securities Investor Protection Corporation (SIPC), and the National Association of Securities Dealers, Inc. (NASD). HRBFA is also a registered investment adviser. We act as a dealer in fixed-income securities including corporate and municipal bonds, various U.S. Government and U.S. Government Agency securities and certificates of deposit.

     HRBFA is authorized to do business as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico. At the end of fiscal year 2007, we operated 195 branch offices, compared to 219 offices in 2006 and 257 in 2005. The reduced number of branch offices is primarily due to the consolidation of smaller branches and the evolution of our tax-partnering program, in which financial advisors are located in retail tax offices.

     FINANCIAL ADVISORS. Our future success is highly dependent on retaining and recruiting productive financial advisors. One of our key initiatives in fiscal year 2007 was to build revenues by attracting and retaining higher-producing advisors.

     During fiscal years 2007, 2006 and 2005, we added 97, 193 and 258 advisors, respectively. These additions were offset by attrition, which caused our number of advisors to decline from 1,010 at April 30, 2006 to 918 at April 30, 2007. Our overall retention rate for fiscal year 2007 was approximately 80%, up from 75% last year. The retention rate for our higher-producing advisors was approximately 92%, up from 91% in 2006. The implementation of minimum production requirements caused our overall advisor retention rate to lag our higher-producing advisor retention rate. Advisor productivity by recruiting class is as follows:

(in 000s)
		Revenue				Total Production
		Per Advisor				Revenues
FISCAL YEAR 2007 –
Pre-2005 class		$	257			$	150,612
2005 recruits			145				16,040
2006 recruits			154				26,331
2007 recruits			121				6,690
FISCAL YEAR 2006 –
Pre-2004 class		$	250			$	137,212
2004 recruits			157				19,579
2005 recruits			109				19,942
2006 recruits			111				13,741
FISCAL YEAR 2005 –
Pre-2003 class		$	230			$	121,342
2003 recruits			114				16,416
2004 recruits			98				19,941
2005 recruits			65				8,203

     Financial advisors generally reach productivity levels equal to those achieved at their prior firm approximately 24 to 36 months after they join our company.

     PARTNERING WITH TAX PROFESSIONALS. The H&R Block Preferred Partner Program^SM facilitates strategic, referral-based partnerships between tax professionals and financial advisors. The program includes the Licensed Referral Tax Professional (LRTP) program and a non-licensed option, which allows non-licensed tax professionals to gain additional rewards and recognition when making qualified client referrals to financial advisor partners. The LRTP program helps tax professionals obtain a securities license, teaming them with a financial advisor and providing a commission to the LRTP for business referred to financial advisors.

     As of April 30, 2007, our Preferred Partner Program had 8,297 active tax partners, of which 612 were licensed. As a result of this initiative, we added more than 13,900 new customer accounts and assets totaling $690 million during fiscal year 2007. We expect to continue to increase the number of tax partners in the coming year.

     H&R BLOCK BANK – In March 2006, the Office of Thrift Supervision (OTS) approved the charter of HRB Bank. HRB Bank commenced operations on May 1, 2006 and offers traditional consumer banking services including checking and savings accounts, home equity lines of credit, individual retirement accounts, certificates of deposit and prepaid debit card accounts to clients in the U.S. HRBFA utilizes HRB Bank for certain FDIC-insured deposits for its customers and HRB Bank also purchases loans from OOMC, HRBMC and other lenders to hold for investment purposes. In the event that, as a result of the sale of OOMC, HRB Bank can no longer purchase loans from OOMC and HRBMC, the main source of future loan purchases would be third-party loan originators.

     The information required by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” is included in Item 7.

     SEASONALITY OF BUSINESS – HRB Bank’s deposit balances can be subject to some seasonal fluctuations related to deposits of Tax Services’ clients, including the H&R Block Prepaid Emerald MasterCard^®, which peak in February and taper off through the remainder of the tax season.

     HRBFA does not experience significant seasonal fluctuations. Financial services businesses are cyclical, however, and directly affected by national and global economic and political conditions, trends in business and finance and changes in interest rates and the conditions of the securities markets in which our clients invest.

     COMPETITIVE CONDITIONS – HRBFA competes directly with a broad range of companies seeking to attract consumer financial assets, including full-service brokerage firms, discount and online brokerage firms, mutual fund companies, investment banking firms, commercial and savings banks, insurance companies and others. The financial services industry has become more concentrated as numerous securities firms have been acquired by or merged into other firms. In addition, we expect competition from domestic and international commercial banks and larger securities firms to continue to increase as a result of legislative and regulatory initiatives in the U.S., including the passage of the Gramm-Leach-Bliley Act in November 1999 and the implementation of the U.S.A. Patriot Act in April 2002. These initiatives strive to remove or relieve certain restrictions on mergers between commercial banks and other types of financial services providers and extend privacy provisions and anti-money laundering procedures across the financial services industry.

     We compete based on expertise and integration with our tax services relationships, quality of service, breadth of services offered, prices, accessibility through delivery channels and technological innovation.

     GOVERNMENT REGULATION – Financial services businesses are subject to extensive regulation by U.S. federal and state regulatory agencies, securities exchanges and by various non- governmental agencies, regulatory bodies and central banks. These regulatory agencies in the U. S. include, among others, the SEC, the NASD, the NYSE, the FDIC, the Federal Reserve, the Municipal Securities Rulemaking Board and the OTS. Additional legislation, regulations and rulemaking may directly affect our manner of operation and profitability.

     HRBFA is registered with the SEC and subject to regulation by the SEC and by self-regulatory organizations, such as the NYSE, NASD and the securities exchanges of which it is a member. As a registered broker-dealer, HRBFA is subject to the Uniform Net Capital Rule (Rule 15c3-1) administered by the SEC, which specifies minimum net capital requirements for registered brokers and dealers.

     HRB Bank is subject to regulation, supervision and examination by the OTS, the Federal Reserve and the FDIC. All savings associations are subject to the capital adequacy guidelines and the regulatory framework for prompt corrective action. HRB Bank must meet specific capital guidelines that involve quantitative measures of HRB Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. HRB Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As a savings and loan holding company, H&R Block, Inc. is subject to regulation by the OTS, including maintenance of a three percent minimum ratio of adjusted tangible capital to adjusted total assets, as defined by the OTS.

     See Item 7, “Regulatory Environment” and Item 8, note 17 to the consolidated financial statements for additional discussion of regulatory requirements, including discussion of our non-compliance with the three percent minimum capital requirement as of January 31, 2007 and April 30, 2007.

     Also see discussion in 1A, “Risk Factors” for additional information.

DISCONTINUED OPERATIONS

GENERAL – Conditions in the non-prime mortgage industry were challenging throughout fiscal year 2007, and particularly in our fourth quarter. Our mortgage operations, as well as the entire industry, were impacted by deteriorating conditions in the secondary market, where reduced investor demand for loan purchases, higher investor yield requirements and increased estimates for future losses reduced the value of non-prime loans. Under these conditions non-prime originators generally reported significant increases in losses and many were unable to meet their financial obligations. As a result, during our fourth quarter our mortgage operations originated mortgage loans that, by the time we sold them in the secondary market, were valued at less than par. Conditions in the non-prime mortgage industry resulted in significant losses in our mortgage operations during the fourth quarter of fiscal year 2007. See additional discussion of the performance of our mortgage operations in Item 7, under “Discontinued Operations.”

     On November 6, 2006 we announced we would evaluate strategic alternatives for OOMC, including a possible sale or other transaction through the public markets. On April 19, 2007, we entered into an agreement to sell OOMC. In conjunction with this plan, we also announced we would terminate the operations of HRBMC.

     During fiscal year 2007, we committed to a plan to sell and/or completed the wind-down of three smaller lines of business previously reported in our Business Services segment, as well as our tax operations in the United Kingdom previously reported in Tax Services.

     During fiscal year 2007, we met the criteria requiring us to present the related financial results of these businesses as discontinued operations and the assets and liabilities of all of the businesses being sold as held-for-sale in the consolidated financial statements for all periods presented. See Item 1A and Item 8, note 20 to our consolidated financial statements for additional information and discussion of the sale of OOMC and impairments we recorded relating to the disposition of these businesses.

MORTGAGE OPERATIONS

OOMC originates and services non-prime mortgage loans and sells and securitizes non-prime mortgage loans and residual interests in the United States. HRBMC, a wholly-owned subsidiary of OOMC, originates non-prime and prime mortgage loans for sale to OOMC, HRB Bank or third-party buyers. Revenues primarily consist of gains from sales and securitizations of mortgage assets, net of repurchase provisions, derivative gains and losses, and impairments of residual interests, interest income and servicing fee income.

     OOMC originates non-prime mortgage loans, which are those that may not be offered through government-sponsored loan agencies and typically involve borrowers with limited income documentation, high levels of consumer debt or past credit problems. Even though these borrowers have credit problems, they generally have equity in their property that will be used to secure the loan. OOMC’s wholesale origination channel works with independent brokers throughout the U.S. to fund non-prime mortgage loans through a national branch network. Wholesale originations represent the majority of OOMC’s total loan production.

     OOMC is headquartered in Irvine, California and operates in 49 states by serving 52,000 mortgage broker locations and through its network of 22 wholesale loan production branches and its relationship with HRBMC.

     HRBMC is a retail mortgage lender for prime, non-prime and government loans and is licensed to conduct business in all 50 states. HRBMC is an approved seller/servicer for Fannie Mae and Freddie Mac and is HUD authorized to originate and underwrite FHA and VA mortgage loans.

     In the current year, we terminated approximately 500 employees and closed 17 of our branch offices through a restructuring. This resulted in a pretax charge of $21.5 million. In the prior year, we terminated approximately 1,200 employees and closed some of our branch offices through a restructuring. This resulted in a pretax charge of $12.6 million. We expect these restructuring activities will continue until the sale of our mortgage operations, including the closure of additional branch locations

and the operations of the bulk acquisitions channel. We filed a Form 8-K on May 17, 2007, related to restructuring activities during fiscal year 2008, which includes the termination of approximately 615 employees. Pretax charges are estimated to be approximately $19.0 million in fiscal year 2008. These restructuring activities are part of our strategy to consolidate our origination processes and reduce overall costs. See additional discussion of our restructuring charge in Item 8, note 20 to the consolidated financial statements.

     LOAN ORIGINATION – We originated $27.1 billion, $40.8 billion and $31.0 billion in mortgage loans during fiscal years 2007, 2006 and 2005, respectively. Information regarding our non-prime loan originations is as follows:

Year Ended April 30,		2007				2006				2005
Loan type:
2-year ARM			34.8	%			43.9	%			61.6	%
3-year ARM			1.2	%			1.9	%			4.0	%
Fixed 1st			14.2	%			12.7	%			17.7	%
Fixed 2nd			2.4	%			4.9	%			3.8	%
Interest only 1st			12.2	%			21.1	%			12.6	%
40-Year			32.9	%			13.4	%			—	%
Other			2.3	%			2.2	%			0.3	%
Percentage of fixed-rate mortgages			21.6	%			20.0	%			22.1	%
Percentage of adjustable-rate mortgages			78.4	%			80.0	%			77.9	%
Percentage of first mortgage loans owner-occupied			91.1	%			91.7	%			92.6	%
Loan purpose:
Cash-out refinance			64.0	%			60.2	%			63.5	%
Purchase			30.5	%			35.0	%			30.8	%
Rate or term refinance			5.5	%			4.8	%			5.7	%
Borrower documentation level:
Full documentation			53.1	%			54.9	%			60.1	%
Stated income			36.9	%			41.3	%			38.1	%
Other			10.0	%			3.8	%			1.8	%

     WHOLESALE. Wholesale loan originations involve an independent broker who assists the borrower in completing the loan application, which includes securing information regarding their assets, liabilities, income, credit history, employment history and personal information. We also originate stated income loans where income verification may not be obtained. We require a credit report on each applicant from an industry-recognized credit reporting company. In evaluating an applicant’s credit history, we use credit bureau risk scores, generally known as a FICO score, which is a statistical ranking of likely future credit performance developed by Fair, Isaac & Company and provided by the three national credit data repositories. Qualified independent appraisers are required to appraise mortgaged properties used to secure mortgage loans. The broker then identifies a lender who offers a loan product best suited to the borrower’s financial needs. No one broker currently originates more than 1.2% of our total non-prime production.

     Upon receipt of an application from a broker, a credit report and an appraisal report, one of our branch offices processes and underwrites the loan. Our underwriting guidelines require mortgage loans be underwritten in a standardized procedure that complies with federal and state laws and regulations. The guidelines are primarily intended to assess the value of the mortgaged property, evaluate the adequacy of the property as collateral for the mortgage loan, and assess the creditworthiness of the related borrower. The underwriting process may include an automated underwriting decision system as a tool to assist in the assessment of the creditworthiness of the borrower. Based upon this assessment, we advise the broker whether the loan application meets our underwriting guidelines and product description by issuing a loan approval or denial. In some cases, we issue a “conditional approval,” which requires the submission of additional information or clarification. The mortgage loans are underwritten with a view toward resale in the secondary market.

     RETAIL. HRBMC originates our retail mortgage loans. In fiscal year 2007, 58% of HRBMC’s originations were non-prime and 42% were prime, compared to 69% and 31%, respectively, in 2006. During fiscal year 2007, approximately 24% of HRBMC’s loans were made to existing H&R Block clients compared to 20% in 2006.

     The application and approval process in our retail locations is similar to those described previously under “Wholesale.” HRBMC’s non-prime mortgage loans are primarily sold to OOMC. Substantially all of HRBMC’s prime mortgage loans are sold to Countrywide Home Loans, Inc. (Countrywide). The majority of mortgage loans sold to Countrywide are underwritten through an automated system under which Countrywide assumes our representations and warranties, which comply with Countrywide’s underwriting guidelines. This agreement allows us to achieve improved execution due to price, efficiencies in delivery, and elimination of redundancies in operations. We do not retain servicing rights related to the prime mortgage loans. See discussion of our prime warehouse line in Item 7, under “Capital Resources and Liquidity.”

     SALE AND SECURITIZATION OF LOANS – Substantially all non-prime mortgage loans are sold daily to qualifying special purpose entities (Trusts). See discussion of our loan sale and securitization process in Item 7, under “Off-Balance Sheet Financing Arrangements.”

     Loans meeting certain specified criteria are sold to HRB Bank, which holds the loans for investment purposes.

     SERVICING – Loan servicing involves collecting and remitting mortgage loan payments, making required advances, accounting for principal and interest, holding escrow for payment of taxes and insurance and contacting delinquent borrowers. We receive loan-servicing fees monthly over the life of the mortgage loans. We primarily service non-prime mortgage loans. At the end of fiscal year 2007, we serviced 384,156 loans totaling $67.0 billion, compared to 441,981 loans totaling $73.4 billion at April

30, 2006 and 435,290 loans totaling $68.0 billion at April 30, 2005.

     The following table summarizes our servicing portfolio by origin and includes related mortgage servicing rights (MSRs) as of April 30, 2007 and the rate we earned on each type of servicing during fiscal year 2007:

(dollars in 000s)
										Base Rate
Type of Servicing		Principal Balance				MSR Balance				Earned
Originated		$	63,868,068			$	253,067				0. 39	%
Sub-servicing			3,069,073				—				0. 22	%
Purchased			59,908				—				0. 50	%
Total		$	66,997,049			$	253,067				0. 37	%

     When non-prime loans are sold or securitized, we generally retain the right to service the loans, which results in MSR assets being recorded on our balance sheet. Assumptions used in estimating the value of MSRs are discussed in Item 7, “Critical Accounting Policies” and Item 8, note 1 to our consolidated financial statements. In addition to servicing loans we originate, we also service non-prime loans originated by other lenders, designated in the above table as sub-servicing. MSRs are recorded only in conjunction with our originated or purchased loan-servicing portfolio.

     GEOGRAPHIC DISTRIBUTION – The following table details the percent of non-prime loan origination volume and our loan origination branches by state, excluding our retail channel, for fiscal years 2007 and 2006:

		2007								2006
		Percent of				Number of				Percent of				Number of
State		Volume				Branches				Volume				Branches
California			23.5	%			4				24.5	%			6
Florida			11.0	%			3				10.7	%			3
New York			9.2	%			1				9.1	%			2
Texas			6.4	%			2				4.6	%			3
Massachusetts			5.0	%			1				6.7	%			2
New Jersey			4.9	%			1				5.1	%			1
Other			40.0	%			10				39.3	%			17

     SEASONALITY OF BUSINESS – Residential mortgage volume is not subject to significant seasonal fluctuations. The mortgage business is cyclical, however, and directly affected by national economic conditions, trends in business and finance and is impacted by changes in interest rates.

     COMPETITIVE CONDITIONS – The non-prime residential mortgage loan market is highly competitive. There are a substantial number of companies competing in the residential loan market, including mortgage banking companies, commercial banks, savings associations, credit unions and other financial institutions. During fiscal year 2007, the declining performance of non-prime originations, including early payment defaults by borrowers, caused a significant increase in losses, primarily related to loan repurchase obligations and decreases in secondary market pricing in the industry. Unable to meet these financial obligations, many originators entered bankruptcy or otherwise ceased non-prime lending operations during the year. Many of the remaining competitors are well-capitalized companies that compete vigorously on price, service and product differentiation.

     There are also numerous companies competing in the business of servicing non-prime loans. No one firm is a dominant supplier of non-prime and prime mortgage loans or a dominant servicer of non-prime loans.

     Inside B&C Lending ranked OOMC as the number four originator, based on market share as of March 31, 2007, and the number four servicer, based on servicing volume as of March 31, 2007, of non-prime loans in the industry.

     GOVERNMENT REGULATION – Mortgage loans purchased, originated and/or serviced are subject to federal laws and regulations, including:

	§		The federal Truth-in-Lending Act, as amended, and Regulation Z promulgated thereunder;
	§		The Equal Credit Opportunity Act, as amended, and Regulation B promulgated thereunder;
	§		The Fair Credit Reporting Act, as amended;
	§		The Fair Debt Collection Practices Act;
	§		The federal Real Estate Settlement Procedures Act, as amended, and Regulation X promulgated thereunder;
	§		The Home Ownership Equity Protection Act (HOEPA);
	§		The Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended;
	§		The Home Mortgage Disclosure Act (HMDA) and Regulation C promulgated thereunder;
	§		The federal Fair Housing Act;
	§		The Telephone Consumer Protection Act;
	§		The Gramm-Leach-Bliley Act and regulations adopted thereunder;
	§		The Fair and Accurate Credit Transactions Act;
	§		Regulation AB; and
	§		Certain other laws and regulations.

     Applicable state laws generally regulate interest rates and other charges pertaining to non-prime loans. These states also require certain disclosures and require originators of certain mortgage loans to be licensed unless an exemption is available. In addition, most states have other laws, public policies and general principles of equity relating to consumer protection, unfair and deceptive practices, and practices that may apply to the origination, servicing and collection of mortgage loans. Other

proposed non-prime lending rules being discussed may require lenders to qualify borrowers at the fully-indexed interest rate, which may cause some borrowers to no longer qualify for certain loans products.

     In September 2006, the federal financial regulatory agencies (The Board of Governors of the Federal Reserve System, the Office of Comptroller of the Currency, the OTS, the National Credit Union Administration, and the Federal Deposit Insurance Corporation) jointly issued Interagency Guidance on Nontraditional Mortgage Product Risks (the “Guidance”) to address risks posed by interest-only loans and other mortgage products that allow borrowers to defer repayment of principal or interest. The Guidance also addresses the layering of risks that results from combining these product types with other features that may compound risk, such as relying on reduced documentation to evaluate a borrower’s creditworthiness. The Guidance directs federally regulated financial institutions originating these loans to maintain underwriting standards that are consistent with prudent lending practices, including analysis of a borrower’s capacity to repay the full amount of credit that may be extended and to provide borrowers with clear and balanced information about the relative benefits and risks of these products sufficiently early in the process to enable them to make informed decisions. While not directly applicable to us, the Guidance may affect our ability to make or sell the nontraditional loans covered by the Guidance. Additionally, the Guidance is instructive of the regulatory climate concerning those loans and may be adopted in whole or in part by other agencies that regulate us. It is also possible that the Guidance may be adopted as laws or used as guidance by federal, state or local agencies and that those laws or guidance may be applied to us. Since its issuance, over 30 states have mirrored the Guidance which now places OOMC under additional regulation by these states.

     In recent years, there has been a noticeable increase in state, county and municipal statutes, ordinances and regulations that prohibit or regulate so-called “predatory lending” practices. Predatory lending statutes such as HOEPA, regulate “high-cost loans,” which are defined separately by each state, county or municipal statute, regulation or ordinance, but generally include mortgage loans with interest rates exceeding a (1) specified margin over the Treasury Index for a comparable maturity, or (2) designated percentage of points and fees charged to borrowers. We do not originate loans which meet the definition of high-cost loans under any law.

     Certain state laws restrict or prohibit prepayment penalties on mortgage loans. In September 2003, the OTS released a new rule that reduced the scope of the Alternative Mortgage Transactions Parity Act preemption effective July 1, 2004 and, as a result, we can no longer rely on the Parity Act to preempt state restrictions on prepayment penalties. These restrictions prohibit us from charging any prepayment penalty in six states and restrict the amount or duration of prepayment penalties that we may impose in an additional eleven states. This places us at a competitive disadvantage relative to financial institutions that may be able to offer loans with interest rate and loan fee structures that are more attractive than those we offer.

     See discussion in Item 1A, “Risk Factors” for additional information.

SERVICE MARKS, TRADEMARKS AND PATENTS –

We have made a practice of selling our services and products under service marks and trademarks and of obtaining protection for these by all available means. Our service marks and trademarks are protected by registration in the U.S. and other countries where our services and products are marketed. We consider these service marks and trademarks, in the aggregate, to be of material importance to our business, particularly our business segments providing services and products under the “H&R Block” brand.

     We have no registered patents that are material to our business.

EMPLOYEES –

We have approximately 15,000 regular full-time employees. The highest number of persons we employed during the fiscal year ended April 30, 2007, including seasonal employees, was approximately 136,600.

AVAILABILITY OF REPORTS AND OTHER INFORMATION –

     Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through our website at www.hrblock.com as soon as

reasonably practicable after such reports are electronically filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at ww.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

     Copies of the following corporate governance documents are posted on our website: (1) The Amended and Restated Articles of Incorporation of H&R Block, Inc., (2) The Amended and Restated Bylaws of H&R Block, Inc., (3) The H&R Block, Inc. Corporate Governance Guidelines, (4) the H&R Block, Inc. Code of Business Ethics and Conduct, (5) the H&R Block, Inc. Audit Committee Charter, (6) the H&R Block, Inc. Governance and Nominating Committee Charter, and (7) the H&R Block, Inc. Compensation Committee Charter. If you would like a printed copy of any of these corporate governance documents, please send your request to the Office of the Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105.

     Information contained on our website does not constitute any part of this report.

ITEM 1A. RISK FACTORS

In this report, and from time to time throughout the year, we share our expectations for the Company’s future performance. The following explains the critical risk factors impacting our business and reasons actual results may differ from our expectations. This discussion does not intend to be a comprehensive list and there may be other risks and factors that may have an effect on our business.

     LIQUIDITY AND CAPITAL – We use capital primarily to fund working capital requirements, pay dividends, repurchase shares of our common stock and acquire businesses. We are also dependent on commercial paper issuances and/or lines of credit to fund RAL participations and seasonal working capital needs. A disruption in such markets could adversely affect our access to these funds. To meet our future financing needs, we may issue additional debt or equity securities.

     LITIGATION – We are involved in lawsuits in the normal course of our business related to RALs, our POM guarantee program, electronic filing of tax returns, Express IRAs, losses incurred by customers in their investment accounts, mortgage lending activities, business valuation services and other matters. Adverse outcomes related to litigation could result in substantial damages and could adversely affect our results of operations. Negative public opinion can also result from our actual or alleged conduct in such claims, possibly damaging our reputation and adversely affecting the market price of our stock. See Item 3, “Legal Proceedings” for additional information.

     PRIVACY OF CLIENT INFORMATION – Privacy concerns relating to the disclosure of consumer financial information have drawn increased attention from federal and state governments. The IRS generally prohibits the use or disclosure by tax return preparers of taxpayers’ information without the prior written consent of the taxpayer. In addition, other regulations require financial service providers to adopt and disclose consumer privacy policies and provide consumers with a reasonable opportunity to opt-out of having personal information disclosed to unaffiliated third parties for marketing purposes. Although we have established security procedures to protect against identity theft, breaches of our clients’ privacy may occur. To the extent the measures we have taken prove to be insufficient or inadequate, we may become subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to our brand and reputation.

     In addition, changes in these federal and state regulatory requirements could result in more stringent requirements and could result in a need to change business practices, including how information is disclosed. These changes could have a material adverse effect on our business, financial condition and results of operations, and our ability to access the capital markets.

     INTERNAL CONTROL CERTIFICATION – We have documented and tested our internal control procedures in accordance with various SEC rules governing Section 404 of the Sarbanes-Oxley Act (SOX 404). SOX 404 requires us to assess the effectiveness of our internal controls over financial reporting annually, and obtain an opinion on the effectiveness of our internal controls from our Independent Registered Public Accounting Firm. Management’s assessment of our internal controls over financial reporting may identify deficiencies that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Should we, or our independent auditors, determine in future periods that we have a material weaknesses in our internal controls over financial reporting, our results of operations or financial condition may be adversely affected and the price of our common stock may decline.

     OPERATIONAL RISK – There is a risk of loss resulting from inadequate or failed processes or systems, theft or fraud. These can occur in many forms including, among others, errors, business interruptions, inappropriate behavior of or misconduct by our employees or those contracted to perform services for us, and

vendors that do not perform in accordance with their contractual agreements. These events can potentially result in financial losses or other damages. We rely on internal and external information and technological systems to manage our operations and are exposed to risk of loss resulting from breaches in the security, or other failures of these systems. Replacement of our major operational systems could have a significant impact on our ability to conduct our core business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information and transaction systems.

     POTENTIAL SALE TRANSACTION – On April 19, 2007, we entered into an agreement to sell OOMC. The purchase price to be received in connection with the sale of OOMC will consist of payments based on the fair value of the adjusted tangible net assets of OOMC (as defined in the agreement) as of the date of sale less $300.0 million. Because the final sale price will be based on third-party bids and valuations received at closing as well as the ultimate value received upon disposition of certain assets after closing, and because market conditions have changed and may change significantly during the period prior to closing, the value of the adjusted tangible net assets of the business at closing may be significantly different than the value as of April 30, 2007. In addition, the transaction is subject to various closing conditions, including that (1) OOMC maintain at least $8.0 billion of total capacity in its warehouse facilities throughout the period to the closing date (of which at least $2.0 billion is to be in the form of unused capacity at the closing date), (2) OOMC have servicer ratings of at least RPS2 by Fitch, SQ2 by Moody’s and Above Average by S&P, and (3) agreed upon regulatory and other approvals and consents be obtained. See discussion of warehouse facilities and related waivers in Item 7 under “Off-Balance Sheet Financing Arrangements.” If the closing conditions are not satisfied by the requisite time, the sale could be terminated. Failure to complete this transaction could adversely affect the market price of our stock. If conditions in the non-prime mortgage industry, particularly in home appreciation, continue to decline, our operating results, capital levels and liquidity could be negatively impacted during the periods we continue to own OOMC.

TAX SERVICES

COMPETITIVE POSITION – Increased competition for tax preparation clients in our retail offices, online and software channels could adversely affect our current market share and limit our ability to grow our client base. See clients served statistics included in Item 7, under “Tax Services.”

     REFUND ANTICIPATION LOANS – Changes in government regulation related to RALs could adversely affect our ability to offer RALs or our ability to purchase participation interests. Third-party financial institutions currently originating RALs and similar products could decide to cease or significantly limit such offerings and related collection practices. Changes in IRS practices could adversely affect our ability to use the IRS debt indicator to limit our bad debt exposure. Changes in any of these, as well as possible litigation related to RALs, may adversely affect our results of operations. See discussion of RAL litigation in Item 3, “Legal Proceedings.”

     Since July 1996, we have been a party to agreements with HSBC and its predecessors to participate in RALs provided by a lending bank to H&R Block tax clients. During fiscal year 2006, we signed a new agreement with HSBC under which HSBC and its designated bank will provide funding of all RALs offered through June 2011. We may extend this agreement for two successive one-year periods. If HSBC and its designated bank do not continue to provide funding for RALs, we could seek other RAL lenders to continue offering RALs to our clients or consider alternative funding strategies.

     The RAL program is regularly reviewed both from a business perspective and to ensure compliance with applicable state and federal laws. It is our intention to continue to offer the RAL program in the foreseeable future.

     Loss of the RAL program could adversely affect our operating results. In addition to the loss of revenues and income directly attributable to the RAL program, the inability to offer RALs could indirectly result in the loss of retail tax clients and associated tax preparation revenues, unless we were able to take mitigating actions. Total revenues related directly to the RAL program (including revenues from participation interests) were $193.5 million for the year ended April 30, 2007, representing 4.8% of consolidated revenues and contributed $120.5 million to the segment’s pretax results. Revenues related directly to the RAL program totaled $179.3 million for the year ended April 30, 2006, representing 5.0% of consolidated revenues and contributed $106.5 million to the segment’s pretax results.

BUSINESS SERVICES

ALTERNATIVE PRACTICE STRUCTURE WITH ATTEST FIRMS – Our relationship with the Attest Firms requires us to comply with applicable regulations regarding the practice of public accounting and auditor independence rules and requirements. In addition, our relationship with the Attest Firms closely links our RSM McGladrey brand with the Attest Firms. If the Attest Firms were to encounter regulatory or independence issues resulting from their relationship with us or if significant litigation arose

involving the Attest Firms or their services which implicated RSM, our brand reputation and our ability to realize the mutual benefits of our relationship, such as the ability to attract and retain quality professionals, could be impaired.

CONSUMER FINANCIAL SERVICES

REGULATORY ENVIRONMENT – GENERAL – The securities and banking industries are subject to extensive regulation. The SEC, the NYSE, the NASD and other self-regulatory organizations and state securities commissions can, among other things, censure, fine, issue cease-and-desist orders or suspend or expel a broker-dealer or any of its officers or employees. The OTS may take similar action with respect to our banking activities. Similarly, the attorneys general of each state could bring legal action on behalf of the citizens of the various states to ensure compliance with local laws.

     REGULATORY ENVIRONMENT – BROKER-DEALER – HRBFA must comply with many laws and rules, including rules relating to possession and control of customer funds and securities, margin lending and execution and settlement of transactions.

     The SEC, NYSE and NASD and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by securities broker-dealers. Net capital is the net worth of a broker or dealer (assets minus liabilities), less deductions for certain types of assets. Failure to maintain the required net capital could result in suspension or revocation of registration by the SEC and suspension or expulsion by the NYSE and/or NASD, and could ultimately lead to the firm’s liquidation.

     HRBFA will be transitioning individual clients in certain fee-in-lieu-of-commission accounts to a commission-based or alternative brokerage account, or to investment adviser accounts as a result of recent court actions on an SEC rule. As of April 30, 2007, HRBFA had approximately $2.9 billion of assets under management and realized approximately $24.0 million in revenue from these accounts for fiscal year 2007. During the process of converting these accounts, we are exposed to risk in advisor and client retention, product pricing and related production revenues.

     REGULATORY ENVIRONMENT – BANKING – H&R Block, Inc., as a savings and loan holding company, and HRB Bank, as a federally chartered savings bank, are subject to extensive regulation, supervision and examination by the OTS and FDIC. Such regulation covers all banking business, including lending practices, safeguarding deposits, capital structure, recordkeeping, transactions with affiliates and conduct and qualifications of personnel.

     HRB Bank is subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital requirements may trigger actions by regulators that, if undertaken, could have a direct material effect on HRB Bank and our consolidated financial statements. HRB Bank must meet specific capital guidelines involving quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. A bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about the strength of components of its capital, risk weightings of assets, off-balance sheet transactions and other factors. Quantitative measures established by regulation to ensure capital adequacy require HRB Bank to maintain minimum amounts and ratios of tangible equity, total risk-based capital and Tier 1 capital. In addition to these minimum ratio requirements, HRB Bank is required to continually maintain a 12.0% minimum leverage ratio as a condition of its charter-approval order through fiscal year 2009. This condition was extended through fiscal year 2012 as a result of a Supervisory Directive issued on May 29, 2007. There are no conditions or events since March 31, 2007 that management believes have changed HRB Bank’s category. We will monitor regulatory compliance with this ratio monthly and discuss with the OTS in the event the minimum is not maintained.

     As of March 31, 2007, our most recent Thrift Financial Report (TFR) filing with the OTS, HRB Bank was a “well capitalized” institution under the prompt corrective action provisions of the FDIC. See Item 8, note 17 to the consolidated financial statements for additional information.

     H&R Block, Inc. is subject to a three percent minimum ratio of adjusted tangible capital to adjusted total assets, as defined by the OTS. We fell below the three percent minimum ratio at April 30, 2007 and the OTS issued a Supervisory Directive on May 29, 2007. Failure to comply with the Supervisory Directive could trigger additional discretionary actions by the OTS such as a supervisory agreement, cease-and-desist orders and civil monetary penalties. See Item 7, “Regulatory Environment” and Item 8, note 17 to the consolidated financial statements for additional information, including discussion of our non-compliance with the three percent minimum capital requirement and actions taken by the OTS. If we are not in a position to cure deficiencies, a resulting failure could impair our ability to repurchase shares of our common stock, acquire businesses and pay dividends.

     CONCENTRATION OF CREDIT RISK – The overall credit quality of HRB Bank’s mortgage loans held for investment is impacted by the strength of the U. S. economy and local economies. We continually monitor changes in the economy, particularly unemployment rates and housing prices, as these factors can impact the ability of borrowers to repay their loans. Economic trends that negatively affect housing prices and the job

market could result in, among other things, deterioration in credit quality of our loan portfolio. Our loan portfolio is concentrated in the states of Florida, California, New York and Wisconsin, which represented 18.8%, 16.3%, 12.8% and 9.7%, respectively, of our total mortgage loans held for investment at April 30, 2007. No other state held more than 5% of our loan balances.

     INTEGRATION INTO THE H&R BLOCK BRAND – We are working to foster an advice-based relationship with our tax clients through our retail tax office network. This advice-based relationship is key to the integration of Consumer Financial Services into the H&R Block brand and deepening our current client relationships. If we are unable to successfully integrate, it may significantly impact our ability to differentiate our business from other financial service providers and grow our client base.

     RECRUITING AND RETENTION OF FINANCIAL ADVISORS – Attracting and retaining experienced financial advisors is extremely competitive in the investment industry. Additionally, in this industry, clients tend to follow their advisors, regardless of their affiliated investment firm. The inability to recruit and retain qualified and productive advisors, may adversely affect our results of operations.

     INTEREST RATE RISK – Net interest income is an important source of revenue for this segment. Our ability to manage interest rate risk could impact our financial condition. Our results of operations depend, in part, on our level of net interest income and our effective management of the impact of changing interest rates and varying asset and liability maturities. Many factors affect interest rates, including governmental monetary policies and domestic and international economic and political conditions.

     RECURRING OPERATING LOSSES – Continuing operating losses at HRBFA may impact the valuation of goodwill and long-lived assets. Such losses could also necessitate additional capital contributions to comply with regulatory requirements. The inability to operate this segment in a profitable manner may adversely affect our results of operations.

DISCONTINUED OPERATIONS

LIQUIDITY AND CAPITAL – We are dependent on the use of our off-balance sheet arrangements to fund our daily non-prime mortgage loan originations, and depend on the secondary market to securitize and sell mortgage loans and residual interests. Our off-balance sheet arrangements are subject to certain covenants, including a “minimum net income” financial covenant. As of April 30, 2007, OOMC did not meet the “minimum net income” financial covenant contained in certain of its committed warehouse facilities. This covenant requires OOMC to maintain a cumulative minimum net income of at least $1 for the four consecutive fiscal quarters ended April 30, 2007. On April 27, 2007, OOMC obtained waivers of the minimum net income financial covenants from all of the warehouse facility providers. These waivers extend through various dates. Two waivers are subject to OOMC having a specified amount of total warehouse capacity. If we do not obtain extensions of facilities and waivers that expire before July 31, 2007 or expand existing capacity, we would be in violation of this warehouse capacity requirement.

     OOMC will not meet this financial covenant at July 31, 2007. We have, however, obtained waivers from a sufficient number of warehouse providers to allow OOMC to continue its off-balance sheet financing activities. At our current origination levels, we estimate we would only need waivers for between $3.0 billion and $4.0 billion of available capacity at any given time. However, the sale of OOMC is subject to various closing conditions, including that OOMC maintain at least $8.0 billion of total capacity in its warehouse facilities throughout the period to the closing date (of which at least $2.0 billion is to be in the form of unused capacity at the closing date).

     If OOMC cannot obtain extensions or waivers, warehouse facility providers would have the right to terminate their future funding obligations under the applicable warehouse facilities, terminate OOMC’s right to service the loans remaining in the applicable warehouse or request funding of the 10% guarantee. This termination could adversely impact OOMC’s ability to fund new loans and our ability to complete the OOMC sales transaction. See additional discussion in Item 7, under “Off-Balance Sheet Financing Arrangements.”

     COMPETITIVE POSITION – The majority of our mortgage loan applications are submitted through a network of brokers who have relationships with many other mortgage lenders. Unfavorable changes in our pricing, service or other factors could result in a decline in our mortgage origination volume. A significant decline in our servicer ratings could adversely affect our pricing and origination volume. Increased competition among mortgage lenders can also result in a decline in coupon rates offered to our borrowers, which in turn lowers margins and could adversely affect our gains on sales of mortgage loans.

     MARKET RISKS – Our day-to-day operating activities of originating and selling mortgage loans have many aspects of interest rate risk. Additionally, the valuation of our retained residual interests and mortgage servicing rights includes many estimates and assumptions made by management surrounding interest rates, prepayment speeds and credit losses. Variation in interest rates or the factors underlying our assumptions could affect our results of operations. See Item 7A, under “Discontinued Operations” for discussion of interest rate risk, and Item 7, “Critical Accounting Policies” for discussion of our valuation methodology.

     Conditions in the non-prime mortgage industry were challenging throughout fiscal year 2007, and particularly in our fourth quarter. Our mortgage operations, as well as the entire industry, were impacted by deteriorating conditions in the secondary market, where reduced investor demand for loan purchases, higher investor yield requirements and increased estimates for future losses reduced the value of non-prime loans. Under these conditions non-prime originators generally reported significant increases in losses and many were unable to meet their financial obligations. As a result, during our fourth quarter our mortgage operations originated mortgage loans that, by the time we sold them in the secondary market, were valued at less than par. Conditions in the non-prime mortgage industry resulted in significant losses in our mortgage operations during the fourth quarter of fiscal year 2007. See additional discussion of the performance of our mortgage operations in Item 7, under “Discontinued Operations.” If conditions in the non-prime mortgage industry do not improve, it could adversely affect the results of our mortgage operations.

     LEGISLATION AND REGULATION – Several states and cities are considering or have passed laws, regulations or ordinances aimed at curbing predatory lending and servicing practices. The federal government is also considering legislative and regulatory proposals in this regard. In general, these proposals involve lowering the existing federal HOEPA thresholds for defining a “high-cost” loan and establishing enhanced protections and remedies for borrowers who receive such loans. If unfavorable laws and regulations are passed, it could restrict our ability to originate loans. If rating agencies refuse to rate our loans, loan buyers may not want to purchase loans labeled as “high-cost,” and it could restrict our ability to sell our loans in the secondary market. Accordingly, all of these items could adversely affect our results of operations.

     In 2002, the Federal Reserve Board adopted changes to Regulation C promulgated under the HMDA. Among other things, the new regulations require lenders to report pricing data on loans with annual percentage rates that exceed the yield on treasury bills with comparable maturities by 3%. The expanded reporting was effective in 2004 for reports filed in 2005. We anticipate that a majority of our loans would be subject to the expanded reporting requirements. The expanded reporting does not provide for additional loan information such as credit risk, debt-to-income ratio, loan-to-value ratio, documentation level or other salient loan features. However, reported information may lead to increased litigation as the information could be misinterpreted by third parties and could adversely affect our results of operations.

     COUNTERPARTY CREDIT RISK – Derivative instruments involve counterparty credit risk, which is the risk that a counterparty may fail to perform on its contractual obligations. We manage this risk through the use of a policy that includes credit standard guidelines, counterparty diversification, monitoring of counterparty financial condition, use of master netting agreements with counterparties, and exposure limits based on counterparty credit, exposure amount and management risk tolerance. The policy is reviewed on an annual basis and as conditions warrant. See Item 7A, under “Discontinued Operations” and Item 8, note 20 to our consolidated financial statements for discussion of our derivative instruments.

     DELINQUENCY RATES – Our underwriting criteria or collection methods may not provide adequate protection against the risks inherent in the loans we originate and sell. In the event of a default, we may be required to repurchase loans previously sold. Repurchased loans are normally sold in subsequent sale transactions. In the event a repurchased loan cannot be sold, the collateral value of the financed item may not cover the outstanding loan balance and costs of recovery. In the event our mortgage loans held for sale or mortgage loans underlying our residual interests in securitizations experience higher delinquencies, foreclosures, repossessions or losses than anticipated, our results of operations or financial condition could be adversely affected. Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to originate and sell loans, the prices we receive on our loans, or the values of our mortgage servicing rights and residual interests in securitizations, which could adversely affect our financial condition and results of operations. See additional discussion of our loan repurchases in Item 8, note 20 to the consolidated financial statements.

     REAL ESTATE MARKET – Our residual interests and beneficial interest in Trusts are secured by mortgage loans, which are in turn secured by residential real estate. Any material decline in real estate values would likely result in higher delinquencies, defaults and foreclosures and losses. Additionally, a significant portion of the mortgage loans we originate or service is secured by properties in California. A decline in the economy or the residential real estate market values, or the occurrence of a natural disaster not covered by standard homeowners’ insurance policies, such as an earthquake, hurricane or wildfire, could decrease the value of mortgaged properties.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We completed construction of new corporate headquarters during fiscal year 2007, and consolidated the majority of our Kansas City-based personnel into one facility. We own our new corporate headquarters, which is located in Kansas City, Missouri. Our former corporate headquarters building was sold during fiscal year 2007.

     Most of our tax offices, except those in shared locations, are operated under leases throughout the U.S. Our Canadian executive offices are located in a leased office in Calgary, Alberta. Our Canadian tax offices are operated under leases throughout Canada.

     RSM’s executive offices are located in leased offices in Bloomington, Minnesota. Its administrative offices are located in leased offices in Davenport, Iowa. RSM also leases office space throughout the U.S.

     The executive offices of HRBFA are located in leased offices in Detroit, Michigan. Branch offices are operated throughout the U.S., in a combination of leased and owned facilities. HRB Bank is headquartered and its single branch location is also located in our corporate facility.

     OOMC’s executive offices are located in leased offices in Irvine, California. OOMC also leases offices for its loan origination and servicing centers and branch office operations throughout the U.S. HRBMC is headquartered in leased offices in Irvine, California. HRBMC also leases offices for its loan origination centers and branch office operations throughout the U.S.

     All current leased and owned facilities are in good repair and adequate to meet our needs.

ITEM 3. LEGAL PROCEEDINGS

The information below should be read in conjunction with the information included in Item 8, note 19 to our consolidated financial statements.

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

     The amounts claimed in the RAL Cases have been very substantial in some instances. We have successfully defended against numerous RAL Cases, some of which were dismissed on our motions for dismissal or summary judgment, and others were dismissed voluntarily by the plaintiffs after denial of class certification. Other cases have been settled, with one settlement resulting in a pretax expense of $43.5 million in fiscal year 2003 (the “Texas RAL Settlement”) and other settlements resulting in a combined pretax expense in fiscal year 2006 of $70.2 million (the “2006 Settlements”).

     We believe we have meritorious defenses to the remaining RAL Cases and we intend to defend them vigorously. There can be no assurances, however, as to the outcome of the pending RAL Cases individually or in the aggregate. Likewise, there can be no assurances regarding the impact of the RAL Cases on our financial statements. The following is updated information regarding the pending RAL Cases that are attorney general actions or class actions or putative class actions:

     Lynne A. Carnegie, et al. v. Household International, Inc., H&R Block, Inc., et al., (formerly Joel E. Zawikowski, et al. v. Beneficial National Bank, H&R Block, Inc., Block Financial Corporation, et al.) Case No. 98 C 2178, United States District Court for the Northern District of Illinois, Eastern Division, instituted on April 18, 1998. This case constitutes one of the 2006 Settlements. On April 19, 2006, we entered into a settlement agreement regarding this case, subject to final court approval. The settlement was approved by the court on August 28, 2006. One objector filed an appeal, which was dismissed on March 1, 2007. Unless a Petition for Certiorari is filed by the objector and granted by the United States Supreme Court, the settlement is final.

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

decision to decertify the class. The plaintiff is seeking further review by the appellate court.

     The People of California v. H&R Block, Inc., H&R Block Services, Inc., H&R Block Enterprises, Inc., H&R Block Tax Services, Inc., Block Financial Corporation, HRB Royalty, Inc., and Does 1 through 50, Case No. CGC-06-449461, in the California Superior Court, San Francisco County, instituted on February 15, 2006 (alleging, among other things, untrue, misleading or deceptive statements in marketing RALs and unfair competition with respect to debt collection activities; seeks equitable relief, civil penalties and restitution). This case is in the discovery stage.

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

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

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

     EXPRESS IRA LITIGATION – On March 15, 2006, the New York Attorney General filed a lawsuit in the Supreme Court of the State of New York, County of New York (Index No. 06/401110) entitled The People of New York v. H&R Block, Inc. and H&R Block Financial Advisors, Inc. The complaint alleged fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the Express IRA product and sought equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. On December 1, 2006, the Supreme Court of the State of New York issued a ruling that dismissed the New York Attorney General’s lawsuit in its entirety on procedural grounds but granted leave to amend and refile the lawsuit. The amended complaint has been filed and alleges causes of action similar to those claimed in the original complaint and seeks equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. We intend to defend this case vigorously, but there are no assurances as to its outcome.

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

     SECURITIES LITIGATION – On March 17, 2006, the first of three putative class actions alleging violations of certain securities laws were filed against the Company and certain of its current and former officers and directors (the “Securities Class Action Cases”). In addition, on April 5, 2006, the first of nine shareholder derivative actions purportedly brought on behalf of the Company (which is named as a “nominal defendant”) were filed against certain of the Company’s current and former directors and officers (the “Derivative Cases”). On September 20, 2006, the United States District

Court for the Western District of Missouri ordered all of the Securities Class Action Cases and the Derivative Cases consolidated into a single action styled In re H&R Block Securities Litigation. The court appointed a lead plaintiff who filed a consolidated complaint on April 6, 2007 against the Company and certain of its officers. The complaint alleges, among other things, deceptive, material and misleading financial statements, failure to prepare financial statements in accordance with generally accepted accounting principles and concealment of the potential for lawsuits stemming from the allegedly fraudulent nature of the Company’s operations. The complaint seeks unspecified damages and equitable relief. We intend to defend this litigation vigorously, but there are no assurances as to its outcome.

     OTHER CLAIMS AND LITIGATION – As reported previously, the NASD brought charges against HRBFA regarding the sale by HRBFA of Enron debentures in 2001. A hearing for this matter commenced in May 2006, was recessed until October 2006 and is scheduled to continue through August 2007. We intend to defend the NASD charges vigorously, although there can be no assurances regarding the outcome and resolution of the matter.

     As part of an industry-wide review, the IRS is investigating tax-planning strategies that certain RSM clients utilized during fiscal years 2000 through 2003. Specifically, the IRS is examining these strategies to determine whether RSM complied with tax shelter reporting and listing regulations and whether such strategies were abusive as defined by the IRS. If the IRS were to determine that RSM did not comply with the tax shelter reporting and listing regulations, it might assess fines or penalties against RSM. Moreover, if the IRS were to determine that the tax planning strategies were inappropriate, clients that utilized the strategies could face penalties and interest for underpayment of taxes. Some of these clients are seeking or may attempt to seek recovery from RSM. There can be no assurance regarding the outcome and resolution of this matter.

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

     We have from time to time been party to investigations, claims and lawsuits not discussed herein arising out of our business operations. These investigations, claims and lawsuits include actions by state attorneys general, other state regulators, individual plaintiffs, and cases in which plaintiffs seek to represent a class of similarly situated customers. The amounts claimed in these claims and lawsuits are substantial in some instances, and the ultimate liability with respect to such litigation and claims is difficult to predict. Some of these investigations, claims and lawsuits pertain to RALs, the origination and servicing of mortgage loans, the electronic filing of customers’ income tax returns, the POM guarantee program, and our Express IRA program and other investment products and RSM EquiCo, Inc. business valuation services. We believe we have meritorious defenses to each of these claims, and we are defending or intend to defend them vigorously, although there is no assurance as to their outcome. In the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material adverse effect on our consolidated financial statements.

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

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

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2007.

PART II

ITEM 5.		MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

H&R Block’s common stock is traded on the NYSE. The information called for by this item with respect to H&R Block’s common stock appears in Item 8, note 22 to our consolidated financial statements. On June 15, 2007, there were 29,455 shareholders of record and the closing stock price on the NYSE was $23.11 per share. During the fiscal year ended April 30, 2007, we issued approximately 21,000 shares of our common stock as purchase price consideration for acquisitions. These issuances were private offerings exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

     A summary of our securities authorized for issuance under equity compensation plans as of April 30, 2007 is as follows:

		(shares in 000s)
		Number of securities				Weight-average				Number of securities remaining
		to be issued upon				exercise price of				available for future issuance under
		exercise of options				outstanding options				equity compensation plans (excluding
		warrants and rights				warrants and rights				securities reflected in the first column)
Equity compensation plans approved by security holders			23,405			$	21.61				25,796
Equity compensation plans not approved by security holders			—			$	—				—
Total			23,405			$	21.61				25,796

     The remaining information called for by this item relating to “Securities Authorized for Issuance under Equity Compensation Plans” is reported in Item 8, note 13 to our consolidated financial statements.

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

														(shares in 000s)
						Average				Total Number of Shares				Maximum Number of
		Total Number of				Price Paid				Purchased as Part of Publicly				Shares that May Be Purchased
		Shares Purchased (2)				per Share				Announced Plans or Programs (1)				Under the Plans or Programs (1)
February 1 — February 28			7			$	24.23				—				22,352
March 1 — March 31			1			$	20.83				—				22,352
April 1 — April 30			2			$	22.88				—				22,352

     PERFORMANCE GRAPH — The following graph compares the cumulative five-year total return provided shareholders on H&R Block, Inc.’s common stock relative to the cumulative total returns of the S&P 500 index and the S&P Diversified Commercial & Professional Services index. An investment of $100, with reinvestment of all dividends, is assumed to have been made in our common stock and in each of the indexes on April 30, 2002 and its relative performance is tracked through April 30, 2007.

ITEM 6. SELECTED FINANCIAL DATA

We derived the selected consolidated financial data presented below as of and for each of the five years in the period ended April 30, 2007 from our consolidated financial statements. During fiscal year 2007, we met the criteria requiring us to present the related financial results of OOMC, HRBMC and four other businesses as discontinued operations and the assets and liabilities of all of the businesses being sold as held-for-sale in the consolidated financial statements. All periods presented have been reclassified to reflect our discontinued operations. The data set forth below should be read in conjunction with Item 7 and our consolidated financial statements in Item 8.

		(in 000s, except per share amounts)
April 30,		2007				2006				2005				2004				2003
Revenues		$	4,021,274			$	3,574,753			$	3,146,369			$	2,895,786			$	2,528,395
Net income before discontinued operations and change in accounting principle			374,337				297,541				319,749				275,769				74,434
Net income (loss)			(433,653	)			490,408				623,910				694,093				477,615
Basic earnings (loss) per share:
Net income before discontinued operations and change in accounting principle		$	1.16			$	0.91			$	0.96			$	0.78			$	0.21
Net income (loss)			(1.34	)			1.49				1.88				1.96				1.33
Diluted earnings (loss) per share:
Net income before discontinued operations and change in accounting principle		$	1.15			$	0.89			$	0.95			$	0.76			$	0.20
Net income (loss)			(1.33	)			1.47				1.85				1.92				1.30
Total assets		$	7,499,493			$	5,989,135			$	5,538,056			$	5,233,827			$	4,666,502
Long-term debt			519,807				417,262				922,933				545,811				822,287
Dividends per share		$	0.53			$	0.49			$	0.43			$	0.39			$	0.35

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are a financial services company with subsidiaries delivering tax, investment, mortgage and business services and products. We are the only major company offering a full range of software, online and in-office tax preparation solutions, combined with personalized financial advice concerning retirement savings, home ownership and other opportunities to help clients build a better financial future.

     Our key strategic priorities for each of our reportable segments can be summarized as follows:

	§		Tax Services — expand access to our services through improved distribution of our digital offerings and continue to improve the quality of service we provide to our clients.
	§		Business Services — continue expansion of our national accounting, tax and consulting business, build and manage brand awareness, build differentiated and value-driven services and improve our client service culture.
	§		Consumer Financial Services — integrate the Tax Services client base into this segment and serve the broad consumer market through advisory and banking relationships.

     DISCONTINUED OPERATIONS — On April 19, 2007, we entered into an agreement to sell OOMC. In conjunction with this plan, we also announced we would terminate the operations of HRBMC.

     During fiscal year 2007, we committed to a plan to sell and/or completed the wind-down of three smaller lines of business previously reported in our Business Services segment, as well as our tax operations in the United Kingdom previously reported in Tax Services.

     During fiscal year 2007, we met the criteria requiring us to present the related financial results of these businesses as discontinued operations and the assets and liabilities of all of the businesses being sold as held-for-sale in the consolidated financial statements. All periods presented have been reclassified to reflect our discontinued operations. See Item 1 and Item 8, note 20 to our consolidated financial statements for additional information.

		(in 000s, except per share amounts)
Consolidated Results of Operations
Year ended April 30,		2007				2006				2005
REVENUES —
Tax Services		$	2,685,858			$	2,449,751			$	2,356,708
Business Services			932,361				828,133				547,185
Consumer Financial Services			388,090				287,955				239,244
Corporate and eliminations			14,965				8,914				3,232
		$	4,021,274			$	3,574,753			$	3,146,369
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES —
Tax Services		$	705,171			$	590,089			$	665,291
Business Services			57,661				70,661				43,207
Consumer Financial Services			19,811				(32,835	)			(75,370	)
Corporate and eliminations			(146,845	)			(117,433	)			(105,515	)
			635,798				510,482				527,613
Income taxes			261,461				212,941				207,864
Net income from continuing operations			374,337				297,541				319,749
Net income (loss) of discontinued operations			(807,990	)			192,867				304,161
Net income		$	(433,653	)		$	490,408			$	623,910
Basic earnings per share:
Net income from continuing operations		$	1.16			$	0.91			$	0.96
Net income (loss) of discontinued operations			(2.50	)			0.58				0.92
Net income		$	(1.34	)		$	1.49			$	1.88
Diluted earnings per share
Net income from continuing operations		$	1.15			$	0.89			$	0.95
Net income (loss) of discontinued operations			(2.48	)			0.58				0.90
Net income		$	(1.33	)		$	1.47			$	1.85

RESULTS OF OPERATIONS —

TAX SERVICES

     This segment primarily consists of our income tax preparation businesses — retail, online and software. This segment includes our tax operations in the United States, Canada and Australia. The following discussion excludes the results of our tax business in the United Kingdom, which is reported in discontinued operations for all periods presented.

Tax Services Operating Statistics		(in 000s, except average fee)
Year Ended April 30,		2007				2006(1)				2005(1)
CLIENTS SERVED —
United States:
Company-owned operations			10,336				10,359				10,608
Franchise operations			5,458				5,373				5,428
IMAL only (2)			77				—				—
			15,871				15,732				16,036
Digital tax solutions (3)			4,444				3,721				3,017
			20,315				19,453				19,053
International (4)			2,569				2,459				2,333
			22,884				21,912				21,386
NET AVERAGE FEE PER CLIENT SERVED (5) —
Company-owned operations		$	172.45			$	162.91			$	153.53
Franchise operations			151.06				140.37				133.49
		$	165.06			$	155.20			$	146.75
RALs (6) —
Company-owned operations			2,402				2,542				2,667
Franchise operations			1,450				1,487				1,499
			3,852				4,029				4,166

Tax Services Financial Results		(in 000s)
Year Ended April 30,		2007				2006				2005
Service revenues:
Tax preparation fees		$	1,896,269			$	1,791,624			$	1,718,208
Other services			301,411				204,892				192,311
			2,197,680				1,996,516				1,910,519
Other revenues:
Royalties			220,136				207,728				197,551
Loan participation fees and related revenue			210,040				177,852				182,784
Other			58,002				67,655				65,854
Total revenues			2,685,858				2,449,751				2,356,708
Cost of services:
Compensation and benefits			826,064				753,793				722,067
Occupancy			346,937				316,686				281,298
Supplies			58,013				52,857				47,600
Depreciation and amortization			42,043				44,825				54,505
Bad debt			25,228				31,820				33,020
Allocated shared services and other			189,595				118,342				121,958
			1,487,880				1,318,323				1,260,448
Provision for RAL litigation			—				70,200				—
Cost of other revenues, selling, general and administrative			492,807				471,139				430,969
Total expenses			1,980,687				1,859,662				1,691,417
Pretax income		$	705,171			$	590,089			$	665,291

FISCAL 2007 COMPARED TO FISCAL 2006 — Tax Services’ revenues increased $236.1 million, or 9.6%, compared to the prior year. We opened nearly 300 new company-owned offices, 250 of which were part of the expansion of our retail distribution network. This expansion contributed incremental revenues of $22.3 million and pretax losses of $5.7 million in fiscal year 2007.

     Tax preparation fees from our retail offices increased $104.6 million, or 5.8%, for fiscal year 2007. This increase is primarily due to an increase of 5.9% in the net average fee per U.S. client served, while the number of U.S. clients served in company-owned offices was essentially flat compared to last year. Our international operations contributed $9.6 million to the increase, resulting from a 4.5% increase in clients served.

     Other service revenue increased $96.5 million, or 47.1%, primarily due to $34.6 million in additional license fees earned from bank products, $25.9 million in additional revenues from our online tax preparation and e-filing services and a $12.2 million increase in the recognition of deferred fee revenue from our POM guarantees. Additionally, this segment earned

customer fees in connection with an agreement with HRB Bank for our new H&R Block Emerald Prepaid MasterCard® program, under which, this segment shares in the revenues and expenses associated with the program.

     Royalty revenue increased $12.4 million, or 6.0%, due to a 7.6% increase in the net average fee and a 1.6% increase in clients served in franchise offices.

     Loan participation fees and related revenues increased $32.2 million, or 18.1%, from the prior year. This increase is primarily due to the introduction of the IMAL, an early-season loan product, which increased our participation revenues $17.6 million. The remainder of the increase is primarily due to our new RAL participation agreement with HSBC.

     Other revenues decreased $9.7 million, or 14.3%, primarily due to a decline in revenues from supply sales to franchises, as our franchises now order directly from the supplier.

     Revenue from our digital business, which includes both service and product revenues, increased $29.2 million, or 21.9%, primarily due to a 19.4% increase in clients served. In fiscal year 2007, we implemented an aggressive plan to grow market share, although the required spending to achieve these results did impact our margin.

     Total expenses increased $121.0 million, or 6.5%, compared to the prior year. Cost of services increased $169.6 million, or 12.9%, from the prior year. Our real estate expansion efforts have contributed to a total increase of $28.0 million across all cost of services categories. Compensation and benefits increased $72.3 million, or 9.6%, primarily due to higher wages associated with increased revenues, costs associated with our earlier office openings and initiatives addressing operational readiness for the tax season. Occupancy expenses increased $30.3 million, or 9.6%, primarily as a result of higher rent expenses, due to a 5.9% increase in company-owned offices under lease and a 3.9% increase in the average rent. Other cost of services increased $71.3 million, or 60.2%, primarily due to additional corporate shared services for information technology and other projects, and costs associated with the H&R Block Emerald Prepaid MasterCard® program, which this segment shares with HRB Bank.

     Cost of other revenues, selling, general and administrative expenses increased $21.7 million, or 4.6%, primarily due to increases of $30.9 million and $26.0 million in bad debt on loan participations and marketing expenses, respectively. The higher bad debt expense is primarily due to an $18.0 million favorable adjustment to RAL bad debt recorded in the prior year and the addition of our IMAL product. These increases were partially offset by a $26.6 million reduction in corporate shared services and a $10.8 million decrease in legal expenses.

     In the prior year, we recorded $70.2 million, including legal fees, related to the settlement of RAL litigation.

     Pretax income for fiscal year 2007 increased $115.1 million, or 19.5%, from 2006, primarily due to higher revenues and the impact of the $70.2 million prior year RAL litigation charge.

FISCAL 2006 COMPARED TO FISCAL 2005 — Tax Services’ revenues increased $93.0 million, or 3.9%, compared to fiscal year 2005. We opened more than 750 new offices, 550 of which were part of the expansion of our company-owned retail distribution network. This expansion contributed incremental revenues of $36.4 million and pretax losses of $8.5 million in fiscal year 2006.

     Tax preparation fees from our retail offices increased $73.4 million, or 4.3%, for fiscal year 2006. This increase is primarily due to an increase of 6.1% in the net average fee per U.S. client served, partially offset by a decrease of 2.3% in U.S. clients served in company-owned offices. The decrease in clients served was partially due to a number of technology problems that severely hurt the start of our filing season, coupled with increased competition due to competitors’ refund lending products. Our international operations contributed $17.1 million to the increase, resulting from a 5.4% increase in clients served.

     Royalty revenue increased $10.2 million, or 5.2%, due to a 5.2% increase in the net average fee, slightly offset by a 1.0% decline in clients served in franchise offices.

     Loan participation fees and related revenues earned during fiscal year 2006 decreased $4.9 million, or 2.7%, from fiscal year 2005. This decrease is primarily due to a decrease in the number of RALs, which resulted from increased competition for clients in the early months of the tax season.

     Revenue from our digital business increased 8.2%, primarily due to a 23.3% increase in clients served, partially offset by planned reductions in unit prices.

     Total expenses increased $168.2 million, or 9.9%, primarily due to a $70.2 million charge relating to the settlement of two RAL claims. See additional discussion below and in Item 8, note 19 to the consolidated financial statements.

     Cost of services for the fiscal year 2006 increased $57.9 million, or 4.6%, from fiscal year 2005. Our real estate expansion efforts have contributed to a total increase of $43.5 million across all cost of services categories. Compensation and benefits increased $31.7 million, or 4.4%, primarily due to an increase in staff needed for our new offices and the addition of costs related to our small business initiatives. Occupancy expenses increased $35.4 million, or 12.6%, primarily as a result of higher rent

expenses, due to a 9.5% increase in company-owned offices under lease and a 7.3% increase in the average rent. Depreciation declined $9.7 million, or 17.8%, primarily due to decreased capital expenditures compared to fiscal year 2005.

     Cost of other revenues, selling, general and administrative expenses increased $40.2 million, or 9.3%, primarily due to a $31.5 million increase in corporate shared services, $20.7 million of which was related to our marketing efforts. We also incurred $7.5 million in additional corporate wages and $7.1 million in additional legal costs in fiscal year 2006. During the fourth quarter of fiscal year 2006, we revised our estimate for the provision for bad debt related to our participation interests in RALs, resulting in a decrease to our provision for bad debt of $18.0 million during fiscal year 2006.

     Pretax income for fiscal year 2006 decreased $75.2 million, or 11.3%, from 2005, primarily due to the impact of the RAL litigation.

RAL LITIGATION — On December 21, 2005, we entered into a settlement agreement regarding litigation pertaining to our RAL programs entitled Deadra D. Cummins, et al. v. H&R Block, Inc. et al.; Mitchell v. H&R Block, Inc. et al.; Green v. H&R Block, Inc. et al.; and Becker v. H&R Block, Inc. (the “Cummins Settlement Agreement”). Pursuant to the Cummins Settlement Agreement’s terms, we contributed a total of up to $62.5 million in cash for purposes of making payments to the settlement class, paying all attorneys’ fees and costs to class counsel, and covering service awards to the representative plaintiffs. In addition, we paid costs for providing notice of the settlement to settlement class members. Settlement of this matter resulted in a pretax charge of $50.7 million in fiscal year 2006.

     On April 19, 2006, we entered into a settlement agreement, subject to final court approval, regarding litigation entitled Lynne A. Carnegie, et al. v. Household International, Inc., H&R Block, Inc., et al. (the “Carnegie Settlement Agreement”). Pursuant to the Carnegie Settlement Agreement, we contributed a total of $19.5 million in cash for purposes of making payments to the settlement class, paying all attorneys’ fees and costs to class counsel, incentive payment awards to plaintiff and all notice and administration costs. We recorded a $19.5 million pretax charge related to this settlement in the third quarter of fiscal year 2006.

     We are named as a defendant in one other class-action lawsuit and one state attorney general lawsuit alleging that we engaged in wrongdoing with respect to the RAL program. We believe we have meritorious defenses to the other lawsuits and will vigorously defend our position. Nevertheless, the amounts claimed in these lawsuits are very substantial, and there can be no assurances as to their ultimate outcome, or as to their impact on our financial statements. See additional discussion of RAL Litigation in Item 3, “Legal Proceedings” and in Item 8, note 19 to the consolidated financial statements.

BUSINESS SERVICES

This segment offers middle-market companies accounting, tax and business consulting services, wealth management and capital market services. The following discussion excludes the results of the three businesses reported in discontinued operations for all periods presented.

Business Services – Operating Statistics
Year Ended April 30,		2007				2006				2005
ACCOUNTING, TAX AND BUSINESS CONSULTING —
Chargeable hours (000s)			5,075				4,357				2,898
Chargeable hours per person			1,373				1,385				1,430
Net billed rate per hour		$	148			$	141			$	133
Average margin per person		$	118,415			$	114,755			$	112,573

Business Services – Financial Results		(in 000s)
Year Ended April 30,		2007				2006				2005
Service revenues:
Accounting, tax and consulting		$	808,223			$	704,338			$	425,329
Capital markets			48,886				59,553				67,922
Other services			29,993				26,248				19,692
			887,102				790,139				512,943
Other			45,259				37,994				34,242
Total revenues			932,361				828,133				547,185
Cost of services:
Compensation and benefits			511,257				457,050				307,301
Occupancy			68,859				55,883				21,072
Other			69,941				60,101				53,218
			650,057				573,034				381,591
Amortization of intangible assets			15,521				16,165				14,442
Cost of other revenues, selling, general and administrative			209,122				168,273				107,945
Total expenses			874,700				757,472				503,978
Pretax income		$	57,661			$	70,661			$	43,207

FISCAL 2007 COMPARED TO FISCAL 2006 — Business Services’ revenues for fiscal year 2007 increased $104.2 million, or 12.6%, over the prior year.

     Accounting, tax and consulting revenues increased $103.9 million, or 14.7%, over the prior year. This increase resulted primarily from the acquisition of AmexTBS, which contributed $98.7 million in additional service revenues. This acquisition, coupled with an increase in our existing business, was partially offset by a decline in consulting revenue, resulting from a change in organizational structure between the businesses we acquired from AmexTBS and the attest firms that, while not affiliates of our company, also serve our clients. As a result, we no longer record the revenues and expenses associated with leasing employees in these offices to the attest firms.

     Capital markets revenues declined $10.7 million. Valuation and seminar revenues declined $23.2 million due to a 59.2% decline in the number of business valuation projects. This decrease was partially offset by a $12.6 million increase in underwriting revenues due to a 28.6% increase in transactions and a 32.2% increase in revenue per transaction. Other revenues increased primarily due to higher computer hardware and software sales.

     Total expenses increased $117.2 million, or 15.5%, compared to the prior year. Cost of services increased $77.0 million, due to increases in compensation and benefits and occupancy expenses. Compensation and benefits increased $54.2 million, or 11.9%, due to an increase in the number of personnel, primarily as a result of the AmexTBS acquisition, and an increase in the average wage per employee. Occupancy expenses increased $13.0 million due to higher rent expense resulting from office locations added with the AmexTBS acquisition in fiscal year 2006. These offices only contributed seven months of expense in the prior year, compared to twelve months in the current year.

     Cost of other revenues, selling, general and administrative expenses increased $40.8 million, or 24.3%, due to seven months of expense from the AmexTBS acquisition in the prior year, compared to twelve months in the current year, $5.9 million of costs incurred related to international acquisitions that will not be completed and additional costs associated with our business development initiatives.

     Pretax income for the year ended April 30, 2007 of $57.7 million compares to $70.7 million in the prior year. The decline was primarily due to off-season losses of AmexTBS.

FISCAL 2006 COMPARED TO FISCAL 2005 — Business Services’ revenues for fiscal year 2006 increased $280.9 million, or 51.3%, from fiscal year 2005. This increase was primarily due to the acquisition of AmexTBS, which increased accounting, tax and consulting revenues $251.3 million. The remaining $27.7 million increase in tax, accounting and consulting revenues was primarily driven by increases in the net billed rate per hour and chargeable hours.

     Capital markets revenues declined $8.4 million due to a 36.0% decline in the number of business valuation projects. Other service revenues increased $6.6 million as a result of growth in wealth management services.

     Total expenses increased $253.5 million, or 50.3%, for fiscal year 2006 compared to the prior year. Cost of services increased $191.4 million, primarily due to a $149.7 million increase in compensation and benefits. Compensation and benefits increased primarily due to the AmexTBS acquisition. In addition, baseline increases in the number of personnel and the average wage per employee, driven by marketplace competition for professional staff, also contributed to the increase. Occupancy expenses increased $34.8 million primarily due to acquisitions.

     Cost of other revenues, selling, general and administrative expenses increased $60.3 million primarily due to acquisitions and additional costs associated with our business development initiatives.

     Pretax income for the year ended April 30, 2006 was $70.7 million, compared to $43.2 million in fiscal year 2005.

CONSUMER FINANCIAL SERVICES

This segment is primarily engaged in offering brokerage services, along with investment planning and related financial advice through HRBFA and full-service banking through HRB Bank. HRBFA and HRB Bank, our “Block-branded” businesses, are focused on increasing client loyalty and retention by offering expanded financial and banking services to our retail tax clients. HRB Bank commenced operations May 1, 2006, therefore segment results for fiscal years 2006 and 2005 include only the operations of HRBFA and are not directly comparable to fiscal year 2007.

Consumer Financial Services – Operating Statistics
Year Ended April 30,		2007				2006				2005
Broker-dealer:
Traditional brokerage accounts (1)			386,902				418,162				431,749
New traditional brokerage accounts funded by tax clients			13,920				17,072				18,164
Cross-service revenue as a percent of total production revenue			16.3	%			16.1	%			14.8	%
Average assets per traditional brokerage account		$	85,518			$	75,222			$	63,755
Average margin balances (millions)		$	404			$	539			$	597
Average customer payable balances (millions)		$	613			$	782			$	975
Number of advisors			918				958				1,010
Banking:
Efficiency ratio (2)			37	%			N/A				N/A
Net interest margin (3)			2.70	%			N/A				N/A
Pretax return on average assets (4)			2.60	%			N/A				N/A
Total assets (millions)		$	1,501				N/A				N/A
Loans purchased from affiliates (millions)		$	1,181				N/A				N/A

Consumer Financial Services – Operating Results		(in 000s)
Year Ended April 30,		2007				2006				2005
Service revenues:
Financial advisor production revenue		$	199,673			$	190,474			$	165,902
Other			68,661				32,256				29,206
			268,334				222,730				195,108
Net interest income on:
Margin lending			52,163				54,152				40,584
Banking activities			23,963				—				—
			76,126				54,152				40,584
Provision for loan loss reserves			(3,622	)			—				—
Other			(1,187	)			4,430				438
Total revenues (1)			339,651				281,312				236,130
Cost of services:
Compensation and benefits			136,105				135,256				116,552
Occupancy			20,586				21,050				22,178
Other			27,418				21,132				19,555
			184,109				177,438				158,285
Amortization of intangible assets			36,625				36,625				36,625
Selling, general, and administrative			99,106				100,084				116,590
Total expenses			319,840				314,147				311,500
Pretax income (loss)		$	19,811			$	(32,835	)		$	(75,370	)

FISCAL 2007 COMPARED TO FISCAL 2006 — Consumer Financial Services’ revenues, net of interest expense and provision for loan losses, for fiscal year 2007 increased $58.3 million, or 20.7%, over the prior year, primarily as a result of HRB Bank, which commenced operations May 1, 2006.

     Financial advisor production revenue, which consists primarily of fees earned on assets under administration and commissions on customer trades, increased $9.2 million, or 4.8%, over the prior year, due primarily to higher annuitized revenues. The following table summarizes the key drivers of production revenue:

Year Ended April 30,		2007				2006
Client trades			907,075				974,625
Average revenue per trade		$	126.54			$	119.11
Assets under administration (billions)		$	33.1			$	31.8
Annualized productivity per advisor		$	216,000			$	194,000

     Other service revenues increased $36.4 million, due to revenues earned from our new H&R Block Prepaid Emerald MasterCard® program, coupled with positive sweep account rate variances and higher underwriting fees.

     Net interest income on banking activities totaled $24.0 million for fiscal year 2007. The following table summarizes the key drivers of net interest revenue on banking activities:

		(dollars in 000s)
		Average Balance				Average Rate
Loans		$	746,387				6.80	%
Investments			117,350				5.25	%
Deposits			700,707				4.59	%

     Total expenses increased $5.7 million, or 1.8%. Cost of services increased $6.7 million, or 3.8%, primarily due to the expenses of HRB Bank, which opened May 1, 2006.

     Pretax income for Consumer Financial Services for fiscal year 2007 was $19.8 million compared to the prior year loss of $32.8 million.

FISCAL 2006 COMPARED TO FISCAL 2005 — Consumer Financial Services’ revenues, net of interest expense, increased $45.2 million, or 19.1% over fiscal year 2005.

     Financial advisor production revenue increased $24.6 million, or 14.8%, over fiscal year 2005, primarily due to additional annuitized revenue. Higher annuitized revenues resulted from increased sales of annuities and insurance, wealth management accounts, mutual funds, and unit investment trusts.

     Annualized productivity averaged approximately $194,000 per advisor during fiscal year 2006 compared to $166,000 in the prior year. Increased productivity was due to minimum production standards put into place during the fourth quarter of fiscal year 2005.

     Net interest income increased $13.6 million, or 33.4%, from the prior year, as a result of higher interest rates earned, partially offset by a decline in average margin balances.

     Total expenses increased $2.6 million, or 0.8%. Cost of services increased $19.2 million, or 12.1%, primarily as a result of $18.7 million of additional compensation and benefits expenses resulting from higher production revenues.

     Selling, general and administrative expenses decreased $16.5 million, or 14.2%, primarily due to a $4.8 million decline in legal expenses, due in part to a favorable arbitration outcome. Fiscal year 2006 results also improved due to reduced back-office headcount relating to cost containment efforts and gains on the disposition of certain assets during the year. These decreases were partially offset by increased bonus accruals associated with the segment’s improved performance.

     The pretax loss for Consumer Financial Services for fiscal year 2006 was $32.8 million compared to a loss of $75.4 million in 2005.

DISCONTINUED OPERATIONS

Discontinued operations includes OOMC and HRBMC, mortgage businesses primarily engaged in the origination and acquisition of non-prime and prime mortgage loans, the sale and securitization of mortgage loans and residual interests, and the servicing of non-prime loans. These businesses were previously reported in our Mortgage Services segment in our Annual Report on Form 10-K for fiscal year 2006. Also included are the results of three smaller lines of business previously reported in our Business Services segment, as well as our tax operations in the United Kingdom previously reported in our Tax Services segment. Operating results presented below are net of eliminations of intercompany activities.

Discontinued Operations – Operating Statistics		(dollars in 000s)
Year Ended April 30,		2007				2006				2005
VOLUME OF LOANS ORIGINATED —
Wholesale (non-prime)		$	24,342,779			$	36,028,794			$	26,977,810
Retail:
Non-prime			1,588,944				3,260,071				3,005,168
Prime			1,141,744				1,490,898				1,018,746
		$	27,073,467			$	40,779,763			$	31,001,724
LOAN CHARACTERISTICS(1)—
Weighted average FICO score			613				622				614
Weighted average interest rate for borrowers (WAC)			8.60	%			7.87	%			7.36	%
Weighted average loan-to-value			82.2	%			80.6	%			78.9	%
ORIGINATION MARGIN (% OF ORIGINATION VOLUME)—
Loan sale premium (discount)			(0.06	%)			1.42	%			2.77	%
Residual cash flows from beneficial interest in Trusts			0.43	%			0.51	%			0.63	%
Gain (loss) on derivatives			(0.04	%)			0.35	%			0.15	%
Loan sale repurchase reserves			(1.44	%)			(0.18	%)			(0.13	%)
Retained MSRs			0.64	%			0.61	%			0.44	%
			(0.47	%)			2.71	%			3.86	%
Cost of acquisition			(0.14	%)			(0.37	%)			(0.54	%)
Direct origination expenses			(0.49	%)			(0.58	%)			(0.68	%)
Net gain on sale — gross margin (2)			(1.10	%)			1.76	%			2.64	%
Other revenues			(0.11	%)			(0.02	%)			0.03	%
Other cost of origination			(1.61	%)			(1.33	%)			(1.55	%)
Net margin (loss)			(2.80	%)			0.41	%			1.12	%
Total cost of origination (3)			2.10	%			1.91	%			2.23	%
Total cost of origination and acquisition			2.24	%			2.28	%			2.77	%
LOAN DELIVERY —
Loan sales:
Third-party buyers		$	26,295,714			$	40,272,225			$	30,975,523
HRB Bank			1,181,498				—				—
		$	27,477,212			$	40,272,225			$	30,975,523
Execution price (4)			1.10	%			1.58	%			3.01	%

Discontinued Operations – Operating Results		(in 000s)
Year Ended April 30,		2007				2006			2005
Components of gains on sales:
Gain on mortgage loans		$	101,980			$	648,693			$	811,734
Gain (loss) on derivatives			(11,042	)			141,223				46,853
Loan sale repurchase reserves			(388,733	)			(73,562	)			(39,673	)
Gain on sales of residual interests			7,038				31,463				15,396
Impairment of residual interests			(168,878	)			(34,107	)			(12,235	)
			(459,635	)			713,710				822,075
Interest income			55,024				133,703				149,581
Loan servicing revenue			433,438				398,992				273,056
Other			45,747				51,643				28,938
Total revenues			74,574				1,298,048				1,273,650
Cost of services			380,186				351,676				253,461
Cost of other revenues			295,336				444,391				356,052
Impairments			350,878				—				—
Selling, general and administrative			281,182				185,070				174,035
Total expenses			1,307,582				981,137				783,548
Pretax income (loss)			(1,233,008	)			316,911				490,102
Income taxes (benefit)			(425,018	)			124,044				185,941
Net income (loss)		$	(807,990	)		$	192,867			$	304,161

FISCAL 2007 COMPARED TO FISCAL 2006 — Conditions in the non-prime mortgage industry were challenging throughout fiscal year 2007, and particularly in our fourth quarter. Our mortgage operations, as well as the entire industry, were impacted by deteriorating conditions in the secondary market, where reduced investor demand for loan purchases, higher investor yield requirements and increased estimates for future losses reduced the value of non-prime loans. Under these

conditions non-prime originators generally reported significant increases in losses and many were unable to meet their financial obligations. During the fourth quarter we tightened our underwriting standards, which had the effect of reducing our loan origination volumes, but we expect will result in the origination of higher quality loans with better pricing in the secondary markets.

     The pretax loss of $1.2 billion includes losses of $50.2 million from our Business Services and Tax Services discontinued operations, with the remainder from our mortgage business. As discussed more fully below, mortgage results include $388.7 million in loss provisions and repurchase reserves, impairments of residual interests of $168.9 million and impairments of other assets totaling $345.8 million. If conditions in the industry, particularly in home appreciation, continue to decline, our future results would continue to be negatively impacted.

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

		(dollars in 000s)
Year Ended April 30,		2007				2006
Application process:
Total number of applications			256,877				369,210
Number of sales associates (1)			1,683				2,814
Closing ratio (2)			49.7	%			60.3	%
Originations:
Total number of loans originated			127,556				222,749
WAC			8.60	%			7.87	%
Average loan size		$	212			$	183
Total volume of loans originated		$	27,073,467			$	40,779,763
Direct origination and acquisition expenses, net		$	171,374			$	387,911
Revenue (loan value):
Net gain on sale — gross margin (3)			(1.10	%)			1.76	%

     Gains on sales of mortgage assets decreased $1.2 billion from the prior year. This decrease resulted primarily from significantly lower origination volumes and loan sale premiums, increases in loan repurchase reserves and impairments of residual interests and losses on derivatives.

     During the fourth quarter, concerns about credit quality in the non-prime industry resulted in lower demand for non-prime loans and a higher yield requirement by investors that purchase the loans. As a result, during the quarter we originated mortgage loans that, by the time we sold them in the secondary market, were valued at less than par. Our fourth quarter net gain on sale gross margin was a negative 6.87% and a negative 1.10% for the full fiscal year. We sold 73% and 39% of our loans through securitizations in the fourth quarter and fiscal year, respectively. Additionally, our loan sale premium declined 148 basis points from 1.42% in fiscal year 2006, to a negative 0.06% in the current year.

     The disruption in the secondary market, coupled with declining credit quality and increasing early payment defaults, caused investors in our loans to become increasingly more likely to execute on early payment default provisions available to them in loan sale agreements. As a result, we experienced higher actual and expected loan repurchase activity. Additionally, after we repurchased the loans, we experienced higher severity of losses on those loans. We recorded total loss provisions of $388.7 million during fiscal year 2007 compared to $73.6 million in the prior year. The provision recorded in the current year consists of $238.8 million recorded on loans sold during the current year and $149.9 million related to loans sold in the prior year. Loss provisions as a percent of loan volumes increased 126 basis points over the prior year. See additional discussion of our reserves and repurchase obligations in Item 8, note 20 to our consolidated financial statements.

     During the current year, we recorded impairments of $168.9 million in gains on sales of mortgage assets due to higher expected credit losses resulting from the decline in performance of the underlying collateral. We also recorded unfavorable pretax mark-to-market adjustments in other comprehensive income, which decreased the fair value of our residual interests $32.4 million during the current year. These adjustments were recorded net of write-ups of $18.6 million and deferred taxes of $5.3 million. We also recorded $7.0 million and $31.5 million in gains on the sale of residual interests for the years ended April 30, 2007 and 2006, respectively.

     During the current year, we recorded a net $11.0 million in losses, compared to gains of $141.2 million in the prior year, related to our various derivative instruments. The decline for the current year was caused by market interest rates, based on the two-year swap, declining 6 basis points compared to an increase of 131 basis points during the prior year. See Item 8, note 20 to the consolidated financial statements.

     The value of MSRs recorded in the current year increased to 64 basis points from 61 basis points in the prior year due to changes in our assumptions used to value MSRs, as well as an increase in average loan balances. However, this increase was offset by an overall decline in origination volumes, resulting in

a net decrease in gains on sales of mortgage loans of $78.3 million. See additional discussion of our MSR assumptions in “Critical Accounting Policies” and in Item 8, note 20 to the consolidated financial statements.

     Interest income decreased $78.7 million from the prior year. This decrease is primarily due to higher levels of non-performing loans, lower accretion resulting from the sale of previously securitized residual interests and lower write-ups to residual interest balances.

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

		(dollars in 000s)
Year Ended April 30,		2007				2006
Average servicing portfolio:
With related MSRs		$	63,870,378			$	56,521,595
Without related MSRs			3,314,538				19,106,863
		$	67,184,916			$	75,628,458
Ending servicing portfolio:
With related MSRs		$	63,927,976			$	62,910,568
Without related MSRs			3,069,073				10,471,509
		$	66,997,049			$	73,382,077
Number of loans serviced			384,156				441,981
Average delinquency rate			9.77	%			5.16	%
Weighted average FICO score			621				621
WAC of portfolio			8.08	%			7.58	%
Carrying value of MSRs			253,067				272,472

     Loan servicing revenues increased $34.4 million, or 8.6%, compared to the prior year. The increase reflects higher late fee income on delinquent loans. This increase was partially offset by a reduction in our average servicing portfolio, which decreased 11.2%, to $67.2 billion. The annualized rate earned on our entire servicing portfolio was 37 basis points for the current year, compared to 38 basis points in the prior year.

     Total expenses for the fiscal year ended April 30, 2007 increased $326.4 million, or 33.3%, over the prior year. Cost of services increased $28.5 million primarily as a result of higher amortization of MSRs, partially offset by reductions in compensation and occupancy expenses resulting from our mortgage restructuring activities.

     Cost of other revenues decreased $149.1 million, primarily due to our ongoing restructuring plans. As a result, compensation and benefits declined $116.7 million and other expenses declined $27.4 million.

     In conjunction with our agreement to sell OOMC, we recorded impairments during the fourth quarter of fiscal year 2007. The purchase price will be calculated as the fair value of the adjusted tangible net assets of OOMC (as defined by the agreement) at closing less $300.0 million. At April 30, 2007, we valued our assets and liabilities held for sale at estimated fair value at closing, less costs to sell, of $1.1 billion which resulted in an impairment charge of $345.8 million, including the full impairment of goodwill of $152.5 million. Because conditions may change during the period prior to closing, the adjusted tangible net assets of the business at the closing date may be significantly different than the estimated value we have reported as of April 30, 2007. Any changes could change the final impairment amount recorded at closing. See discussion of additional conditions of the sale in Item 1A, under “Potential Sale Transaction.”

     Selling, general and administrative expenses increased $96.1 million due primarily to severance costs in connection with our ongoing restructuring plans, coupled with retention bonuses and higher consulting expenses. See additional discussion of the restructuring charge in Item 8, note 20 to the consolidated financial statements.

     The pretax loss for the year ended April 30, 2007 was $1.2 billion compared to income of $316.9 million in the prior year.

     The loss from discontinued operations for fiscal year 2007 of $808.0 million is net of tax benefits of $425.0 million, and includes income tax benefits related to OOMC totaling $374.6 million. Income taxes for discontinued operations also included one-time benefits of $16.2 million related to permanent deductions for the tax basis of investments in two subsidiaries that were abandoned during the year. Assets of discontinued operations held for sale includes deferred tax assets of $393.6 million, net of the related valuation allowance, and deferred tax liabilities of $94.0 million as of April 30, 2007. In addition, we recorded a valuation allowance of $55.8 million, which primarily relates to deferred tax assets for capital losses and basis differences in certain state jurisdictions. Deferred tax assets of $183.2 million relate to certain residual assets. Although the tax position associated with these deferred tax assets is more likely than not of being sustained, there is a level of uncertainty associated with the amount of benefit. We believe the net deferred tax asset at April 30, 2007 is, more likely than not, realizable.

FISCAL 2006 COMPARED TO FISCAL 2005 — Revenues from discontinued operations increased $24.4 million, or 1.9%, over fiscal year 2005. Revenues increased as a result of higher loan servicing revenues and gains on derivatives, partially offset by lower margins on mortgage loans sold and lower accretion.

     Despite a 31.5% increase in loan origination volume, gains on sales of mortgage loans decreased $163.0 million, primarily as a result of moderating demand by loan buyers and rising two-year swap rates. Market interest rates, based on the two-year swap, increased from an average of 3.32% last year to 4.63% in the current year. However, our WAC increased only 51 basis points, up to 7.87% from 7.36% in the prior year. Due to competitive market conditions, we were unable to align our WAC with increases in market rates. Because of poor alignment of our WAC with market rates and increases in our funding costs, our loan sale premium declined 135 basis points, to 1.42% from 2.77% in the prior year. In fiscal year 2006, we also increased our loss reserves above our normal loss accrual,

primarily related to repurchase activity for loans sold related to early payment defaults, which reduced gains on sales of mortgage loans.

     The initial value of MSRs recorded in fiscal year 2006 increased to 61 basis points from 44 basis points in the prior year, which resulted in an increase of $113.0 million in gains on sales of mortgage loans. These increases were primarily due to higher origination volumes, average loan size and interest rates, coupled with updated valuation assumptions. During fiscal year 2006 we updated our assumptions used to value our MSRs. The assumptions were updated primarily to reflect lower servicing costs, in particular interest paid to bondholders on monthly loan prepayments, and higher discount rates. These changes in assumptions increased the weighted average value of MSRs recorded during fiscal year 2006 by approximately $37.0 million (9 basis points of total retained MSRs of 61 basis points) over the prior year.

     To mitigate the risk of short-term changes in market interest rates related to our loan originations and beneficial interest in Trusts, we use interest rate swaps and forward loan sale commitments. We generally enter into interest rate swap arrangements related to existing loan applications with rate-lock commitments and for rate-lock commitments we expect to make in the next two to three weeks. During fiscal year 2006, we recorded a net $141.2 million in gains, compared to $46.9 million in the prior year, related to our interest rate swaps and other derivative instruments. This increase was primarily due to rising short-term interest rates and an increase in the average notional amount of swap arrangements to $8.4 billion in fiscal year 2006, compared to $2.4 billion in fiscal year 2005.

     In fiscal year 2006, we completed sales of available-for-sale residual interests and recorded a gain of $31.5 million. These sales accelerated cash flows from these residual interests, effectively realizing previously recorded unrealized gains included in other comprehensive income. We recorded a gain of $15.4 million in the prior year on a similar transaction.

     During fiscal year 2006, our available-for-sale residual interests performed better than expected in our internal valuation models, with lower credit losses than originally modeled, partially offset by higher than expected interest rates. We recorded favorable pretax mark-to-market adjustments, which increased the fair value of these residual interests $53.3 million during the year. These adjustments were recorded, net of write-downs of $18.0 million and deferred taxes of $13.5 million, in other comprehensive income and will be accreted into income throughout the remaining life of those residual interests. Offsetting this increase were impairments of $34.1 million, which were recorded in gains on sales of mortgage assets. Future changes in interest rates or other assumptions, based on market conditions or actual loan pool performance, could cause additional adjustments to the fair value of these residual interests and could cause changes to the accretion of these residual interests in future periods.

     Loan servicing revenues increased $125.9 million, or 46.1%, compared to the prior year. The increase reflects a higher loan servicing portfolio resulting from our loan origination growth. The average servicing portfolio for the year increased 37.9%, to $75.6 billion, even with lower volumes in our sub-servicing business. The weighted average rate earned on our entire servicing portfolio was 38 basis points for fiscal year 2006, compared to 36 basis points in the prior year.

     Total expenses for fiscal year 2006 increased $197.6 million, or 25.2%, from the prior year. Cost of services increased $98.2 million, or 38.7%, mainly as a result of a higher average servicing portfolio during the current quarter year and increased amortization of MSRs.

     Cost of other revenues increased $88.3 million over fiscal year 2005, and includes a $12.6 million restructuring charge associated with the closing of some of our branch offices. Compensation and benefits increased $53.8 million primarily due to an increase in the average number of sales associates during the year to support higher loan volumes and the resulting increase in origination-based incentives, coupled with $6.7 million in severance charges recorded as part of the restructuring. Occupancy expenses increased $7.8 million primarily due to $5.9 million in lease termination costs recorded as part of the restructuring. Other expenses increased $26.8 million primarily as a result of $20.1 million in additional interest expense related to mortgage loans held on our balance sheet and $5.0 million of additional depreciation and amortization of our origination and servicing software.

     Selling, general and administrative expenses increased $11.0 million primarily due to $15.3 million in additional marketing expenses, $5.1 million in additional occupancy costs and $3.2 million in higher allocated shared services. These increases were partially offset by a $15.7 million decline in compensation and benefits resulting from reductions in administrative and corporate headcount and lower bonus accruals.

     Pretax income decreased $173.2 million, or 35.3%, for fiscal year 2006.

CRITICAL ACCOUNTING POLICIES —

We consider the policies discussed below to be critical to understanding our financial statements, as they require the use of significant judgment and estimation in order to measure, at a specific point in time, matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, we caution that future events rarely develop precisely as forecasted, and estimates routinely require adjustment and may require material adjustment.

     REVENUE RECOGNITION — We have many different revenue sources, each governed by specific revenue recognition policies. Our revenue recognition policies can be found in Item 8, note 1 to our consolidated financial statements. Additional discussion of our recognition of gains on sales of mortgage assets follows.

     VALUATION OF MORTGAGE LOANS HELD FOR INVESTMENT — Determining the allowance for credit losses for loans held for investment requires us to make estimates of losses that are highly uncertain and requires a high degree of judgment.

     We record an allowance representing our estimate of credit losses inherent in our portfolio of loans held for investment at the balance sheet date. The majority of our estimated credit loss is evaluated for mortgage loans on a pooled basis. We stratify the loan portfolio based on our view of risk associated with various elements of the pool and assign estimated loss rates based on those risks. Loss rates are based on historical experience, our assessment of economic and market conditions and loss rates of comparable financial institutions. We review non-performing loans individually and record loss estimates typically based on the value of the underlying collateral. Changes in our estimates can affect our operating results.

     VALUATION OF GOODWILL — We test goodwill and other indefinite life intangible assets for impairment annually, or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value. Our goodwill impairment analysis is based on a discounted cash flow approach and market comparables, when available. This analysis, at the reporting unit level, requires significant management judgment with respect to revenue and expense forecasts, anticipated changes in working capital, and the selection and application of an appropriate discount rate. Changes in the projections or assumptions could materially affect our estimate of reporting unit fair values. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could effect our conclusions regarding the existence or amount of potential impairment.

     The goodwill balance in our continuing operations was $993.9 million as of April 30, 2007 and $941.3 million as of April 30, 2006. No goodwill impairments were identified in our continuing operations during fiscal years 2007, 2006 or 2005. In fiscal year 2007, we recorded $154.9 million in goodwill impairments related to the sale or wind-down of businesses reported as discontinued operations.

     LITIGATION — It is our policy to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. Assessing the likely outcome of pending litigation, including the amount of potential loss if any, is highly subjective. Our estimates may differ from actual results due to difficulties in predicting the outcome of jury trial, arbitration hearings, settlement discussions and related activity; predicting the outcome of class certification actions; and various other uncertainties.

     A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known issue and an analysis of historical experience in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” and related pronouncements. Therefore, we have recorded reserves related to certain legal matters for which we believe it is probable that a loss will be incurred and the range of such loss can be estimated. With respect to other matters, we have concluded that a loss is only reasonably possible or remote, or is not estimable and, therefore, no liability is recorded.

     INCOME TAXES — We calculate our current and deferred tax provision for the fiscal year based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the applicable calendar year. Adjustments based on filed returns are recorded in the appropriate periods when identified. We file a consolidated federal tax return on a calendar year basis, generally in the second fiscal quarter of the subsequent year.

     We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered taxable income in carry-back periods, historical and forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, and tax planning strategies in determining the need for a valuation allowance against our deferred tax assets. In the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the deferred tax assets would be

realized, we would reverse the applicable portion of the previously provided valuation allowance.

     The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly subjective and based on our best judgments. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate on a quarterly basis.

     GAINS ON SALES OF MORTGAGE ASSETS — We sell substantially all of the non-prime mortgage loans we originate to the Trusts which are qualifying special purpose entities (QSPEs), with servicing rights generally retained. Prime mortgage loans are sold in loan sales, servicing released, to third-party buyers. Gains or losses on sales of mortgage loans are recognized when control of the assets is surrendered (when loans are sold to third-party buyers, including the Trusts) and are based on the difference between net proceeds received (cash proceeds less repurchase reserves) and the allocated cost of the assets sold. We determine the allocated cost of assets sold based on the relative fair values of net proceeds (i.e. the loans sold), retained MSRs and the beneficial interest in Trusts, which represents our residual interest in the ultimate expected outcome from the disposition of the loans by the Trusts.

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

		(in 000s)
Acquisition cost of underlying mortgage loans						$	1,000,000
Fair values:
Net proceeds:
Cash received		$	999,000
Less repurchase reserves			(4,000	)		$	995,000
Beneficial interest in Trusts							20,000
MSRs							7,000
						$	1,022,000
Computation of gain on sale:
Net proceeds						$	995,000
Less allocated cost ($995,000 / $1,022,000 x $1,000,000)							973,581
Recorded gain on sale						$	21,419
Recorded beneficial interest in Trusts ($20,000 / $1,022,000 x $1,000,000)						$	19,570
Recorded value of MSRs ($7,000 / $1,022,000 x $1,000,000)						$	6,849
Recorded liability for repurchase reserves						$	4,000