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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

(Mark One)	 	 	
[X]	 	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 	 	For the quarterly period ended October 31, 2010	
 	 	 	
OR	
[  ]	 	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
(State or other jurisdiction of
incorporation or organization)	 	44-0607856
(I.R.S. Employer
Identification No.)	
 
One H&R Block Way
Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
 
(816) 854-3000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   Ö    No        
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes     Ö      No         
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   Ö  	 	Accelerated filer     	 	Non-accelerated filer      	 	Smaller reporting company      	
 	 	 	
 	 	(Do not check if a smaller reporting company)	
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes            No     Ö   
 
The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on November 30, 2010 was 305,110,195 shares.

 

 
Form 10-Q for the Period Ended October 31, 2010

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 	 	 	 	Page	 	
 	 	 	 	 	 	 	 	
PART I	 	Financial Information	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Item 1.	 	Condensed Consolidated Balance Sheets
October 31, 2010 and April 30, 2010	 	 	1	 	 	
 	 	 	 	 	 	 	 	
 	 	Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss)
Three and Six Months Ended October 31, 2010 and 2009	 	 	2	 	 	
 	 	 	 	 	 	 	 	
 	 	Condensed Consolidated Statements of Cash Flows
Six Months Ended October 31, 2010 and 2009	 	 	3	 	 	
 	 	 	 	 	 	 	 	
 	 	Notes to Condensed Consolidated Financial Statements	 	 	4	 	 	
 	 	 	 	 	 	 	 	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	24	 	 	
 	 	 	 	 	 	 	 	
Item 3.	 	Quantitative and Qualitative Disclosures about Market Risk	 	 	31	 	 	
 	 	 	 	 	 	 	 	
Item 4.	 	Controls and Procedures	 	 	31	 	 	
 	 	 	 	 	 	 	 	
PART II	 	Other Information	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Item 1.	 	Legal Proceedings	 	 	31	 	 	
 	 	 	 	 	 	 	 	
Item 1A.	 	Risk Factors	 	 	34	 	 	
 	 	 	 	 	 	 	 	
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds	 	 	35	 	 	
 	 	 	 	 	 	 	 	
Item 6.	 	Exhibits	 	 	35	 	 	
 	 	 	 	 	 	
SIGNATURES	 	 	36	 	 	

 EX-10.2	
 EX-31.1	
 EX-31.2	
 EX-32.1	
 EX-32.2	
 EX-101 INSTANCE DOCUMENT	
 EX-101 SCHEMA DOCUMENT	
 EX-101 CALCULATION LINKBASE DOCUMENT	
 EX-101 LABELS LINKBASE DOCUMENT	
 EX-101 PRESENTATION LINKBASE DOCUMENT	
 EX-101 DEFINITION LINKBASE DOCUMENT	

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

 	 	October 31, 2010	 	 	April 30, 2010	 	
 	 	
 	 	(Unaudited)	 	 	 	 	
 	 	 	 	 	 	 	 	 	
ASSETS	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	959,746	 	 	$	1,804,045	 	
Cash and cash equivalents – restricted	 	 	35,473	 	 	 	34,350	 	
Receivables, less allowance for doubtful accounts of $115,505 and $112,475	 	 	416,333	 	 	 	517,986	 	
Prepaid expenses and other current assets	 	 	324,014	 	 	 	292,655	 	
 	 	 	 	 	 	 	 	 	
Total current assets	 	 	1,735,566	 	 	 	2,649,036	 	
Mortgage loans held for investment, less allowance for loan losses of $87,567 and $93,535	 	 	537,226	 	 	 	595,405	 	
Property and equipment, at cost, less accumulated depreciation and amortization of $683,537 and $657,008	 	 	327,881	 	 	 	345,470	 	
Intangible assets, net	 	 	373,324	 	 	 	367,432	 	
Goodwill	 	 	867,417	 	 	 	840,447	 	
Other assets	 	 	466,368	 	 	 	436,528	 	
 	 	 	 	 	 	 	 	 	
Total assets	 	$	4,307,782	 	 	$	5,234,318	 	

LIABILITIES AND STOCKHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	 	
Customer banking deposits	 	$	929,898	 	 	$	852,555	 	
Accounts payable, accrued expenses and other current liabilities	 	 	660,999	 	 	 	756,577	 	
Accrued salaries, wages and payroll taxes	 	 	81,163	 	 	 	199,496	 	
Accrued income taxes	 	 	151,708	 	 	 	459,175	 	
Current portion of long-term debt	 	 	3,407	 	 	 	3,688	 	
Commercial paper borrowings	 	 	39,517	 	 	 	-	 	
Federal Home Loan Bank borrowings	 	 	50,000	 	 	 	50,000	 	
 	 	 	 	 	 	 	 	 	
Total current liabilities	 	 	1,916,692	 	 	 	2,321,491	 	
 	 	 	 	 	 	 	 	 	
Long-term debt	 	 	1,041,103	 	 	 	1,035,144	 	
Federal Home Loan Bank borrowings	 	 	25,000	 	 	 	25,000	 	
Other noncurrent liabilities	 	 	445,182	 	 	 	412,053	 	
 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	3,427,977	 	 	 	3,793,688	 	
 	 	 	 	 	 	 	 	 	
Commitments and contingencies	 	 	 	 	 	 	 	 	
Stockholders’ equity:	 	 	 	 	 	 	 	 	
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 412,440,599 and 431,390,599	 	 	4,124	 	 	 	4,314	 	
Additional paid-in capital	 	 	810,403	 	 	 	832,604	 	
Accumulated other comprehensive income	 	 	2,757	 	 	 	1,678	 	
Retained earnings	 	 	2,104,050	 	 	 	2,658,586	 	
Less treasury shares, at cost	 	 	(2,041,529	)	 	 	(2,056,552	)	
 	 	 	 	 	 	 	 	 	
Total stockholders’ equity	 	 	879,805	 	 	 	1,440,630	 	
 	 	 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	 	$	4,307,782	 	 	$	5,234,318	 	

See Notes to Condensed Consolidated Financial Statements
1

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

 	 	
 	 	Three Months Ended October 31,	 	 	Six Months Ended October 31,	 	
 	 	
 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	

Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Service revenues	 	$	296,139	 	 	$	294,958	 	 	$	543,558	 	 	$	542,943	 	
Interest income	 	 	10,635	 	 	 	12,113	 	 	 	20,937	 	 	 	24,400	 	
Product and other revenues	 	 	16,115	 	 	 	19,010	 	 	 	32,868	 	 	 	34,243	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	322,889	 	 	 	326,081	 	 	 	597,363	 	 	 	601,586	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenues	 	 	392,950	 	 	 	410,949	 	 	 	760,966	 	 	 	797,399	 	
Selling, general and administrative	 	 	108,943	 	 	 	129,685	 	 	 	225,972	 	 	 	232,902	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	501,893	 	 	 	540,634	 	 	 	986,938	 	 	 	1,030,301	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating loss	 	 	(179,004	)	 	 	(214,553	)	 	 	(389,575	)	 	 	(428,715	)	
Other income, net	 	 	3,885	 	 	 	1,700	 	 	 	7,139	 	 	 	4,989	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before tax benefit	 	 	(175,119	)	 	 	(212,853	)	 	 	(382,436	)	 	 	(423,726	)	
Income tax benefit	 	 	(68,307	)	 	 	(86,381	)	 	 	(147,986	)	 	 	(166,637	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from continuing operations	 	 	(106,812	)	 	 	(126,472	)	 	 	(234,450	)	 	 	(257,089	)	
Net loss from discontinued operations	 	 	(2,237	)	 	 	(2,115	)	 	 	(5,280	)	 	 	(5,132	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(109,049	)	 	$	(128,587	)	 	$	(239,730	)	 	$	(262,221	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic and diluted loss per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from continuing operations	 	$	(0.35	)	 	$	(0.38	)	 	$	(0.75	)	 	$	(0.77	)	
Net loss from discontinued operations	 	 	(0.01	)	 	 	-	 	 	 	(0.02	)	 	 	(0.01	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(0.36	)	 	$	(0.38	)	 	$	(0.77	)	 	$	(0.78	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic and diluted shares	 	 	306,804	 	 	 	335,346	 	 	 	313,247	 	 	 	334,939	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid per share	 	$	0.15	 	 	$	0.15	 	 	$	0.30	 	 	$	0.30	 	

Comprehensive income (loss):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(109,049	)	 	$	(128,587	)	 	$	(239,730	)	 	$	(262,221	)	
Change in unrealized gain on available-for-sale securities, net	 	 	(333	)	 	 	329	 	 	 	(639	)	 	 	(418	)	
Change in foreign currency translation adjustments	 	 	5,396	 	 	 	2,586	 	 	 	1,376	 	 	 	12,123	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive loss	 	$	(103,986	)	 	$	(125,672	)	 	$	(238,993	)	 	$	(250,516	)	

See Notes to Condensed Consolidated Financial Statements
2

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

Six Months Ended October 31,	 	2010	 	 	2009	 	

Net cash used in operating activities	 	$	(548,001	)	 	$	(786,152	)	
 	 	 	 	 	 	 	 	 	
Cash flows from investing activities:	 	 	 	 	 	 	 	 	
Principal repayments on mortgage loans held for investment, net	 	 	30,829	 	 	 	38,693	 	
Purchases of property and equipment, net	 	 	(35,005	)	 	 	(7,280	)	
Payments made for business acquisitions, net	 	 	(43,310	)	 	 	(6,606	)	
Other, net	 	 	30,851	 	 	 	18,473	 	
 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) investing activities	 	 	(16,635	)	 	 	43,280	 	
 	 	 	 	 	 	 	 	 	
Cash flows from financing activities:	 	 	 	 	 	 	 	 	
Repayments of commercial paper	 	 	(75,000	)	 	 	-	 	
Proceeds from commercial paper	 	 	114,490	 	 	 	-	 	
Customer banking deposits, net	 	 	77,023	 	 	 	638,466	 	
Dividends paid	 	 	(95,068	)	 	 	(100,784	)	
Repurchase of common stock, including shares surrendered	 	 	(283,470	)	 	 	(3,785	)	
Proceeds from exercise of stock options	 	 	1,493	 	 	 	8,218	 	
Other, net	 	 	(21,352	)	 	 	(30,884	)	
 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) financing activities	 	 	(281,884	)	 	 	511,231	 	

Effects of exchange rates on cash	 	 	2,221	 	 	 	9,221	 	
 	 	 	 	 	 	 	 	 	
Net decrease in cash and cash equivalents	 	 	(844,299	)	 	 	(222,420	)	
Cash and cash equivalents at beginning of the period	 	 	1,804,045	 	 	 	1,654,663	 	
 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of the period	 	$	959,746	 	 	$	1,432,243	 	
 	 	 	 	 	 	 	 	 	
Supplementary cash flow data:	 	 	 	 	 	 	 	 	
Income taxes paid	 	$	103,803	 	 	$	196,427	 	
Interest paid on borrowings	 	 	30,933	 	 	 	37,304	 	
Interest paid on deposits	 	 	3,828	 	 	 	4,134	 	
Transfers of loans to foreclosed assets	 	 	11,185	 	 	 	9,212	 	
 
See Notes to Condensed Consolidated Financial Statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	(unaudited)	

1. 	Summary of Significant Accounting Policies	
 
Basis of Presentation
The condensed consolidated balance sheet as of October 31, 2010, the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended October 31, 2010 and 2009, and the condensed consolidated statements of cash flows for the six months ended October 31, 2010 and 2009 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows at October 31, 2010 and for all periods presented have been made.
“H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2010 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2010 or for the year then ended, are derived from our April 30, 2010 Annual Report to Shareholders on Form 10-K.
 
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the determination of our allowance for loan losses, potential losses from loan repurchase and indemnity obligations associated with our discontinued mortgage business, contingent losses associated with pending litigation, fair value of reporting units, reserves for uncertain tax positions and related matters. We revise our estimates when facts and circumstances dictate. However, future events and their effects cannot be determined with absolute certainty. As such, actual results could differ materially from those estimates.
 
Seasonality of Business
Our operating revenues are seasonal in nature with peak revenues occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.
 
Concentrations of Risk
Our mortgage loans held for investment include concentrations of loans to borrowers in certain states, which may result in increased exposure to loss as a result of changes in real estate values and underlying economic or market conditions related to a particular geographical location. Approximately 51% of our mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California and New York.

2. 	Business Combinations	
Effective July 20, 2010, our Business Services segment acquired certain non-attest assets and liabilities of Caturano & Company, Inc. (Caturano), a Boston-based accounting firm, for an aggregate purchase price of $40.2 million. We expect this acquisition to expand our presence in the Boston market. We made cash payments of $32.6 million, including $29.8 million at closing. Payment of the remaining purchase price is
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deferred and will be paid over 14 years. The following table summarizes the fair value of identifiable assets acquired and liabilities assumed and the resulting goodwill as of October 31, 2010:

(in 000s)	 	

Customer relationships(1)	 	$	6,733	 	
Non-compete agreements(2)	 	 	2,766	 	
Attest firm affiliation(3)	 	 	7,629	 	
Goodwill	 	 	27,289	 	
Fixed assets	 	 	2,500	 	
Other assets	 	 	831	 	
Other liabilities	 	 	(1,640)	 	
Unfavorable leasehold(2)	 	 	(5,890)	 	
 	 	 	 	 	
Total purchase price	 	$	40,218	 	

 	

(1)	 	Estimated life of 12 years.	
(2)	 	Estimated life of 7 years.	
(3)	 	Estimated life of 18 years. Represents the benefits to be received from the Alternative Practice Structure arrangement and Administrative Services Agreement with the attest firm of Caturano.	
In connection with the acquisition a deferred compensation plan, an employee retention program and a performance bonus plan were put in place for eligible employees. Expenses related to these plans will be treated as compensation and will be expensed as incurred. We incurred expenses totaling $1.3 million under these plans during the six months ended October 31, 2010.
In October 2010, we signed a definitive merger agreement to acquire all of the outstanding shares of 2SS Holdings, Inc., developer of TaxACT digital tax preparation solutions, for $287.5 million in cash. Completion of the transaction is subject to the satisfaction of customary closing conditions, including regulatory approval.

3. 	Earnings (Loss) Per Share and Stockholders’ Equity	
Basic and diluted earnings (loss) per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 15.6 million shares and 19.3 million shares for the three and six months ended October 31, 2010, respectively and 19.3 million shares for the three and six months ended October 31, 2009, as the effect would be antidilutive due to the net loss from continuing operations during each period.
The computations of basic and diluted loss per share from continuing operations are as follows:

 	 	(in 000s, except per share amounts)	 	
 	 	
 	 	Three Months Ended October 31,	 	 	Six Months Ended October 31,	 	
 	 	
 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	

Net loss from continuing operations attributable to shareholders	 	$	(106,812	)	 	$	(126,472	)	 	$	(234,450	)	 	$	(257,089	)	
Amounts allocated to participating securities (nonvested shares)	 	 	(26	)	 	 	(27	)	 	 	(7	)	 	 	340	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from continuing operations attributable to common shareholders	 	$	(106,786	)	 	$	(126,445	)	 	$	(234,443	)	 	$	(257,429	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic weighted average common shares	 	 	306,804	 	 	 	335,346	 	 	 	313,247	 	 	 	334,939	 	
Potential dilutive shares	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dilutive weighted average common shares	 	 	306,804	 	 	 	335,346	 	 	 	313,247	 	 	 	334,939	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings (loss) per share from continuing operations attributable to common shareholders:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	(0.35	)	 	$	(0.38	)	 	$	(0.75	)	 	$	(0.77	)	
Diluted	 	 	(0.35	)	 	 	(0.38	)	 	 	(0.75	)	 	 	(0.77	)	

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The weighted average shares outstanding for the three and six months ended October 31, 2010 decreased to 306.8 million and 313.2 million, respectively, from 335.3 million and 334.9 million for the three and six months ended October 31, 2009, respectively. During the six months ended October 31, 2010, we purchased and immediately retired 19.0 million shares of our common stock at a cost of $279.9 million. We may continue to repurchase and retire common stock or retire shares held in treasury from time to time in the future. The cost of shares retired during the period was allocated to the components of stockholders’ equity as follows:

(in 000s)	 	

Common stock	 	$	190	 	
Additional paid-in capital	 	 	11,370	 	
Retained earnings	 	 	268,387	 	
 	 	 	 	 	
 	 	$	279,947	 	

 	
During the six months ended October 31, 2010 and 2009, we issued 1.0 million and 1.6 million shares of common stock, respectively, due to the exercise of stock options, employee stock purchases and vesting of nonvested shares.
During the six months ended October 31, 2010, we acquired 0.2 million shares of our common stock at an aggregate cost of $3.5 million, and during the six months ended October 31, 2009, we acquired 0.2 million shares at an aggregate cost of $3.8 million. Shares acquired during these periods represented shares swapped or surrendered to us in connection with the vesting of nonvested shares and the exercise of stock options.
During the six months ended October 31, 2010, we granted 2.1 million stock options and 0.6 nonvested shares and units in accordance with our stock-based compensation plans. The weighted average fair value of options granted was $2.25 for management options. These awards vest over a four year period with one-fourth vesting each year. Stock-based compensation expense of our continuing operations totaled $2.7 million and $6.2 million for the three and six months ended October 31, 2010, respectively, and $4.8 million and $12.1 million for the three and six months ended October 31, 2009, respectively. At October 31, 2010, unrecognized compensation cost for options totaled $6.4 million, and for nonvested shares and units totaled $16.4 million.

4. 	Mortgage Loans Held for Investment and Related Assets	
The composition of our mortgage loan portfolio as of October 31, 2010 and April 30, 2010 is as follows:

 	 	 	 	 	 	 	 	 	 	 	(dollars in 000s)	 	
 	 	
As of	 	October 31, 2010	 	 	April 30, 2010	 	
 	 	
 	 	Amount	 	 	% of Total	 	 	Amount	 	 	% of Total	 	

Adjustable-rate loans	 	$	365,262	 	 	 	59	%	 	$	411,122	 	 	 	60	%	
Fixed-rate loans	 	 	254,995	 	 	 	41	%	 	 	272,562	 	 	 	40	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	620,257	 	 	 	100	%	 	 	683,684	 	 	 	100	%	
Unamortized deferred fees and costs	 	 	4,536	 	 	 	 	 	 	 	5,256	 	 	 	 	 	
Less: Allowance for loan losses	 	 	(87,567	)	 	 	 	 	 	 	(93,535	)	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	537,226	 	 	 	 	 	 	$	595,405	 	 	 	 	 	

 	
Activity in the allowance for loan losses for the six months ended October 31, 2010 and 2009 is as follows:
(in 000s)

Six Months Ended October 31,	 	2010	 	 	2009	 	 	 	

Balance, beginning of the period	 	$	93,535	 	 	$	84,073	 	 	 	
Provision	 	 	16,300	 	 	 	27,000	 	 	 	
Recoveries	 	 	86	 	 	 	29	 	 	 	
Charge-offs	 	 	(22,354	)	 	 	(15,109	)	 	 	
 	 	 	 	 	 	 	 	 	 	 	
Balance, end of the period	 	$	87,567	 	 	$	95,993	 	 	 	

 	

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Our loan loss reserve as a percent of mortgage loans was 14.1% at October 31, 2010 compared to 13.7% at April 30, 2010.
In cases where we modify a loan and in so doing grant a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (TDR). TDR loans totaled $121.7 million and $145.0 million at October 31, 2010 and April 30, 2010, respectively. The principal balance of non-performing assets as of October 31, 2010 and April 30, 2010 is as follows:
(in 000s)

As of	 	October 31, 2010	 	 	April 30, 2010	 	 	 	

Impaired loans:	 	 	 	 	 	 	 	 	 	 	
30 – 59 days	 	$	1,366	 	 	$	330	 	 	 	
60 – 89 days	 	 	12,398	 	 	 	11,851	 	 	 	
90+ days, non-accrual	 	 	149,040	 	 	 	153,703	 	 	 	
TDR loans, accrual	 	 	111,249	 	 	 	113,471	 	 	 	
TDR loans, non-accrual	 	 	10,440	 	 	 	31,506	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	
 	 	 	284,493	 	 	 	310,861	 	 	 	
Real estate owned(1)	 	 	25,577	 	 	 	29,252	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	
Total non-performing assets	 	$	310,070	 	 	$	340,113	 	 	 	

 	

(1)	 	Includes loans accounted for as in-substance foreclosures of $9.4 million and $12.5 million at October 31, 2010 and April 30, 2010, respectively.	
Activity related to our real estate owned is as follows:
(in 000s)

Six Months Ended October 31,	 	2010	 	 	2009	 	 	 	

Balance, beginning of the period	 	$	29,252	 	 	$	44,533	 	 	 	
Additions	 	 	11,185	 	 	 	9,212	 	 	 	
Sales	 	 	(12,784	)	 	 	(10,055	)	 	 	
Writedowns	 	 	(2,076	)	 	 	(4,795	)	 	 	
 	 	 	 	 	 	 	 	 	 	 	
Balance, end of the period	 	$	25,577	 	 	$	38,895	 	 	 	

 	

5. 	Goodwill and Intangible Assets	
Changes in the carrying amount of goodwill for the six months ended October 31, 2010 consist of the following:
 	 	 	 	 	 	 	 	 	 	 	 	 	
(in 000s)	 	
 	 	
 	 	Tax Services	 	 	Business Services	 	 	Total	 	

Balance at April 30, 2010:	 	 	 	 	 	 	 	 	 	 	 	 	
Goodwill	 	$	453,884	 	 	$	403,751	 	 	$	857,635	 	
Accumulated impairment losses	 	 	(2,188	)	 	 	(15,000	)	 	 	(17,188	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	451,696	 	 	 	388,751	 	 	 	840,447	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Changes:	 	 	 	 	 	 	 	 	 	 	 	 	
Acquisitions	 	 	6,778	 	 	 	27,655	 	 	 	34,433	 	
Disposals and other	 	 	(5,175	)	 	 	(2,288	)	 	 	(7,463	)	
Impairments	 	 	-	 	 	 	-	 	 	 	-	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at October 31, 2010:	 	 	 	 	 	 	 	 	 	 	 	 	
Goodwill	 	 	455,487	 	 	 	429,118	 	 	 	884,605	 	
Accumulated impairment losses	 	 	(2,188	)	 	 	(15,000	)	 	 	(17,188	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	453,299	 	 	$	414,118	 	 	$	867,417	 	

 	
We test goodwill for impairment annually at the beginning of our fourth quarter, or more frequently if events occur which could, more likely than not, reduce the fair value of a reporting unit’s net assets below its carrying value. No events indicating possible impairment of goodwill were identified during the six months ended October 31, 2010.
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Intangible assets consist of the following:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(in 000s)	 	
 	 	
As of	 	October 31, 2010	 	 	 	 	 	April 30, 2010	 	 	 	 	
 	 	
 	 	Gross
	 	 	 	 	 	 	 	 	Gross
	 	 	 	 	 	 	 	
 	 	Carrying
	 	 	Accumulated
	 	 	 	 	 	Carrying
	 	 	Accumulated
	 	 	 	 	
 	 	Amount	 	 	Amortization	 	 	Net	 	 	Amount	 	 	Amortization	 	 	Net	 	

Tax Services:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Customer relationships	 	$	75,270	 	 	$	(37,009	)	 	$	38,261	 	 	$	67,705	 	 	$	(33,096	)	 	$	34,609	 	
Noncompete agreements	 	 	22,508	 	 	 	(21,685	)	 	 	823	 	 	 	23,062	 	 	 	(21,278	)	 	 	1,784	 	
Reacquired franchise rights	 	 	219,665	 	 	 	(8,167	)	 	 	211,498	 	 	 	223,773	 	 	 	(6,096	)	 	 	217,677	 	
Franchise agreements	 	 	19,201	 	 	 	(2,453	)	 	 	16,748	 	 	 	19,201	 	 	 	(1,813	)	 	 	17,388	 	
Purchased technology	 	 	14,500	 	 	 	(7,381	)	 	 	7,119	 	 	 	14,500	 	 	 	(6,266	)	 	 	8,234	 	
Trade name	 	 	1,325	 	 	 	(500	)	 	 	825	 	 	 	1,325	 	 	 	(400	)	 	 	925	 	
Business Services:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Customer relationships	 	 	151,882	 	 	 	(124,601	)	 	 	27,281	 	 	 	145,149	 	 	 	(120,037	)	 	 	25,112	 	
Noncompete agreements	 	 	35,818	 	 	 	(23,341	)	 	 	12,477	 	 	 	33,052	 	 	 	(22,118	)	 	 	10,934	 	
Attest firm affiliation	 	 	7,629	 	 	 	(106	)	 	 	7,523	 	 	 	-	 	 	 	-	 	 	 	-	 	
Trade name – amortizing	 	 	2,600	 	 	 	(2,600	)	 	 	-	 	 	 	2,600	 	 	 	(2,600	)	 	 	-	 	
Trade name – non-amortizing	 	 	55,637	 	 	 	(4,868	)	 	 	50,769	 	 	 	55,637	 	 	 	(4,868	)	 	 	50,769	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	606,035	 	 	$	(232,711	)	 	$	373,324	 	 	$	586,004	 	 	$	(218,572	)	 	$	367,432	 	

 	
Amortization of intangible assets for the three and six months ended October 31, 2010 was $7.3 and $14.2 million respectively, and $7.5 million and $14.4 million for the three and six months ended October 31, 2009, respectively. Estimated amortization of intangible assets for fiscal years 2011 through 2015 is $30.1 million, $27.7 million, $23.2 million, $19.8 million and $14.5 million, respectively.
In connection with the acquisition of Caturano, as discussed in note 2, we recorded a liability related to unfavorable operating lease terms in the amount of $5.9 million, which will be amortized over the remaining contractual life of the operating lease.

6. 	Income Taxes	
We file a consolidated federal income tax return in the United States and file tax returns in various state and foreign jurisdictions. The U.S. Federal consolidated tax returns for the years 1999 through 2007 are currently under examination by the Internal Revenue Service, with the 1999-2005 years currently at the appellate level. Federal returns for tax years prior to 1999 are closed by statute. Historically, tax returns in various foreign and state jurisdictions are examined and settled upon completion of the exam.
During the six months ended October 31, 2010, we accrued additional gross interest and penalties of $2.7 million related to our uncertain tax positions. We had gross unrecognized tax benefits of $130.5 million and $129.8 million at October 31, 2010 and April 30, 2010, respectively. The gross unrecognized tax benefits increased $0.7 million in the current year, due to accruals of tax and interest on positions related to prior years. Except as noted below, we have classified the liability for unrecognized tax benefits, including corresponding accrued interest, as long-term at October 31, 2010, and included this amount in other noncurrent liabilities on the condensed consolidated balance sheet.
Based upon the expiration of statutes of limitations, payments of tax and other factors in several jurisdictions, we believe it is reasonably possible that the gross amount of reserves for previously unrecognized tax benefits may decrease by approximately $21.1 million within twelve months of October 31, 2010. This portion of our liability for unrecognized tax benefits has been classified as current and is included in accounts payable, accrued expenses and other current liabilities on the condensed consolidated balance sheets.
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7. 	Interest Income and Expense	
The following table shows the components of interest income and expense of our continuing operations:

(in 000s)	 	
 	 	
 	 	Three Months Ended October 31,	 	 	Six Months Ended October 31,	 	
 	 	
 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	

Interest income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mortgage loans held for investment	 	$	6,525	 	 	$	8,072	 	 	$	12,848	 	 	$	15,968	 	
Other	 	 	4,110	 	 	 	4,041	 	 	 	8,089	 	 	 	8,432	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	10,635	 	 	$	12,113	 	 	$	20,937	 	 	$	24,400	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Borrowings	 	$	20,891	 	 	$	18,514	 	 	$	41,534	 	 	$	37,471	 	
Deposits	 	 	1,947	 	 	 	2,284	 	 	 	3,870	 	 	 	4,333	 	
FHLB advances	 	 	396	 	 	 	508	 	 	 	792	 	 	 	1,017	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	23,234	 	 	$	21,306	 	 	$	46,196	 	 	$	42,821	 	

 	

8. 	Fair Value	
We use the following valuation methodologies for assets and liabilities measured at fair value and the general classification of these instruments pursuant to the fair value hierarchy.
 	 	 	
 	• 	Available-for-sale securities – Available-for-sale securities are carried at fair value on a recurring basis. When available, fair value is based on quoted prices in an active market and as such, would be classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted prices of securities with similar characteristics, discounted cash flows or other pricing models. Available-for-sale securities that we classify as Level 2 include certain agency and non-agency mortgage-backed securities, U.S. states and political subdivisions debt securities and other debt and equity securities.	
 	• 	Impaired mortgage loans held for investment – The fair value of impaired mortgage loans held for investment are generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. These loans are classified as Level 3.	
The following methods were used to determine the fair values of our other financial instruments:
 	 	 	
 	• 	Cash equivalents, accounts receivable, demand deposits, accounts payable, accrued liabilities and the current portion of long-term debt  – The carrying values reported in the balance sheet for these items approximate fair market value due to the relative short-term nature of the respective instruments.	
 	• 	Mortgage loans held for investment – The fair value of mortgage loans held for investment is generally determined using a pricing model based on current market information obtained from origination data, and bids received from time to time. The fair value of certain impaired loans held for investment is primarily based on the appraised value of the underlying collateral less estimated selling costs.	
 	• 	IRAs and other time deposits – The fair value is calculated based on the discounted value of contractual cash flows.	
 	• 	Long-term debt – The fair value of borrowings is based on rates currently available to us for obligations with similar terms and maturities, including current market rates on our Senior Notes.	

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The following table presents for each hierarchy level the financial assets that are measured at fair value on both a recurring and non-recurring basis at October 31, 2010 and April 30, 2010:

 	 	(dollars in 000s)	 	
 	 	
 	 	Total	 	 	Level 1	 	 	Level 2	 	 	Level 3	 	

As of October 31, 2010:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Recurring:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Available-for-sale securities	 	$	28,834	 	 	$	-	 	 	$	28,834	 	 	$	-	 	
Non-recurring:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Impaired mortgage loans held for investment	 	 	226,837	 	 	 	-	 	 	 	-	 	 	 	226,837	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	255,671	 	 	$	-	 	 	$	28,834	 	 	$	226,837	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As a percentage of total assets	 	 	5.9%	 	 	 	-%	 	 	 	0.7%	 	 	 	5.3%	 	
As of April 30, 2010:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Recurring:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Available-for-sale securities	 	$	31,948	 	 	$	-	 	 	$	31,948	 	 	$	-	 	
Non-recurring:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Impaired mortgage loans held for investment	 	 	249,549	 	 	 	-	 	 	 	-	 	 	 	249,549	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	281,497	 	 	$	-	 	 	$	31,948	 	 	$	249,549	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As a percentage of total assets	 	 	5.4%	 	 	 	-%	 	 	 	0.6%	 	 	 	4.8%	 	

There were no significant changes to the unobservable inputs used in determining the fair values of our level 2 and level 3 financial assets.
The carrying amounts and estimated fair values of our financial instruments at October 31, 2010 are as follows:
 
(in 000s)

 	 	Carrying
	 	 	Estimated
	 	 	 	
 	 	Amount	 	 	Fair Value	 	 	 	

Mortgage loans held for investment	 	$	537,226	 	 	$	317,183	 	 	 	
IRAs and other time deposits	 	 	490,993	 	 	 	488,890	 	 	 	
Long-term debt	 	 	1,044,510	 	 	 	1,055,225	 	 	 	
FHLB advances	 	 	75,000	 	 	 	75,132	 	 	 	

 
 	 	
9. 	Regulatory Requirements	
H&R Block Bank (HRB Bank) files its regulatory Thrift Financial Report (TFR) on a calendar quarter basis with the Office of Thrift Supervision (OTS). The following table sets forth HRB Bank’s regulatory capital requirements at September 30, 2010, as calculated in the most recently filed TFR:

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

Total risk-based capital ratio (1)	 	$	386,088	 	 	 	81.0%	 	 	$	38,141	 	 	 	8.0%	 	 	$	47,677	 	 	 	10.0%	 	
Tier 1 risk-based capital ratio (2)	 	$	379,758	 	 	 	79.7%	 	 	 	N/A	 	 	 	N/A	 	 	$	28,606	 	 	 	6.0%	 	
Tier 1 capital ratio (leverage) (3)	 	$	379,758	 	 	 	30.7%	 	 	$	148,485	 	 	 	12.0%	 	 	$	61,869	 	 	 	5.0%	 	
Tangible equity ratio (4)	 	$	379,758	 	 	 	30.7%	 	 	$	18,561	 	 	 	1.5%	 	 	 	N/A	 	 	 	N/A	 	

 	 	 	
(1)	 	Total risk-based capital divided by risk-weighted assets.	
(2)	 	Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets.	
(3)	 	Tier 1 (core) capital divided by adjusted total assets.	
(4)	 	Tangible capital divided by tangible assets.	
As of October 31, 2010, HRB Bank’s leverage ratio was 26.2%.
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10. 	Variable Interests	
In June 2009, the Financial Accounting Standards Board (FASB) issued revised authoritative guidance associated with the consolidation of variable interest entities (VIEs). The revised guidance replaced the previous quantitative-based assessment for determining whether an enterprise is the primary beneficiary of a VIE and focuses primarily on a qualitative assessment. This assessment requires identifying the enterprise that has (1) the power to direct the activities of the VIE that can most significantly impact the entity’s performance; and (2) the obligation to absorb losses and the right to receive benefits from the VIE that could potentially be significant to such entity. The revised guidance also requires that the enterprise continually reassess whether it is the primary beneficiary of a VIE rather than conducting a reassessment only upon the occurrence of specific events.
We implemented this guidance on May 1, 2010 and evaluated our financial interests to determine if we had interests in VIEs and if we are the primary beneficiary of the VIE.
The following is a description of our financial interests in VIEs which we consider significant or where we are the sponsor. For these VIEs we have determined that we are not the primary beneficiary and, therefore have not consolidated the VIEs. Prior to implementation of this new guidance we did not consolidate these entities.
 	 	 	
 	• 	McGladrey & Pullen LLP – The administrative services agreement with McGladrey & Pullen, LLP (M&P) and compensation arrangements between RSM McGladrey (RSM) and their managing directors represent a variable interest in M&P. These agreements are described more fully in our 2010 Annual Report to Shareholders on Form 10-K.	
We have concluded that RSM is not the primary beneficiary of M&P and, therefore, we have not consolidated M&P. RSM does not have an equity interest in M&P, nor does it have the power to direct any activities of M&P and does not receive any of its income. We have no assets or liabilities included in our condensed consolidated balance sheets related to our variable interests. We believe RSM’s maximum exposure to economic loss, resulting from various agreements with M&P, relates primarily to shared office space from operating leases under the administrative services agreement equal to approximately $106.3 million, and variability in our operating results due to the compensation agreements with RSM managing directors. We do not provide any support that is not contractually required.
 	 	 	
 	• 	Securitization Trusts – Sand Canyon Corporation (SCC) holds an interest in and is the sponsor (issuer) of 56 REMIC Trusts and 14 NIM Trusts (collectively, “Trusts”) related to previously originated mortgage loans that were securitized. These Trusts are variable interest entities. The REMIC Trusts hold static pools of sub-prime residential mortgage loans. The NIM Trusts hold beneficial interests in certain REMIC Trusts. The Trusts were designed to collect and pass through to the beneficial interest holders the cash flows of the underlying mortgage loans. The REMIC Trusts were financed with bonds and equity. The NIM Trusts were financed with notes and equity. All bonds and notes are held by third-party investors.	
Our identification of the primary beneficiary of the Trusts was based on a determination that the servicer of the underlying mortgage loans has the power to direct the most significant activities of the Trusts because the servicer handles all of the loss mitigation activities for the mortgage loans.
SCC is not the servicer of the mortgage loans underlying the REMIC Trusts. Therefore, SCC is not the primary beneficiary of the REMIC Trusts because it does not have the power to direct the most significant activities of the REMIC Trusts, which is the servicing of the underlying mortgage loans.
SCC does have the exclusive right to appoint a servicer when certain conditions have been met for specific loans related to two of the NIM Trusts. As of October 31, 2010, those conditions have been met for a minority portion of the loans underlying those Trusts. As this right pertains only to a minority of the loans, we have concluded that SCC does not have the power to direct the most significant activities of these two NIM Trusts, as the servicer has the power to direct significant activities over the majority of the mortgage loans. In the remaining NIM Trusts, SCC has a shared right to appoint a servicer under certain conditions. For these NIM Trusts, we have concluded that SCC is not the primary beneficiary because the power to direct the most significant activities, which is the servicing of the underlying mortgage loans, is shared with other unrelated parties.
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At October 31, 2010, we had no significant assets or liabilities included in our condensed consolidated balance sheets related to SCC’s variable interests in the Trusts. We have a liability, as discussed in note 11, and a deferred tax asset recorded in our condensed consolidated balance sheets related to obligations for representations and warranties SCC made in connection with the transfer of mortgage loans, including mortgage loans held by the securitization trusts. We have no remaining exposure to economic loss arising from impairment of SCC’s beneficial interest in the Trusts. If SCC receives cash flows in the future as a holder of beneficial interests we would record gains as other income in our income statement. Neither we nor SCC has liquidity arrangements, guarantees or other commitments for the Trusts, nor has any support been provided that was not contractually required.

11. 	Commitments and Contingencies	
Changes in deferred revenue balances related to our Peace of Mind (POM) program, the current portion of which is included in accounts payable, accrued expenses and other current liabilities and the long-term portion of which is included in other noncurrent liabilities in the condensed consolidated balance sheets, are as follows:

 	 	(in 000s)	 	
 	 	
Six Months Ended October 31,	 	2010	 	 	2009	 	

Balance, beginning of period	 	$	141,542	 	 	$	146,807	 	
Amounts deferred for new guarantees issued	 	 	1,422	 	 	 	1,351	 	
Revenue recognized on previous deferrals	 	 	(48,358)	 	 	 	(47,044)	 	
 	 	 	 	 	 	 	 	 	
Balance, end of period	 	$	94,066	 	 	$	101,114	 	

 	
In addition to amounts accrued for our POM guarantee, we had accrued $11.5 million and $14.5 million at October 31, 2010 and April 30, 2010, respectively, related to our standard guarantee which is included with our standard tax preparation services.
The following table summarizes certain of our other contractual obligations and commitments:

 	 	(in 000s)	 	
 	 	
As of	 	October 31, 2010	 	 	April 30, 2010	 	

Franchise Equity Lines of Credit – undrawn commitment	 	$	30,683	 	 	$	36,806	 	
Contingent business acquisition obligations	 	 	22,154	 	 	 	20,697	 	
Media advertising purchase obligation	 	 	26,548	 	 	 	26,548	 	

We routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees. Guarantees and indemnifications of the Company and its subsidiaries include obligations to protect counterparties from losses arising from the following: (1) tax, legal and other risks related to the purchase or disposition of businesses; (2) penalties and interest assessed by federal and state taxing authorities in connection with tax returns prepared for clients; (3) indemnification of our directors and officers; and (4) third-party claims relating to various arrangements in the normal course of business. Typically, there is no stated maximum payment related to these indemnifications, and the terms of the indemnities may vary and in many cases are limited only by the applicable statute of limitations. The likelihood of any claims being asserted against us and the ultimate liability related to any such claims, if any, is difficult to predict. While we cannot provide assurance we will ultimately prevail in the event any such claims are asserted, we believe the fair value of guarantees and indemnifications relating to our continuing operations is not material as of October 31, 2010.
 
Discontinued Operations
Sand Canyon Corporation (“SCC”, previously known as Option One Mortgage Corporation) ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations. The sale of servicing assets did not include the sale of any mortgage loans.
In connection with the securitization and sale of loans, SCC made certain representations and warranties, including, but not limited to, representations relating to matters such as ownership of the loan, validity of lien securing the loan, and the loan’s compliance with SCC’s underwriting criteria. Representations and warranties in whole loan sale transactions to institutional investors included a “knowledge
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qualifier” which limits SCC liability for borrower fraud to those instances where SCC had knowledge of the fraud at the time the loans were sold. In the event that there is a breach of a representation and warranty and such breach materially and adversely affects the value of a mortgage loan, SCC may be obligated to repurchase a loan or otherwise indemnify certain parties for losses incurred as a result of loan liquidation. Generally, these representations and warranties are not subject to a stated term, but would be subject to statutes of limitation applicable to the contractual provisions.
Claims received by SCC have primarily related to alleged breaches of representations and warranties related to a loan’s compliance with the underwriting standards established by SCC at origination, borrower fraud and credit exceptions without sufficient compensating factors. Claims received since May 1, 2008 follows:

(in millions)	
 	
 	 	Fiscal Year 2009	 	Fiscal Year 2010	 	Fiscal Year 2011	 	 	
 	
 	 	Q1	 	Q2	 	Q3	 	Q4	 	Q1	 	Q2	 	Q3	 	Q4	 	Q1	 	Q2	 	Total	

Loan Origination Year:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2005	 	$	40	 	$	21	 	$	1	 	$	-	 	$	-	 	$	15	 	$	-	 	$	-	 	$	6	 	$	1	 	$	84	
2006	 	 	89	 	 	10	 	 	111	 	 	7	 	 	2	 	 	57	 	 	4	 	 	45	 	 	100	 	 	15	 	 	440	
2007	 	 	43	 	 	10	 	 	85	 	 	15	 	 	4	 	 	11	 	 	7	 	 	-	 	 	3	 	 	5	 	 	183	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	172	 	$	41	 	$	197	 	$	22	 	$	6	 	$	83	 	$	11	 	$	45	 	$	109	 	$	21	 	 	707	

 	
For those claims determined to be valid, SCC has complied with its obligations by either repurchasing the mortgage loans or REO properties, providing for the reimbursement of losses in connection with liquidated REO properties, or reaching other settlements. SCC has denied approximately 84% of all claims received, excluding resolution reached under other settlements. Counterparties could reassert claims that SCC has denied. Of claims determined to be valid, approximately 24% resulted in loan repurchases, and 76% resulted in indemnification or settlement payments. Losses on loan repurchase, indemnification and settlement payments totaled approximately $58 million for the period May 1, 2008 through October 31, 2010. Loss severity rates on repurchases and indemnification have approximated 60% and SCC has not observed any material trends related to average losses by counterparty. Repurchased loans are considered held for sale and are included in prepaid expenses and other current assets on the condensed consolidated balance sheets. The net balance of all mortgage loans held for sale by SCC was $14.6 million at October 31, 2010.
SCC generally has 60 to 120 days to respond to representation and warranty claims and performs a loan-by-loan review of all repurchase claims during this time. SCC has completed its review of all claims, with the exception of claims totaling approximately $121 million, which remained subject to review as of October 31, 2010. Of the claims still subject to review, approximately $97 million are from private-label securitizations, related to rescissions of mortgage insurance, and $24 million are from monoline insurers.
All claims asserted against SCC since May 1, 2008 relate to loans originated during calendar years 2005 through 2007, of which, approximately 88% relate to loans originated in calendar years 2006 and 2007. During calendar year 2005 through 2007, SCC originated approximately $84 billion in loans, of which less than 1% were sold to government sponsored entities. SCC is not subject to loss on loans that have been paid in full, repurchased, or were sold without recourse.
The majority of claims asserted since May 1, 2008, which have been determined by SCC to represent a valid breach of its representations and warranties, relate to loans that became delinquent within the first two years following the origination of the mortgage loan. SCC believes the longer a loan performs prior to an event of default, the less likely the default will be related to a breach of a representation and warranty. The balance of loans originated in 2005, 2006 and 2007 which defaulted in the first two years is $4.0 billion, $6.3 billion and $2.9 billion, respectively, at October 31, 2010.
SCC estimates losses relating to representation and warranty claims by estimating loan repurchase and indemnification obligations on both known claims and projections of future claims. Projections of future claims are based on an analysis that includes a combination of reviewing repurchase demands and actual defaults and loss severities by counterparty, inquiries from various third-parties, the terms and provisions of related agreements and the historical rate of repurchase and indemnification obligations related to breaches of representations and warranties. SCC’s methodology for calculating this liability considers the
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probability that individual counterparties (whole-loan purchasers, private label securitization trustees and monoline insurers) will assert future claims.
SCC has recorded a liability for estimated contingent losses related to representation and warranty claims as of October 31, 2010, of $184.7 million, which represents SCC’s best estimate of the probable loss that may occur. This overall liability amount includes $49.7 million, which was established under an indemnity agreement dated April 2008 with a specific counterparty in exchange for a full and complete release of such party’s ability to assert representation and warranty claims. This indemnity agreement was given as part of obtaining the counterparty’s consent to SCC’s sale of its mortgage servicing business in 2008. Though disbursements related to this agreement have not been significant, SCC believes that the full amount under this indemnity agreement will ultimately be paid.
While SCC uses the best information available to it in estimating its liability, probable losses are inherently difficult to estimate and require considerable management judgment. There may be a wide range of reasonably possible losses in excess of the recorded liability that cannot be estimated, primarily due to difficulties inherent in estimating the level of future claims that will be asserted and the percentage of those claims that are ultimately determined to be valid. Although net losses on settled claims since May 1, 2008 have been within initial loss estimates, to the extent that valid claim volumes or the value of residential home prices differ in the future from current estimates, future losses may be greater than the current estimates and those differences may be significant.
A rollforward of our liability for losses on repurchases for the six months ended October 31, 2010 and 2009 is as follows:

 	 	(in 000s)	 	
 	 	
Six Months Ended October 31,	 	2010	 	 	2009	 	

Balance, beginning of period	 	$	188,200	 	 	$	206,595	 	
Provisions	 	 	-	 	 	 	-	 	
Losses on repurchase and indemnifications	 	 	(3,478)	 	 	 	(5,382)	 	
 	 	 	 	 	 	 	 	 	
Balance, end of period	 	$	184,722	 	 	$	201,213	 	

 	
The repurchase liability is included in accounts payable, accrued expenses and other current liabilities on our condensed consolidated balance sheets. There have been no provisions for additional losses included in the income statement since April 30, 2008; however, loss provisions would be recorded net of tax in discontinued operations.

12. 	Litigation and Related Contingencies	
We are party to investigations, legal claims and lawsuits arising out of our business operations. As required, we accrue our best estimate of loss contingencies when we believe a loss is probable and we can reasonably estimate the amount of any such loss. Amounts accrued, including obligations under indemnifications, totaled $24.6 million and $35.5 million at October 31, 2010 and April 30, 2010, respectively. Litigation is inherently unpredictable and it is difficult to predict the outcome of particular matters with reasonable certainty and, therefore, the actual amount of any loss may prove to be larger or smaller than the amounts reflected in our consolidated financial statements.
 
RAL Litigation
We have been named in multiple lawsuits as defendants in litigation regarding our refund anticipation loan program in past years. All of those lawsuits have been settled or otherwise resolved, except for one.
The sole remaining case is a putative class action styled 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 plaintiffs allege inadequate disclosures with respect to the RAL product and assert claims for violation of consumer protection statutes, negligent misrepresentation, breach of fiduciary duty, common law fraud, usury, and violation of the Truth In Lending Act. Plaintiffs seek unspecified actual and punitive damages, injunctive relief, attorneys’ fees and costs. A Pennsylvania class was certified, but later decertified by the trial court in December 2003. An appellate court subsequently reversed the decertification decision. We are appealing the reversal. We have not concluded that a loss related to this matter is probable nor have we accrued a loss contingency related to this matter.
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Plaintiffs have not provided a dollar amount of their claim and we are not able to estimate a possible range of loss. We believe we have meritorious defenses to this case and intend to defend it vigorously. There can be no assurances, however, as to the outcome of this case or its impact on our consolidated results of operations.
 
Peace of Mind Litigation
We have been named defendants in lawsuits regarding our Peace of Mind program (collectively, the “POM Cases”), under which our applicable tax return preparation subsidiary assumes liability for additional tax assessments attributable to tax return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax Services, Inc., et al., Case No. 08-CV-591 in the U.S. District Court for the Southern District of Illinois, is a putative class action case originally filed in the Circuit Court of Madison County, Illinois on January 18, 2002. The plaintiffs allege that the sale of POM guarantees constitutes statutory fraud, an unfair trade practice and breach of a fiduciary duty. The plaintiffs seek unspecified damages, injunctive relief, attorneys’ fees and costs. On September 17, 2010, the federal court denied plaintiffs’ motion for class certification. The parties subsequently reached an agreement to settle the case, along with the  Soliz  case referenced below.
There is one other putative class action pending against us in Texas that involves the POM guarantee. This case, styled  Desiri L. Soliz v. H&R Block, et al.  (Cause No. 03-032-D), was filed on January 23, 2003 in the District Court of Kleberg County, Texas. This case involves the same plaintiffs’ attorneys that are involved in the  Marshall  litigation in Illinois and contains allegations similar to those in the  Marshall  litigation. The plaintiff seeks actual and treble damages, equitable relief, attorneys’ fees and costs. No class has been certified. Following the denial of class certification in the  Marshall  litigation, the parties reached an agreement to settle this case, along with the  Marshall  litigation. Settlement amounts related to the POM Cases are immaterial to the financial statements and are accrued at October 31, 2010.
 
Express IRA Litigation
We have been named defendants in lawsuits regarding our former Express IRA product. All of those lawsuits have been settled or otherwise resolved, except for one.
The one remaining case was filed on January 2, 2008 by the Mississippi Attorney General in the Chancery Court of Hinds County, Mississippi First Judicial District (Case No. G 2008 6 S 2) and is styled  Jim Hood, Attorney for the State of Mississippi v. H&R Block, Inc., H&R Block Financial Advisors, Inc .,  et al.  The complaint alleges fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the sale of the product in Mississippi and seeks equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. We are not able to estimate a possible range of loss. We believe we have meritorious defenses to the claims in this case, and we intend to defend this case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated results of operations.
Although we sold H&R Block Financial Advisors, Inc. (HRBFA) effective November 1, 2008, we remain responsible for any liabilities relating to the Express IRA litigation, among other things, through an indemnification agreement. A portion of our accrual is related to these indemnity obligations.
 
RSM McGladrey Litigation
RSM EquiCo, its parent and certain of its subsidiaries and affiliates, are parties to a class action filed on July 11, 2006 and styled  Do Right’s Plant Growers, et al. v. RSM EquiCo, Inc., et al.,  Case No. 06 CC00137, in the California Superior Court, Orange County. The complaint contains allegations relating to business valuation services provided by RSM EquiCo, including allegations of fraud, negligent misrepresentation, breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and unfair competition. Plaintiffs seek unspecified actual and punitive damages, in addition to pre-judgment interest and attorneys’ fees. On March 17, 2009, the court granted plaintiffs’ motion for class certification on all claims. The defendants filed two requests for interlocutory review of the decision, the last of which was denied by the Supreme Court of California on September 30, 2009. A trial date has been set for May 2011.
The certified class consists of RSM EquiCo’s U.S. clients who signed platform agreements and for whom RSM EquiCo did not ultimately market their business for sale. A portion of our loss contingency accrual is related to this matter for the amount of loss that we consider probable and estimable, although it is
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possible that our losses could exceed the amount we have accrued. The fees paid to RSM EquiCo in connection with these agreements total approximately $185 million, a number which substantially exceeds the equity of RSM EquiCo. Plaintiffs seek to recover restitution in an amount equal to the fees paid, in addition to punitive damages and attorney fees. We believe we have meritorious defenses to the case and intend to defend the case vigorously. The amount claimed in this action is substantial and could have a material adverse impact on our consolidated results of operations. There can be no assurance regarding the outcome of this matter.
On December 7, 2009, a lawsuit was filed in the Circuit Court of Cook County, Illinois (2009-L-014920) against M&P, RSM and H&R Block styled  Ronald R. Peterson ex rel. Lancelot Investors Fund, L.P., et al. v. McGladrey & Pullen LLP, et al.  The case was removed to the United States District Court for the Northern District of Illinois on December 28, 2009 (Case No. 1:10-CV-00274). The complaint, which was filed by the trustee for certain bankrupt investment funds, seeks unspecified damages and asserts claims against RSM for vicarious liability and alter ego liability and against H&R Block for equitable restitution relating to audit work performed by M&P. The amount claimed in this case is substantial. On November 3, 2010, the court dismissed the case against all defendants in its entirety with prejudice.
RSM and M&P operate in an alternative practice structure (“APS”). Accordingly, certain claims and lawsuits against M&P could have an impact on RSM. More specifically, any judgments or settlements arising from claims and lawsuits against M&P that exceed its insurance coverage could have a direct adverse effect on M&P’s operations. Although RSM is not responsible for the liabilities of M&P, significant M&P litigation and claims could impair the profitability of the APS and impair the ability to attract and retain clients and quality professionals. This could, in turn, have a material adverse effect on RSM’s operations and impair the value of our investment in RSM. There is no assurance regarding the outcome of any claims or litigation involving M&P.
 
Litigation and Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated and the loan servicing business was sold during fiscal year 2008, SCC remains subject to investigations, claims and lawsuits pertaining to its loan origination and servicing activities that occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state attorneys general, other state and federal regulators, municipalities, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others alleged to be similarly situated. Among other things, these investigations, claims and lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, public nuisance, fraud, and violations of securities laws, the Truth in Lending Act, Equal Credit Opportunity Act and the Fair Housing Act. In the current non-prime mortgage environment, the number of these investigations, claims and lawsuits has increased over historical experience and is likely to continue at increased levels. The amounts claimed in these investigations, claims and lawsuits are substantial in some instances, and the ultimate resulting liability is difficult to predict and thus cannot be reasonably estimated. In the event of unfavorable outcomes, the amounts SCC may be required to pay in the discharge of liabilities or settlements could be substantial and, because SCC’s operating results are included in our consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a lawsuit in the Superior Court of Suffolk County, Massachusetts (Case No. 08-2474-BLS) styled  Commonwealth of Massachusetts v. H&R Block, Inc., et al.,  alleging unfair, deceptive and discriminatory origination and servicing of mortgage loans and seeking equitable relief, disgorgement of profits, restitution and statutory penalties. In November 2008, the court granted a preliminary injunction limiting the ability of the owner of SCC’s former loan servicing business to initiate or advance foreclosure actions against certain loans originated by SCC or its subsidiaries without (1) advance notice to the Massachusetts Attorney General and (2) if the Attorney General objects to foreclosure, approval by the court. An appeal of the preliminary injunction was denied. A trial date has been set for June 2011. A portion of our loss contingency accrual is related to this matter for the amount of loss that we consider probable and estimable, although it is possible that our losses could exceed the amount we have accrued. We are not able to estimate a possible range of loss. We believe we have meritorious defenses to the claims presented and we intend to defend them vigorously. There can be no assurances, however, as to its outcome or its impact on our consolidated results of operations.
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On October 15, 2010, the Federal Home Loan Bank of Chicago filed a lawsuit in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) styled  Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation, et al.  against multiple defendants, including various SCC related entities and H&R Block, Inc. related entities, arising out of FHLB’s purchase of mortgage-backed securities. Plaintiff asserts claims for rescission and damages under Illinois securities law and for common law negligent misrepresentation in connection with its purchase of two securities originated and securitized by SCC. These two securities had a total initial principal amount of approximately $50 million, of which approximately $42 million remains outstanding. We have not concluded that a loss related to this matter is probable nor have we established a loss contingency related to this matter. We believe the claims in this case are without merit and we intend to defend them vigorously. There can be no assurances, however, as to its outcome or its impact on our consolidated results of operations.
 
Other Claims and Litigation
We have been named in several wage and hour class action lawsuits throughout the country, respectively styled  Alice Williams v. H&R Block Enterprises LLC,  Case No.RG08366506 (Superior Court of California, County of Alameda, filed January 17, 2008);  Arabella Lemus v. H&R Block Enterprises LLC, et al.,  Case No. CGC-09-489251 (United States District Court, Northern District of California, filed June 9, 2009);  Delana Ugas v. H&R Block Enterprises LLC, et al.,  Case No. BC417700 (United States District Court, Central District of California, filed July 13, 2009); Barbara Petroski v. H&R Block Eastern Enterprises, Inc., et al.,  Case No. 10-CV-00075 (United States District Court, Western District of Missouri, filed January 25, 2010);  Lance Hom v. H&R Block Enterprises LLC, et al.,  Case No. 10CV0476 H (United States District Court, Southern District of California, filed March 4, 2010); and  Stacy Oyer v. H&R Block Eastern Enterprises, Inc., et al.,  Case No. 10-CV-00387-WMS (United States District Court, Western District of New York, filed May 10, 2010). These cases involve a variety of legal theories and allegations including, among other things, failure to compensate employees for all hours worked; failure to provide employees with meal periods; failure to provide itemized wage statements; failure to pay wages due upon termination; failure to compensate for mandatory off-season training; and/or misclassification of non-exempt employees. The parties have agreed to consolidate certain of these cases into a single action because they allege substantially identical claims. The plaintiffs seek actual damages, in addition to statutory penalties, pre-judgment interest and attorneys’ fees. We have not concluded that a loss related to these matters is probable nor have we accrued a loss contingency related to these matters. Moreover, we are not able to estimate a possible range of loss. We believe we have meritorious defenses to the claims in these cases and intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances, however, and the ultimate liability with respect to these matters is difficult to predict. There can be no assurances as to the outcome of these cases or their impact on our consolidated results of operations, individually or in the aggregate.
In addition, we are from time to time 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 others similarly situated. We believe we have meritorious defenses to each of these investigations, claims and lawsuits, and we are defending or intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances, however, the ultimate liability with respect to such matters is difficult to predict. 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 impact on our consolidated results of operations.
We are also party to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including claims and lawsuits (collectively, “Other Claims”) concerning the preparation of customers’ income tax returns, the fees charged customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters and contract disputes. 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 impact on our consolidated results of operations.
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13. 	Segment Information	
 
Results of our continuing operations by reportable operating segment are as follows:

 	 	 	 	 	 	 	 	 	 	 	(in 000s)	 	
 	 	
 	 	Three Months Ended October 31,	 	 	Six Months Ended October 31,	 	
 	 	
 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	

Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tax Services	 	$	110,921	 	 	$	109,305	 	 	$	202,566	 	 	$	197,268	 	
Business Services	 	 	203,426	 	 	 	206,602	 	 	 	378,136	 	 	 	384,220	 	
Corporate	 	 	8,542	 	 	 	10,174	 	 	 	16,661	 	 	 	20,098	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	322,889	 	 	$	326,081	 	 	$	597,363	 	 	$	601,586	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pretax income (loss):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tax Services	 	$	(154,355	)	 	$	(172,188	)	 	$	(328,979	)	 	$	(344,162	)	
Business Services	 	 	8,397	 	 	 	174	 	 	 	7,964	 	 	 	1,495	 	
Corporate	 	 	(29,161	)	 	 	(40,839	)	 	 	(61,421	)	 	 	(81,059	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before tax benefit	 	$	(175,119	)	 	$	(212,853	)	 	$	(382,436	)	 	$	(423,726	)	

 	

14. 	Accounting Pronouncements	
In July 2010 the Financial Accounting Standard Board (FASB) issued Accounting Standards Update 2010-20, “Disclosures About Credit Quality of Financing Receivables and Allowance for Credit Losses.” This guidance would require enhanced disclosures about the allowance for credit losses and the credit quality of financing receivables and would apply to financing receivables held by all creditors. This guidance is effective beginning with the first interim or annual reporting period ending after December 15, 2010. Early application is encouraged. We are currently evaluating the effect of this guidance on our financial statement disclosures.
In October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements.” This guidance amends the criteria for separating consideration in multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (1) vendor-specific objective evidence; (2) third-party evidence; or (3) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. This guidance is effective prospectively for revenue arrangements entered into or materially modified beginning with our fiscal year 2012. We believe this guidance will not have a material effect on our consolidated financial statements.
In June 2009, the FASB issued guidance, under Topic 860 – Transfers and Servicing. This guidance will require more disclosure about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity and changes the requirements for derecognizing financial assets. We adopted this guidance as of May 1, 2010 and it did not have a material effect on our consolidated financial statements.

15. 	Condensed Consolidating Financial Statements	
Block Financial LLC (BFC) is an indirect, wholly-owned consolidated subsidiary of the Company. BFC is the Issuer and the Company is the Guarantor of the Senior Notes issued on January 11, 2008 and October 26, 2004, our unsecured committed lines of credit (CLOCs) and other indebtedness issued from time to time. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company’s investment in
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subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions.

 	 	
Condensed Consolidating Income Statements	 	 	 	 	 	 	 	 	 	 	 	(in 000s)	 	
 	 	
Three Months Ended
	 	H&R Block, Inc.
	 	 	BFC
	 	 	Other
	 	 	 	 	 	Consolidated
	 	
October 31, 2010	 	(Guarantor)	 	 	(Issuer)	 	 	Subsidiaries	 	 	Elims	 	 	H&R Block	 	

Total revenues	 	$	-	 	 	$	17,320	 	 	$	305,569	 	 	$	-	 	 	$	322,889	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenues	 	 	-	 	 	 	35,959	 	 	 	356,991	 	 	 	-	 	 	 	392,950	 	
Selling, general and administrative	 	 	-	 	 	 	9,379	 	 	 	99,564	 	 	 	-	 	 	 	108,943	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	 	 	-	 	 	 	45,338	 	 	 	456,555	 	 	 	-	 	 	 	501,893	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating loss	 	 	-	 	 	 	(28,018	)	 	 	(150,986	)	 	 	-	 	 	 	(179,004	)	
Other income (expense), net	 	 	(175,119	)	 	 	4,890	 	 	 	(1,005	)	 	 	175,119	 	 	 	3,885	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before tax benefit	 	 	(175,119	)	 	 	(23,128	)	 	 	(151,991	)	 	 	175,119	 	 	 	(175,119	)	
Income tax benefit	 	 	(68,307	)	 	 	(7,654	)	 	 	(60,653	)	 	 	68,307	 	 	 	(68,307	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from continuing operations	 	 	(106,812	)	 	 	(15,474	)	 	 	(91,338	)	 	 	106,812	 	 	 	(106,812	)	
Net loss from discontinued operations	 	 	(2,237	)	 	 	(1,330	)	 	 	(907	)	 	 	2,237	 	 	 	(2,237	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(109,049	)	 	$	(16,804	)	 	$	(92,245	)	 	$	109,049	 	 	$	(109,049	)	

 	

 	 	
Three Months Ended
	 	H&R Block, Inc.
	 	 	BFC
	 	 	Other
	 	 	 	 	 	Consolidated
	 	
October 31, 2009	 	(Guarantor)	 	 	(Issuer)	 	 	Subsidiaries	 	 	Elims	 	 	H&R Block	 	

Total revenues	 	$	-	 	 	$	21,026	 	 	$	305,055	 	 	$	-	 	 	$	326,081	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenues	 	 	-	 	 	 	45,861	 	 	 	365,088	 	 	 	-	 	 	 	410,949	 	
Selling, general and administrative	 	 	-	 	 	 	2,457	 	 	 	127,228	 	 	 	-	 	 	 	129,685	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	 	 	-	 	 	 	48,318	 	 	 	492,316	 	 	 	-	 	 	 	540,634	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating loss	 	 	-	 	 	 	(27,292	)	 	 	(187,261	)	 	 	-	 	 	 	(214,553	)	
Other income (expense), net	 	 	(212,853	)	 	 	(2,607	)	 	 	4,307	 	 	 	212,853	 	 	 	1,700	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before tax benefit	 	 	(212,853	)	 	 	(29,899	)	 	 	(182,954	)	 	 	212,853	 	 	 	(212,853	)	
Income tax benefit	 	 	(86,381	)	 	 	(12,294	)	 	 	(74,087	)	 	 	86,381	 	 	 	(86,381	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from continuing operations	 	 	(126,472	)	 	 	(17,605	)	 	 	(108,867	)	 	 	126,472	 	 	 	(126,472	)	
Net loss from discontinued operations	 	 	(2,115	)	 	 	(2,115	)	 	 	-	 	 	 	2,115	 	 	 	(2,115	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(128,587	)	 	$	(19,720	)	 	$	(108,867	)	 	$	128,587	 	 	$	(128,587	)	

 	
 
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Six Months Ended
	 	H&R Block, Inc.
	 	 	BFC
	 	 	Other
	 	 	 	 	 	Consolidated
	 	
October 31, 2010	 	(Guarantor)	 	 	(Issuer)	 	 	Subsidiaries	 	 	Elims	 	 	H&R Block	 	

Total revenues	 	$	-	 	 	$	38,320	 	 	$	559,043	 	 	$	-	 	 	$	597,363	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenues	 	 	-	 	 	 	74,987	 	 	 	685,979	 	 	 	-	 	 	 	760,966	 	
Selling, general and administrative	 	 	-	 	 	 	11,469	 	 	 	214,503	 	 	 	-	 	 	 	225,972	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	 	 	-	 	 	 	86,456	 	 	 	900,482	 	 	 	-	 	 	 	986,938	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating loss	 	 	-	 	 	 	(48,136	)	 	 	(341,439	)	 	 	-	 	 	 	(389,575	)	
Other income (expense), net	 	 	(382,436	)	 	 	5,272	 	 	 	1,867	 	 	 	382,436	 	 	 	7,139	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before tax benefit	 	 	(382,436	)	 	 	(42,864	)	 	 	(339,572	)	 	 	382,436	 	 	 	(382,436	)	
Income tax benefit	 	 	(147,986	)	 	 	(15,495	)	 	 	(132,491	)	 	 	147,986	 	 	 	(147,986	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from continuing operations	 	 	(234,450	)	 	 	(27,369	)	 	 	(207,081	)	 	 	234,450	 	 	 	(234,450	)	
Net loss from discontinued operations	 	 	(5,280	)	 	 	(4,334	)	 	 	(946	)	 	 	5,280	 	 	 	(5,280	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(239,730	)	 	$	(31,703	)	 	$	(208,027	)	 	$	239,730	 	 	$	(239,730	)	

 	

 	 	
Six Months Ended
	 	H&R Block, Inc.
	 	 	BFC
	 	 	Other
	 	 	 	 	 	Consolidated
	 	
October 31, 2009	 	(Guarantor)	 	 	(Issuer)	 	 	Subsidiaries	 	 	Elims	 	 	H&R Block	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenues	 	$	-	 	 	$	44,222	 	 	$	557,420	 	 	$	(56	)	 	$	601,586	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenues	 	 	-	 	 	 	91,421	 	 	 	705,978	 	 	 	-	 	 	 	797,399	 	
Selling, general and administrative	 	 	-	 	 	 	4,955	 	 	 	228,003	 	 	 	(56	)	 	 	232,902	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	 	 	-	 	 	 	96,376	 	 	 	933,981	 	 	 	(56	)	 	 	1,030,301	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating loss	 	 	-	 	 	 	(52,154	)	 	 	(376,561	)	 	 	-	 	 	 	(428,715	)	
Other income (expense), net	 	 	(423,726	)	 	 	(3,840	)	 	 	8,829	 	 	 	423,726	 	 	 	4,989	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before tax benefit	 	 	(423,726	)	 	 	(55,994	)	 	 	(367,732	)	 	 	423,726	 	 	 	(423,726	)	
Income tax benefit	 	 	(166,637	)	 	 	(22,986	)	 	 	(143,651	)	 	 	166,637	 	 	 	(166,637	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from continuing operations	 	 	(257,089	)	 	 	(33,008	)	 	 	(224,081	)	 	 	257,089	 	 	 	(257,089	)	
Net loss from discontinued operations	 	 	(5,132	)	 	 	(5,132	)	 	 	-	 	 	 	5,132	 	 	 	(5,132	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(262,221	)	 	$	(38,140	)	 	$	(224,081	)	 	$	262,221	 	 	$	(262,221	)	

 	
 
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Condensed Consolidating Balance Sheets	 	 	 	 	 	 	 	 	 	 	 	(in 000s)	 	
 	 	
 	 	H&R Block, Inc.
	 	 	BFC
	 	 	Other
	 	 	 	 	 	Consolidated
	 	
October 31, 2010	 	(Guarantor)	 	 	(Issuer)	 	 	Subsidiaries	 	 	Elims	 	 	H&R Block	 	

Cash & cash equivalents	 	$	-	 	 	$	810,258	 	 	$	149,499	 	 	$	(11	)	 	$	959,746	 	
Cash & cash equivalents – restricted	 	 	-	 	 	 	140	 	 	 	35,333	 	 	 	-	 	 	 	35,473	 	
Receivables, net	 	 	-	 	 	 	223,131	 	 	 	193,202	 	 	 	-	 	 	 	416,333	 	
Mortgage loans held for investment	 	 	-	 	 	 	537,226	 	 	 	-	 	 	 	-	 	 	 	537,226	 	
Intangible assets and goodwill, net	 	 	-	 	 	 	-	 	 	 	1,240,741	 	 	 	-	 	 	 	1,240,741	 	
Investments in subsidiaries	 	 	2,722,826	 	 	 	-	 	 	 	234	 	 	 	(2,722,826	)	 	 	234	 	
Other assets	 	 	15,022	 	 	 	243,462	 	 	 	859,545	 	 	 	-	 	 	 	1,118,029	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	2,737,848	 	 	$	1,814,217	 	 	$	2,478,554	 	 	$	(2,722,837	)	 	$	4,307,782	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Customer deposits	 	$	-	 	 	$	929,909	 	 	$	-	 	 	$	(11	)	 	$	929,898	 	
Long-term debt	 	 	-	 	 	 	998,785	 	 	 	45,725	 	 	 	-	 	 	 	1,044,510	 	
FHLB borrowings	 	 	-	 	 	 	75,000	 	 	 	-	 	 	 	-	 	 	 	75,000	 	
Short-term borrowings	 	 	-	 	 	 	39,517	 	 	 	-	 	 	 	-	 	 	 	39,517	 	
Other liabilities	 	 	123	 	 	 	125,343	 	 	 	1,213,586	 	 	 	-	 	 	 	1,339,052	 	
Net intercompany advances	 	 	1,857,920	 	 	 	(404,933	)	 	 	(1,452,987	)	 	 	-	 	 	 	-	 	
Stockholders’ equity	 	 	879,805	 	 	 	50,596	 	 	 	2,672,230	 	 	 	(2,722,826	)	 	 	879,805	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	 	$	2,737,848	 	 	$	1,814,217	 	 	$	2,478,554	 	 	$	(2,722,837	)	 	$	4,307,782	 	

 	

 	 	
 	 	H&R Block, Inc.
	 	 	BFC
	 	 	Other
	 	 	 	 	 	Consolidated
	 	
April 30, 2010	 	(Guarantor)	 	 	(Issuer)	 	 	Subsidiaries	 	 	Elims	 	 	H&R Block	 	

Cash & cash equivalents	 	$	-	 	 	$	702,021	 	 	$	1,102,135	 	 	$	(111	)	 	$	1,804,045	 	
Cash & cash equivalents – restricted	 	 	-	 	 	 	6,160	 	 	 	28,190	 	 	 	-	 	 	 	34,350	 	
Receivables, net	 	 	57	 	 	 	105,192	 	 	 	412,737	 	 	 	-	 	 	 	517,986	 	
Mortgage loans held for investment, net -	 	 	 	 	 	 	595,405	 	 	 	-	 	 	 	-	 	 	 	595,405	 	
Intangible assets and goodwill, net	 	 	-	 	 	 	-	 	 	 	1,207,879	 	 	 	-	 	 	 	1,207,879	 	
Investments in subsidiaries	 	 	3,276,597	 	 	 	-	 	 	 	231	 	 	 	(3,276,597	)	 	 	231	 	
Other assets	 	 	19,014	 	 	 	332,782	 	 	 	722,626	 	 	 	-	 	 	 	1,074,422	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	3,295,668	 	 	$	1,741,560	 	 	$	3,473,798	 	 	$	(3,276,708	)	 	$	5,234,318	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Customer deposits	 	$	-	 	 	$	852,666	 	 	$	-	 	 	$	(111	)	 	$	852,555	 	
Long-term debt	 	 	-	 	 	 	998,605	 	 	 	36,539	 	 	 	-	 	 	 	1,035,144	 	
FHLB borrowings	 	 	-	 	 	 	75,000	 	 	 	-	 	 	 	-	 	 	 	75,000	 	
Other liabilities	 	 	48,775	 	 	 	153,154	 	 	 	1,629,060	 	 	 	-	 	 	 	1,830,989	 	
Net intercompany advances	 	 	1,806,263	 	 	 	(431,696	)	 	 	(1,374,567	)	 	 	-	 	 	 	-	 	
Stockholders’ equity	 	 	1,440,630	 	 	 	93,831	 	 	 	3,182,766	 	 	 	(3,276,597	)	 	 	1,440,630	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	 	$	3,295,668	 	 	$	1,741,560	 	 	$	3,473,798	 	 	$	(3,276,708	)	 	$	5,234,318	 	

 	
 
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Condensed Consolidating Statements of Cash Flows	 	 	 	 	 	 	 	 	 	 	 	(in 000s)	 	
 	 	
Six Months Ended
	 	H&R Block, Inc.
	 	 	BFC
	 	 	Other
	 	 	 	 	 	Consolidated
	 	
October 31, 2010	 	(Guarantor)	 	 	(Issuer)	 	 	Subsidiaries	 	 	Elims	 	 	H&R Block	 	

Net cash used in operating activities:	 	$	(46,961	)	 	$	(15,379	)	 	$	(485,661	)	 	$	-	 	 	$	(548,001	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from investing:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mortgage loans originated for investment, net	 	 	-	 	 	 	30,829	 	 	 	-	 	 	 	-	 	 	 	30,829	 	
Purchase property & equipment	 	 	-	 	 	 	-	 	 	 	(35,005	)	 	 	-	 	 	 	(35,005	)	
Payments made for business acquisitions, net	 	 	-	 	 	 	-	 	 	 	(43,310	)	 	 	-	 	 	 	(43,310	)	
Net intercompany advances	 	 	423,572	 	 	 	-	 	 	 	-	 	 	 	(423,572	)	 	 	-	 	
Other, net	 	 	-	 	 	 	(40,237	)	 	 	71,088	 	 	 	-	 	 	 	30,851	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) investing activities	 	 	423,572	 	 	 	(9,408	)	 	 	(7,227	)	 	 	(423,572	)	 	 	(16,635	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from financing:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repayments of short-term borrowings	 	 	-	 	 	 	(75,000	)	 	 	-	 	 	 	-	 	 	 	(75,000	)	
Proceeds from short-term borrowings	 	 	-	 	 	 	114,490	 	 	 	-	 	 	 	-	 	 	 	114,490	 	
Customer banking deposits	 	 	-	 	 	 	76,923	 	 	 	-	 	 	 	100	 	 	 	77,023	 	
Dividends paid	 	 	(95,068	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(95,068	)	
Repurchase of common stock	 	 	(283,470	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(283,470	)	
Proceeds from exercise of stock options	 	 	1,493	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,493	 	
Net intercompany advances	 	 	-	 	 	 	15,851	 	 	 	(439,423	)	 	 	423,572	 	 	 	-	 	
Other, net	 	 	434	 	 	 	760	 	 	 	(22,546	)	 	 	-	 	 	 	(21,352	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) financing activities	 	 	(376,611	)	 	 	133,024	 	 	 	(461,969	)	 	 	423,672	 	 	 	(281,884	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Effects of exchange rates on cash	 	 	-	 	 	 	-	 	 	 	2,221	 	 	 	-	 	 	 	2,221	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash	 	 	-	 	 	 	108,237	 	 	 	(952,636	)	 	 	100	 	 	 	(844,299	)	
Cash – beginning of period	 	 	-	 	 	 	702,021	 	 	 	1,102,135	 	 	 	(111	)	 	 	1,804,045	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash – end of period	 	$	-	 	 	$	810,258	 	 	$	149,499	 	 	$	(11	)	 	$	959,746	 	

 	
 
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Six Months Ended
	 	H&R Block, Inc.
	 	 	BFC
	 	 	Other
	 	 	 	 	 	Consolidated
	 	
October 31, 2009	 	(Guarantor)	 	 	(Issuer)	 	 	Subsidiaries	 	 	Elims	 	 	H&R Block	 	

Net cash provided by (used in) operating activities:	 	$	5,880	 	 	$	(14,655	)	 	$	(777,377	)	 	$	-	 	 	$	(786,152	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from investing:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mortgage loans originated for investment, net	 	 	-	 	 	 	38,693	 	 	 	-	 	 	 	-	 	 	 	38,693	 	
Purchase property & equipment	 	 	-	 	 	 	546	 	 	 	(7,826	)	 	 	-	 	 	 	(7,280	)	
Net intercompany advances	 	 	89,577	 	 	 	-	 	 	 	-	 	 	 	(89,577	)	 	 	-	 	
Other, net	 	 	-	 	 	 	13,847	 	 	 	(1,980	)	 	 	-	 	 	 	11,867	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) investing activities	 	 	89,577	 	 	 	53,086	 	 	 	(9,806	)	 	 	(89,577	)	 	 	43,280	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from financing:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Customer banking deposits	 	 	-	 	 	 	634,637	 	 	 	-	 	 	 	3,829	 	 	 	638,466	 	
Dividends paid	 	 	(100,784	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(100,784	)	
Acquisition of treasury shares	 	 	(3,785	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(3,785	)	
Proceeds from stock options	 	 	8,218	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	8,218	 	
Net intercompany advances	 	 	-	 	 	 	183,042	 	 	 	(272,619	)	 	 	89,577	 	 	 	-	 	
Other, net	 	 	894	 	 	 	(8,975	)	 	 	(22,803	)	 	 	-	 	 	 	(30,884	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) financing activities	 	 	(95,457	)	 	 	808,704	 	 	 	(295,422	)	 	 	93,406	 	 	 	511,231	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Effects of exchange rates on cash	 	 	-	 	 	 	-	 	 	 	9,221	 	 	 	-	 	 	 	9,221	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash	 	 	-	 	 	 	847,135	 	 	 	(1,073,384	)	 	 	3,829	 	 	 	(222,420	)	
Cash – beginning of period	 	 	-	 	 	 	241,350	 	 	 	1,419,535	 	 	 	(6,222	)	 	 	1,654,663	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash – end of period	 	$	-	 	 	$	1,088,485	 	 	$	346,151	 	 	$	(2,393	)	 	$	1,432,243	 	

 	
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ITEM 2. 	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	
 
RESULTS OF OPERATIONS
Our subsidiaries provide tax preparation, retail banking and various business advisory and consulting services. We are the only company offering a full range of software, online and in-office tax preparation solutions to individual tax clients.
 
RECENT EVENTS
In August 2010, the Internal Revenue Service (IRS) announced that, as of the beginning of the upcoming tax season, it would no longer furnish the debt indicator (DI), to tax preparers or financial institutions. The DI is an underwriting tool that lenders use when considering whether to loan money to taxpayers who apply for a refund anticipation loan (RAL), which is short term loan, secured by the taxpayer’s federal tax refund. As a result of the IRS decision, approval rates and loan amounts will likely be lower, and lenders may issue RALs that have a greater probability of not being repaid. Our participation interests in any RALs issued without the DI used in the credit assessment of the client may have a higher risk of default, which could increase our bad debt expense and reduce our profitability. During the fiscal year ended April 30, 2010, our revenues from RAL participations (including RALs which were based on underwriting standards that included use of the DI) totaled $146.2 million. RAL volumes are expected to decline in fiscal year 2011, and alternate products may have lower margins resulting in reduced profitability. We estimate that the impact of the discontinuation of the DI will reduce our profitability by approximately $0.05 per diluted share. Our estimate is based on a number of assumptions and actual results could differ.
On October 15, 2010, we filed a complaint in the United States District Court for the Eastern District of Missouri for injunctive relief against HSBC Bank USA, National Association and certain of its affiliates (collectively, HSBC) seeking to require HSBC to perform its contractual obligations to offer RALs in our retail offices. At the time of the filing of our Form 10-Q for the period ended October 31, 2010, the ultimate outcome of this matter, its effect on our ability to offer RALs in our retail offices and its impact on our financial results is unknown.
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TAX SERVICES
This segment primarily consists of our income tax preparation businesses – retail, online and software. This segment includes our tax operations in the U.S., Canada and Australia. Additionally, this segment includes the product offerings and activities of H&R Block Bank (HRB Bank) that primarily support the tax network, our participations in refund anticipation loans, and our commercial tax businesses, which provide tax preparation software to CPAs and other tax preparers.

 	 	
Tax Services – Operating Results	 	 	(in 000s)	 	
 	 	
 	 	Three Months Ended October 31,	 	 	Six Months Ended October 31,	 	
 	 	
 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	

Tax preparation fees	 	$	63,590	 	 	$	59,305	 	 	$	98,135	 	 	$	92,930	 	
Fees from Peace of Mind guarantees	 	 	19,811	 	 	 	19,130	 	 	 	48,358	 	 	 	47,044	 	
Fees from Emerald Card activities	 	 	6,693	 	 	 	9,428	 	 	 	17,268	 	 	 	21,119	 	
Royalties	 	 	7,027	 	 	 	6,055	 	 	 	12,632	 	 	 	9,662	 	
Other	 	 	13,800	 	 	 	15,387	 	 	 	26,173	 	 	 	26,513	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenues	 	 	110,921	 	 	 	109,305	 	 	 	202,566	 	 	 	197,268	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Compensation and benefits:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Field wages	 	 	52,188	 	 	 	54,938	 	 	 	91,437	 	 	 	94,317	 	
Other wages	 	 	28,506	 	 	 	28,841	 	 	 	56,992	 	 	 	58,721	 	
Benefits and other compensation	 	 	18,093	 	 	 	19,795	 	 	 	52,397	 	 	 	41,111	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	98,787	 	 	 	103,574	 	 	 	200,826	 	 	 	194,149	 	
Occupancy and equipment	 	 	88,142	 	 	 	93,023	 	 	 	170,766	 	 	 	180,943	 	
Depreciation and amortization	 	 	22,568	 	 	 	22,410	 	 	 	44,963	 	 	 	44,726	 	
Marketing and advertising	 	 	12,106	 	 	 	15,261	 	 	 	20,519	 	 	 	22,100	 	
Other	 	 	50,386	 	 	 	48,814	 	 	 	99,607	 	 	 	101,101	 	
Gain on sale of tax offices, net	 	 	(6,713	)	 	 	(1,589	)	 	 	(5,136	)	 	 	(1,589	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	 	 	265,276	 	 	 	281,493	 	 	 	531,545	 	 	 	541,430	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pretax loss	 	$	(154,355	)	 	$	(172,188	)	 	$	(328,979	)	 	$	(344,162	)	

 	
 
Three months ended October 31, 2010 compared to October 31, 2009
Tax Services’ revenues increased $1.6 million, or 1.5%, for the three months ended October 31, 2010 compared to the prior year. Tax preparation fees increased $4.3 million, or 7.2%, primarily due to favorable foreign exchange rates in the current year.
Total expenses decreased $16.2 million, or 5.8%, for the three months ended October 31, 2010. Compensation and benefits decreased $4.8 million, or 4.6%, primarily as a result of reductions in force during the first quarter of this year. Occupancy and equipment expenses decreased $4.9 million, or 5.2%, primarily due to the closure of offices.
During the current quarter, we recognized net gains of $6.7 million on the sale of certain company-owned offices to franchises, compared to $1.6 million in the prior year.
The pretax loss for the three months ended October 31, 2010 and 2009 was $154.4 million and $172.2 million, respectively.
 
Six months ended October 31, 2010 compared to October 31, 2009
Tax Services’ revenues increased $5.3 million, or 2.7%, for the six months ended October 31, 2010 compared to the prior year. Tax preparation fees increased $5.2 million, or 5.6%, primarily due to favorable foreign exchange rates in the current year.
Total expenses decreased $9.9 million, or 1.8%, for the six months ended October 31, 2010. Compensation and benefits increased $6.7 million, or 3.4%, primarily as a result of severance costs and related payroll taxes recorded during the first quarter of this year. Occupancy and equipment expenses decreased $10.2 million, or 5.6%, primarily due to the closure of offices.
During the current year, we recognized net gains of $5.1 million on the sale of certain company-owned offices to franchises, compared to $1.6 million in the prior year.
The pretax loss for the six months ended October 31, 2010 and 2009 was $329.0 million and $344.2 million, respectively.
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BUSINESS SERVICES
This segment consists of RSM McGladrey, Inc. (RSM), a national firm offering tax, consulting and accounting services and capital market services to middle-market companies.

 	 	
Business Services – Operating Results	 	 	(in 000s)	 	
 	 	
 	 	Three Months Ended October 31,	 	 	Six Months Ended October 31,	 	
 	 	
 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	

Tax services	 	$	111,659	 	 	$	107,612	 	 	$	192,990	 	 	$	190,281	 	
Business consulting	 	 	64,522	 	 	 	60,070	 	 	 	126,200	 	 	 	121,991	 	
Accounting services	 	 	9,253	 	 	 	11,878	 	 	 	20,095	 	 	 	23,407	 	
Capital markets	 	 	1,482	 	 	 	1,012	 	 	 	3,872	 	 	 	2,529	 	
Reimbursed expenses	 	 	5,796	 	 	 	6,204	 	 	 	12,127	 	 	 	10,353	 	
Other	 	 	10,714	 	 	 	19,826	 	 	 	22,852	 	 	 	35,659	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenues	 	 	203,426	 	 	 	206,602	 	 	 	378,136	 	 	 	384,220	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Compensation and benefits	 	 	138,803	 	 	 	149,309	 	 	 	265,916	 	 	 	283,689	 	
Occupancy	 	 	12,641	 	 	 	9,671	 	 	 	24,571	 	 	 	18,923	 	
Depreciation	 	 	4,883	 	 	 	5,540	 	 	 	9,535	 	 	 	10,830	 	
Marketing and advertising	 	 	9,514	 	 	 	4,721	 	 	 	14,173	 	 	 	9,554	 	
Amortization of intangible assets	 	 	3,057	 	 	 	2,942	 	 	 	5,893	 	 	 	5,907	 	
Other	 	 	26,131	 	 	 	34,245	 	 	 	50,084	 	 	 	53,822	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	 	 	195,029	 	 	 	206,428	 	 	 	370,172	 	 	 	382,725	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pretax income	 	$	8,397	 	 	$	174	 	 	$	7,964	 	 	$	1,495	 	

 	
 
Three months ended October 31, 2010 compared to October 31, 2009
Business Services’ revenues for the three months ended October 31, 2010 decreased $3.2 million, or 1.5% from the prior year. Tax services and consulting revenues increased primarily as a result of the acquisition of Caturano & Company, Inc. (Caturano), as discussed in note 2 to the condensed consolidated financial statements. Other revenues declined primarily as a result of a reduction in management fees received related to the new administrative services agreement with McGladrey & Pullen LLP (M&P), as discussed in note 10 to the condensed consolidated financial statements.
Total expenses decreased $11.4 million, or 5.5%, from the prior year. Compensation and benefits decreased $10.5 million, or 7.0%, primarily due to decreases in managing director compensation in the current year. Other expenses declined $8.1 million, or 23.7%, primarily due to litigation costs recorded in the prior year.
Pretax income for the three months ended October 31, 2010 was $8.4 million compared to $0.2 million in the prior year.
 
Six months ended October 31, 2010 compared to October 31, 2009
Business Services’ revenues for the six months ended October 31, 2010 decreased $6.1 million, or 1.6% from the prior year. Tax services and consulting revenues increased primarily as a result of the acquisition of Caturano. Other revenues declined primarily as a result of a reduction in management fees received related to the new administrative services agreement with M&P.
Total expenses decreased $12.6 million, or 3.3%, from the prior year. Compensation and benefits decreased $17.8 million, or 6.3%, primarily due to decreases in managing director compensation in the current year. Other expenses declined $3.7 million, or 6.9%, primarily due to litigation costs recorded in the prior year.
Pretax income for the six months ended October 31, 2010 was $8.0 million compared to $1.5 million in the prior year.
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CORPORATE, ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating losses include interest income from U.S. passive investments, interest expense on borrowings, net interest margin and gains or losses relating to mortgage loans held for investment, real estate owned, residual interests in securitizations and other corporate expenses, principally related to finance, legal and other support departments.

 	 	
Corporate – Operating Results	 	 	(in 000s)	 	
 	 	
 	 	Three Months Ended October 31,	 	 	Six Months Ended October 31,	 	
 	 	
 	 	2010	 	 	2009	 	 	2010	 	 	2009	 	

Interest income on mortgage loans held for investment	 	$	6,525	 	 	$	8,072	 	 	$	12,848	 	 	$	15,968	 	
Other	 	 	2,017	 	 	 	2,102	 	 	 	3,813	 	 	 	4,130	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenues	 	 	8,542	 	 	 	10,174	 	 	 	16,661	 	 	 	20,098	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	 	20,861	 	 	 	19,216	 	 	 	41,649	 	 	 	38,874	 	
Provision for loan losses	 	 	8,300	 	 	 	13,400	 	 	 	16,300	 	 	 	27,000	 	
Compensation and benefits	 	 	10,279	 	 	 	13,486	 	 	 	22,664	 	 	 	26,787	 	
Other	 	 	(1,737	)	 	 	4,911	 	 	 	(2,531	)	 	 	8,496	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	 	 	37,703	 	 	 	51,013	 	 	 	78,082	 	 	 	101,157	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pretax loss	 	$	(29,161	)	 	$	(40,839	)	 	$	(61,421	)	 	$	(81,059	)	

 	
 
Three months ended October 31, 2010 compared to October 31, 2009
Interest income earned on mortgage loans held for investment decreased $1.5 million from the prior year, primarily as a result of declining rates and non-performing loans. The provision for loan losses declined $5.1 million from the prior year as a result of the continued run-off of our portfolio. See additional discussion below under “Mortgage Loans Held for Investment.” Other expenses declined $6.6 million primarily due to expense reductions.
 
Six months ended October 31, 2010 compared to October 31, 2009
Interest income earned on mortgage loans held for investment decreased $3.1 million from the prior year, primarily as a result of declining rates and non-performing loans. The provision for loan losses declined $10.7 million from the prior year as a result of the continued run-off of our portfolio. Other expenses declined $11.0 million primarily due to expense reductions.
 
Income Taxes
Our effective tax rate for continuing operations was 39.0% and 38.7% for the three and six months ended October 31, 2010, respectively, compared to 40.6% and 39.3% for the three and six months ended and October 31, 2009, respectively. Our effective tax rate decreased from the prior year due primarily to audit settlements and changes to the state income tax reserves. We expect our effective tax rate for full fiscal year 2011 to be approximately 39%.
 
Mortgage Loans Held for Investment
Mortgage loans held for investment at October 31, 2010 totaled $537.2 million. The portfolio includes loans originated by Sand Canyon Corporation (SCC) and purchased by HRB Bank which constitutes approximately 63% of the total loan portfolio at October 31, 2010. We have experienced higher rates of delinquency and have greater exposure to loss with respect to this segment of our loan portfolio. Our remaining loan portfolio totaled $229.8 million and is characteristic of a prime loan portfolio, and we believe subject to a lower loss exposure.
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Detail of our mortgage loans held for investment and the related allowance, excluding unamortized deferred fees and costs of $4.5 million and $5.3 million at October 31, 2010 and April 30, 2010, respectively, is as follows:

 	 	 	 	 	 	 	 	 	 	 	(dollars in 000s)	 	
 	 	
 	 	Outstanding
	 	 	Loan Loss Allowance	 	 	% 30 + Days
	 	
 	 	Principal Balance	 	 	Amount	 	 	% of Principal	 	 	Past Due	 	

As of October 31, 2010:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchased from SCC	 	$	390,448	 	 	$	78,488	 	 	 	20.1	%	 	 	39.3	%	
All other	 	 	229,809	 	 	 	9,079	 	 	 	4.0	%	 	 	10.4	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	620,257	 	 	$	87,567	 	 	 	14.1	%	 	 	28.6	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As of April 30, 2010:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchased from SCC	 	$	434,644	 	 	$	82,793	 	 	 	19.1	%	 	 	37.8	%	
All other	 	 	249,040	 	 	 	10,742	 	 	 	4.3	%	 	 	8.9	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	683,684	 	 	$	93,535	 	 	 	13.7	%	 	 	27.3	%	

 	
We recorded provisions for loan losses of $8.3 million and $16.3 million during the three and six months ended October 31, 2010, respectively, compared to $13.4 million and $27.0 million during the three and six months ended October 31, 2009, respectively. Our allowance for loan losses as a percent of mortgage loans was 14.1%, or $87.6 million, at October 31, 2010, compared to 13.7%, or $93.5 million, at April 30, 2010. This allowance represents our best estimate of credit losses inherent in the loan portfolio as of the balance sheet dates.
 
Discontinued Operations
Sand Canyon Corporation (“SCC”, previously known as Option One Mortgage Corporation) ceased originating mortgage loans in December of 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations. The sale of servicing assets did not include the sale of any mortgage loans. SCC retained contingent liabilities that arose from the operations of SCC prior to its disposal, including certain mortgage loan repurchase obligations, contingent liabilities associated with litigation and related claims, lease commitments, and employee termination benefits. SCC also retained residual interests in certain mortgage loan securitization transactions prior to cessation of its origination business. The net loss from discontinued operations totaled $2.2 million and $5.3 million for the three and six months ended October 31, 2010 compared to $2.1 million and $5.1 million for the three and six months ended October 31, 2009.
In connection with the securitization and sale of mortgage loans, SCC made certain representations and warranties. In the event that there is a breach of a representation and warranty and such breach materially and adversely affects the value of a mortgage loan, SCC may be obligated to repurchase a loan or otherwise indemnify certain parties for losses incurred as a result of loan liquidation. Losses on valid claims totaled $3.5 million and $5.4 million for the six months ended October 31, 2010 and 2009, respectively. These amounts were recorded as reductions of our loan repurchase liability. Claims received since May 1, 2008 follows:

(in millions)	 	
 	 	
 	 	Fiscal Year 2009	 	 	Fiscal Year 2010	 	 	Fiscal Year 2011	 	 	 	 	
 	 	Q1	 	 	Q2	 	 	Q3	 	 	Q4	 	 	Q1	 	 	Q2	 	 	Q3	 	 	Q4	 	 	Q1	 	 	Q2	 	 	Total	 	

Loan Origination Year	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2005	 	$	40	 	 	$	21	 	 	$	1	 	 	$	-	 	 	$	-	 	 	$	15	 	 	$	-	 	 	$	-	 	 	$	6	 	 	$	1	 	 	$	84	 	
2006	 	 	89	 	 	 	10	 	 	 	111	 	 	 	7	 	 	 	2	 	 	 	57	 	 	 	4	 	 	 	45	 	 	 	100	 	 	 	15	 	 	 	440	 	
2007	 	 	43	 	 	 	10	 	 	 	85	 	 	 	15	 	 	 	4	 	 	 	11	 	 	 	7	 	 	 	-	 	 	 	3	 	 	 	5	 	 	 	183	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	172	 	 	$	41	 	 	$	197	 	 	$	22	 	 	$	6	 	 	$	83	 	 	$	11	 	 	$	45	 	 	$	109	 	 	$	21	 	 	$	707	 	

 	
SCC has recorded a liability for estimated contingent losses related to representation and warranty claims as of October 31, 2010, of $184.7 million, which represents SCC’s best estimate of the probable loss that may occur. This overall liability amount includes $49.7 million, which was established under an indemnity agreement dated April 2008 with a specific counterparty in exchange for a full and complete release of such party’s ability to assert representation and warranty claims. This indemnity agreement was given as part of obtaining the counterparty’s consent to SCC’s sale of its mortgage servicing business in 2008. Though disbursements
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related to this agreement have not been significant, SCC believes that the full amount under this indemnity agreement will ultimately be paid.
While SCC uses the best information available to it in estimating its liability, probable losses are inherently difficult to estimate and require considerable management judgment. There may be a wide range of reasonably possible losses in excess of the recorded liability that cannot be estimated, primarily due to difficulties inherent in estimating the level of future claims that will be asserted and the percentage of those claims that are ultimately determined to be valid. Although net losses on settled claims since May 1, 2008 have been within initial loss estimates, to the extent that valid claim volumes or residential home prices differ in the future from current estimates, future losses may be greater than the current estimates and those differences may be significant.
 
FINANCIAL CONDITION
These comments should be read in conjunction with the condensed consolidated balance sheets and condensed consolidated statements of cash flows found on pages 1 and 3, respectively.
CAPITAL RESOURCES AND LIQUIDITY – Our sources of capital include cash from operations, cash from customer deposits, issuances of common stock and debt. We use capital primarily to fund working capital, pay dividends, repurchase shares of common stock and acquire businesses. Our operations are highly seasonal and therefore generally require the use of cash to fund operating losses during the period May through mid-January.
Given the likely availability of a number of liquidity options discussed herein, including borrowing capacity under our unsecured committed lines of credit (CLOCs), we believe, that in the absence of any unexpected developments, our existing sources of capital at October 31, 2010 are sufficient to meet our operating needs.
CASH FROM OPERATING ACTIVITIES – Cash used by operations totaled $548.0 million for the first six months of fiscal year 2011, compared with $786.2 million for the same period last year. The decrease was primarily due to lower income tax payments made during the current year and other changes in working capital.
CASH FROM INVESTING ACTIVITIES – Cash used in investing activities totaled $16.6 million for the first six months of fiscal year 2011, compared to $43.3 million provided in the same period last year.
Mortgage Loans Held for Investment. We received net payments of $30.8 million and $38.7 million on our mortgage loans held for investment for the first six months of fiscal years 2011 and 2010, respectively. Cash payments declined primarily due to non-performing loans and continued run-off of our portfolio.
Purchases of Property and Equipment. Total cash paid for property and equipment was $35.0 million and $7.3 million for the first six months of fiscal years 2011 and 2010, respectively.
Business Acquisitions. Total cash paid for acquisitions was $43.3 million and $6.6 million during the six months ended October 31, 2010 and 2009, respectively. In July 2010 our Business Services segment acquired a Boston-based accounting firm, and cash used in investing activities includes payments totaling $32.6 million related to this acquisition. See additional discussion in note 2 to the condensed consolidated financial statements.
In October 2010, we signed a definitive merger agreement to acquire all of the outstanding shares of 2SS Holdings, Inc., developer of TaxACT digital tax preparation solutions, for $287.5 million in cash. We expect this acquisition will be funded by excess available liquidity from cash-on-hand or short-term borrowings. Completion of the transaction is subject to the satisfaction of customary closing conditions, including regulatory approval.
Sales of Businesses. During the first half of fiscal year 2011, we sold nearly 250 tax offices to franchisees for proceeds of $58.0 million. During fiscal year 2010, we sold 267 tax offices to franchisees for proceeds of $65.7 million. The majority of these sales were financed through affiliate loans. Sales proceeds and cash payments under the lines of credit are both included in investing activities.
CASH FROM FINANCING ACTIVITIES – Cash used in financing activities totaled $281.9 million for the first six months of fiscal year 2011, compared to $511.2 million provided in the same period last year.
Short-Term Borrowings. We had commercial paper borrowings of $39.5 million at October 31, 2010, while we had no similar borrowings in the same period last year. These borrowings were used to fund our off-season losses and cover our seasonal working capital needs.
Customer Banking Deposits. Customer banking deposits increased $77.0 million for the six months ended October 31, 2010 compared to an increase of $638.5 million in the prior year. We utilize cash provided by deposit balances as a funding source for our Emerald Advance lines of credit during the tax season. Funding from customer deposits will be obtained later this year than in the prior year.
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Dividends. We have consistently paid quarterly dividends. Dividends paid totaled $95.1 million and $100.8 million for the six months ended October 31, 2010 and 2009, respectively.
Repurchase and Retirement of Common Stock. During the six months ended October 31, 2010, we purchased and immediately retired 19.0 million shares of our common stock at a cost of $279.9 million. We may continue to repurchase and retire common stock or retire treasury stock in the future.
Issuances of Common Stock. Proceeds from the issuance of common stock totaled $1.5 million and $8.2 million for the six months ended October 31, 2010 and 2009, respectively. This decline is due to a reduction in stock option exercises and the related tax benefits.
 
BORROWINGS
The following chart provides the debt ratings for Block Financial LLC (BFC) as of October 31, 2010 and April 30, 2010:

 	 	
 	 	October 31, 2010	 	 	April 30, 2010	 	
 	 	
 	 	Short-term	 	 	Long-term	 	 	Outlook	 	 	Short-term	 	 	Long-term	 	 	Outlook	 	

Moody’s	 	 	P-2	 	 	 	Baa2	 	 	 	Negative	 	 	 	P-2	 	 	 	Baa1	 	 	 	Stable	 	
S&P(1)	 	 	A-2	 	 	 	BBB	 	 	 	Negative	 	 	 	A-2	 	 	 	BBB	 	 	 	Positive	 	
DBRS	 	 	R-2 (high	)	 	 	BBB (high	)	 	 	Stable	 	 	 	R-2 (high	)	 	 	BBB (high	)	 	 	Positive	 	

 	 	 	
(1)	 	Placed on CreditWatch Negative, effective October 20, 2010.	
 
We maintain a committed line of credit (CLOC) agreement to support commercial paper issuances, general corporate purposes or for working capital needs. This facility provides funding up to $1.7 billion and matures July 31, 2013. This facility bears interest at an annual rate of LIBOR plus 1.30% to 2.80% or PRIME plus .30% to 1.80% (depending on the type of borrowing) and includes an annual facility fee of .20% to .70% of the committed amounts, based on our credit ratings. Covenants include: (1) maintenance of a minimum net worth of $650.0 million on the last day of any fiscal quarter; and (2) reduction of the aggregate outstanding principal amount of short-term debt, as defined in the agreement, to $200.0 million or less for thirty consecutive days during the period March 1 to June 30 of each year (“Clean-down requirement”). At October 31, 2010, we were in compliance with these covenants and had net worth of $879.8 million. We had no balance outstanding under the CLOCs at October 31, 2010 or April 30, 2010.
There have been no other material changes in our borrowings or debt ratings from those reported at April 30, 2010 in our Annual Report on Form 10-K.
 
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual obligations and commercial commitments from those reported at April 30, 2010 in our Annual Report on Form 10-K.
 
REGULATORY ENVIRONMENT
There have been no material changes in our regulatory environment from those reported at April 30, 2010 in our Annual Report on Form 10-K.
 
FORWARD-LOOKING INFORMATION
This report and other documents filed with the Securities and Exchange Commission (SEC) may contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “would,” “should,” “could” or “may.” Forward-looking statements provide management’s current expectations or predictions of future conditions, events or results. They may include projections of revenues, income, earnings per share, capital expenditures, dividends, liquidity, capital structure or other financial items, descriptions of management’s plans or objectives for future operations, products or services, or descriptions of assumptions underlying any of the above. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date made and management does not undertake to update them to reflect changes or events occurring after that date except as required by federal securities laws.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks from those reported at April 30, 2010 in our Annual Report on Form 10-K.
 
ITEM 4. CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(c)). The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
RAL Litigation
We have been named in multiple lawsuits as defendants in litigation regarding our refund anticipation loan program in past years. All of those lawsuits have been settled or otherwise resolved, except for one.
The sole remaining case is a putative class action styled 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 plaintiffs allege inadequate disclosures with respect to the RAL product and assert claims for violation of consumer protection statutes, negligent misrepresentation, breach of fiduciary duty, common law fraud, usury, and violation of the Truth In Lending Act. Plaintiffs seek unspecified actual and punitive damages, injunctive relief, attorneys’ fees and costs. A Pennsylvania class was certified, but later decertified by the trial court in December 2003. An appellate court subsequently reversed the decertification decision. We are appealing the reversal. We have not concluded that a loss related to this matter is probable nor have we accrued a loss contingency related to this matter. Plaintiffs have not provided a dollar amount of their claim and we are not able to estimate a possible range of loss. We believe we have meritorious defenses to this case and intend to defend it vigorously. There can be no assurances, however, as to the outcome of this case or its impact on our consolidated results of operations.
 
Peace of Mind Litigation
We have been named defendants in lawsuits regarding our Peace of Mind program (collectively, the “POM Cases”), under which our applicable tax return preparation subsidiary assumes liability for additional tax assessments attributable to tax return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax Services, Inc., et al., Case No. 08-CV-591 in the U.S. District Court for the Southern District of Illinois, is a putative class action case originally filed in the Circuit Court of Madison County, Illinois on January 18, 2002. The plaintiffs allege that the sale of POM guarantees constitutes statutory fraud, an unfair trade practice and breach of a fiduciary duty. The plaintiffs seek unspecified damages, injunctive relief, attorneys’ fees and costs. On September 17, 2010, the federal court denied plaintiffs’ motion for class certification. The parties subsequently reached an agreement to settle the case, along with the  Soliz  case referenced below.
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There is one other putative class action pending against us in Texas that involves the POM guarantee. This case, styled  Desiri L. Soliz v. H&R Block, et al.  (Cause No. 03-032-D), was filed on January 23, 2003 in the District Court of Kleberg County, Texas. This case involves the same plaintiffs’ attorneys that are involved in the  Marshall  litigation in Illinois and contains allegations similar to those in the  Marshall  litigation. The plaintiff seeks actual and treble damages, equitable relief, attorneys’ fees and costs. No class has been certified. Following the denial of class certification in the  Marshall litigation, the parties reached an agreement to settle this case, along with the  Marshall  litigation. Settlement amounts related to the POM Cases are immaterial to the financial statements and are accrued at October 31, 2010.
 
Express IRA Litigation
We have been named defendants in lawsuits regarding our former Express IRA product. All of those lawsuits have been settled or otherwise resolved, except for one.
The one remaining case was filed on January 2, 2008 by the Mississippi Attorney General in the Chancery Court of Hinds County, Mississippi First Judicial District (Case No. G 2008 6 S 2) and is styled Jim Hood, Attorney for the State of Mississippi v. H&R Block, Inc., H&R Block Financial Advisors, Inc ., et al.  The complaint alleges fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the sale of the product in Mississippi and seeks equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. We are not able to estimate a possible range of loss. We believe we have meritorious defenses to the claims in this case, and we intend to defend this case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated results of operations.
Although we sold H&R Block Financial Advisors, Inc. (HRBFA) effective November 1, 2008, we remain responsible for any liabilities relating to the Express IRA litigation, among other things, through an indemnification agreement. A portion of our accrual is related to these indemnity obligations.
 
RSM McGladrey Litigation
RSM EquiCo, its parent and certain of its subsidiaries and affiliates, are parties to a class action filed on July 11, 2006 and styled  Do Right’s Plant Growers, et al. v. RSM EquiCo, Inc., et al.,  Case No. 06 CC00137, in the California Superior Court, Orange County. The complaint contains allegations relating to business valuation services provided by RSM EquiCo, including allegations of fraud, negligent misrepresentation, breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and unfair competition. Plaintiffs seek unspecified actual and punitive damages, in addition to pre-judgment interest and attorneys’ fees. On March 17, 2009, the court granted plaintiffs’ motion for class certification on all claims. The defendants filed two requests for interlocutory review of the decision, the last of which was denied by the Supreme Court of California on September 30, 2009. A trial date has been set for May 2011.
The certified class consists of RSM EquiCo’s U.S. clients who signed platform agreements and for whom RSM EquiCo did not ultimately market their business for sale. A portion of our loss contingency accrual is related to this matter for the amount of loss that we consider probable and estimable, although it is possible that our losses could exceed the amount we have accrued. The fees paid to RSM EquiCo in connection with these agreements total approximately $185 million, a number which substantially exceeds the equity of RSM EquiCo. Plaintiffs seek to recover restitution in an amount equal to the fees paid, in addition to punitive damages and attorney fees. We believe we have meritorious defenses to the case and intend to defend the case vigorously. The amount claimed in this action is substantial and could have a material adverse impact on our consolidated results of operations. There can be no assurance regarding the outcome of this matter.
On December 7, 2009, a lawsuit was filed in the Circuit Court of Cook County, Illinois (2009-L-014920) against M&P, RSM and H&R Block styled  Ronald R. Peterson ex rel. Lancelot Investors Fund, L.P., et al. v. McGladrey & Pullen LLP, et al.  The case was removed to the United States District Court for the Northern District of Illinois on December 28, 2009 (Case No. 1:10-CV-00274). The complaint, which was filed by the trustee for certain bankrupt investment funds, seeks unspecified damages and asserts claims against RSM for vicarious liability and alter ego liability and against H&R Block for equitable restitution relating to audit work performed by M&P. The amount claimed in this case is substantial. On November 3, 2010, the court dismissed the case against all defendants in its entirety with prejudice.
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RSM and M&P operate in an alternative practice structure (“APS”). Accordingly, certain claims and lawsuits against M&P could have an impact on RSM. More specifically, any judgments or settlements arising from claims and lawsuits against M&P that exceed its insurance coverage could have a direct adverse effect on M&P’s operations. Although RSM is not responsible for the liabilities of M&P, significant M&P litigation and claims could impair the profitability of the APS and impair the ability to attract and retain clients and quality professionals. This could, in turn, have a material adverse effect on RSM’s operations and impair the value of our investment in RSM. There is no assurance regarding the outcome of any claims or litigation involving M&P.
 
Litigation and Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated and the loan servicing business was sold during fiscal year 2008, SCC remains subject to investigations, claims and lawsuits pertaining to its loan origination and servicing activities that occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state attorneys general, other state and federal regulators, municipalities, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others alleged to be similarly situated. Among other things, these investigations, claims and lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, public nuisance, fraud, and violations of securities laws, the Truth in Lending Act, Equal Credit Opportunity Act and the Fair Housing Act. In the current non-prime mortgage environment, the number of these investigations, claims and lawsuits has increased over historical experience and is likely to continue at increased levels. The amounts claimed in these investigations, claims and lawsuits are substantial in some instances, and the ultimate resulting liability is difficult to predict and thus cannot be reasonably estimated. In the event of unfavorable outcomes, the amounts SCC may be required to pay in the discharge of liabilities or settlements could be substantial and, because SCC’s operating results are included in our consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a lawsuit in the Superior Court of Suffolk County, Massachusetts (Case No. 08-2474-BLS) styled  Commonwealth of Massachusetts v. H&R Block, Inc., et al.,  alleging unfair, deceptive and discriminatory origination and servicing of mortgage loans and seeking equitable relief, disgorgement of profits, restitution and statutory penalties. In November 2008, the court granted a preliminary injunction limiting the ability of the owner of SCC’s former loan servicing business to initiate or advance foreclosure actions against certain loans originated by SCC or its subsidiaries without (1) advance notice to the Massachusetts Attorney General and (2) if the Attorney General objects to foreclosure, approval by the court. An appeal of the preliminary injunction was denied. A trial date has been set for June 2011. A portion of our loss contingency accrual is related to this matter for the amount of loss that we consider probable and estimable, although it is possible that our losses could exceed the amount we have accrued. We are not able to estimate a possible range of loss. We believe we have meritorious defenses to the claims presented and we intend to defend them vigorously. There can be no assurances, however, as to its outcome or its impact on our consolidated results of operations.
On October 15, 2010, the Federal Home Loan Bank of Chicago filed a lawsuit in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) styled  Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation, et al.  against multiple defendants, including various SCC related entities and H&R Block, Inc. related entities, arising out of FHLB’s purchase of mortgage-backed securities. Plaintiff asserts claims for rescission and damages under Illinois securities law and for common law negligent misrepresentation in connection with its purchase of two securities originated and securitized by SCC. These two securities had a total initial principal amount of approximately $50 million, of which approximately $42 million remains outstanding. We have not concluded that a loss related to this matter is probable nor have we established a loss contingency related to this matter. We believe the claims in this case are without merit and we intend to defend them vigorously. There can be no assurances, however, as to its outcome or its impact on our consolidated results of operations.
 
Other Claims and Litigation
We have been named in several wage and hour class action lawsuits throughout the country, respectively styled  Alice Williams v. H&R Block Enterprises LLC , Case No.RG08366506 (Superior Court of California, County of Alameda, filed January 17, 2008);  Arabella Lemus v. H&R Block Enterprises LLC, et al.,  Case No. CGC-09-489251
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(United States District Court, Northern District of California, filed June 9, 2009); Delana Ugas v. H&R Block Enterprises LLC, et al.,  Case No. BC417700 (United States District Court, Central District of California, filed July 13, 2009);  Barbara Petroski v. H&R Block Eastern Enterprises, Inc., et al.,  Case No. 10-CV-00075 (United States District Court, Western District of Missouri, filed January 25, 2010); Lance Hom v. H&R Block Enterprises LLC, et al.,  Case No. 10CV0476 H (United States District Court, Southern District of California, filed March 4, 2010); and  Stacy Oyer v. H&R Block Eastern Enterprises, Inc., et al.,  Case No. 10-CV-00387-WMS (United States District Court, Western District of New York, filed May 10, 2010). These cases involve a variety of legal theories and allegations including, among other things, failure to compensate employees for all hours worked; failure to provide employees with meal periods; failure to provide itemized wage statements; failure to pay wages due upon termination; failure to compensate for mandatory off-season training; and/or misclassification of non-exempt employees. The parties have agreed to consolidate certain of these cases into a single action because they allege substantially identical claims. The plaintiffs seek actual damages, in addition to statutory penalties, pre-judgment interest and attorneys’ fees. We have not concluded that a loss related to these matters is probable nor have we accrued a loss contingency related to these matters. Moreover, we are not able to estimate a possible range of loss. We believe we have meritorious defenses to the claims in these cases and intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances, however, and the ultimate liability with respect to these matters is difficult to predict. There can be no assurances as to the outcome of these cases or their impact on our consolidated results of operations, individually or in the aggregate.
In addition, we are from time to time 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 others similarly situated. We believe we have meritorious defenses to each of these investigations, claims and lawsuits, and we are defending or intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances, however, the ultimate liability with respect to such matters is difficult to predict. 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 impact on our consolidated results of operations.
We are also party to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including claims and lawsuits (collectively, “Other Claims”) concerning the preparation of customers’ income tax returns, the fees charged customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters and contract disputes. 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 impact on our consolidated results of operations.
 
ITEM 1A. RISK FACTORS
 
The elimination of the IRS debt indicator may increase the risk of default on RALs and may reduce our profitability.
 
In August 2010, the Internal Revenue Service (IRS) announced that, as of the beginning of the upcoming tax season, it would no longer furnish the debt indicator (DI), to tax preparers or financial institutions. The DI is an underwriting tool that lenders use when considering whether to loan money to taxpayers who apply for a refund anticipation loan (RAL), which is short term loan, secured by the taxpayer’s federal tax refund. As a result of the IRS decision, approval rates and loan amounts will likely be lower, and lenders may issue RALs that have a greater probability of not being repaid. Our participation interests in any RALs issued without the DI used in the credit assessment of the client may have a higher risk of default, which could increase our bad debt expense and reduce our profitability. During the fiscal year ended April 30, 2010, our revenues from RAL participations (including RALs which were based on underwriting standards that included use of the DI) totaled $146.2 million. RAL volumes are expected to decline in fiscal year 2011, and alternate products may have lower margins resulting in reduced profitability. We estimate that the impact of the discontinuation of the DI will reduce our profitability by approximately $0.05 per diluted share. Our estimate is based on a number of assumptions and actual results could differ.
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On October 15, 2010, we filed a complaint in the United States District Court for the Eastern District of Missouri for injunctive relief against HSBC Bank USA, National Association and certain of its affiliates (collectively, HSBC) seeking to require HSBC to perform its contractual obligations to offer RALs in our retail offices. At the time of the filing of our Form 10-Q for the period ended October 31, 2010, the ultimate outcome of this matter, its effect on our ability to offer RALs in our retail offices and its impact on our financial results is unknown.
There have been no other material changes in our risk factors from those reported at April 30, 2010 in our Annual Report on Form 10-K.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
A summary of our purchases of H&R Block common stock during the second quarter of fiscal year 2011 is as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
(in 000s, except per share amounts)	
 	 	 	 	 	 	Total Number of Shares
	 	Maximum $ Value
	
 	 	Total
	 	Average
	 	Purchased as Part of
	 	of Shares that May
	
 	 	Number of Shares
	 	Price Paid
	 	Publicly Announced
	 	Be Purchased Under
	
 	 	Purchased(1)	 	per Share	 	Plans or Programs(2)	 	the Plans or Programs	

August 1 – August 31	 	 	5	 	$	15.67	 	 	-	 	$	1,416,177	
September 1 – September 30	 	 	3,455	 	$	12.83	 	 	3,450	 	$	1,371,957	
October 1 – October 31	 	 	1	 	$	13.14	 	 	-	 	$	1,371,957	

 
 	 	 	
(1)	 	We purchased 11,406 shares in connection with the funding of employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on nonvested shares.	
 	 	 	
(2)	 	In June 2008, our Board of Directors rescinded previous authorizations to repurchase shares of our common stock, and approved an authorization to purchase up to $2.0 billion of our common stock through June 2012.	
 
ITEM 6. EXHIBITS

 	10	.1	 	Offer Letter from H&R Block Management, LLC to Alan M. Bennett dated August 12, 2010, filed as Exhibit 10.1 to the Company’s current report on Form 8-K dated August 12, 2010, file number 1-6089, is incorporated herein by reference.*	
 	10	.2	 	H&R Block, Inc. 2003 Long-Term Executive Compensation Plan (restated effective September 30, 2010).*	
 	10	.3	 	Agreement and Plan of Merger by and among H&R Block, Inc., HRB Island Acquisition, Inc., 2SS Holdings, Inc., TA Associates Management, L.P. in its capacity as a Stockholder Representative, and Lance Dunn in his capacity as a Stockholder Representative dated as of October 13, 2010, filed as Exhibit 10.1 to the Company’s current report on Form 8-K dated October 14, 2010, file number 1-6089, is incorporated herein by reference.	
 	31	.1	 	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	31	.2	 	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	32	.1	 	Certification by Chief Executive Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.	
 	32	.2	 	Certification by Chief Financial Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.	
 	101	.INS	 	XBRL Instance Document	
 	101	.SCH	 	XBRL Taxonomy Extension Schema	
 	101	.CAL	 	XBRL Extension Calculation Linkbase	
 	101	.LAB	 	XBRL Taxonomy Extension Label Linkbase	
 	101	.PRE	 	XBRL Taxonomy Extension Presentation Linkbase	
 	101	.REF	 	XBRL Taxonomy Extension Reference Linkbase	

 	 	 	
*	 	Indicates management contracts, compensatory plans or arrangements.	

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

 
Alan M. Bennett
President and Chief Executive Officer
December 8, 2010

 
Jeffrey T. Brown
Senior Vice President and
Chief Financial Officer
December 8, 2010

 
Colby R. Brown
Vice President and
Corporate Controller
December 8, 2010
36

Exhibit 10.2
H&R BLOCK, INC.
2003 LONG-TERM EXECUTIVE COMPENSATION PLAN
(As Restated September 30, 2010)
     1. Purposes. The purposes of this 2003 Long-Term Executive Compensation Plan are to provide incentives and rewards to those employees and persons largely responsible for the success and growth of H&R Block, Inc. and its subsidiary corporations, and to assist all such corporations in attracting and retaining executives and other key employees and persons with experience and ability.
     2. Definitions.
     (a) Award means one or more of the following: shares of Common Stock, Restricted Shares, Stock Options, Incentive Stock Options, Stock Appreciation Rights, Performance Shares, Performance Units and any other rights which may be granted to a Recipient under the Plan.
     (b) Committee means the Compensation Committee described in Section 3.
     (c) Common Stock means the Common Stock, without par value, of the Company.
     (d) Company means H&R Block, Inc., a Missouri corporation, and, unless the context otherwise requires, includes its “subsidiary corporations” (as defined in Section 424(f) of the Internal Revenue Code) and their respective divisions, departments and subsidiaries and the respective divisions, departments and subsidiaries of such subsidiaries.
     (e) Incentive Stock Option means a Stock Option which meets all of the requirements of an “incentive stock option” as defined in Section 422(b) of the Internal Revenue Code.
     (f) Internal Revenue Code means the Internal Revenue Code of 1986, as now in effect or hereafter amended.
     (g) Performance Period means that period of time specified by the Committee during which a Recipient must satisfy any designated performance goals in order to receive an Award.
     (h) Performance Share means the right to receive, upon satisfying designated performance goals within a Performance Period, shares of Common Stock, cash, or a combination of cash and shares of Common Stock, based on the market value of shares of Common Stock covered by such Performance Shares at the close of the Performance Period.

 
     (i) Performance Unit means the right to receive, upon satisfying designated performance goals within a Performance Period, shares of Common Stock, cash, or a combination of cash and shares of Common Stock.
     (j) Plan means this 2003 Long-Term Executive Compensation Plan, as the same may be amended from time to time
     (k) Recipient means an employee of the Company or other person who has been granted an Award under the Plan.
     (l) Restricted Share means a share of Common Stock issued to a Recipient hereunder subject to such terms and conditions, including, without limitation, forfeiture or resale to the Company, and to such restrictions against sale, transfer or other disposition, as the Committee may determine at the time of issuance.
     (m) Stock Appreciation Right means the right to receive, upon exercise of a stock appreciation right granted under this Plan, shares of Common Stock, cash, or a combination of cash and shares of Common Stock, based on the increase in the market value of the shares of Common Stock covered by such stock appreciation right from the initial day of the Performance Period for such stock appreciation right to the date of exercise.
     (n) Stock Option means the right to purchase, upon exercise of a stock option granted under this Plan, shares of the Company’s Common Stock.
     3. Administration of the Plan. The Plan shall be administered by the Committee which shall consist of directors of the Company, to be appointed by and to serve at the pleasure of the Board of Directors of the Company. A majority of the Committee members shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be valid acts of the Committee, however designated, or the Board of Directors of the Company if the Board has not appointed a Committee.
     The Committee shall have full power and authority to construe, interpret and administer the Plan and, subject to the powers herein specifically reserved to the Board of Directors and subject to the other provisions of this Plan, to make determinations which shall be final, conclusive and binding upon all persons including, without limitation, the Company, the shareholders of the Company, the Board of Directors, the Recipients and any persons having any interest in any Awards which may be granted under the Plan. The Committee shall impose such additional conditions upon the grant and exercise of Awards under this Plan as may from time to time be deemed necessary or advisable, in the opinion of counsel to the Company, to comply with applicable laws and regulations. The Committee from time to time may adopt rules and regulations for carrying out the Plan and written policies for implementation of the Plan. Such policies may include, but need not be limited to, the type, size and terms of Awards to be made to Recipients and the conditions for payment of such Awards.
     4. Absolute Discretion. The Committee may, in its sole and absolute discretion (subject to the Committee’s power to delegate certain authority in accordance with the second
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paragraph of this Section 4), at any time and from time to time during the continuance of the Plan, (i) determine which Recipients shall be granted Awards under the Plan, (ii) grant to any Recipient so selected such an Award, (iii) determine the type, size and terms of Awards to be granted (subject to Sections 6, 10 and 11 hereof), (iv) establish objectives and conditions for receipt of Awards, (v) place conditions or restrictions on the payment or exercise of Awards, and (vi) do all other things necessary and proper to carry out the intentions of this Plan; provided, however, that, in each and every case, those Awards which are Incentive Stock Options shall contain and be subject to those requirements specified in Section 422 of the Internal Revenue Code and shall be granted only to those persons eligible thereunder to receive the same.
     The Committee may at any time and from time to time delegate to the Chief Executive Officer of the Company authority to take any or all of the actions that may be taken by the Committee as specified in this Section 4 or in other sections of the Plan in connection with the determination of Recipients, types, sizes, terms and conditions of Awards under the Plan and the grant of any such Awards, provided that any authority so delegated (a) shall apply only to Awards to employees of the Company that are not officers of Company under Regulation Section 240.16a-1(f) promulgated pursuant to Section 16 of the Securities Exchange Act of 1934, and (b) shall be exercised only in accordance with the Plan and such rules, regulations, guidelines, and limitations as the Committee shall prescribe.
     5. Eligibility. Awards may be granted to any employee of the Company or to the non- executive Chairman of the Board of the Company. No member of the Committee (other than any ex officio member or the non-executive Chairman of the Board of the Company) shall be eligible for grants of Awards under the Plan. A Recipient may be granted multiple forms of Awards under the Plan. Incentive Stock Options may be granted under the Plan to a Recipient during any calendar year only if the aggregate fair market value (determined as of the date the Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by such Recipient during any calendar year under the Plan and any other “incentive stock option plans” (as defined in the Internal Revenue Code) maintained by the Company does not exceed the sum of $100,000.
     6. Stock Subject to the Plan. The total number of shares of Common Stock issuable under this Plan may not at any time exceed 24,000,000 shares, subject to adjustment as provided herein. All of such shares may be issued or issuable in connection with the exercise of Incentive Stock Options. Shares of Common Stock not actually issued pursuant to an Award shall be available for future Awards. Shares of common Stock to be delivered or purchased under the Plan may be either authorized but unissued Common Stock or treasury shares. The total number of shares of Common Stock that may be subject to one or more Awards granted to any one Recipient during a calendar year may not exceed 1,000,000, subject to adjustment as provided in Section 16 of the Plan.
     7. Awards.
     (a) Awards under the Plan may include, but need not be limited to, shares of Common Stock, Restricted Shares, Stock Options, Incentive Stock Options, Stock Appreciation Rights, Performance Shares and Performance Units. The amount of each Award may be based upon the market value of a share of Common Stock. The
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Committee may make any other type of Award which it shall determine is consistent with the objectives and limitations of the Plan.
     (b) The Committee may establish performance goals to be achieved within such Performance Periods as may be selected by it using such measures of the performance of the Company as it may select as a condition to the receipt of any Award.
     8. Vesting Requirements. The Committee may determine that all or a portion of an Award or a payment to a Recipient pursuant to an Award, in any form whatsoever, shall be vested at such times and upon such terms as may be selected by it.
     9. Deferred Payments and Dividend and Interest Equivalents.
     (a) The Committee may determine that the receipt of all or a portion of an Award or a payment to a Recipient pursuant to an Award, in any form whatsoever, shall be deferred. Deferrals shall be for such periods and upon such terms as the Committee may determine.
     (b) Unless the Committee provides otherwise in an Award agreement, dividends and dividend equivalents will not be paid with respect to any Award, except for dividends with respect to which the dividend record date is on or after the date of issuance of unrestricted vested shares of Common Stock with respect to such Award. The Committee may provide, in its sole and absolute discretion, that a Recipient to whom an Award is payable in whole or in part at a future time in shares of Common Stock shall be entitled to receive an amount per share equal in value to the cash dividends paid per share on issued and outstanding shares as of the dividend record dates occurring during the period from the date of the Award to the date of delivery of such share to the Recipient. The Committee may also authorize, in its sole and absolute discretion, payment of an amount which a Recipient would have received in interest on (i) any Award payable at a future time in cash during the period from the date of the Award to the date of payment, and (ii) any cash dividends paid on issued and outstanding shares as of the dividend record dates occurring during the period from the date of an Award to the date of delivery of shares pursuant to the Award. Any amounts provided under this subsection shall be payable in such manner, at such time or times, and subject to such terms and conditions as the Committee may determine in its sole and absolute discretion.
     10. Stock Option Price. The purchase price per share of Common Stock under each Stock Option shall be determined by the Committee, but shall not be less than market value (as determined by the Committee) of one share of Common Stock on the date the Stock Option or Incentive Stock Option is granted. Payment for exercise of any Stock Option granted hereunder shall be made (a) in cash, or (b) by delivery of Common Stock having a market value equal to the aggregate option price, or (c) by a combination of payment of cash and delivery of Common Stock in amounts such that the amount of cash plus the market value of the Common Stock equals the aggregate option price.
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     11. Stock Appreciation Right Value. The base value per share of Common Stock covered by an Award in the form of a Stock Appreciation Right shall be the market value of one share of Common Stock on the date the Award is granted.
     12. Continuation of Employment. The Committee shall require that a Recipient be an employee or director of the Company at the time an Award is paid or exercised. The Committee may provide for the termination of an outstanding Award if a Recipient ceases to be an employee or director of the Company and may establish such other provisions with respect to the termination or disposition of an Award on the death or retirement of a Recipient (or not being re-elected to the Board of Directors) as it, in its sole discretion, deems advisable. The Committee shall have the sole power to determine the date of any circumstances which shall constitute a cessation of employment or term as a director and to determine whether such cessation is the result of retirement, death or any other reason.
     13. Registration of Stock. Each Award shall be subject to the requirement that if at any time the Committee shall determine that qualification or registration under any state or federal law of the shares of Common Stock, Restricted Shares, Stock Options, Incentive Stock Options, or other securities thereby covered or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of or in connection with the granting of such Award or the purchase of shares thereunder, the Award may not be paid or exercised in whole or in part unless and until such qualification, registration, consent or approval shall have been effected or obtained free of any conditions the Committee, in its discretion, deems unacceptable.
     14. Employment Status. No Award shall be construed as imposing upon the company the obligation to continue the employment or term of a Recipient. No employee or other person shall have any claim or right to be granted an Award under the Plan.
     15. Assignability. No Award granted pursuant to the Plan shall be transferable or assignable by the Recipient other than by will or the laws of descent and distribution and during the lifetime of the Recipient shall be exercisable or payable only by or to him or her; provided, however, that a Recipient who was granted an Award in consideration for serving as the Company’s non-executive Chairman of the Board may transfer or assign an Award to an entity that is or was a shareholder of the Company at any time during which the Recipient served as the Company’s non-executive Chairman of the Board (a “Shareholder Entity”) if (i) the Recipient is affiliated with the manager of the investments made by such Shareholder Entity or otherwise serves on the Company’s Board of Directors at the Shareholder Entity’s direction or request, and (ii) pursuant to the Shareholder Entity’s governance documents or any regulatory, contractual or other requirement, any consideration the Recipient may receive as compensation for serving as a director of the Company must be transferred, assigned, surrendered or otherwise paid to the Shareholder Entity.
     16. Dilution or Other Adjustments. In the event of any changes in the capital structure of the Company, including but not limited to a change resulting from a stock dividend or split-up, or combination or reclassification of shares, the Board of Directors shall make such equitable adjustments with respect to Awards or any provisions of this Plan as it deems necessary and appropriate, including, if necessary, any adjustment in the maximum number of
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shares of Common Stock subject to the Plan, the maximum number of shares that may be subject to one or more Awards granted to any one Recipient during a calendar year, or the number of shares of Common Stock subject to an outstanding Award.
     17. Merger, Consolidation, Reorganization, Liquidation, Etc. If the Company shall become a party to any corporate merger, consolidation, major acquisition of property for stock, reorganization, or liquidation, the Board of Directors shall make such arrangements it deems advisable with respect to outstanding Awards, which shall be binding upon the Recipients of outstanding Awards, including, but not limited to, the substitution of new Awards for any Awards then outstanding, the assumption of any such Awards and the termination of or payment for such Awards.
     18. Withholding Taxes. The Company shall have the right to deduct from all Awards hereunder paid in cash any federal, state, local or foreign taxes required by law to be withheld with respect to such Awards and, with respect to Awards paid in other than cash, to require the payment (through withholding from the Recipient’s salary or otherwise) of any such taxes. Subject to such conditions as the Committee may establish, Awards payable in shares of Common Stock, or in the form of an Incentive Stock Option or Stock Option, may provide that the Recipients thereof may elect, in accordance with any applicable regulations, to satisfy all or any part of the tax required to be withheld by the Company in connection with such Award, or the exercise of such Incentive Stock Option or Stock Option, by electing to have the Company withhold a number of shares of Common Stock awarded, or purchased pursuant to such exercise, having a fair market value on the date the tax withholding is required to be made equal to or less than the amount required to be withheld.
     19. Costs and Expenses. The cost and expenses of administering the Plan shall be borne by the Company and not charged to any Award or to any Recipient.
     20. Funding of Plan. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Award under the Plan.
     21. Award Contracts. The Committee shall have the power to specify the form of Award contracts to be granted from time to time pursuant to and in accordance with the provisions of the Plan and such contracts shall be final, conclusive and binding upon the Company, the shareholders of the Company and the Recipients. No Recipient shall have or acquire any rights under the Plan except such as are evidenced by a duly executed contract in the form thus specified. No Recipient shall have any rights as a holder of Common Stock with respect to Awards hereunder unless and until certificates for shares of Common Stock or Restricted Shares are issued to the Recipient.
     22. Guidelines. The Board of Directors of the Company shall have the power to provide guidelines for administration of the Plan by the Committee and to make any changes in such guidelines as from time to time the Board deems necessary.
     23. Amendment and Discontinuance. The Board of Directors of the Company shall have the right at any time during the continuance of the Plan to amend, modify, supplement,
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suspend or terminate the Plan, provided that in the absence of the approval of the holders of a majority of the shares of Common Stock of the Company present in person or by proxy at a duly constituted meeting of shareholders of the Company, no such amendment, modification or supplement shall (i) increase the aggregate number of shares which may be issued under the Plan, unless such increase is by reason of any change in capital structure referred to in Section 16 hereof, (ii) change the termination date of the Plan provided in Section 24, (iii) delete or amend the market value restrictions contained in Sections 10 and 11 hereof, (iv) materially modify the requirements as to eligibility for participation in the Plan, or (v) materially increase the benefits accruing to participants under the Plan, and provided further, that no amendment, modification or termination of the Plan shall in any manner affect any Award of any kind theretofore granted under the Plan without the consent of the Recipient of the Award, unless such amendment, modification or termination is by reason of any change in capital structure referred to in Section 16 hereof or unless the same is by reason of the matters referred to in Section 17 hereof.
     24. Termination. The Committee may grant Awards at any time prior to July 1, 2013, on which date this Plan will terminate except as to Awards then outstanding hereunder, which Awards shall remain in effect until they have expired according to their terms or until July 1, 2023, whichever first occurs. No Incentive Stock Option shall be exercisable later than 10 years following the date it is granted.
     25. Approval. This restated Plan shall take effect September 30, 2010 (the “Restatement Effective Date”), contingent upon approval by the shareholders of the Company, and shall apply to Awards made on and after the Restatement Effective Date. The Plan as in effect the day before the Restatement Effective Date shall apply to Awards made prior to the Restatement Effective Date, unless the Committee determines in its discretion to apply any provisions of this Plan as in effect upon the Restatement Effective Date to Awards made prior to the Restatement Effective Date.
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Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Alan M. Bennett, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of H&R Block, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2010 	/s/ Alan M. Bennett  	 	
 	Alan M. Bennett 	 	
 	Chief Executive Officer
H&R Block, Inc. 	 	

 

Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey T. Brown, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of H&R Block, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2010 	/s/ Jeffrey T. Brown  	 	
 	Jeffrey T. Brown 	 	
 	Senior Vice President and Chief Financial Officer
H&R Block, Inc. 	 	

 

Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the quarterly report of H&R Block, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ending October 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alan M. Bennett, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 	(1)	 	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 	 	 	 	
 	(2)	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

 	/s/ Alan M. Bennett  	 	
 	Alan M. Bennett 	 	
 	Chief Executive Officer
H&R Block, Inc.
December 8, 2010	 	

 

Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the quarterly report of H&R Block, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ending October 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey T. Brown, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 	(1)	 	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 	 	 	 	
 	(2)	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

 	/s/ Jeffrey T. Brown  	 	
 	Jeffrey T. Brown 	 	
 	Senior Vice President and
Chief Financial Officer
H&R Block, Inc.
December 8, 2010